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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-Q

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

FOR THE QUARTERLY PERIOD ENDED SEPTEMBER 30, 2003

COMPUCREDIT CORPORATION   LOGO

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

        The registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

        The registrant is an accelerated filer (as defined by Rule 12b-2 of the Securities Exchange Act of 1934).

        46,853,183 shares of the issuer's Common Stock, no par value were outstanding as of October 31, 2003.


COMPUCREDIT CORPORATION

FORM 10-Q

TABLE OF CONTENTS

September 30, 2003

 
    
    
  
   Page
PART I.   FINANCIAL INFORMATION    

 
 
Item 1.
 
Financial Statements (Unaudited)
 
 
          Condensed Consolidated Balance Sheets   1
          Condensed Consolidated Statements of Operations   2
          Condensed Consolidated Statement of Shareholders' Equity   3
          Condensed Consolidated Statements of Cash Flows   4
          Notes to Condensed Consolidated Financial Statements   5

 
 
Item 2.
 
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
20

 
 
Item 3.
 
Quantitative and Qualitative Disclosures About Market Risk
 
49

 
 
Item 4.
 
Controls and Procedures
 
50

PART II.
 
OTHER INFORMATION
 
 

 
 
Item 1.
 
Legal Proceedings
 
51

 
 
Item 2.
 
Changes in Securities and Use of Proceeds
 
51

 
 
Item 3.
 
Defaults Upon Senior Securities
 
51

 
 
Item 4.
 
Submission of Matters to a Vote of Security Holders
 
51

 
 
Item 5.
 
Other Information
 
51

 
 
Item 6.
 
Exhibits and Reports on Form 8-K
 
51

 
 
 
 
Signatures
 
52


CompuCredit Corporation and Subsidiaries
Condensed Consolidated Balance Sheets

 
   September 30, 2003
   December 31, 2002
  
 
   (Unaudited)
(Dollars in thousands)

  
Assets              
Cash and cash equivalents   $ 100,334   $ 120,416  
Restricted cash     10,528     10,112  
Retained interests in credit card receivables securitized     459,353     291,439  
Amounts due from securitization     54,275     7,235  
Deferred costs, net     11,541     8,314  
Software, furniture, fixtures and equipment, net     24,265     29,296  
Investment in equity-method investee     6,540     15,593  
Investment in previously charged off receivables     6,857     —  
Investment in debt securities     24,446     18,819  
Prepaid expenses and other assets     21,548     17,691  
   
 
 
Total assets   $ 719,687   $ 518,915  
   
 
 

Liabilities
 
 
 
 
 
 
 
Accounts payable and accrued expenses   $ 33,292   $ 32,570  
Notes payable     7,536     —  
Deferred revenue     8,026     8,979  
Income tax liability     67,357     29,498  
   
 
 
Total liabilities     116,211     71,047  
   
 
 
Minority interest     42,627     —  
   
 
 

Shareholders' equity
 
 
 
 
 
 
 
Preferred stock, no par value, 10,000,000 shares authorized:              
  Series A preferred stock, 25,192 and 30,000 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively     29,302     32,466  
  Series B preferred stock, 10,000 and 10,000 shares issued and outstanding at September 30, 2003 and December 31, 2002, respectively     11,884     11,035  
Common stock, no par value, 150,000,000 shares authorized:              
  47,724,482 and 46,809,165 issued at September 30, 2003 and December 31, 2002, respectively     —     —  
Additional paid-in capital     249,482     241,400  
Treasury stock, at cost, 872,900 and 832,900 shares at September 30, 2003 and December 31, 2002, respectively     (4,586 )   (4,338 )
Deferred compensation     (698 )   (1,013 )
Note issued to purchase stock     —     (500 )
Retained earnings     275,465     168,818  
   
 
 
Total shareholders' equity     560,849     447,868  
   
 
 
Total liabilities and shareholders' equity   $ 719,687   $ 518,915  
   
 
 

See accompanying notes.

1


CompuCredit Corporation and Subsidiaries
Condensed Consolidated Statements of Operations (Unaudited)

 
   For the three months
ended
September 30,
   For the nine months
ended
September 30,
  
 
   2003
   2002
   2003
   2002
  
 
   (Dollars in thousands except per share data)

  
Interest income   $ 3,156   $ 754   $ 5,942   $ 1,414  
Interest expense     (130 )   (5,670 )   (6,409 )   (5,773 )
   
 
 
 
 
Net interest income (expense)     3,026     (4,916 )   (467 )   (4,359 )
   
 
 
 
 

Other operating income:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Securitization income (loss), net     31,385     (18 )   31,385     (18 )
  Income (loss) from retained interests in credit card receivables securitized     76,873     23,708     123,946     (33,511 )
  Servicing income     21,303     31,861     73,832     35,540  
  Other credit card fees and other income     41,747     31,063     109,010     96,118  
  Equity in income of equity-method investee     (269 )   19,553     27,639     24,097  
   
 
 
 
 
Total other operating income     171,039     106,167     365,812     122,226  
   
 
 
 
 

Other operating expense:
 
 
 
 
 
 
 
 
 
 
 
 
 
  Salaries and benefits     5,619     5,663     14,388     12,287  
  Credit card servicing     34,827     44,005     106,330     79,892  
  Marketing and solicitation     2,646     4,361     7,060     9,402  
  Depreciation     3,906     3,750     11,676     10,940  
  Other     11,388     9,550     28,710     23,666  
   
 
 
 
 
Total other operating expense     58,386     67,329     168,164     136,187  
   
 
 
 
 
Income (loss) before minority interest and income taxes     115,679     33,922     197,181     (18,320 )
Minority interest     (26,938 )   —     (26,938 )   —  
   
 
 
 
 
Income (loss) before income taxes     88,741     22,050     170,243     (18,320 )
Income taxes     (31,221 )   (11,872 )   (60,358 )   6,412  
   
 
 
 
 
Net income (loss)   $ 57,520   $ 22,050   $ 109,885   $ (11,908 )
   
 
 
 
 

Net income (loss) attributable to common shareholders
 
$
56,496
 
$
20,996
 
$
106,647
 
$
(14,995
)
   
 
 
 
 

Net income (loss) per common share—basic
 
$
1.12
 
$
0.43
 
$
2.15
 
$
(0.32
)
   
 
 
 
 

Net income (loss) per common share—diluted
 
$
1.11
 
$
0.43
 
$
2.13
 
$
(0.32
)
   
 
 
 
 

See accompanying notes.

2


CompuCredit Corporation and Subsidiaries
Condensed Consolidated Statement of Shareholders' Equity (Unaudited)
For the Nine Months Ended September 30, 2003

 
    
   Common Stock
    
    
    
    
    
    
  
 
   Preferred Stock
   Additional Paid-In Capital
   Treasury Stock
   Deferred Compensation
   Other Changes In Equity
   Retained Earnings
   Total Shareholders' Equity
  
 
   Shares
   Amount
  
 
   (Dollars in thousands)

  
Balance at December 31, 2002 (audited)   $ 43,501   46,809,165   —   $ 241,400   $ (4,338 ) $ (1,013 ) $ (500 ) $ 168,818   $ 447,868  
  Conversion of preferred stock     (5,563 ) 608,684   —     5,563     —     —     —     —     —  
  Preferred dividends     —   —   —     —     —     —     —     (3,238 )   (3,238 )
  Accretion of preferred dividends     3,248   —   —     —     —     —     —     —     3,248  
  Exercise of stock options     —   306,633   —     2,519     —     —     —     —     2,519  
  Purchase of treasury stock     —   —   —     —     (248 )   —     —     —     (248 )
  Repayment of note receivable     —   —   —     —     —     —     500     —     500  
  Amortization of deferred compensation     —   —   —     —     —     315     —     —     315  
  Net income     —   —   —     —     —     —     —     109,885     109,885  
   
 
 
 
 
 
 
 
 
 

Balance at September 30, 2003
 
$
41,186
 
47,724,482
 
—
 
$
249,482
 
$
(4,586
)
$
(698
)
$
—
 
$
275,465
 
$
560,849
 
   
 
 
 
 
 
 
 
 
 

See accompanying notes.

3


CompuCredit Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)

 
   For the nine months ended September 30,
  
 
   2003
   2002
  
 
   (Dollars in thousands)

  
Operating activities              
Net income (loss)   $ 109,885   $ (11,908 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:              
  Depreciation expense     11,676     10,940  
  Amortization expense     4,139     15,646  
  Minority interest     26,938     —  
  Amortization of acquired servicing liability     (31,732 )   (14,619 )
  Amortization of deferred compensation     315     —  
  Securitization income (loss)     (31,385 )   18  
  Retained interests income adjustment, net     221,197     149,738  
  Income from equity investee, net     9,052     (2,951 )
  Changes in assets and liabilities:              
    Increase in restricted cash     (416 )   (10,055 )
    (Increase) decrease in accrued interest and fees     (4,629 )   16,332  
    (Increase) decrease in amounts due from securitization     (47,040 )   6,208  
    Increase in deferred costs     (14,568 )   (9,916 )
    (Increase) decrease in prepaid expenses     (1,640 )   536  
    Decrease in accounts payable and accrued expenses     732     8,955  
    Increase (decrease) in deferred revenue     (952 )   (7,224 )
    Increase (decrease) in income tax liability     37,859     (11,395 )
    Other     19,989     937  
   
 
 
Net cash provided by operating activities     309,420     141,242  
   
 
 
Investing activities              
Investment in equity investee     —     (34,890 )
Proceeds from bond investment     3,073     604  
Purchase of charged off accounts     (28,968 )   —  
Purchase of bonds     (1,870 )   —  
Purchase of credit card portfolios and retained interests     (651,883 )   (75,247 )
Net loan payments (purchases)     (262,002 )   (43,484 )
Recoveries of loans previously charged off     16,541     16,709  
Net proceeds from securitization     621,860     16,321  
Net increase in retained interests     (39,316 )   —  
Purchases and development of software, furniture, fixtures and equipment     (4,831 )   (7,070 )
   
 
 
Net cash used in investing activities     (347,396 )   (127,057 )
   
 
 
Financing activities              
Preferred stock issuance costs     —     (140 )
Repayment of note issued to purchase stock     398     —  
Proceeds from exercise of stock options     2,519     —  
Purchase of treasury stock     (248 )   (2,614 )
Minority interest contribution (distribution), net     15,689     —  
Proceeds from borrowings     —     126,679  
Repayment of short-term borrowings     (464 )   (133,306 )
   
 
 
Net cash provided by (used in) financing activities     17,894     (9,381 )
   
 
 
Net (decrease) increase in cash     (20,082 )   4,804  
Cash and cash equivalents at beginning of period     120,416     55,746  
   
 
 
Cash and cash equivalents at end of period   $ 100,334   $ 60,550  
   
 
 

Supplemental cash flow information
 
 
 
 
 
 
 
Cash paid for interest   $ 6,409   $ 5,670  
   
 
 
Cash paid for income taxes   $ 22,500   $ 4,983  
   
 
 
Accretion of preferred stock dividends   $ 3,248   $ 3,052  
   
 
 

See accompanying notes.

4


CompuCredit Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements (Unaudited)
September 30, 2003

1.     Organization and Basis of Presentation

        The condensed consolidated financial statements include the accounts of CompuCredit Corporation and its subsidiary investees that meet the requirements for consolidation under accounting principles generally accepted in the United States of America (collectively, the "Company"). The Company was formed for the purpose of offering unsecured credit and fee-based products and services to a segment of the consumer credit market. The Company sources the accounts to which it offers these products and services through direct mail, telemarketing, television, the internet and acquisition from other credit card issuers. Because the Company is not a financial institution and because only financial institutions can issue general purpose credit cards, the Company has a contractual arrangement with a third-party financial institution pursuant to which that financial institution issues general purpose Visa and MasterCard credit cards, and the Company purchases the receivables relating to the underlying credit card accounts on a daily basis. Additionally, the Company purchases the receivables relating to accounts generated by other credit card issuers as a further source for growth in its business. The Company markets to its cardholders other fee-based products including card registration, memberships in preferred buying clubs, travel services and credit life, disability and unemployment insurance.

        The accompanying unaudited condensed consolidated financial statements of the Company have been prepared in accordance with accounting principles generally accepted in the United States of America for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission ("SEC") Regulation S-X. Accordingly, they do not include all of the information and notes required by accounting principles generally accepted in the United States of America for complete consolidated financial statements. In the opinion of management, all normal recurring adjustments considered necessary to fairly state the results for the interim periods presented have been included. The preparation of condensed consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain estimates, such as credit losses, payments, discount rates and the yield earned on securitized receivables, have a significant impact on the gains and losses recorded on securitizations and the value of retained interests in credit card receivables securitized. Operating results for the three and nine months ended September 30, 2003 are not necessarily indicative of the results for the year ending December 31, 2003. These condensed consolidated financial statements should be read in conjunction with the notes to the consolidated financial statements for the year ended December 31, 2002 contained in the Company's Annual Report on Form 10-K/A filed with the SEC.

        Certain amounts in prior period financial statements have been reclassified to conform to the current period presentation. All significant intercompany balances and transactions have been eliminated for financial reporting purposes.

2.     Significant Accounting Policies

        The following is a summary of significant accounting policies followed in the preparation of the condensed consolidated financial statements.

5


Cash and Cash Equivalents

        Cash and cash equivalents consist of cash, money market investments and overnight deposits. The Company considers all other highly liquid cash investments with low interest rate risk and maturities of three months or less to be cash equivalents. Cash equivalents are valued at cost, which approximates market.

Restricted Cash

        The Company provides an irrevocable standby letter of credit agreement for $10.0 million to the financial institution that issues the credit cards marketed by the Company. The purpose of the letter of credit is to protect the financial institution from non-payment by the Company of its obligation to purchase receivables arising in the credit card accounts on a daily basis. The Company is required to maintain a minimum cash balance of $10.0 million with the bank that has issued the letter of credit. Such cash, and certain interest earnings thereon, have been disclosed as restricted cash on the face of the consolidated balance sheet. Additionally, a portion of the servicing fee associated with the Embarcadero Trust (see Note 5, "Embarcadero Acquisition") is contingent on the Company achieving certain milestones, and these contingent servicing fee proceeds ($0.5 million at September 30, 2003) are also reflected as restricted cash. If these milestones are achieved, the Company will earn these proceeds in July 2004. If not, these funds will then revert to the Embarcadero Trust to pay down the Series A bonds issued by the trust.

Asset Securitization

        Substantially all of the Company's credit card receivables are securitized. When the Company sells receivables in securitizations, it retains certain undivided ownership interests, interest-only ("I/O") strips and servicing rights. Although the Company continues to service the underlying credit card accounts and maintains the customer relationships, these securitizations are treated as sales, and the securitized receivables are not reflected on the consolidated balance sheet. The retained ownership interests and the interest-only strips are included in retained interests in credit card receivables securitized on the face of the consolidated balance sheet.

        Under Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("Statement No. 140"), gains and losses are recognized at the time of each sale. These gains or losses on sales of receivables depend in part on the previous carrying amount of the financial assets sold, as well as the fair value of the assets and cash proceeds received. The cash flows used in measuring the gains and losses represent estimates of finance charges and late fees, servicing fees, costs of funds paid to investors, payment rates, credit losses, and required amortization payments to investors. The Company initially records a servicing liability within a securitization structure when the servicing fees the Company expects to receive do not provide adequate compensation for servicing the receivables. The initial servicing liability is recorded at estimated fair market value. The servicing liability is then evaluated each quarter and carried at its estimated fair value. Changes in fair value are included as a component of the Company's income (loss) from retained interests in credit card receivables securitized, with actual expenses being recorded into operations as incurred. Because quoted market prices are generally not available, the Company estimates fair value based on the estimated present value of future cash flows using management's best estimates of key assumptions as outlined in Note 6, "Off Balance Sheet Arrangements." The servicing liability is netted against the value of the I/O strip and included in retained interests in credit card receivables securitized on the Company's consolidated balance sheet. In accordance with Statement No. 140, the Company does not consolidate any of the qualified special purpose entities ("QSPEs") in its securitizations.

6


        The retained interests for portfolios securitized by the Company are accounted for as trading securities and reported at estimated fair market value, with changes in fair value included in operations in accordance with Statement of Financial Accounting Standards No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("Statement No. 115"). The estimates used to determine the gains and losses and the related fair values of I/O strips and retained ownership interests are influenced by factors outside of the Company's control, and such estimates could materially change from quarter to quarter.

        Retained interests purchased by the Company during 2002 are carried at the lower of amortized cost or fair market value, net of a servicing liability. In accordance with Emerging Issues Task Force Issue 99-20, "Recognition of Interest Income and Impairment on Purchased and Retained Beneficial Interests in Securitized Financial Assets" ("EITF 99-20"), expected cash flows in excess of the costs of the purchased retained interests are being amortized into income (loss) from retained interests in credit card receivables securitized using the effective interest method.

        Amounts due from securitization include payments recently received on the securitized receivables that are still held by the securitization structure but are due and payable to the Company within the next 30 days.

Accrued Interest and Fees

        Accrued interest and fees represent the estimated collectable portion of fees earned on Company-securitized portfolios but not billed to the cardholder at any period end. Prior to the second quarter of 2002, the Company estimated accrued interest and fees using its estimates of total accrued interest and fees earned but not yet billed. The Company's current estimates, however, better reflect the Company's expectations of the collectible portion of these interest and fees and are in response to evolving regulatory guidance within the industry.

Retained Interests in Finance Charge Receivables

        Included within the Company's retained interests in credit card receivables securitized on its consolidated balance sheet at each period end is the estimated collectible portion of finance charges and fees billed to cardholders within Company-securitized portfolios but not collected (the Company's "retained interests in finance charge receivables"). Prior to the second quarter of 2002, the Company estimated its retained interests in finance charge receivables using its estimates of total finance charges and fees billed but not collected. The Company's current estimates, however, better reflect the Company's expectations of the collectible portion of these finance charges and fees and are in response to evolving regulatory guidance within the industry.

Investment in Previously Charged Off Receivables

        In late 2002, the Company formed a new debt collections subsidiary and began the process of obtaining the appropriate state licenses and meeting the applicable regulatory requirements necessary for the Company to hold itself out as a debt collector and a buyer of defaulted credit card accounts. Through this new subsidiary, the Company now pursues, competitively bids for and acquires previously charged off credit card receivables. All but one of the Company's acquisitions of previously charged off credit card receivables during the first three quarters of 2003 were from the securitization trusts underlying the Company's retained interests investments ($28.6 million in purchase price). The Company is continually evaluating acquisition opportunities, but only at appropriate pricing. Further, the sales of the receivables serviced by the Company are subject to a strict competitive bid process involving other potential portfolio purchasers to ensure that all acquisitions have been at fair market prices.

7


        Static pools consisting of homogenous accounts and receivables are established for each acquisition. Once a static pool is established, the receivables within the pool are not changed. Each static pool is recorded at cost, and is accounted for as a single unit for payment application and income recognition purposes. The Company accounts for its investment in previously charged off receivables by applying the cost recovery method on a portfolio-by-portfolio basis under the guidance of Practice Bulletin 6, "Amortization of Discounts on Certain Acquired Loans" ("PB 6"). Under the cost recovery method, income associated with a particular portfolio is not recognized until cash collections have exceeded the investment. Additionally, until such time that cash collected for a particular portfolio exceeds the Company's investment in the portfolio, the Company will incur commission costs and other servicing costs associated with the cash collections on the portfolio investment that will be charged as an operating expense without any offsetting income amounts.

        The Company will use the cost recovery method for each particular static pool until such time that its experience with that pool is sufficient to justify use of the PB 6 interest method (such method being one by which income associated with each static pool is accrued monthly based on each static pool's effective interest rate) based on the criteria communicated by the Staff of the SEC to the Company during the quarter ended September 30, 2003. The Company does not anticipate meeting these criteria for use of the interest method for any particular acquired pool for the foreseeable future.

        For the three and nine months ended September 30, 2003, the following table shows a roll-forward of the Company's new investment in previously charged off receivables activities:

 
   Three Months Ended September 30, 2003
   Nine Months Ended September 30, 2003
  
 
   (Dollars in thousands)

  
Unrecovered balance at beginning of period   $ 6,935