**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON, D.C. 20549**

 

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**FORM 10-Q**

 

| **ý** | **QUARTERLY REPORT PURSUANT TO SECTION  13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD  ENDED MARCH 31, 2002.** |
|------------|----------------------------------------------------------------------------------------------------------------------------------------------|

 

**or**

 

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

 

**COMPUCREDIT CORPORATION**

 

****

 

a Georgia Corporation

IRS Employer  Identification No. **58-2336689**

SEC File Number **0-25751**

 

**245 Perimeter Center Parkway, Suite 600**

**Atlanta, Georgia 30346**

**(770)206-6200**

 

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              NO    o

 

The number ofshares outstanding of the issuer’s only class of Common Stock, no par value,(the “Common Stock”), as of April 30, 2002 was 46,559,165 shares.

 

 

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**COMPUCREDIT CORPORATION**

 

**FORM 10-Q**

 

**TABLE OF CONTENTS**

 

March 31, 2002

 
| 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                                                                                  |

 

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**CompuCreditCorporation and Subsidiaries**

**ConsolidatedBalance Sheets**

 
|                                                                                                                                    |   | **(Unaudited)**            |    |             |   |
|-----------------------------------------------------------------------------------------------------------------------------------------|--------|----------------------------|---------|------------------|--------|
|                                                                                                                                    |   | **March 31,**              |    | **December 31,** |   |
|                                                                                                                                    |   | **2002**                   |    | **2001**         |   |
|                                                                                                                                    |   | **(Dollars in thousands)** |    |
| **Assets**                                                                                                                              |   |                       |    |             |   |
| Cash and cash equivalents                                                                                                               |   | $                          | 48,060  |             | $      | 55,746 |   |
| Restricted cash                                                                                                                         |   | 10,000                     |    | —           |   |
|                                                                                                                                    |   |                       |    |             |   |
| Retained interests in credit card receivables  securitized                                                                              |   | 349,000                    |    | 358,889          |   |
| Accrued interest and fees                                                                                                               |   | 29,961                     |    | 32,928           |   |
| Net credit card receivables                                                                                                             |   | 378,961                    |    | 391,817          |   |
|                                                                                                                                    |   |                       |    |             |   |
| Amounts due from securitization                                                                                                         |   | 15,049                     |    | 20,996           |   |
| Deferred costs, net                                                                                                                     |   | 14,400                     |    | 17,862           |   |
| Software, furniture, fixtures and equipment, net                                                                                        |   | 33,021                     |    | 34,522           |   |
| Prepaid expenses                                                                                                                        |   | 1,407                      |    | 1,540            |   |
| Other assets                                                                                                                            |   | 11,765                     |    | 13,974           |   |
| Total assets                                                                                                                            |   | $                          | 512,663 |             | $      | 536,457 |   |
|                                                                                                                                    |   |                       |    |             |   |
| **Liabilities**                                                                                                                         |   |                       |    |             |   |
| Accounts payable and accrued expenses                                                                                                   |   | $                          | 22,473  |             | $      | 28,321 |   |
| Notes payable                                                                                                                           |   | —                     |    | 16,517           |   |
| Deferred revenue                                                                                                                        |   | 13,306                     |    | 13,820           |   |
| Income tax liability                                                                                                                    |   | 28,459                     |    | 31,320           |   |
| Total liabilities                                                                                                                       |   | 64,238                     |    | 89,978           |   |
|                                                                                                                                    |   |                       |    |             |   |
| **Shareholders’ equity**                                                                                                           |   |                       |    |             |   |
| Preferred stock, no par value, 10,000,000 shares  authorized:                                                                           |   |                       |    |             |   |
| Series A preferred stock, 30,000 and 30,000 shares  issued and outstanding atMarch 31,  2002 and December 31, 2001, respectively        |   | 30,103                     |    | 29,512           |   |
| Series B preferred stock, 10,000 and 10,000 shares  issued and outstanding atMarch 31,  2002 and December 31, 2001, respectively        |   | 10,247                     |    | 10,000           |   |
| Common stock, no par value:                                                                                                             |   |                       |    |             |   |
| 150,000,000 shares authorized, 46,559,165 and  46,559,165 issued and outstanding at March 31, 2002 and December 31, 2001,  respectively |   | —                     |    | —           |   |
| Additional paid-in capital                                                                                                              |   | 240,352                    |    | 240,352          |   |
| Note issued to purchase stock                                                                                                           |   | (500                       | )       | (500             | )      |
| Retained earnings                                                                                                                       |   | 168,223                    |    | 167,115          |   |
| Total shareholders’ equity                                                                                                         |   | 448,425                    |    | 446,479          |   |
| Total liabilities and shareholders’ equity                                                                                         |   | $                          | 512,663 |             | $      | 536,457 |   |

 

See accompanying notes.

 

1

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**CompuCredit Corporation and Subsidiaries**

**Consolidated Statements of Operations (Unaudited)**

 
|                                                                   |   | **For the three months ended  March 31,**         |   |
|------------------------------------------------------------------------|--------|---------------------------------------------------|--------|
|                                                                   |   | **2002**                                          |   | **2001** |   |
|                                                                   |   | **(Dollars in thousands, except per share data)** |   |
| Interest income                                                        |   | $                                                 | 365    |   | $ | 1,009 |   |
| Interest expense                                                       |   | 60                                                |   | — |   |
| Net interest income                                                    |   | 305                                               |   | 1,009 |   |
| Other operating income:                                                |   |                                              |   |   |   |
| Securitization income, net                                             |   | —                                            |   | 266 |   |
| Income from retained interests in credit card  receivables securitized |   | 5,702                                             |   | 15,445 |   |
| Servicing income                                                       |   | 1,285                                             |   | 1,687 |   |
| Other credit card fees                                                 |   | 24,840                                            |   | 18,713 |   |
| Interchange fees                                                       |   | 3,957                                             |   | 5,361 |   |
| Ancillary products                                                     |   | 4,483                                             |   | 7,570 |   |
| Total other operating income                                           |   | 40,267                                            |   | 49,042 |   |
| Other operating expense:                                               |   |                                              |   |   |   |
| Salaries and benefits                                                  |   | 3,596                                             |   | 2,283 |   |
| Credit card servicing                                                  |   | 20,070                                            |   | 14,129 |   |
| Marketing and solicitation                                             |   | 2,624                                             |   | 12,131 |   |
| Professional fees                                                      |   | 783                                               |   | 982 |   |
| Data processing                                                        |   | 1,600                                             |   | 2,841 |   |
| Net occupancy                                                          |   | 1,192                                             |   | 805 |   |
| Ancillary product expense                                              |   | 1,999                                             |   | 3,967 |   |
| Other                                                                  |   | 5,458                                             |   | 3,104 |   |
| Total other operating expense                                          |   | 37,322                                            |   | 40,242 |   |
|                                                                   |   |                                              |   |   |   |
| Income before income taxes                                             |   | 3,250                                             |   | 9,809 |   |
|                                                                   |   |                                              |   |   |   |
| Income taxes                                                           |   | (1,138                                            | )      | (3,433 | ) |
| Net income                                                             |   | $                                                 | 2,112  |   | $ | 6,376 |   |
| Net income attributable to common shareholders                         |   | $                                                 | 1,108  |   | $ | 6,376 |   |
| Net income per common share—basic                                 |   | $                                                 | 0.02   |   | $ | 0.14 |   |
| Net income per common share—assuming dilution                     |   | $                                                 | 0.02   |   | $ | 0.14 |   |

 

See accompanying notes.

 

2

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**CompuCreditCorporation and Subsidiaries**

**ConsolidatedStatements of Shareholders’ Equity (Unaudited)**

**For the threemonths ended March 31, 2002 and 2001**

 
|                                       |   | **Common Stock**           |       | **Additional  Paid-In  Capital** |   |   |                | **Other Changes********In Equity** |   | **Retained Earnings (Deficit)** |   | **Total Shareholders’ Equity** |   |
|--------------------------------------------|--------|----------------------------|------------|----------------------------------|--------|--------|---------------------|------------------------------------|--------|---------------------------------|--------|-------------------------------------|--------|
|                                       |   | **Shares**                 |       |                             |   |   | **Preferred Stock** |                               |   |                            |   |
|                                       |   |                       | **Amount** |                             |   |   |                |                               |   |
|                                       |   | **(Dollars in thousands)** | ** ** |
| Balance at December 31, 2000               |   | 46,514,639                 |       | $                                | — |   | $                   | 239,789                            |   | $                               | — |                                | — |   | $ | 164,392 |   | $ | 404,181 |   |
| Net income                                 |   | —                     |       | —                           |   | — |                | —                             |   | —                          |   | 6,376                               |   | 6,376 |   |
| Balance at March 31, 2001                  |   | 46,514,639                 |       | $                                | — |   | $                   | 239,789                            |   | $                               | — |                                | $      | — |   | $ | 170,768 |   | $ | 410,557 |   |
|                                       |   |                       |       |                             |   |   |                |                               |   |                            |   |                                |   |   |   |
| Balance at December 31, 2001               |   | 46,559,165                 |       | $                                | — |   | $                   | 240,352                            |   | $                               | 39,512 |                                | $      | (500 | ) | $ | 167,115 |   | $ | 446,479 |   |
| Issuance costs of Series A preferred stock |   | —                     |       | —                           |   | — |                | (140                               | )      | —                          |   | —                              |   | (140 | ) |
| Preferred dividends                        |   | —                     |       | —                           |   | — |                | —                             |   | —                          |   | (1,004                              | )      | (1,004 | ) |
| Accretion of preferred dividends           |   | —                     |       | —                           |   | — |                | 978                                |   | —                          |   | —                              |   | 978 |   |
| Net income                                 |   | —                     |       | —                           |   | — |                | —                             |   | —                          |   | 2,112                               |   | 2,112 |   |
| Balance at March 31, 2002                  |   | 46,559,165                 |       | $                                | — |   | $                   | 240,352                            |   | $                               | 40,350 |                                | $      | (500 | ) | $ | 168,223 |   | $ | 448,425 |   |

 

See accompanying notes.

 

3

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**CompuCreditCorporation and Subsidiaries**

**ConsolidatedStatements of Cash Flows (Unaudited)**

 
|                                                                               |   | **For the three months ended  March 31,** |   |
|------------------------------------------------------------------------------------|--------|-------------------------------------------|--------|
|                                                                               |   | **2002**                                  |   | **2001** |   |
|                                                                               |   | **(Dollars in thousands)**                |   |
| **Operating activities**                                                           |   |                                      |   |   |   |
| Net income                                                                         |   | $                                         | 2,112  |   | $ | 6,376 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities: |   |                                      |   |   |   |
| Depreciation expense                                                               |   | 3,570                                     |   | 1,685 |   |
| Amortization expense                                                               |   | 3,546                                     |   | 1,662 |   |
| Securitization income                                                              |   | —                                    |   | (266 | ) |
| Retained interests income adjustment, net                                          |   | 2,333                                     |   | 4,550 |   |
| Changes in assets and liabilities:                                                 |   |                                      |   |   |   |
| Increase in restricted cash                                                        |   | (10,000                                   | )      | — |   |
| Decrease (increase) in accrued interest and fees                                   |   | 2,967                                     |   | (1,003 | ) |
| Decrease (increase) in amounts due from securitization                             |   | 5,947                                     |   | (165 | ) |
| Increase in deferred costs                                                         |   | (1,007                                    | )      | (1,719 | ) |
| Decrease in prepaid expenses                                                       |   | 133                                       |   | 4,933 |   |
| Decrease in accrued expenses                                                       |   | (5,875                                    | )      | (4,506 | ) |
| Decrease in deferred revenue                                                       |   | (514                                      | )      | (4,134 | ) |
| (Decrease) increase in income tax liability                                        |   | (2,861                                    | )      | 3,433 |   |
| Other                                                                              |   | 2,209                                     |   | 5,356 |   |
| Net cash provided by operating activities                                          |   | 2,560                                     |   | 16,202 |   |
| **Investing activities**                                                           |   |                                      |   |   |   |
| Net loan payments (net loans originated or purchased)                              |   | 57,316                                    |   | (91,497 | ) |
| Recoveries of loans previously charged off                                         |   | 7,757                                     |   | 5,794 |   |
| Net (distributions to) proceeds from securitization                                |   | (56,594                                   | )      | 78,794 |   |
| Purchases of and development of software, furniture,  fixtures and equipment       |   | (2,069                                    | )      | (5,027 | ) |
| Net cash provided by (used in) investing activities                                |   | 6,410                                     |   | (11,936 | ) |
| **Financing activities**                                                           |   |                                      |   |   |   |
| Preferred stock issuance costs                                                     |   | (140                                      | )      | — |   |
| Repayment of short-term borrowings                                                 |   | (16,516                                   | )      | — |   |
| Net cash used in financing activities                                              |   | (16,656                                   | )      | — |   |
|                                                                               |   |                                      |   |   |   |
| **Net (decrease) increase in cash**                                                |   | (7,686                                    | )      | 4,266 |   |
| Cash and cash equivalents at beginning of period                                   |   | 55,746                                    |   | 68,980 |   |
| Cash and cash equivalents at end of period                                         |   | $                                         | 48,060 |   | $ | 73,246 |   |
| **Supplemental cash flow information**                                             |   |                                      |   |   |   |
| Cash paid for interest                                                             |   | $                                         | 116    |   | $ | — |   |
| Cash paid for income taxes                                                         |   | $                                         | 4,000  |   | $ | — |   |
| Accretion of preferred stock dividends                                             |   | $                                         | 978    |   | $ | — |   |

 

See accompanying notes.

 

4

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**CompuCreditCorporation and Subsidiaries**

**Notes toConsolidated Financial Statements (Unaudited)**

**March 31, 2002**

 

**1.            Organizationand Basis of Presentation**

 

The consolidated financial statements include the accounts ofCompuCredit Corporation and its subsidiaries (collectively, “the Company”). TheCompany was formed for the purpose of offering unsecured credit and fee basedproducts and services to a specialized segment of the consumer credit market.The Company markets unsecured general purpose credit cards through direct mail,telemarketing, television and on the internet. All significant intercompanybalances and transactions have been eliminated for financial reportingpurposes. The Company has a contractual arrangement with a third partyfinancial institution pursuant to which the financial institution issuesgeneral purpose credit cards, and the Company purchases the receivables relatingto such accounts. The Company also markets to its cardholders other fee-basedproducts including card registration, memberships in preferred buying clubs,magazines, travel services and credit life, disability and unemploymentinsurance.

 

The accompanyingunaudited condensed consolidated financial statements of the Company have beenprepared in accordance with accounting principles generally accepted in theUnited States for interim financial information and with the instructions toForm 10-Q and Article 10 of Regulation S-X. Accordingly, they do not includeall of the information and footnotes required by accounting principlesgenerally accepted in the United States for complete consolidated financialstatements. In the opinion of management, all normal recurring adjustmentsconsidered necessary to fairly state the results for the interim periodspresented have been included. The preparation of financial statements inconformity with accounting principles generally accepted in the United Statesrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and disclosure of contingent assets andliabilities at the date of the consolidated financial statements as well as thereported amount of revenues and expenses during the reporting period. Actualresults could differ from these estimates. Certain estimates such as creditlosses, payment and discount rates have a significant impact on the gainsrecorded on securitizations and the value of retained interests in credit cardreceivables securitized. Operating results for the three months ended March 31,2002 are not necessarily indicative of the results for the year ended December31, 2002. The notes to the financial statements for the year ended December 31,2001 contained in the Company’s Annual Report on Form 10-K filed with theSecurities and Exchange Commission should be read in conjunction with thesecondensed consolidated financial statements.

 

Certain amounts in prior period financial statements have beenreclassified to conform to the current period presentation.

 

**2.            SignificantAccounting Policies**

 

The following is a summary of significant accounting policies followedin the preparation of the consolidated financial statements.

 

*Asset Securitization*

 

The Company has securitized a substantial portion of its credit cardreceivables. When the Company sells receivables in securitizations, it retainscertain undivided ownership interests, interest-only strips and servicingrights. Although the Company continues to service the underlying credit cardaccounts and maintains the customer relationships, these transactions aretreated as sales and the securitized receivables are not reflected on theconsolidated balance sheet. The fair value of the retained ownership interestsand the interest-only strips are included in Retained Interests in Credit CardReceivables Securitized. Interest and late fee income on loans is a componentof income from retained interests in credit card receivables securitized and isrecognized as revenue when charged to the cardholder’s account. Income fromretained interests in credit card

 

5

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receivablessecuritized is also net of principal charge offs, interest expense paid to theinvestors, changes in fair value of the retained interests and certain directservicing expenses. The Company bills interest and late fees in accordance withthe terms of the applicable cardholder agreements until the balance is eitherpaid off or charges off. The accrued interest and late fee portion of chargedoff loan balances are deducted from current period interest and late feeincome.

 

Under Statement of Financial Accounting Standards No. 140,“Accounting for Transfers and Servicing of Financial Assets and Extinguishmentsof Liabilities”, gains or losses are recognized at the time of each sale. Thesegains or losses on sales of receivables depend in part on the previous carryingamount of the financial assets sold as well as the fair value of the assets andcash proceeds received. These cash flows represent estimates of finance chargesand late fees, servicing fees, costs of funds paid to investors, payment rates,credit losses, and required amortization payments to investors.

 

The retained interests are subsequently accounted for as tradingsecurities and reported at estimated fair market value with changes in fairvalue included in income in accordance with Statement of Financial AccountingStandards No. 115, “Accounting for Certain Investments in Debt and EquitySecurities” (“Statement No. 115”). Certain estimates used in thedetermination of the gains and the related fair values of interest-only stripsand retained ownership interests are influenced by factors outside theCompany’s control, and, as a result, such estimates could materially change inthe near term.

 

Amounts Due from Securitization include payments recently received onthe securitized receivables that are still held by the securitization structurebut are payable to the Company within the next 30 days.

 

**3.            Securitizations**

 

The Company securitizes a substantial portion of its Company issuedcredit card receivables through Master Trusts. Credit card receivables are transferred to the Master Trusts, whichissue notes representing undivided ownership interests in the assets of theMaster Trusts. The Company also securitized two purchased portfolios of creditcard receivables through securitization structures with third party commercialpaper conduits. Generally Accepted Accounting Principles require the Company totreat the transfers as sales and the receivables are removed from theconsolidated balance sheet. The securitization transactions do not affect therelationship the Company has with its customers and the Company continues toservice the credit card receivables. As of March 31, 2002 the Companyreceives servicing fees equal to 0.1% per year of the securitized principalreceivables or 5% of cash collected, depending on the securitization structure.The Company either performs the servicing or contracts with third party serviceproviders.

 

Thetable below summarizes all of the Company’s securitization activity:

 

|                                             |   | **For the quarter ended  March 31,** |    |
|--------------------------------------------------|--------|-------------------------------------------|---------|
|                                             |   | **2002**                                  |    | **2001** |   |
|                                             |   | **(In thousands)**                        |    |
| (Distributions to) proceeds from securitizations |   | $                                         | (56,594 | ) | $ | 78,794 |   |
| Excess cash flows received on retained interests |   | 52,368                                    |    | 53,274 |   |
| Pretax securitization income                     |   | —                                    |    | 266 |   |
|                                                  |        |                                           |         |  |  |  |  |

 

The investors in the Company’s securitization transactions have norecourse against the Company for its customers’ failure to pay their creditcard loans. However, substantially all of the Company’s retained interests aresubordinated to the investors’ interests until the investors have been fullypaid.

 

The pretax securitization income and income from retained interestsrecorded by the Company and the measurement of the Company’s retained interestsare dependent upon management’s estimates of future cash flows using thecash-out method.

 

6

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Underthe cash-out method, the future cash flows (including the release of any cashrelated to credit enhancements) are recorded at a discounted value. The cashflows are discounted based on the timing of when the Company expects to receivethe cash flows. The discount rates are based on management’s estimates ofreturns that would be required by investors in an investment with similar termsand credit quality. Interest rates received on the credit card receivables areestimated based on the stated annual percentage rates in the credit cardagreements. Estimated default and payment rates are based on historicalresults, adjusted for expected changes based on the Company’s credit riskmodels. Credit card receivables are typically charged off when the loan becomes180 days past due, although earlier charge offs may occur specificallyrelated to accounts of bankrupt or deceased customers. Bankrupt and deceasedcustomers’ accounts are typically charged off within 30 days ofverification.

 

Subsequent to each sale, the Company’s retained interests are carried atestimated fair market value with changes in fair value included in income asthey are classified as trading securities. Since quoted market prices aregenerally not available, the Company estimates fair value based on theestimated present value of future cash flows using management’s best estimatesof key assumptions.

 

Ourretained interests in credit card receivables securitized include thefollowing:

 

|                                                       |   | **March 31, 2002** |    | **December 31,   2001** |   |
|------------------------------------------------------------|--------|-------------------------|---------|-------------------------|--------|
|                                                       |   | **(In thousands)**      |    |
| I/O strip                                                  |   | $                       | 95,915  |                    | $      | 84,390 |   |
| Servicing liability                                        |   | (43,108                 | )       | (38,123                 | )      |
| Net I/O strip                                              |   | 52,807                  |    | 46,267                  |   |
| Fair value of Seller’s Interest                       |   | 296,193                 |    | 312,622                 |   |
| Retained interests in credit card receivables  securitized |   | $                       | 349,000 |                    | $      | 358,889 |   |

 

Our net I/O strip is comprised of the I/O strip and the relatedservicing liability. The I/O strip reflects the fair value of our rights tofuture income from the portfolio. The servicing liability reflects the fairvalue of the cost to service the portfolio above and beyond the servicingincome we expect to receive from the securitization.

 

Changes in any of these assumptions used to value our retained interestscould impact the fair value estimates and the realization of future cash flows.The weighted average key assumptions used to estimate the fair value of theCompany’s retained interests as of the end of each year are presented below:

 

|                                   |   | **March 31,   2002** |   | **December 31,  2001** |   |
|----------------------------------------|--------|----------------------|--------|------------------------|--------|
| Payment rate (monthly)                 |   | 7.1                  | %      | 8.0                    | %      |
| Expected credit loss rate (annualized) |   | 16.7                 |   | 16.7                   |   |
| Residual cashflows discount rate       |   | 34.9                 |   | 34.9                   |   |
| Servicing liability discount rate      |   | 14.1                 |   | 14.0                   |   |

 

 

7

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At March 31, 2002, the following illustrates the hypotheticaleffect an adverse 5 and 10 percent change in key economic assumptions hason the retained interests in credit card receivables securitized ($ inthousands):

 

|                                          |   | **Credit card  loans** |    |
|-----------------------------------------------|--------|------------------------|---------|
| **Payment rate (monthly)**                    |   | 7.1                    | %       |
| *Impact on fair value of 5% adverse  change*  |   | $                      | (741    | ) |
| *Impact on fair value of 10% adverse  change* |   | $                      | (1,681  | ) |
| **Expected credit loss rate (annualized)**    |   | 16.7                   | %       |
| *Impact on fair value of 5% adverse  change*  |   | $                      | (7,536  | ) |
| *Impact on fair value of 10% adverse  change* |   | $                      | (15,069 | ) |
| **Residual cashflows discount rate**          |   | 34.9                   | %       |
| *Impact on fair value of 5% adverse  change*  |   | $                      | (3,590  | ) |
| *Impact on fair value of 10% adverse  change* |   | $                      | (7,060  | ) |
| **Servicing discount rate**                   |   | 14.1                   | %       |
| *Impact on fair value of 5% adverse  change*  |   | $                      | (133    | ) |
| *Impact on fair value of 10% adverse  change* |   | $                      | (266    | ) |

 

These sensitivities are hypothetical and should be used with caution. Asthe figures indicate, changes in fair value based on a 5% and a 10% variationin assumptions generally cannot be extrapolated because the relationship of thechange in assumption to the change in fair value may not be linear. Also, inthis table, the effect of a variation in a particular assumption on the fairvalue of the retained interest is calculated without changing any otherassumptions; in reality, changes in one assumption may result in changes inanother. For example, increases in market interest rates may result in lowerprepayments and increased credit loses, which could magnify or counteract thesensitivities.

 

The Company’s managed loan portfolio is comprised of retained interestsin loans securitized and the investors share of securitized credit card loans.The investors share of securitized credit card loans is not an asset of theCompany. Therefore, they are not included in the Company’s consolidated balancesheets. The principal balances outstanding as of March 31, 2002 andDecember 31, 2001, were $1.7 billion and $1.7 billion, respectively.The following table summarizes the balances included in the CompuCredit’smanaged loan portfolio.

 

|                                                                               |   | **March 31,  2002** |      | **December 31,  2001** |   |
|------------------------------------------------------------------------------------|--------|---------------------|-----------|------------------------|--------|
|                                                                               |   | **(In thousands)**  |      |
| Investors’ interests in loans securitized—Not included  on Balance Sheet |   | $                   | 1,456,040 |                   | $      | 1,523,839 |   |
| Face amount of credit card receivables underlying  Seller’s Interest(1)       |   | 353,030             |      | 368,003                |   |
| Total managed loans                                                                |   | $                   | 1,809,070 |                   | $      | 1,891,842 |   |

 

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(1)                                  The amount noted above is calculated as the totalface value of the credit card receivables underlying our securitizations lessthe investors interests in loans securitized. The fair value of the Seller’sInterest is a component of our Retained Interest in Credit Card ReceivablesSecuritized on our Balance Sheet and is disclosed earlier in this footnote.

 

**4.            EarningsPer Share**

 

The following table sets forth the computation of basic and dilutedearnings per share:

 
|                                                                               |   | **For the three months ended   March 31,**       |   |
|------------------------------------------------------------------------------------|--------|--------------------------------------------------|--------|
|                                                                               |   | **2002**                                         |   | **2001** |   |
|                                                                               |   | **(In thousands,********except per share data)** |   |
| Numerator:                                                                         |   |                                             |   |   |   |
| Net income                                                                         |   | $                                                | 2,112  |   | $ | 6,376 |   |
| Preferred stock dividends                                                          |   | (1,004                                           | )      | — |   |
| Income attributable to common shareholders                                         |   | $                                                | 1,108  |   | $ | 6,376 |   |
| Denominator:                                                                       |   |                                             |   |   |   |
| Denominator for basic earnings per  share—weighted-average shares outstanding |   | 46,559                                           |   | 46,515 |   |
| Effect of dilutive stock options                                                   |   | 7                                                |   | 83 |   |
| Denominator for diluted earnings per share—adjusted  weighted-average shares  |   | 46,566                                           |   | 46,598 |   |
| Basic earnings per share                                                           |   | $                                                | 0.02   |   | $ | 0.14 |   |
| Diluted earnings per share                                                         |   | $                                                | 0.02   |   | $ | 0.14 |   |

 

8

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The preferred shares were not included in the denominator because theirinclusion would have been anti-dilutive.

 

**5.            Borrowings**

 

Until January 2002, the Company had a $25.0 million one-yearrevolving credit facility, of which, $15.0 million was outstanding under thisfacility and $10.0 million was reserved for a letter of credit in favor of athird party servicer.  This agreementexpired in January 2002 and was paid in full.  During the first quarter of 2002, the Company entered into anirrevocable standby letter of credit agreement for $10.0 million with abank.  The agreement contains provisionsallowing the third party servicer of the receivables to draw under the letterof credit as needed.  The Company isrequired to maintain a cash balance of $10.0 million with the lender. Such cashhas been disclosed as “Restricted cash” on the face of the balance sheet.

 

**6.            SubsequentEvents**

 

On April 15, 2002, the Company announced that it would acquire withother investors a retained interest in a transaction which would securitize$1.3 billion in credit card receivables to be sold by Providian National Bankat a discount.  The Company intends toservice the credit card receivables and collect a normal servicing fee apartfrom its investment in the retained interest. The transaction is contingent upon establishment of a securitization andother customary closing conditions and is expected to close in May 2002.

 

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**ITEM 2.MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OFOPERATIONS**

 

*The following discussion should be read in conjunctionwith our condensed consolidated financial statements and the related notesincluded herein.*

 

This Management’s Discussion and Analysis of Financial Condition andResults of Operations includes forward–looking statements. We have basedthese forward–looking statements on our current plans, expectations andbeliefs about future events. In light of the risks, uncertainties andassumptions discussed under the caption “Risk Factors” in “Item 1. Business” ofour Annual Report on Form 10-K filed with the Securities and ExchangeCommission and other factors discussed in that section, there is a risk thatour actual experience will differ materially from the expectations and beliefsreflected in the forward–looking statements in this section.

 

**General**

 

CompuCredit is a credit card company that originates and purchasescredit card receivables and markets products and services to its customers forwhich it earns fees. We market unsecured credit cards through direct mail,telemarketing and the internet.

 

We generate revenue primarily through (1) interest income and latefees on outstanding revolving credit card receivables, (2) credit cardfees, including annual membership, cash advance, over-limit and other creditcard fees, and (3) interchange fees, which are the portion of the merchantfees assessed by Visa and MasterCard and passed on to us on the purchase volumeon our credit card receivables. Non-interest income includes securitizationincome, income from retained interests in credit card receivables securitized,servicing income and fee-based product revenues. Our primary expenses are thecosts of funding our receivables, credit losses and operating expenses,including employee compensation, account solicitation and marketing expenses,data processing, servicing expenses and income taxes.

 

We originate our receivables portfolio through the use of our targetmarketing system to obtain customers through direct mail, television,telemarketing and internet campaigns. We also add accounts by purchasingportfolios of credit card receivables. Absent portfolio acquisitions, the sizeof our receivables depends in part on the timing, size and success of ourmarketing campaigns. During periods of reduced marketing our receivablesportfolio may not grow and may even decline. We have reduced our marketinggrowth plans for 2002 as compared to 2001. We believe this is prudent for usgiven the uncertainties that exist in the economy as well as in the financialmarkets in general. We intend to pursue portfolio acquisitions that haveappropriate returns for our business. We also intend to grow our existing portfolio through marketing campaignsduring 2002, although at a much slower rate than 2001.

 

Due to a reduction in our marketing, our portfolio declined during thefirst quarter of 2002.  Absent anyportfolio acquisitions, given seasonal patterns of payments and purchases andour reduced marketing plans, we believe our portfolio may decrease slightlyduring the remaining first half of the year and then level off or slightlyincrease during the remainder of 2002. If we see improvements in the financialmarkets, we may increase our marketing plans during 2002, which would in turnincrease our receivables portfolio. Additionally, any portfolio acquisitionsduring 2002 also would increase our receivables portfolio.

 

On April 15, 2002, we announced that we would acquire with otherinvestors a retained interest in a transaction which would securitize $1.3billion in credit card receivables to be sold by Providian National Bank at adiscount.  We intend to service thecredit card receivables and collect a normal servicing fee apart from ourinvestment in the retained interest. The transaction is contingent upon establishment of a securitization andother customary closing conditions and is expected to close in May 2002.

 

##### **CreditCard Securitizations**

 

We have securitized a substantial portion of our credit cardreceivables. Our securitization agreements with investors specify theconditions and price of each sale including the total amount of receivables theinvestor is committing to purchase from us. The agreements include terms andconditions that are similar to those included in bank loan agreements anddefine our duties to service the securitized receivables. We are required bythe agreements to remit collections on the receivables to the investors in thesecuritizations. The

 

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agreementsalso include representations and warranties regarding the receivables andfinancial performance measures that must be met in order for us to continue tosecuritize receivables and in order for us to receive any additional cash fromthe 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.

 

After an initial purchase by the investors, there is usually a periodduring which collections from the receivables are used to purchase newreceivables. This is referred to as a revolving period. At the end of therevolving period, the investment of collections in new receivables ends andcollections are instead used to repay the investors. The period during whichinvestors are being repaid is referred to as an amortization period. Theamortization period may begin at a specific point in time determined under theagreements or it may be caused by specified events including deterioration inthe quality of the receivables purchased or a material adverse change in ourfinancial condition. A breach of a representation or warranty made by us couldalso cause an amortization period to begin.

 

The investors inthe securitizations require us to provide credit support for the receivables toreduce the risk of loss to the investors resulting from cardholders notrepaying their credit card balances when due. We negotiate with each investorthe amount of the credit support, which is based on historical and expecteddelinquency and loss experience on the receivables. The credit support isusually in the form of overcollateralization, which means that we sell the receivablesfor less than, or at a discount from, their outstanding balances. As a result,the receivables available to repay the investors exceed the total amount of theinvestors’ interests in the receivables. This excess is the retained interestthat we own, which is also referred to as a subordinated interest, or aSeller’s Interest. The investors in the securitized receivables have norecourse against us for our cardholders’ failure to pay their credit cardloans; however, substantially all of our Seller’s Interests are subordinated tothe investors’ interests until the investors have been fully repaid. This meansthat our Seller’s Interests will first absorb any losses due to cardholders’failure to repay their balances before investors in the securitizations have toabsorb these losses.

 

We will receive additional cash from the securitized receivables ifcollections from the receivables exceed required interest and principalpayments to the investors. The collections from the receivables depend on theperformance of the receivables, which includes the timing and amount ofpayments on the receivables, the interest rates, fees and other charges paid onthe receivables, and their delinquency and loss rates. In each securitization,we receive cash, retain a Seller’s Interest, retain the rights to receive cashin the future and service the accounts. Our securitizations are treated assales under Generally Accepted Accounting Principles. As such, we remove thesecuritized loans from our Consolidated Balance Sheet. As noted above, weretain a Seller’s Interest in the pool of assets included in eachsecuritization, with the right to receive collections allocated to suchsubordinated interest after payments to investors are made. The collectionsreceived are recorded as Income from Retained Interests in Credit CardReceivables Securitized. The Seller’s Interest equals the fair market value ofthe assets included in the securitization structure less the investors’ownership. Additionally, we recognize an “interest-only” (“I/O”) strip, whichis the present value of the projected excess cash flows the receivables willproduce during its life. The excess cash flow is the excess of the financecharges and late fees generated by the securitized receivables over the relatedcredit losses, interest paid to investors, servicing costs and certain otherexpenses. 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.

 

Securitizations are accounted for under Financial Accounting StandardsNo. 140, “Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities” (“Statement No. 140”), and, prior toApril 1, 2001, were accounted for under Financial Accounting StandardsNo. 125, “Accounting for Transfers and Servicing of Financial Assets andExtinguishments of Liabilities” (“Statement No. 125”). Under thesestatements, gains or losses are recognized at the time of each sale and arerecorded as securitization income or loss in our income statement. Gains or losseson the sales of receivables depends in part on the

 

11

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previouscarrying amount of the financial assets sold as well as the fair value of theassets and cash proceeds received.

 

The securitization transactions do not affect the relationship we havewith our customers. We continue to service the credit card receivables. As ofMarch 31, 2002, we received servicing fees equal to 0.1% per year of thesecuritized principal receivables or 5% of cash collected, depending on thesecuritization. We either perform the servicing or contract with third partyservice providers.

 

The table below summarizes our securitization activity.

 

|                                              |   | **For the quarter ended********March 31,** |    |
|---------------------------------------------------|--------|-------------------------------------------------|---------|
|                                              |   | **2002**                                        |    | **2001** |   |
|                                              |   | **(In thousands)**                              |    |
| (Distributions for) proceeds from securitizations |   | $                                               | (56,594 | ) | $ | 78,794 |   |
| Excess cash flows received on retained interests  |   | 52,368                                          |    | 53,274 |   |
| Pretax securitization income                      |   | —                                          |    | 266 |   |
|                                                   |        |                                                 |         |  |  |  |  |

 

Finance charges and past due fees collected in excess of servicing feesand periodic interest payments are available to absorb the investors’ share ofcredit losses. Investors bear the risk of credit losses on the underlyingreceivables to the extent that credit losses, servicing fees and periodicinterest payments required by the investors exceed finance charges and past duefees earned on the receivables and our retained interests in the receivablespool. Investors in our securitization programs generally are entitled toreceive principal payments either through monthly payments during anamortization period or in one lump sum from the proceeds of issuances ofadditional notes or participation interests in the receivables pool.

 

**Results of Operations**

 

Net income for the three months ended March 31, 2002 was$2.1 million, or $0.02 per diluted share, compared to net income of$6.4 million, or $0.14 per diluted share for the three months ended March31, 2001.  During the three months endedMarch 31, 2002, we earned less in interest income and other operating income ascompared to the three months ended March 31, 2001.  Our operating expenses for the three months ended March 31, 2002were less than the comparable period in 2001.

 

Income from retained interests in credit card receivables securitizeddecreased to $5.7 million for the three months ended March 31, 2002compared to $15.4 million for the three months ended March 31, 2001 dueprimarily to a reduction in the net interest margin on the receivables and anincrease in charge offs on the portfolio. Additionally, we did not earn any securitization income during the threemonths ended March 31, 2002 (compared to securitization income during the threemonths ended March 31, 2001 of $266,000) because our portfolio decreased insize.  See our discussion under “NetSecuritization Income and Income from Retained Interests” below.

 

The largest component of our income comes from the profit generated fromour managed receivables. Growth in managed receivables cannot be predicted withcertainty. In general, it is a product of our marketing and other strategicefforts. However, it also is dependent upon a number of factors that we are notable to control, such as levels of consumer spending, competition and generaleconomic conditions.

 

Other operating income, excluding securitization income and income fromretained interests in credit card receivables securitized, increased to$34.6 million for the three months ended March 31, 2002 from$33.3 million for the three months ended March 31, 2001. This increase isdue primarily to the increase in other credit card fees, which includes annualmembership, over-limit and cash advance fees. The revenue associated with thesefees increased as a result of the growth of our managed loans from the March31, 2001 quarter and due to certain accounts structured to have higher fees andlower finance charges.

 

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Other operating expenses decreased to $37.3 million for the threemonths ended March 31, 2002 from $40.2 million for the three months endedMarch 31, 2001. The decrease is due primarily to the decrease in our marketingand solicitation expenses, offset by increases in the cost of operationsassociated with the growth in our business, including additional servicing andcollection costs.  During the threemonths ended March 31, 2002, we implemented certain cost cutting initiativesthat we believe will reduce our cost of operations during the second half of2002 as a percentage of average managed loans.

 

***Net Interest Income***

 

Net interest income consists of interest income earned on cash and cashequivalents less interest expense. Net interest income totaled$0.3 million for the three months ended March 31, 2002 and$1.0 million for the three months ended March 31, 2001. The decrease innet interest income of $0.7 million during 2002 is attributable to thereduction of the prime rate, as well as a reduction in our average cash andcash equivalents.

 

Until January 2002, $15.0 million was outstanding under our$25.0 million one-year revolving credit facility and $10.0 millionwas reserved for a letter of credit in favor of a third party servicer. Therevolving credit facility expired in January 2002 and was paid infull.  During the three months endedMarch 31, 2001, we did not have any interest expense.

 

***NetSecuritization Income and Income from Retained Interests***

 

Retained Interests in Credit Card Receivables Securitized are valued inaccordance with the provisions of Statement No. 140. These retainedinterests are subsequently accounted for as trading securities and reported atestimated fair market value in accordance with Financial Accounting StandardNo. 115, “Accounting for Certain Investments in Debt and EquitySecurities” (“Statement No. 115”). See “Credit Card Securitizations.”

 

Net securitization income is recognized under Statement No. 140 atthe time the receivables are securitized. Gains or losses on sales ofreceivables depend in part on the previous carrying amount of the financialassets sold as well as the fair value of the assets and cash proceeds received.In a sale, we receive cash, retain an interest in the receivables sold(Seller’s Interest) and retain rights to receive cash in the future (the I/Ostrip). We did not earn any net securitization income during the three monthsended March 31, 2002 because our portfolio decreased in size.  Net securitization income was$0.3 million for the three months ended March 31, 2001.

 

Income from retained interests in credit card receivables securitizedincludes the income earned on the retained interests and any changes in thefair value of the retained interest in credit card receivables securitized inaccordance with Statement No. 115. Income from retained interests incredit card receivables securitized for the three months ended March 31, 2002was $5.7 million, compared to $15.4 million for the three monthsended March 31, 2001. The decrease in our income from retained interests incredit card receivables securitized is due to a decline in our net interestmargin on the receivables and an increase in charge offs on the portfolio.

 

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The fair value of our retained interests in credit card receivablessecuritized 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. Because quotedmarket prices are generally not available, the fair value is based on theestimated present value of future cash flows using management’s best estimatesof finance charges and late fees, servicing fees, costs of funds paid toinvestors, payment rates, credit losses, discount rates and requiredamortization payments to investors. The weighted average key assumptions usedas of the end of each period are presented below. Changes in any of theseassumptions could impact the estimates of the fair value of our retainedinterest as well as the realization of expected future cash flows:

 

|                                   |   | **March 31,   2002** |   | **December 31,   2001** |   |
|----------------------------------------|--------|----------------------|--------|-------------------------|--------|
| Payment rate (monthly)                 |   | 7.1                  | %      | 8.0                     | %      |
| Expected credit loss rate (annualized) |   | 16.7                 |   | 16.7                    |   |
| Residual cashflows discount rate       |   | 34.9                 |   | 34.9                    |   |
| Servicing liability discount rate      |   | 14.1                 |   | 14.0                    |   |

 

The payment ratedeclined from 8.0% at December 31, 2001 to 7.1% at March 31, 2002 due to slowergrowth and seasoning of the portfolio and stronger payments in the fourthquarter of 2001 due to the events of September 11, 2001.  The discount rates are based on management’sestimates of returns that would be required by investors in an investment withsimilar terms and credit quality. Estimated default and discount rates are based on historical results,adjusted for expected changes based on our credit risk models. The returns tothe investors in the securitizations are based on management’s estimates.

 

Our retained interests in credit card receivables securitized includethe following:

 

|                                                       |   | **March 31,   2002** |    | **December 31,   2001** |   |
|------------------------------------------------------------|--------|----------------------|---------|-------------------------|--------|
|                                                       |   | **(In thousands)**   |    |
| I/O strip                                                  |   | $                    | 95,915  |                    | $      | 84,390 |   |
| Servicing liability                                        |   | (43,108              | )       | (38,123                 | )      |
| Net I/O strip                                              |   | 52,807               |    | 46,267                  |   |
| Fair value of Seller’s Interest                       |   | 296,193              |    | 312,622                 |   |
| Retained interests in credit card receivables  securitized |   | $                    | 349,000 |                    | $      | 358,889 |   |

 

Our net I/O strip is comprised of the I/O strip and the relatedservicing liability. The I/O strip reflects the estimated fair value of ourrights to future income from the portfolio. The servicing liability reflectsthe estimated fair value of the cost to service the portfolio above and beyondthe servicing income we expect to receive from the securitization. The decreasein our retained interests from December 31, 2001 to March 31, 2002 is afunction of the decrease in the total receivables securitized at the end ofeach of the stated periods.

 

***Other Operating Income***

 

Other operating income, excluding securitization income and income fromretained interests in credit card receivables securitized, consists of thefollowing:

 

|                         |   | **Three Months Ended March 31,** |   |
|------------------------------|--------|----------------------------------|--------|
|                         |   | **2002**                         |   | **2001** |   |
|                         |   | **(In thousands)**               |   |
| Servicing income             |   | $                                | 1,285  |   | $ | 1,687 |   |
| Other credit card fees       |   | 24,840                           |   | 18,713 |   |
| Interchange fees             |   | 3,957                            |   | 5,361 |   |
| Ancillary products           |   | 4,483                            |   | 7,570 |   |
| Total other operating income |   | $                                | 34,565 |   | $ | 33,331 |   |

 

The increase in other operating income to $34.6 million for thethree months ended March 31, 2002 from $33.3 million for the three monthsended March 31, 2001 relates to the increase in our managed receivables, whichincreased to $1.8 billion at March 31, 2002 from $1.6 billion atMarch 31, 2001. A substantial portion of the servicing income relates toour purchased portfolios. As the size of these purchased portfolios decreases,there is a corresponding decrease in servicing income. Other credit card feesincreased to $24.8 million from $18.7 million due to increases inannual, late, over-limit and cash advance fees. These fees

 

14

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area function of the increase in our managed loans and due to certain accountsstructured to have higher fees and lower finance charges.  Interchange fees are the portion of themerchant fee assessed by Visa and passed on to us on the purchase volume on ourcredit card receivables. Interchange fees decreased to $4.0 million from$5.4 million due to a decrease in the purchase volume on our managedreceivables. Ancillary product revenue decreased to $4.5 million from$7.6 million due to fewer customers purchasing our products and because wehave decreased our growth in new accounts during the past two quarters.

 

Our total other operating income is primarily a function of the size ofour average credit card receivables portfolio. We have decreased our growthprojections for the remainder of 2002, compared to 2001, and as a result ourother operating income may decline in 2002 as compared to 2001. Additionally,our ancillary product income is very sensitive to our new account growth assales of our fee–based products are higher to new customers than toexisting cardholders.  As we havedecreased our growth plans for new accounts in 2002, our ancillary productincome may continue to decline in 2002.

 

***Other Operating Expense***

 

Other operating expense consists of the following for the periodsindicated:

 

|                          |   | **Three Months Ended March 31,** |   |
|-------------------------------|--------|----------------------------------|--------|
|                          |   | **2002**                         |   | **2001** |   |
|                          |   | **(In thousands)**               |   |
| Salaries and benefits         |   | $                                | 3,596  |   | $ | 2,283 |   |
| Credit card servicing         |   | 20,070                           |   | 14,129 |   |
| Marketing and solicitation    |   | 2,624                            |   | 12,131 |   |
| Professional fees             |   | 783                              |   | 982 |   |
| Data processing               |   | 1,600                            |   | 2,841 |   |
| Net occupancy                 |   | 1,192                            |   | 805 |   |
| Ancillary product expense     |   | 1,999                            |   | 3,967 |   |
| Other                         |   | 5,458                            |   | 3,104 |   |
| Total other operating expense |   | $                                | 37,322 |   | $ | 40,242 |   |

 

Other operating expense for the three months ended March 31, 2002decreased to $37.3 million from $40.2 million for the three monthsended March 31, 2001. This decrease is due primarily to a decrease in marketingand solicitation expenses, data processing expenses and ancillary productexpenses, offset by increases in credit card servicing, salaries and benefits,and other expenses.  Credit cardservicing costs primarily include collections and customer serviceexpenses.  These expenses include certainin-house collections and customer service representatives as well as costsassociated with corresponding with our cardholders.  Servicing expense also includes certain outsourced collectionsand customer service representatives. Credit card servicing costs increased due to an increase in our managedreceivables.

 

During 2001, based on anticipated growth in our managed receivables, weincreased our infrastructure, customer service and collection personnel.Salaries and benefits, net occupancy and other expenses increased as ouroperations expanded to service the increase in managed loans. We have reducedour growth plans for 2002 and we are implementing certain cost cuttinginitiatives that we believe will reduce our cost of operations during thesecond half of 2002.  Data processingexpenses decreased due to the realization of certain cost cutting effortsimplemented in January of 2002. Marketing and solicitation costs decreased due to reduced levels ofdirect mail, television, telemarketing and internet campaigns.  We reduced our marketing and solicitationefforts during the second half of 2001 and for the three months ended March 31,2002 as a result of concerns relating to the availability of financing, generaleconomic conditions and uncertainty regarding credit quality of accounts wehistorically have targeted. Our expected growth rate in 2002 will be negativelyimpacted by this reduction in marketing. Ancillary product expense decreaseddue to a decrease in ancillary product marketing and a decrease in ancillaryproducts sold.

 

***Income Taxes***

 

Income taxes were $1.1 million for the three months ended March 31,2002 and $3.4 million for the three months ended March 31, 2001. Oureffective tax rate was 35.0% for each of the three months ended March 31, 2002and 2001.  Substantially all of ourincome tax liabilities at March 31, 2002 were deferred tax liabilities.

 

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##### **SelectedCredit Card Data**

 

In August 1997, we began securitizing our credit card receivables.In each securitization, we receive cash, retain an interest in the receivablesthat are securitized, retain the rights to receive cash in the future andservice the accounts. Securitizations are treated as sales under GAAP. As such,we remove the securitized loans from our consolidated balance sheet. Theperformance of the underlying credit card receivables will affect the futurecash flows we actually receive. The information in the following table ispresented for the credit card receivables that we have securitized.

 
|                        |   | **At or for the Three Months Ended**       |      |
|-----------------------------|--------|--------------------------------------------|-----------|
|                        |   | **2002**                                   |      | **2001** |   | **2000** |   |
|                        |   | **Mar. 31**                                |      | **Dec. 31** |   | **Sep. 30** |   | **Jun. 30** |   | **Mar. 31** |   | **Dec. 31** |   | **Sep. 30** |   | **Jun. 30** |   |
|                        |   | **(In thousands; percentages annualized)** |      |
| Period-end managed loans    |   | $                                          | 1,809,070 |   | $ | 1,891,842 |   | $ | 1,804,631 |   | $ | 1,671,762 |   | $ | 1,589,584 |   | $ | 1,528,372 |   | $ | 1,321,128 |   | $ | 1,171,932 |   |
| Period-end managed accounts |   | 2,057                                      |      | 2,185 |   | 2,163 |   | 2,300 |   | 2,256 |   | 2,178 |   | 1,891 |   | 1,648 |   |
| Average managed loans       |   | $                                          | 1,860,209 |   | $ | 1,838,873 |   | $ | 1,745,136 |   | $ | 1,623,730 |   | $ | 1,574,554 |   | $ | 1,398,041 |   | $ | 1,256,239 |   | $ | 1,097,610 |   |
| Net interest margin         |   | 16.9                                       | %         | 19.0 | % | 21.5 | % | 22.0 | % | 21.6 | % | 21.8 | % | 23.4 | % | 23.3 | % |
| Operating ratio             |   | 9.0                                        | %         | 9.8 | % | 8.8 | % | 8.4 | % | 9.1 | % | 7.9 | % | 7.6 | % | 7.3 | % |

 

The net interest margin includes all net interest and late fee income onall outstanding loans, less the interest expense paid to the investors andfinance charge charge offs. Our operating ratio includes all expensesassociated with our business, other than marketing and solicitation andancillary product expenses, and is expressed as a percentage of average managedloans.

 

During 1998, we purchased two portfolios of credit card receivables withoutstanding receivables balances at the time of purchase of$579.7 million. The presented credit card data excludes certain of thesereceivables and the related accounts which at the time of purchase were closedaccounts in a certain delinquency status. Management believed that theseaccounts were either in the process of being charged off by the seller due todelinquency or were likely to be charged off in the near term. As a result,management believed that it would have had very little opportunity to influencethe delinquency or default rates of these accounts prior to charge off. Wetherefore excluded these accounts, the receivables and any activity in theaccounts since the date of purchase from any credit card data presented. At thetime of the purchases, there were approximately 52,000 such accounts,representing 25.9% of the accounts purchased and $137.2 million of the $579.7 millionoutstanding receivables purchased.

 

The portfolios acquired during 1998 were purchased at substantialdiscounts. A portion of the discount at the time of purchase related to thecredit quality of the remaining loans in the portfolio and reflects thedifference between the purchased face amount of the receivables and the futurecash collections management expects to receive with respect to the purchasedface amount. The substantial discount we received on the purchased portfolioexceeds the discount we ascribed to the credit quality of the purchasedreceivables. We are reporting this excess discount as additional interestincome over the life of the portfolio for managed loan reporting and areamortizing it into interest income using the interest method. As of March 31,2002, approximately $6.2 million of this discount remained.

 

Our net interest margins are influenced by a number of factors,including the level of finance charges and late fees billed, the weightedaverage cost of funds and the level of our finance charge charge offs. Our netinterest margin for the three months ended March 31, 2002 was 16.9% as comparedto 19.0% for the three months ended December 31, 2001. The decrease in our netinterest margin is due to a decrease in the finance charge and late fee incomebilled to our cardholders and an increase in the finance charge charge offs onthe portfolio. These decreases were slightly offset by a reduction in theaverage cost of funds of the portfolio.

 

Each quarter, we re-underwrite our portfolio to price our products toappropriately reflect the level of

 

16

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ourcustomer’s credit risks. As part of this underwriting process, existingcustomers may be offered increased or decreased pricing depending on theircredit risk as well as their supply and demand for credit. Increases in pricingmay increase our net interest margin, while decreases in pricing may reduce ournet interest margin. We expect our net interest margin to continue to decreaseduring the second quarter of 2002 due primarily to expected increases infinance charge charge offs for the remainder of 2002. The increase in financecharge charge offs is based on the current economic environment as well as theexpected seasoning of the credit card accounts. We believe that our netinterest margin may also decline in 2002 if the finance charges and late feesbilled on our portfolio continue to decline, or if our weighted average cost offunds increases. We expect to mitigate part of the expected decline in our netinterest margin by actively repricing certain accounts as part of ourunderwriting process mentioned above.

 

Our operating ratio includes all costs of operating our business, otherthan marketing expenses and ancillary product expenses. Our operating ratiofluctuates based on our rate of loan growth and the level of our expenditureson our infrastructure, our personnel, our collections and customer serviceoperations, our internet technology and our database management system. Theoperating ratio decreased to 9.0% during the three months ended March 31, 2002as compared to 9.8% during the three months ended December 31, 2001 as weimplemented certain cost cutting initiatives, including automation projects andstaff reductions.  We expect to continueto reduce our operating ratio as a percentage of average managed loans duringthe second half of 2002.  Included inour operating expenses for the first quarter of 2002 was approximately $3.0million paid to our primary subservicer to reimburse them for servicing feweraccounts than previously projected.

 

**Asset Quality**

 

Our delinquency and net loan charge off rates at any point in timereflect the credit performance of our receivables. 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 also affects the stability of delinquency and loss rates of theportfolio.

 

Our strategy for managing delinquency and loan losses consists of activeaccount management throughout the customer relationship. This strategy includescredit line management and pricing based on the risk of the credit cardaccounts.

 

*Delinquencies.* Delinquencies have the potential to impact net income in the form of netcredit losses. Delinquencies are also costly in terms of the personnel andresources dedicated to resolving them. A credit card account is contractually delinquentif the minimum payment is not received by the specified date on the customer’sstatement. It is our policy to continue to accrue interest and fee income onall credit card accounts, except in limited circumstances, until the accountand all related loans, interest and other fees are charged off. See “—NetCharge offs.”

 

The following table presents the delinquency trends of our credit cardreceivables portfolio on a managed loan portfolio basis:

 
|              |        | **At or for the Three Months Ended** |        |
|-------------------|-------------|--------------------------------------|-------------|
| **2002**          |        | **2001**                             |        | **2000** |
| **Mar. 31**       | **Dec. 31** |                                 | **Sep. 30** |   | **Jun. 30** |   | **Mar. 31** | **Dec. 31** |   | **Sep. 30** |   | **Jun. 30** |
|              |        | **(% of Total)**                     |        |
| Loans Delinquent: |        |                                 |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 30 to 59 days     |        | 3.8                                  | %           | 4.6 | % | 3.9 | % | 4.2 | % | 4.0 | % | 3.9 | % | 3.8 | % | 3.4 | % |
| 60 to 89 days     |        | 3.2                                  |        | 3.3 |   | 3.1 |   | 3.3 |   | 2.7 |   | 3.1 |   | 2.8 |   | 2.4 |   |
| 90 or more        |        | 9.0                                  |        | 7.8 |   | 7.8 |   | 7.3 |   | 6.7 |   | 6.4 |   | 6.0 |   | 4.9 |   |
|              |        |                                 |        |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total 30 or more  |        | 16.0                                 | %           | 15.7 | % | 14.8 | % | 14.8 | % | 13.4 | % | 13.4 | % | 12.6 | % | 10.7 | % |
| Total 60 or more  |        | 12.2                                 | %           | 11.1 | % | 10.9 | % | 10.6 | % | 9.4 | % | 9.5 | % | 8.8 | % | 7.3 | % |

 

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The following table separately reports our loan delinquency trends forour originated portfolio and for our purchased portfolio:

 
|                     |   | **At or for the Three Months Ended** |   |
|--------------------------|--------|--------------------------------------|--------|
|                     |   | **2002**                             |   | **2001** |   | **2000** |   |
|                     |   | **Mar. 31**                          |   | **Dec. 31** |   | **Sep. 30** |   | **Jun. 30** |   | **Mar. 31** |   | **Dec. 31** |   | **Sep. 30** |   | **Jun. 30** |   |
|                     |   | **(% of Total)**                     |   |
| **Originated Portfolio** |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans Delinquent:        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 30 to 59 days            |   | 3.7                                  | %      | 4.5 | % | 3.9 | % | 4.1 | % | 3.8 | % | 3.5 | % | 3.6 | % | 3.3 | % |
| 60 to 89 days            |   | 3.2                                  |   | 3.4 |   | 3.1 |   | 3.3 |   | 2.6 |   | 3.0 |   | 2.7 |   | 2.3 |   |
| 90 or more               |   | 9.3                                  |   | 7.9 |   | 7.9 |   | 7.3 |   | 6.7 |   | 6.4 |   | 6.0 |   | 4.8 |   |
|                     |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total 30 or more         |   | 16.2                                 | %      | 15.8 | % | 14.9 | % | 14.7 | % | 13.1 | % | 12.9 | % | 12.3 | % | 10.4 | % |
| Total 60 or more         |   | 12.5                                 | %      | 11.3 | % | 11.0 | % | 10.6 | % | 9.3 | % | 9.4 | % | 8.7 | % | 7.1 | % |
|                     |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| **Purchased Portfolio**  |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Loans Delinquent:        |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 30 to 59 days            |   | 4.8                                  | %      | 5.9 | % | 4.4 | % | 5.0 | % | 5.7 | % | 6.7 | % | 5.4 | % | 4.3 | % |
| 60 to 89 days            |   | 2.9                                  |   | 3.0 |   | 2.7 |   | 3.8 |   | 3.5 |   | 4.1 |   | 3.6 |   | 2.8 |   |
| 90 or more               |   | 5.7                                  |   | 5.5 |   | 6.4 |   | 7.4 |   | 7.4 |   | 7.1 |   | 5.7 |   | 5.5 |   |
|                     |   |                                 |   |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Total 30 or more         |   | 13.4                                 | %      | 14.4 | % | 13.5 | % | 16.2 | % | 16.6 | % | 17.9 | % | 14.7 | % | 12.6 | % |
| Total 60 or more         |   | 8.6                                  | %      | 8.5 | % | 9.1 | % | 11.2 | % | 10.9 | % | 11.2 | % | 9.3 | % | 8.3 | % |

 

In general, as the average age of an originated credit card receivablesportfolio increases, delinquency rates can be expected to first be artificiallylow during the first six months of their life; dramatically increase and peaktowards the rest of the first year and during the second year; and thendecrease and stabilize after year two. We have observed this trend in theindustry as well as within our own originated portfolio. Our delinquency rateshave increased due primarily to the seasoning of significant growth in newreceivables that occurred during 2000 and 1999 and the general economicconditions that prevailed during 2001 and the three months ended March 31,2002. The increase in delinquencies of 90 or more from December 31, 2001 toMarch 31, 2002 is due primarily to the result of successful collection efforts,which have prevented accounts from charging off; however, the payments madehave not been sufficient to bring the accounts current.  Additionally, the decrease in the 30 to 59day delinquency bucket are the result of strong payments being made byindividuals in this bucket.  We areusing our account management strategies on our portfolio, which are intended toreduce the expected increase in delinquency rates as our portfolio continues tomature.

 

*Net Charge offs.*  Netcharge offs include the principal amount of losses from customers unwilling orunable to pay their loan balance, as well as bankrupt and deceased customers,less current period recoveries. Net charge offs exclude accrued finance chargesand fees, which are charged against the related income at the time of chargeoff. Losses from fraudulent activity in accounts are also excluded from netcharge offs and are included separately in other operating expenses. Wegenerally charge off loans when the loan becomes contractually 180 dayspast due. However, bankrupt accounts and the accounts of deceased customerswithout a surviving, contractually liable individual or an estate large enoughto pay the debt in full are charged off within 30 days of notification ofthe customer’s bankruptcy or death and subsequent confirmation, if applicable.

 

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Approximately $87.5 million of the discount on our portfoliopurchases during 1998 related to the credit quality of the remaining loans inthe portfolio and reflected the difference between the purchased face amountand the future cash collections management expected to receive with respect tothe purchased face amount. For purposes of reporting adjusted charge off ratioson managed loans below, this discount related to credit quality and wasutilized to offset a portion of actual net charge offs. This amount was fullyamortized as of June 30, 2001 and therefore, beginning with the quarterended September 30, 2001, the actual and adjusted charge off ratios willbe the same. The following table presents our net charge offs for the periodsindicated on a managed loan portfolio basis:

 
|                                               |        | **For the Three Months Ended** |         |
|----------------------------------------------------|-------------|--------------------------------|--------------|
| **2002**                                           |        | **2001**                       |         | **2000** |
| **Mar. 31**                                        | **Dec. 31** |                           | **Sept. 30** |   | **Jun. 30** |   | **Mar. 31** | **Dec. 31** |   | **Sept. 30** |   | **Jun. 30** |
| **(Dollars in thousands; percentages annualized)** |
| **Selected Credit Card Data:**                     |        |                           |         |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| Average managed loans                              |        | $                              | 1,860,209    |   | $ | 1,838,873 |   | $ | 1,745,136 |   | $ | 1,623,730 |   | $ | 1,574,554 |   | $ | 1,398,041 |   | $ | 1,256,239 |   | $ | 1,097,610 |   |
| Net charge offs                                    |        | 68,407                         |         | 70,207 |   | 63,759 |   | 59,807 |   | 58,229 |   | 46,552 |   | 35,678 |   | 26,302 |   |
| Adjusted net charge offs                           |        | 68,407                         |         | 70,207 |   | 63,759 |   | 59,434 |   | 58,126 |   | 46,132 |   | 34,525 |   | 25,346 |   |
| Net charge off ratio                               |        | 14.7                           | %            | 15.3 | % | 14.6 | % | 14.7 | % | 14.8 | % | 13.3 | % | 11.4 | % | 9.6 | % |
| Adjusted charge off ratio                          |        | 14.7                           | %            | 15.3 | % | 14.6 | % | 14.6 | % | 14.8 | % | 13.2 | % | 11.0 | % | 9.2 | % |
|                                                    |             |                                |              |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |  |

 

As described above under delinquencies, as our portfolio matures, weexpect charge off rates to also increase and then stabilize. Our charge offratio increased during 2001 and 2000 due primarily to seasoning of ourportfolio and a general slowing of the economy. Typically, as our accountsmature, there are very few charge offs during the first 180 days, then thecharge offs are expected to increase and peak in the second year and thenstabilize in the third year. We expect our charge off rates to continue toincrease as our portfolio seasons. We plan to continue to focus our resourceson refining our credit underwriting standards for new accounts and to increaseour focus on collection and post charge off recovery efforts to minimizelosses.

 

*Credit Losses.*  Forsecuritized receivables, anticipated credit losses are reflected in thecalculations of net securitization income and the fair value of our retainedinterests in credit card receivables securitized while the actual charge offsare included in income from retained interests in credit card receivablessecuritized. In evaluating credit losses, we take into consideration severalfactors, including (1) historical charge off and recovery activity byreceivables portfolio, (2) recent and expected delinquency and collectiontrends by receivables portfolio, (3) the impact of current economicconditions and recent economic trends on the customers’ ability to repay and(4) the risk characteristics of the portfolios. Substantially all of ourcredit card receivables have been securitized. As we have securitized ourreceivables, we have removed them from our balance sheet.

 

**Liquidity, Funding and Capital Resources**

 

A primary financial goal is to maintain an adequate level of liquiditythrough active management of assets and liabilities. Because thecharacteristics of our assets and liabilities change, liquidity management is adynamic process affected by the pricing and maturity of our assets andliabilities.

 

We finance our business through cash flows from operations, assetsecuritizations and the issuance of equity:

 

•                  During the three months ended March 31, 2002, wegenerated approximately $2.6 million in cash flow from operations comparedto $16.2 million during the three months ended March 31, 2001.  The $13.6 million decrease is due primarilyto $10.0 million being used to cash collateralize the irrevocable standbyletter of credit we entered into during the first quarter of 2002 as furtherexplained below.

 

•                  Until January 2002, we had a$25.0 million one-year revolving credit facility, of which$15.0 million was outstanding under this facility and $10.0 millionwas reserved for a letter of credit in favor of a third party servicer. Thisagreement expired in January 2002 and was paid in full.

 

•                  During the first quarter of 2002, the Companyentered into an irrevocable standby letter of credit agreement for $10.0million with a bank.  The letter ofcredit allows the subservicer of the receivables to draw under the letter ofcredit as needed.  We are required tomaintain a cash balance of $10.0 million with the lender. Such cash isreflected as “Restricted cash” on the face of the balance sheet.

 

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•                  As of March 31, 2002, we had total securitizationfacilities of $2.0 billion and had used approximately $1.5 billion ofthese facilities. These facilities include the outstanding amounts on twofloating rate three-year term securitizations of approximately$441.5 million that we completed during July 2001 and approximately$627.4 million that we completed during August 2000.

 

| **Maturity Date** |   | **Facility Limit****** |    |
|-------------------|--------|------------------------|---------|
|              |   | **(in millions)**      |    |
| April 2002        |   | $                      | 212.7   |   |
| May 2002          |   | 200.0                  |    |
| October 2002      |   | 306.0                  |    |
| March 2003        |   | 250.0                  |    |
| September 2003(1) |   | 627.4                  |    |
| July 2004(2)      |   | 441.5                  |    |
|              |   | $                      | 2,037.6 |   |

 

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(1)        Represents the expected principal payment date;however, as early as September 2002, collections on the receivables could beaccumulated for the benefit of this facility and not be available to us to fundnew purchases.

 

(2)        Represents the expected principal payment date;however, as early as July 2003, collections on the receivables could beaccumulated for the benefit of this facility and not be available to us to fundnew purchases.

 

Subsequent to March 31, 2002, we renewed an $87.7 million facility,which was set to expire in April 2002, for three months.  The remaining facility scheduled to renew inApril 2002 expired and was not renewed.

 

During the fourth quarter of 2001, we needed additional liquidity tofund our operations, pay off our revolving credit facility in January 2002 andto fund the growth in our retained interests in our securitizations. Aspreviously noted, we sold $40.0 million of preferred stock and we alsosold approximately $36.3 million of our retained interest in oursecuritizations at a substantial discount. We continue to explore a wide rangeof options for liquidity in order for us to maintain our growth and to beprepared for adverse changes in the securitization marketplace. These optionsmay include revolving lines of credit, selling a subordinated interest in oneor more of our securitizations, or the issuance of debt or equity. We expect toexplore other options aswell. There cannot, however, be any assurances that wewill be able to obtain liquidity on satisfactory terms. Should we not obtainadditional liquidity, we will need to significantly limit our growth and willbe more susceptible to adverse changes in the securitization marketplace.

 

During the firstquarter of 2002, we had positive cash flow from operations.   Our cash flow from operations is dependenton the performance of our managed portfolio including charge off rates, netinterest margin, payment rates and operating expenses.  We currently expect to have lower paymentrates, lower net interest margins and higher charge off rates during the secondquarter of 2002 as compared to the first quarter.  This may result in negative cash flow from operations during thesecond quarter of 2002.  Based on ourcurrent expectations of our managed portfolio performance and our expectedgrowth rates during the third and fourth quarter of this year, we expect tohave positive cash flow from operations during these quarters.

 

Our most significant source of liquidity is the securitization of creditcard receivables. The maturity terms of our securitizations vary. With theexception of the three-year securitizations that we completed in July 2001and August 2000, most are one-year securitizations. Once repayment begins,payments from customers on credit card receivables are accumulated to repay theinvestors and are no longer reinvested in new credit card receivables. At thattime, our funding requirements for new credit card receivables will increaseaccordingly. The occurrence of certain events may also cause the securitizationtransactions to amortize earlier than scheduled or may require additionalenhancements. These events include a decline in the portfolio’s annual yield ora decline in the payment rate, and in each case, below certain rates, or anincrease in delinquencies or charge offs above certain rates, will cause earlyamortization. The portfolio’s annual yield typically includes finance chargesand past due fees earned on the receivables less servicing fees and creditlosses. These events would accelerate the need to utilize alternative fundingsources. Under each of our securitization structures, there has not been anearly amortization period. As each facility expires or comes up for renewal,there can be no assurance that the facility will be renewed or if renewed therecan be no assurance that the terms will be as favorable as the terms thatcurrently exist. Either of these events could significantly increase our needfor additional liquidity. For additional information regarding oursecuritization practice, see the information under the caption “Credit CardSecuritizations.”

 

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Absent changes in the manner in which we securitize credit cardreceivables, we believe that our asset securitizations and cash flow fromoperations generally will provide adequate liquidity for our business at itscurrent level. However, in order for us to continue growing our business, wewill need additional sources of liquidity to fund our retained interest portionof the growth. In addition, should the terms of the securitizations availableto us become less favorable, we also will need additional sources of liquidityto fund our retained interests. We are particularly concerned about thecontinued availability of securitizations on terms previously available to usgiven the recent poor performance of several of our competitors and the impactof their performance on the marketplace for securitizations.

 

**Critical Accounting Policies**

 

Our financial statements are prepared in accordance with GenerallyAccepted Accounting Principles. These principles are numerous and complex. Oursignificant accounting policies are summarized in the footnotes to our financialstatements. In many instances, the application of GAAP requires management tomake estimates or to apply subjective principles to particular facts andcircumstances. A variance in the estimates used or a variance in theapplication, or interpretation of GAAP could yield a materially differentaccounting result. It is impracticable for us to summarize every accountingprinciple that requires us to use judgment or estimates in itsapplication.  In our Form 10-K for theyear ended December 31, 2001, we discuss the two areas where we believe thatthe estimations, judgments or interpretations that we have made, if different,would have yielded the most significant differences in our financialstatements, valuation of retained interests and non-consolidation of specialpurpose entities, and we urge you to review that discussion.  In addition, in Note 3 to the financialstatements included in this report we update our sensitivity analysis withrespect to valuations.

 

 

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**Forward-Looking Information**

 

All statements in this quarterly report concerning ouroperating and earnings expectations for fiscal year 2002 and our liquidityexpectations, and all other statements regarding our future performance(including those using words such as “believe,” “estimate,” “project,”“anticipate, or “predict”), are forward-looking statements. Theseforward-looking statements are not guarantees of future performance and aresubject to various assumptions, risks, and other factors that could cause ouractual results to differ materially from those suggested by theseforward-looking statements. These factors include, among others, the followingrisks and others set forth under the caption “Risk Factors” in our AnnualReport on Form 10-K for the year ended December 31, 2001:  

 

(1) Our financial performance is significantlydependent upon the collectibility of the credit card receivables that weoriginate or purchase.  Collectibilityis a function of many factors, including the validity of the selection criteriathat we use in issuing credit cards, the maturity of the relationships with ourcustomers, and general economic conditions, and it is extremely difficult topredict.  Lower collectibility adverselyimpacts our performance.  To the extentthat we have over-estimated collectibility, in all likelihood we haveover-estimated our performance;  

 

(2) We are substantially dependent uponsecuritizations and other borrowed funds in order to fund the credit cardreceivables that we originate or purchase. All of our securitization facilities are of finite duration (andultimately will need to be extended or replaced) and contain conditions thatmust be fulfilled in order for funding to be available.  In the event that advance rates for securitizationsare reduced, investors in securitizations require a greater rate of return, wefail to meet the requirements for continued funding, or large-scalesecuritizations otherwise become unavailable to us, we may not be able tomaintain or grow our base of credit card receivables or it may be moreexpensive for us to do so.  In addition,a portion of our credit card receivables cannot be financed throughsecuritizations because of advance rate limitations and must be financedthrough equity that either is the result of profitable operations or is raisedfrom third parties or through funds borrowed elsewhere.  The cost and availability of equity andborrowed funds is dependent upon our financial performance, the performance ofour industry generally, and general economic and market conditions, andrecently has been both expensive and difficult to obtain;

 

(3) Our financial performance is, in part, a functionof the aggregate amount of credit card receivables that we haveoutstanding.  In turn, this is a functionof many factors including interest rates, seasonality, general economicconditions, competition from other credit card issuers and other sources ofconsumer financing, access to funding as noted above, and the success of ourmarketing efforts.  To the extent thatwe have over-estimated the size or growth of our credit card receivables, inall likelihood we have over-estimated our future performance;  

 

(4) Many of our expenses are fixed and are not easilyreduced or increased.  In the event thatwe overestimate the size or growth of our business, we may have excessiveexpenses that adversely impact our future performance.  In the event that we underestimate the sizeor growth, we may not be able to service the credit card receivables that weoriginate or purchase as effectively as we otherwise would;  

 

(5) We operate in a heavily regulated industry.  Changes in bankruptcy, privacy or otherconsumer protection laws may adversely affect our ability to collect creditcard account balances or otherwise adversely affect our business or expose usto litigation.  Similarly, regulatorychanges could adversely affect our ability to market credit cards and otherproducts and services to our customers. The accounting rules that govern our business are exceedingly complex,difficult to apply, and in a state of flux. As a result, how we value our credit card receivables and otherwiseaccount for our business (including whether we consolidate our securitizations)is subject to change depending upon the interpretation of, and changes in,those rules; and

 

(6) We routinely explore various opportunities to growour business, including the purchase of credit card receivable portfolios andother businesses.  There are a number ofrisks attendant to any acquisition, including the possibility that we willovervalue the assets to be  purchased,that we will not be able to successfully integrate the acquired business orassets, and that we will not be able to produce the expected level ofprofitability from the acquired business or assets.  As a result, the impact of any acquisition on our futureperformance may not be as favorable as expected and actually may be adverse.

 

We expressly disclaim any obligation to update orrevise any forward-looking statements, whether as a result of new information,future events or otherwise, except as required by law.

 

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**ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKETRISK**

 

Interest rate sensitivity is comprised of basis risk, gap risk andmarket risk. Basis risk is caused by the difference in the interest rateindices used to price assets and liabilities. Gap risk is caused by thedifference in repricing intervals between assets and liabilities. Market riskis the risk of loss from adverse changes in market prices and rates. Ourprincipal market risk is related to changes in interest rates. This riskaffects us directly in our lending and borrowing activities, as well asindirectly as interest rates may impact the payment performance of ourcustomer.

 

We incur basis risk because we fund managed assets at a spread over thecommercial paper rate or LIBOR while the rates on the underlying assets areindexed to the prime rate. This basis risk results from the potentialvariability in the spread between the prime rate and the commercial paper rate,on the one hand, and LIBOR, on the other hand, over time. We have not hedgedour basis risk due to the cost of hedging this risk versus the benefits fromelimination of this risk.

 

We attempt to minimize the impact of market interest rate fluctuationson net interest income and net income by regularly evaluating the risk inherentin our asset and liability structure, especially our off-balance sheet assetsand liabilities such as securitized receivables. The impact of market interestrate fluctuations on our securitized receivables is reflected in the valuationof our retained interests in credit card receivables securitized. This riskarises from continuous changes in our asset and liability mix, changes inmarket interest rates, including changes affected by fluctuations in prevailinginterest rates, payment trends on our interest–earning assets and paymentrequirements on our interest–bearing liabilities, and the general timingof all other cash flows. To manage our direct risk to market interest rates,management actively monitors market interest rates and the interest sensitivecomponents of our securitization structures. Management seeks to minimize theimpact of changes in interest rates on the fair value of assets, net income andcash flow primarily by matching asset and liability repricings. There can be noassurance that management will be successful in its attempt to manage suchrisks.

 

At March 31, 2002, all of our credit card receivables and otherinterest–earning assets had variable rate pricing, with receivablescarrying annual percentage rates at a spread over the prime rate, subject tocertain interest rate floors. At March 31, 2002, our securitizations had$1.5 billion in variable rate, interest–bearing liabilities, payableto investors compared to $1.3 billion as of March 31, 2001. Sinceboth our managed interest–earning assets and our managed interest–bearingliabilities reprice approximately every 30 days, we believe that theimpact of a change in interest rates would not be material to our financialperformance.

 

We believe we are not exposed to any material foreign currency exchangerate risk or commodity price risk.

 

**PARTII — OTHER INFORMATION**

 

**Item 1.            Legal Proceedings**

 

CompuCredit and certain officers of CompuCredit were defendants in aclass action lawsuit pending in the Federal District Court for the NorthernDistrict of Georgia.  The lawsuit arosein connection with the decline in the market value of the common stock ofCompuCredit on October 25, 2000.  Thelawsuit alleged

 

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that,prior to that date, CompuCredit and the chief executive officer and chieffinancial officer of CompuCredit made false and misleading statements regardingCompuCredit in violation of federal securities laws.  On February 19, 2002, the court dismissed the lawsuit.  Subsequently, counsel for the plaintiffsindicated that they would not be appealing the dismissal.  CompuCredit may become involved inadditional litigation from time to time relating to claims arising in theordinary course of its business.

 

**Item 2.            Changes in Securities and Use ofProceeds.**

 

(a)  Notapplicable.

 

(b)  Notapplicable.

 

(c)          Not applicable.

 

**Item 3.            DefaultsUpon Senior Securities.**

 

None.

 

**Item 4.            Submission of Matters to a Vote ofSecurity Holders.**

 

We held our annual shareholdersmeeting on May 9, 2002 for the purpose of electing nine members of our Board ofDirectors and to remove the conversion limitations on the Series A PreferredStock and the Series B Preferred Stock. Proxies for the meeting were solicited pursuant to Section 14(a) of theSecurities Exchange Act of 1934, and there was no solicitation in opposition tomanagement’s solicitations.

 

(1)           Votes regarding the election of ninedirectors to hold office for a term of one year and until their respectivesuccessors are elected and qualified were as follows:

 

| **DIRECTOR**          |   | **FOR**    |   | **ABSTAIN/BROKER  NON-VOTES** |   |
|-----------------------|--------|------------|--------|-------------------------------|--------|
| David G. Hanna        |   | 39,172,782 |   | 3,034,453                     |   |
| Peter L. Briger, Jr.  |   | 42,158,168 |   | 49,067                        |   |
| Richard W. Gilbert    |   | 39,166,482 |   | 3,040,753                     |   |
| Frank J. Hanna, III   |   | 41,948,468 |   | 258,767                       |   |
| Richard R. House, Jr. |   | 39,796,082 |   | 2,411,153                     |   |
| Richard E. Huddleston |   | 42,145,468 |   | 61,767                        |   |
| Gail Coutcher-Hughes  |   | 42,145,468 |   | 61,767                        |   |
| Mack F. Mattingly     |   | 42,157,168 |   | 50,067                        |   |
| Thomas G. Rosencrants |   | 42,143,968 |   | 63,267                        |   |

 

(2)           Votesregarding the removal of conversion limitations on the Series A Preferred Stockand the Series B Preferred Stock were as follows:

 

| **FOR**    |   | **AGAINST** |   | **ABSTAIN/BROKER  NON-VOTES** |   |
|------------|--------|-------------|--------|-------------------------------|--------|
| 36,315,421 |   | 216,347     |   | 5,675,440                     |   |

 

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**Item 5.                Other Information.**

 

None.

 

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

 

(a)  Exhibits

 

None.

 

(b)  Reports on Form 8-K

 

Current Report on Form 8-Kdated March 12, 2002, including Exhibit 99.1, which contains certaininformation regarding Changes in Registrant’s Certifying Accountant.

 

Current Report on Form8-K/A dated March 12, 2002, including Exhibit 99.1, which contains certaininformation regarding Changes in Registrant’s Certifying Accountant.

 

Current Report onForm 8-K/A dated April 1, 2002, including Exhibit 16, which containscertain information regarding Changes in Registrant’s Certifying Accountant.

 

Current Report onForm 8-K dated April 19, 2002, including Exhibit 99.1, which containscertain information regarding Changes in Registrant’s Certifying Accountant.

 

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**SIGNATURES**

 

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.

 
|         | CompuCredit Corporation |
|--------------|-------------------------|
|         |                    |   |
| May 15, 2002 | By                      | /s/ Ashley L. Johnson |
|         |                    | Ashley L. Johnson |
|         |                    | Chief Financial Officer  (duly authorized officer and  principal financial officer) |

 

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