COMPUCREDIT CORP, 10-Q, 2000-11-14

COMPUCREDIT CORP
10-Q, 2000-11-14
PERSONAL CREDIT INSTITUTIONS

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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

<TABLE>
<C> <S>
/X/ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD
ENDED SEPTEMBER 30, 2000.
</TABLE>

<TABLE>
<C> <S>
/ / TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE
SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD
FROM TO .
</TABLE>

COMMISSION FILE NUMBER 025751

COMPUCREDIT CORPORATION
(Exact name of registrant as specified in its charter)

<TABLE>
<S> <C>
GEORGIA 58-2336689
(State or other jurisdiction of (IRS Employer Identification No.)
incorporation or organization))

ONE RAVINIA DRIVE, SUITE 500, ATLANTA, GEORGIA 30346
(Address of principal executive offices) (Zip Code)
</TABLE>

(770) 206-6200
(Registrant's telephone number, including area code)

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

YES /X/ NO / /

The number of shares outstanding of the issuer's only class of Common Stock, no
par value, (the "Common Stock"), as of October 31, 2000 was 46,514,639 shares.

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<PAGE>
COMPUCREDIT CORPORATION
FORM 10-Q
TABLE OF CONTENTS

September 30, 2000

<TABLE>
<CAPTION>
PAGE
--------
<S> <C> <C> <C>
PART I. FINANCIAL INFORMATION

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

Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations................................... 9

Item 3. Quantitative and Qualitative Disclosures About Market
Risk........................................................ 19

PART II. OTHER INFORMATION

Item 1. Legal Proceedings........................................... 20

Item 2. Changes in Securities and Use of Proceeds................... 20

Item 3. Defaults Upon Senior Securities............................. 20

Item 4. Submission of Matters to a Vote of Security Holders......... 20

Item 5. Other Information........................................... 20

Item 6. Exhibits and Reports on Form 8-K............................ 20

Signatures.................................................. 22
</TABLE>
<PAGE>
PART I--FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

COMPUCREDIT CORPORATION AND SUBSIDIARIES
CONDENSED CONSOLIDATED BALANCE SHEETS

<TABLE>
<CAPTION>
SEPTEMBER 30, DECEMBER 31,
2000 1999
------------- ------------
(UNAUDITED)
(DOLLARS IN THOUSANDS)
<S> <C> <C>
ASSETS
Cash and cash equivalents................................... $139,505 $ 11,837
Restricted cash............................................. -- 10,000

Retained interests in credit card receivables securitized... 254,967 165,572
Accrued interest and fees................................... 19,848 9,828
-------- --------
Net credit card receivables................................. 274,815 175,400

Amounts due from securitization............................. 10,100 12,010
Deferred costs, net......................................... 7,680 2,235
Software, furniture, fixtures and equipment, net............ 11,705 6,605
Prepaid expenses............................................ 3,683 1,742
Other assets................................................ 7,674 5,719
-------- --------
Total assets................................................ $455,162 $225,548
======== ========

LIABILITIES
Accrued expenses............................................ $ 19,742 $ 10,575
Deferred revenue............................................ 6,105 6,601
Income tax liability........................................ 36,471 32,151
-------- --------
Total liabilities........................................... 62,318 49,327

SHAREHOLDERS' EQUITY
Common stock, no par value, 150,000,000 shares authorized,
46,514,639 and 41,834,725 issued and outstanding at
September 30, 2000 and December 31, 1999, respectively.... -- --
Additional paid-in capital.................................. 239,789 93,374
Retained earnings........................................... 153,055 82,847
-------- --------
Total shareholders' equity.................................. 392,844 176,221
-------- --------
Total liabilities and shareholders' equity.................. $455,162 $225,548
======== ========
</TABLE>

SEE ACCOMPANYING NOTES.

1
<PAGE>
COMPUCREDIT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF INCOME (UNAUDITED)

Other operating income:
Securitization income, net................. 4,041 3,623 9,797 5,612
Income from retained interests in credit
card receivables securitized............. 29,547 12,244 93,351 48,416
Servicing income........................... 1,791 2,387 6,057 6,707
Other credit card fees..................... 14,557 6,040 36,167 11,371
Interchange fees........................... 4,939 2,708 13,726 4,759
Ancillary products......................... 6,424 5,492 20,041 11,133
-------- ------- -------- --------
Total other operating income................. 61,299 32,494 179,139 87,998

Other operating expense:
Salaries and benefits...................... 1,485 836 3,939 2,140
Credit card servicing...................... 7,838 2,415 18,552 4,826
Marketing and solicitation................. 14,414 10,733 38,794 23,651
Professional fees.......................... 555 175 1,480 1,296
Data processing............................ 909 800 3,266 1,900
Net occupancy.............................. 285 207 805 493
Ancillary product expense.................. 2,189 1,605 6,194 4,953
Other...................................... 2,176 858 5,026 1,884
-------- ------- -------- --------
Total other operating expense................ 29,851 17,629 78,056 41,143

Income before income taxes................... 33,244 15,401 106,713 48,332
Income tax expense........................... (11,068) (5,169) (35,676) (16,515)
-------- ------- -------- --------
Net income................................... $ 22,176 $10,232 $ 71,037 $ 31,817
======== ======= ======== ========
Net income attributable to common
shareholders............................... $ 22,176 $10,232 $ 71,037 $ 31,235
======== ======= ======== ========
Net income per common share--basic(1)........ $ 0.48 $ 0.24 $ 1.56 $ 0.81
======== ======= ======== ========
Net income per common share--diluted(1)...... $ 0.48 $ 0.24 $ 1.55 $ 0.81
======== ======= ======== ========
</TABLE>

------------------------

(1) After giving retroactive effect to the 15.2-for-1 stock split effective
April 28, 1999.

SEE ACCOMPANYING NOTES.

2
<PAGE>
COMPUCREDIT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY (UNAUDITED)

FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2000 AND 1999

<TABLE>
<CAPTION>
COMMON STOCK ADDITIONAL TOTAL
--------------------- PAID-IN PREFERRED RETAINED SHAREHOLDERS'
SHARES(1) AMOUNT CAPITAL STOCK EARNINGS EQUITY
---------- -------- ---------- --------- -------- -------------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
Balance at December 31, 1998..... 34,168,193 $ -- $ 10,532 $ 20,000 $ 22,744 $ 53,276
Conversion of preferred
stock........................ 1,916,532 -- 20,000 (20,000) -- --
Issuance of common stock....... 5,750,000 -- 62,842 -- -- 62,842
Net income..................... -- -- -- -- 31,813 31,813
---------- -------- -------- -------- -------- --------
Balance at September 30, 1999.... 41,834,725 $ -- $ 93,374 $ -- $ 54,557 $147,931
========== ======== ======== ======== ======== ========

Balance at December 31, 1999..... 41,834,725 $ -- $ 93,374 $ -- $ 82,847 $176,221
Issuance of common stock....... 4,600,000 -- 145,242 -- -- 145,242
Stock options exercised........ 79,914 -- 1,173 -- -- 1,173
Cash dividend paid by pooled
Company...................... -- -- -- -- (829) (829)
Net income..................... -- -- -- -- 71,037 71,037
---------- -------- -------- -------- -------- --------
Balance at September 30, 2000.... 46,514,639 $ -- $239,789 $ -- $153,055 $392,844
========== ======== ======== ======== ======== ========
</TABLE>

------------------------

(1) After giving retroactive effect to the 15.2-for-1 stock split effective
April 28, 1999.

SEE ACCOMPANYING NOTES.

3
<PAGE>
COMPUCREDIT CORPORATION AND SUBSIDIARIES

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)

<TABLE>
<CAPTION>
FOR THE NINE MONTHS ENDED
SEPTEMBER 30,
-------------------------
2000 1999
----------- -----------
(DOLLARS IN THOUSANDS)
<S> <C> <C>
OPERATING ACTIVITIES
Net income.................................................. $ 71,037 $ 31,817
Adjustments to reconcile net income to net cash provided by
operating activities:
Depreciation expense.................................... 2,902 968
Amortization expense.................................... 3,374 977
Securitization income................................... (9,797) (5,612)
Retained interests income adjustment, net............... 2,018 (11,039)
Changes in assets and liabilities:
Restricted cash....................................... 10,000 --
Accrued interest and fees............................. (10,019) (3,866)
Amounts due from securitization....................... 1,910 (2,189)
Deferred costs........................................ (9,371) (2,219)
Prepaid expenses...................................... (1,942) (1,440)
Amounts due to securitization......................... -- (9,298)
Accrued expenses...................................... 9,165 7,304
Deferred revenue...................................... (495) 3,068
Income tax liability.................................. 4,319 2,296
Other................................................. (1,953) (3,402)
--------- ---------
Net cash provided by operating activities................... 71,148 7,365

INVESTING ACTIVITIES
Net loans originated or purchased........................... (520,497) (295,187)
Recoveries of loans previously charged off.................. 7,250 270
Net proceeds from securitization of loans................... 419,772 199,632
Proceeds from retained interests in credit card receivables
securitized............................................... 12,412 36,796
Purchases of and development of software, furniture,
fixtures and equipment.................................... (8,003) (4,456)
--------- ---------
Net cash used in investing activities....................... (89,066) (62,945)

FINANCING ACTIVITIES
Proceeds from exercise of stock options..................... 1,173 --
Cash dividend paid by pooled company........................ (829) (4)
Net proceeds from issuance of common stock.................. 145,242 62,842
--------- ---------
Net cash provided by financing activities................... 145,586 62,838

NET INCREASE IN CASH 127,668 7,258
Cash and cash equivalents at beginning of period............ 11,837 12,711
--------- ---------
Cash and cash equivalents at end of period.................. $ 139,505 $ 19,969
========= =========
</TABLE>

SEE ACCOMPANYING NOTES.

4
<PAGE>
COMPUCREDIT CORPORATION AND SUBSIDIARIES
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS (UNAUDITED)
SEPTEMBER 30, 2000

1. ORGANIZATION AND BASIS OF PRESENTATION

The condensed consolidated financial statements include the accounts of
CompuCredit Corporation and its subsidiaries (collectively, the "Company"). All
significant intercompany balances and transactions have been eliminated for
financial reporting purposes. The Company was formed for the purpose of offering
unsecured credit and fee based products and services to a specialized segment of
the consumer credit market. CompuCredit markets unsecured
Aspire-Registered Trademark- Visa-Registered Trademark- credit cards through
direct mail, telemarketing and on the Internet through its wholly owned
subsidiary, AspireCard.com. The Company has a contractual arrangement with a
third party financial institution pursuant to which the financial institution
issues general purpose Visa credit cards under the Company's "Aspire" trademark,
and the Company purchases the receivables relating to such accounts.

The accompanying unaudited condensed consolidated financial statements of
the Company have been prepared in accordance with generally accepted accounting
principles for interim financial information and with the instructions to
Form 10-Q and Article 10 of Regulation S-X. Accordingly, they do not include all
of the information and footnotes required by generally accepted accounting
principles for complete consolidated financial statements. In the opinion of
management, all normal recurring adjustments considered necessary to fairly
state the results for the interim periods presented have been included. The
preparation of financial statements in conformity with generally accepted
accounting principles requires management to make estimates and assumptions that
affect the reported amounts of assets and liabilities and disclosure of
contingent assets and liabilities at the date of the consolidated financial
statements as well as the reported amount of revenues and expenses during the
reporting period. Actual results could differ from these estimates. Certain
estimates such as credit losses, payment and discount rates have a significant
impact on the gains recorded on securitizations and the value of retained
interests in credit card receivables securitized. Operating results for the nine
months ended September 30, 2000 are not necessarily indicative of the results
for the year ended December 31, 2000. The notes to the financial statements for
the year ended December 31, 1999 contained in the Company's Annual Report on
Form 10-K filed with the Securities and Exchange Commission should be read in
conjunction with these condensed consolidated financial statements.

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

2. SIGNIFICANT ACCOUNTING POLICIES

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

ASSET SECURITIZATION

The Company has securitized a substantial portion of its credit card
receivables. When the Company sells receivables in securitizations, it retains
certain undivided ownership interests, interest-only strips and servicing
rights. Although the Company continues to service the underlying credit card
accounts and maintains the client relationships, these transactions are treated
as sales and the securitized receivables are not reflected on the consolidated
balance sheet. The retained ownership interests are included in Retained
Interests in Credit Card Receivables Securitized. Amounts Due from
Securitization include payments recently received on the securitized receivables
that are still held by the securitization structure but are payable to the
Company within the next 30 days.

5
<PAGE>
Under Statement of Financial Accounting Standards No. 125, "Accounting for
Transfers and Servicing of Financial Assets and Extinguishments of Liabilities"
("Statement No. 125"), gains are recognized at the time of each sale. These
gains are based on the estimated fair value of the retained interests, which are
based on the estimated present value of the cash flows the Company expects to
receive over the estimated outstanding life of the receivables. These cash flows
represent estimates of finance charges and late fees, servicing fees, costs of
funds paid to investors, payment rates, credit losses, and required amortization
payments to investors.

The retained interests are subsequently accounted for as trading securities
and reported at estimated fair market value with changes in fair value included
in income in accordance with Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities"
("Statement No. 115"). Certain estimates used in the determination of the gains
and the related fair values of interest-only strips and retained ownership
interests are influenced by factors outside the Company's control, and, as a
result, such estimates could materially change in the near term.

BUSINESS COMBINATION

On April 13, 2000, the Company closed its acquisition of Citadel
Group, Inc. ("Citadel") of Daytona Beach, Florida. The transaction was accounted
for as a pooling of interests through the exchange of 1,783,333 shares of the
Company's common stock for all of the outstanding stock of Citadel. The
consolidated financial statements of the Company have been restated to reflect
the financial position, results of operations and cash flows of the respective
companies as though the companies were combined for all periods presented.

RECENTLY ISSUED ACCOUNTING STANDARDS

In June 1998, the Financial Accounting Standards Board issued Financial
Accounting Standard ("FAS") No. 133, "Accounting for Derivative Instruments and
Hedging Activities." This Statement establishes new accounting and reporting
standards for derivative instruments and hedging activities. It requires that an
entity recognize all derivatives as either assets or liabilities on the balance
sheet and measure those derivatives at fair value. The accounting for the gains
or losses resulting from changes in the value of those derivatives will depend
on the intended use of the derivative and whether it qualifies for hedge
accounting. FAS 133, as amended by statement 138, is required to be adopted for
fiscal years beginning after June 15, 2000. The Company does not believe that
adoption of this Statement will have a material impact on its financial
statements.

In December, 1999, the Securities and Exchange Commission staff issued Staff
Accounting Bulletin (SAB) No. 101, Revenue Recognition in Financial Statements.
This SAB explains how the SEC staff believes existing Revenue Recognition rules
should be applied. In June 2000, the SEC issued SAB 101B, which delays the
implementation date of SAB 101 until no later than the fourth fiscal quarter of
fiscal years beginning after December 15, 1999. The Company does not believe
that adoption of this SAB will have a material impact on its financial
statements.

3. SECURITIZATIONS

The Company securitizes a substantial portion of its Company issued credit
card receivables through the CompuCredit Credit Card Master Note Business Trust
(the "Master Trust"). Credit card receivables are transferred to the Master
Trust, which issues notes representing undivided ownership interests in the
assets of the Master Trust. The Company also securitized two purchased
portfolios of credit card receivables through securitization structures with
third party commercial paper conduits. The Company's transfers are treated as
sales as they satisfy the requirements of Statement No. 125 and the receivables
are removed from the consolidated balance sheet. The securitization transactions
do not

6
<PAGE>
affect the relationship the Company has with its clients and the Company
continues to service the credit card receivables. As of September 30, 2000, the
Company receives servicing fees equal to either the cost of servicing the
portfolio plus 0.1% per year of the securitized principal receivables or 5% of
cash collected, depending on the securitization. The Company either provides the
servicing or contracts with third party service providers.

The table below summarizes the Company's securitization activity:

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- -------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Proceeds from
securitizations............ $155,940 $146,331 $432,184 $236,428
Excess cash flows received on
retained interests......... 42,325 22,276 117,371 59,120
Pretax securitization
income..................... 4,041 3,623 9,797 5,612
</TABLE>

The investors in the Company's securitization transactions have no recourse
against the Company for its clients' failure to pay their credit card loans.
However, most of the Company's retained interests are subordinated to the
investors' interests until the investors have been fully paid.

As an additional credit enhancement on CompuCredit's securitization
structures associated with its purchased receivables, CompuCredit pays a portion
of the excess cash collected on the receivables to the investors as an
accelerated amortization payment. This excess cash that the Company paid to the
investors totaled $12.4 million and $36.8 million for the three months ended
September 30, 2000 and 1999, respectively. The decrease in 2000 is due to a
reduction in the amortization payments required under our agreements and due to
the decrease in the purchased portfolio receivables outstanding. The Company's
valuation of its retained interests incorporates this credit enhancement, and
the Company estimates that it takes approximately three to five years from the
inception of each securitization structure to completely repay the investors
using excess cash collected on the receivables. Once the investors are repaid,
any remaining receivables and funds held in the securitization structure will be
payable to the Company.

The pretax securitization income recorded by the Company and the measurement
of the Company's retained interests are dependent upon management's estimates of
future cash flows using the cash-out method. Under the cash-out method, the
future cash flows (including the release of any cash related to credit
enhancements) are recorded at a discounted value. The cash flows are discounted
based on the timing of when the Company expects to receive the cash flows. The
discount rates are based on management's estimates of returns that would be
required by investors in an investment with similar terms and credit quality.
Interest rates received on the credit card receivables are estimated based on
the stated annual percentage rates in the credit card agreements. Estimated
default and payment rates are based on historical results, adjusted for expected
changes based on the Company's credit risk models. Credit card receivables are
typically charged off in the next billing cycle after becoming 180 days past
due, although earlier charge-offs may occur specifically related to accounts of
bankrupt or deceased clients. Bankrupt and deceased clients' accounts are
typically charged off within 30 days of verification.

Subsequent to each sale, the Company's retained interests are carried at
estimated fair market value with changes in fair value included in income as
they are classified as trading securities. Since quoted market prices are
generally not available, the Company estimates fair value based on the estimated
present value of future cash flows using management's best estimates of key
assumptions. Changes in any of these assumptions could impact the fair value
estimates and the realization of future

7
<PAGE>
cash flows. The weighted average key assumptions used to estimate the fair value
of the Company's retained interests as of the end of each nine-month period are
presented below:

<TABLE>
<CAPTION>
SEPTEMBER 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Payment rate (monthly)...................................... 8.7% 7.2%
Expected credit loss rate (annualized)...................... 10.3 10.9
Residual cash flows discount rate........................... 17.2 19.4
</TABLE>

The return to the investors in the securitizations is based on management's
estimates of forward yield curves. The changes in the weighted average
assumptions from September 30, 1999 to September 30, 2000 are primarily due to
the change in the mix of CompuCredit's originated and purchased receivables.
Since the receivables originated by CompuCredit have historically performed
better than the purchased portfolio, the significant growth experienced in the
originated portfolio has caused the weighted average assumptions to improve as
of September 30, 2000.

4. EARNINGS PER SHARE

The following table sets forth the computation of earnings per share:

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30, SEPTEMBER 30,
--------------------------- -------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
(IN THOUSANDS, EXCEPT PER SHARE DATA)
<S> <C> <C> <C> <C>
Numerator:
Net income................................. $22,176 $10,232 $71,037 $31,817
Preferred stock dividends.................. -- -- -- (582)
------- ------- ------- -------
Income attributable to common
shareholders............................. 22,176 10,232 71,037 31,235

Denominator:
Denominator for basic earnings per share--
Weighted-average shares outstanding...... 46,468 41,834 45,675 38,530
Effect of dilutive stock options......... 218 99 202 49
Denominator for diluted earnings per
share--
Adjusted weighted-average shares......... 46,686 41,933 45,877 38,579
------- ------- ------- -------
Basic earnings per share..................... $ 0.48 $ 0.24 $ 1.56 $ 0.81
======= ======= ======= =======
Diluted earnings per share................... $ 0.48 $ 0.24 $ 1.55 $ 0.81
======= ======= ======= =======
</TABLE>

The number of weighted average shares outstanding gives effect to the
15.2-for-1 stock split effective April 28, 1999, which occurred in connection
with the Company's initial public offering. On April 28, 1999, the Company
completed its initial public offering of 5,000,000 shares of common stock at
$12.00 per share. On May 5, 1999, the Company issued an additional 750,000
shares of common stock at $12.00 per share following the exercise by the
Underwriters of their over-allotment option granted in connection with the
Company's initial public offering. In February 2000, the Company issued an
additional 4,600,000 shares of common stock at $33.50 per share in a follow-on
offering.

Earnings per share for the three and nine months ended September 30, 1999
have been restated for the pooling with Citadel. Basic and diluted earnings per
share increased $.02 for the three-month period ended September 30, 1999 and
$.04 for the nine-month period ended September 30, 1999 as a result of this
transaction.

8
<PAGE>
ITEM 2. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
OF OPERATIONS

The following discussion should be read in conjunction with our condensed
consolidated financial statements and the related notes included herein.

GENERAL

CompuCredit Corporation is a credit card company that uses analytical
techniques, including sophisticated computer models, to identify consumers whom
we believe are credit-worthy and are overlooked by more traditional consumer
credit providers. CompuCredit markets unsecured Aspire-Registered Trademark-
Visa-Registered Trademark- credit cards through direct mail, telemarketing and
the Internet. In July 1999, CompuCredit launched its consumer website
www.aspirecard.com through its Internet marketing services subsidiary,
AspireCard.com, Inc. Consumers can apply at www.aspirecard.com and receive a
credit decision within seconds. CompuCredit also markets credit life insurance,
card registration, buying club memberships and travel services to its
cardholders.

On April 13, 2000, the Company closed its acquisition of Citadel
Group, Inc. ("Citadel") of Daytona Beach, Florida. The transaction was accounted
for as a pooling of interests through the exchange of 1,783,333 shares of the
Company's common stock for all of the outstanding stock of Citadel. Citadel
currently markets fee-based products and services to CompuCredit's AspireVisa
cardholders.

Consumer credit product revenues consist of (1) interest income on
outstanding revolving credit card receivables, (2) credit card fees, including
annual membership, cash advance, over-limit, past-due and other credit card
fees, and (3) interchange fees, which are the portion of the merchant fee
assessed by Visa and passed on to us on the purchase volume on our credit card
receivables. Non-interest income includes securitization income, income from
retained interests in credit card receivables securitized, servicing income and
fee-based product revenues. The expenses relating to consumer credit products
are typically the costs of funding our receivables, credit losses and operating
expenses, including employee compensation, account solicitation and marketing
expenses, data processing and servicing expenses.

CREDIT CARD SECURITIZATIONS

We have securitized a substantial portion of our credit card receivables.
Our securitization transactions involve the sale of our credit card receivables
to a separate entity. The entity is either a corporation or a trust that has
been created by us exclusively to purchase receivables. The entity purchases the
receivables from us using cash generated from selling interests in the
receivables to investors. The investors in our securitization transactions are
commercial paper conduits administered by major banking institutions. A
commercial paper conduit is a company that issues short-term debt securities
backed by financial assets such as credit card receivables.

We have entered into agreements with investors which specify the conditions
and price of each sale including the total amount of receivables the investor is
committing to purchase from us. The agreements include terms and conditions that
are similar to those included in bank loan agreements and define our duties to
service the securitized receivables. We are required by the agreements to remit
collections on the receivables to the investors in the securitizations. The
agreements also include representations and warranties regarding the receivables
and financial performance measures that must be met in order for us to continue
to securitize receivables and in order for us to receive any additional cash
from the collections of the receivables.

After an initial purchase by the investors, there is usually a period during
which collections from the receivables are used to purchase new receivables.
This is referred to as a revolving period. At the end of the revolving period,
the investment of collections in new receivables ends and collections are

9
<PAGE>
instead used to repay the investors. The period during which investors are being
repaid is referred to as an amortization period. The amortization period may
begin at a specific point in time determined under the agreements or it may be
caused by specified events including deterioration in the quality of the
receivables purchased or a material adverse change in our financial condition. A
breach of a representation or warranty made by us could also cause an
amortization period to begin.

The investors in the securitizations require us to provide credit support
for the receivables to reduce the risk of loss to the investors resulting from
cardholders not repaying their credit card balances when due. We negotiate with
each investor the amount of the credit support, which is based on historical and
expected delinquency and loss experience on the receivables. The credit support
is usually in the form of over collateralization, which means that we sell the
receivables for less than, or at a discount from, their outstanding balances. As
a result, the receivables available to repay the investors exceed the total
amount of the investors' interests in the receivables. This excess is the
retained interest that we own. The investors in the securitized receivables have
no recourse against us for our cardholders' failure to pay their credit card
loans; however, most of our retained interests are subordinated to the
investors' interests until the investors have been fully repaid. This means that
our retained interests will first absorb any losses due to cardholders' failure
to repay their balances before investors in the securitizations have to absorb
these losses.

We will receive additional cash from the securitized receivables if
collections from the receivables exceed required interest and principal payments
to the investors. The collections from the receivables depend on the performance
of the receivables, which includes the timing and amount of payments on the
receivables, the interest rates, fees and other charges paid on the receivables,
and their delinquency and loss rates.

In each securitization, we receive cash, retain an interest in the
receivables that are securitized, and have rights to receive cash in the future
as the securitized receivables are collected. The rights to future cash flows
are commonly referred to as interest-only strips. Although we continue to
service the underlying credit card receivables and maintain the client
relationships, these transactions are treated as sales under generally accepted
accounting principles and the securitized receivables are not reflected on our
consolidated balance sheet. The retained interests and the interest-only strips
are included in Retained Interests in Credit Card Receivables Securitized.
Amounts Due from Securitization on our balance sheet includes payments recently
received on the securitized receivables that are still held by the
securitization structure but are payable to us in the next 30 days.

We have adopted Statement of Financial Accounting Standards No. 125,
"Accounting for Transfers and Servicing of Financial Assets and Extinguishments
of Liabilities" for all of our securitization transactions. Under Statement
No. 125, gains are recognized at the time of each sale. These gains are based on
the estimated fair value of the retained interests, which are based on the
estimated present value of the cash flows we expect to receive over the
estimated outstanding life of the receivables. The expected cash flows are based
on estimates of finance charges and late fees, servicing fees, costs of funds
paid to investors, payment rates, credit losses, and required amortization
payments to investors.

Retained Interests in Credit Card Receivables Securitized on our balance
sheet are calculated in accordance with the provisions of Statement No. 125.
These retained interests are subsequently accounted for as trading securities
and reported at estimated fair market value with changes in fair value included
in income in accordance with Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities."
Estimates used in the determination of the gains and the related fair values of
interest-only strips and retained ownership interests are influenced by factors
outside our control, and, as a result, these estimates could materially change.

The securitization transactions do not affect the relationship we have with
our clients, and we continue to service the credit card receivables. As of
September 30, 2000, we received servicing fees equal to either the cost of
servicing the portfolio plus 0.1% per year of the securitized principal

10
<PAGE>
receivables or 5% of cash collected, depending on the securitization. We either
provide the servicing or contract with third party service providers.

The table below summarizes our securitization activity.

<TABLE>
<CAPTION>
FOR THE THREE MONTHS ENDED FOR THE NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
--------------------------- -------------------------
2000 1999 2000 1999
------------ ------------ ----------- -----------
(IN THOUSANDS)
<S> <C> <C> <C> <C>
Proceeds from securitizations................ $155,940 $146,331 $432,184 $236,428
Excess cash flows received on retained
interests.................................. 42,325 22,276 117,371 59,120
Pretax securitization income................. 4,041 3,623 9,797 5,612
</TABLE>

Finance charges and past due fees collected in excess of servicing fees and
periodic interest payments are available to absorb the investors' share of
credit losses. Investors bear the risk of credit losses on the underlying
receivables to the extent that credit losses, servicing fees and periodic
interest payments required by the investors exceed finance charges and past due
fees earned on the receivables and our retained interests in the receivables
pool. Investors in our securitization programs are generally entitled to receive
principal payments either through monthly payments during an amortization period
or in one lump sum from the proceeds of issuances of additional certificates or
participation interests in the receivables pool.

As additional credit support on our securitization structures associated
with our purchased receivables, we pay a portion of the excess cash collected to
the investors as an accelerated amortization payment. This excess cash totaled
$12.4 million for the three months ended September 30, 2000 and $36.8 million
for the three months ended September 30, 1999. The decrease in 2000 is due to
the change in the structure of the accelerated amortization payments and due to
the decrease in the purchased portfolio receivables outstanding. Once the
investors are repaid, any remaining receivables and funds held in the buying
entity are payable to us. In each securitization transaction, we retain the risk
of compliance with federal and state laws and regulations regarding the
securitized accounts and any fraudulent activity with regard to such accounts.

MANAGED LOAN PORTFOLIO

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

During 1998, we purchased two portfolios of credit card receivables with
outstanding receivables balances at the time of purchase of $579.7 million. The
presented managed loan data excludes certain of these receivables and the
related accounts which at the time of purchase were closed accounts in a certain
delinquency status. Management believes that these accounts were either in the
process of being charged off by the seller due to delinquency or were likely to
be charged off in the near term. As a result, management believes that it would
have had very little opportunity to influence the delinquency or default rates
of these accounts prior to charge-off. We therefore excluded these accounts, the
receivables and any activity in the accounts since the date of purchase from any
managed loan data presented. At the time of the purchases, there were
approximately 52,000 such accounts, representing 25.9% of the accounts purchased
and $137.2 million of the $579.7 million outstanding receivables purchased.

11
<PAGE>
The portfolios acquired during 1998 were purchased at substantial discounts.
A portion of the discount at the time of purchase related to the credit quality
of the remaining loans in the portfolio and reflects the difference between the
purchased face amount of the receivables and the future cash collections
management expects to receive with respect to the purchased face amount. The
substantial discount we received on the purchased portfolio exceeds the discount
we ascribed to the credit quality of the purchased receivables. We are reporting
this excess discount as additional interest income over the life of the
portfolio for managed loan reporting and are amortizing it into interest income
using the interest method.

<TABLE>
<CAPTION>
AT OR FOR THE QUARTER ENDED
----------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1999 1999 1999 2000 2000 2000
-------- --------- -------- ---------- ---------- ----------
(IN THOUSANDS, EXCEPT FOR PERCENTAGES)
<S> <C> <C> <C> <C> <C> <C>
Period-end total managed loans........... $526,217 $667,063 $898,691 $1,026,099 $1,171,932 $1,321,128
Period-end total managed accounts........ 633 927 1,181 1,416 1,648 1,891
Total average managed loan portfolio..... $496,859 $592,379 $769,624 $ 963,939 $1,097,610 $1,256,239
Net interest margin on managed loans,
annualized............................. 21.0% 23.1% 23.6% 23.8% 23.3% 23.4%
Operating ratio.......................... 7.6% 9.1% 8.7% 8.0% 7.3% 7.6%
</TABLE>

Our net interest margins are influenced by a number of factors, including
the timing and size of portfolio purchases and the level of our charge-offs.
Purchased portfolios typically have lower interest rates and late fees until we
convert the accounts to Aspire Visa accounts. When we convert accounts to Aspire
Visa accounts, we reprice the accounts to interest rates and fees that are
similar to those on accounts we have originated through our solicitation
process. We typically convert the accounts within six months of purchase.
Fluctuations in our charge-off ratios also affect our net interest margins. At
charge-off, the interest and late fees on an account are deducted from interest
income in the current period.

Our operating ratio includes all costs of operating our business on a
managed loan basis, other than marketing expenses and ancillary product
expenses. Our operating ratio increased from June 30, 2000 to September 30, 2000
as we spent more on our infrastructure, our collections operations, our credit
card servicing and our database management system to accommodate our current and
anticipated portfolio growth.

RESULTS OF OPERATIONS

Net income for the three months ended September 30, 2000 was $22.2 million,
or $0.48 per share on a diluted basis, an increase of $12.0 million from net
income of $10.2 million for the three months ended September 30, 1999. Net
income for the nine months ended September 30, 2000 was $71.0 million, or $1.55
per share on a diluted basis, an increase of $39.2 million from net income of
$31.8 million for the nine months ended September 30, 1999. The increase in net
income was primarily the result of the growth in our managed loans.

The changes in operating results were also largely attributable to the
growth in managed loans from $667.1 million at September 30, 1999 to
$1.321 billion at September 30, 2000. The increase in managed loans was the
result of direct mail, telemarketing and Internet marketing and solicitations.

Other operating income, excluding securitization income and income from
retained interests in credit card receivables securitized, increased
$11.1 million from $16.6 million for the three months ended September 30, 1999
to $27.7 million for the three months ended September 30, 2000. Other operating
income increased $42.0 million from $34.0 million for the nine months ended
September 30, 1999 to $76.0 million for the nine months ended September 30,
2000. The increases are primarily due to the increase in customer purchases of
our fee-based products and the increase in managed loans, which resulted in
increases in interchange fees and other credit card fees, which include annual
membership, over-limit and cash advance fees.

12
<PAGE>
Other operating expenses increased to $29.9 million for the three months
ended September 30, 2000, from $17.6 million for the three months ended
September 30, 1999. Other operating expenses increased to $78.1 million for the
nine months ended September 30, 2000, from $41.1 million for the nine months
ended September 30, 1999. These increases primarily reflect the increase in the
cost of operations associated with the growth in our business, including
additional marketing and solicitation expenses and additional credit card
servicing costs.

INTEREST INCOME

Interest income consists of interest income earned on cash and cash
equivalents. Interest income totaled $1.8 million for the three months ended
September 30, 2000 and totaled $536,000 for the three months ended
September 30, 1999. Interest income totaled $5.6 million for the nine months
ended September 30, 2000 and totaled $1.5 million for the nine months ended
September 30, 1999. The increase in interest income is attributable to the
investing of the cash proceeds we received from our first quarter 2000 follow-on
public offering.

NET SECURITIZATION INCOME

Net securitization income includes gains representing the estimated present
value at the time of initial securitization of cash flows we expect to receive
over the estimated life of the receivables securitized. The present value of the
cash flows is estimated in the same manner as described below in "Income from
Retained Interests in Credit Card Receivables Securitized." Securitization
income is recognized at the time of the initial securitization. Net
securitization income for the three months ended September 30, 2000 increased to
$4.0 million compared to $3.6 million for the three months ended September 30,
1999. Net securitization income for the nine months ended September 30, 2000 was
$9.8 million compared to $5.6 million for the nine months ended September 30,
1999. The increase is due to the change in volume of credit card receivables
securitized.

INCOME FROM RETAINED INTERESTS IN CREDIT CARD RECEIVABLES SECURITIZED

Retained Interests in Credit Card Receivables Securitized are calculated in
accordance with the provisions of Statement No. 125. These retained interests
are subsequently accounted for as trading securities and reported at estimated
fair market value in accordance with Statement of Financial Accounting Standards
No. 115, "Accounting for Certain Investments in Debt and Equity Securities." We
receive cash flows relating to these retained interests equal to the finance
charges and past due fees in excess of the sum of the return paid to investors,
estimated contractual servicing fees, credit losses and required amortization
payments to investors. This cash flow received on our retained interests and
changes in the fair value of the retained interests is recorded as Income from
Retained Interests in Credit Card Receivables Securitized in accordance with
Statement No. 115. Since quoted market prices are generally not available, the
fair value is based on the estimated present value of future cash flows using
management's best estimates of finance charges and late fees, servicing fees,
costs of funds paid to investors, payment rates, credit losses, and required
amortization payments to investors. The weighted average key assumptions used to
estimate the fair value of our retained interests as of the end of each period
are presented below. Changes in any of these assumptions could impact the
estimates of the fair value of the retained interests as well as the realization
of expected future cash flows:

<TABLE>
<CAPTION>
AT SEPTEMBER 30
-------------------
2000 1999
-------- --------
<S> <C> <C>
Payment rate (monthly)...................................... 8.7% 7.2%
Expected credit loss rate (annualized)...................... 10.3 10.9
Residual cash flows discount rate........................... 17.2 19.4
</TABLE>

13
<PAGE>
The changes in the weighted average assumptions from September 30, 1999 to
September 30, 2000 are primarily due to the change in the mix of our originated
and purchased receivables. Since the receivables we originated have historically
performed better than the purchased portfolio, the significant growth
experienced in the originated portfolio has caused the weighted average
assumptions to improve as of September 30, 2000. The discount rates are based on
management's estimates of returns that would be required by investors in an
investment with similar terms and credit quality. Interest rates received on the
credit card receivables are estimated based on the stated annual percentage
rates in the credit card agreements. Estimated default and payment rates are
based on historical results, adjusted for expected changes based on our credit
risk models. The returns to the investors in the securitizations are based on
management's estimates of forward yield curves.

OTHER OPERATING INCOME

Other operating income, excluding securitization income and income from
retained interests in credit card receivables securitized, consists of the
following for the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
----------------------- -----------------------
2000 1999 2000 1999
---------- ---------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Servicing income.............. $ 1,791 $ 2,387 $ 6,057 $ 6,707
Other credit card fees........ 14,557 6,040 36,167 11,371
Interchange fees.............. 4,939 2,708 13,726 4,759
Ancillary products............ 6,424 5,492 20,041 11,133
------- ------- ------- -------
Total other operating
income.................... $27,711 $16,627 $75,991 $33,970
======= ======= ======= =======
</TABLE>

14
<PAGE>
The increase in other operating income to $27.7 million for the three months
ended September 30, 2000 and to $76.0 million for the nine months ended
September 30, 2000 relates to the growth in our managed loan portfolio since
September 30, 1999. Our managed loans grew from $667.1 million at September 30,
1999 to $1.321 billion at September 30, 2000. We service the credit card
receivables that have been securitized and recognize servicing income. A
substantial portion of the servicing income relates to our purchased portfolios.
As the size of these purchased portfolios decreases, there is a corresponding
decrease in servicing income. Other credit card fees include credit card fees
such as annual membership, over-limit and cash advance fees. Interchange fees
are the portion of the merchant fee assessed by Visa and passed on to us on the
purchase volume on our credit card receivables. Ancillary product revenues are
associated with the products and services that we market to our clients, and
have increased in 2000 as customer purchases of our fee-based products have
increased.

OTHER OPERATING EXPENSE

Other operating expense consists of the following for the periods indicated:

<TABLE>
<CAPTION>
THREE MONTHS ENDED NINE MONTHS ENDED
SEPTEMBER 30 SEPTEMBER 30
------------------- -------------------
2000 1999 2000 1999
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Salaries and benefits................... $ 1,485 $ 836 $ 3,939 $ 2,140
Credit card servicing................... 7,838 2,415 18,552 4,826
Marketing and solicitation.............. 14,414 10,733 38,794 23,651
Professional fees....................... 555 175 1,480 1,296
Data processing......................... 909 800 3,266 1,900
Net occupancy........................... 285 207 805 493
Ancillary product expense............... 2,189 1,605 6,194 4,953
Other................................... 2,176 858 5,026 1,884
------- ------- ------- -------
Total other operating expense......... $29,851 $17,629 $78,056 $41,143
======= ======= ======= =======
</TABLE>

Other operating expense for the three months ended September 30, 2000
increased to $29.9 million from $17.6 million for the three months ended
September 30, 1999 and increased to $78.1 million from $41.1 million for the
comparable nine-month periods due primarily to increases in marketing and
solicitation, credit card servicing, salaries and benefits and data processing
expenses. The increases in operating expenses also are due to the growth in our
credit card receivables. Ancillary product expenses relate to the products and
services that we market to our clients, including our insurance products, and
include expenses associated with claim reserves and program administrative
expenses. Other expenses include depreciation and other general and
administrative costs.

INCOME TAXES

Income tax expense for the three months ended September 30, 2000 was
$11.1 million and for the three months ended September 30, 1999 was
$5.2 million. Our effective tax rate was 33.3% for the three months ended
September 30, 2000 and 33.6% for the three months ended September 30, 1999.
Income tax expense was $35.7 million for the nine months ended September 30,
2000 and $16.5 million for the comparable period in 1999. The effective tax rate
was 33.4% for the nine months ended September 30, 2000 and 34.2% for the nine
months ended September 30, 1999.

ASSET QUALITY

Our delinquency and net loan charge-off rates at any point in time reflect
the credit risk of receivables, the average age of our credit card accounts, the
timing of portfolio purchases, the success

15
<PAGE>
of our collection and recovery efforts and general economic conditions. The
average age of our credit card account portfolio affects the stability of
delinquency and loss rates of the portfolio.

Our strategy for managing delinquency and loan losses consists of active
account management throughout the client relationship. This strategy includes
credit line management and pricing based on the risk of the credit card
accounts.

DELINQUENCIES. Delinquencies have the potential to impact net income in the
form of net credit losses, which impact the value of our retained interests in
securitizations. Delinquencies are also costly in terms of the personnel and
resources dedicated to resolving them. A credit card account is contractually
delinquent if the minimum payment is not received by the specified date on the
client's statement. It is our policy to continue to accrue interest and fee
income on all credit card accounts, except in limited circumstances, until the
account and all related loans, interest and other fees are charged off. See "Net
Charge-Offs."

The following table presents the delinquency trends of our credit card
receivables portfolio on a managed loan portfolio basis:
<TABLE>
<CAPTION>
AT THE QUARTER ENDED
-------------------------------------------------------------------------------------
JUNE 30, SEPTEMBER 30, DECEMBER 31, MARCH 31,
1999 1999 1999 2000
------------------- ------------------- ------------------- -------------------
% OF % OF % OF % OF
AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL AMOUNT TOTAL
-------- -------- -------- -------- -------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Loans Delinquent:
30 to 59 days...... $20,506 3.9% $24,127 3.6% $29,700 3.3% $ 31,270 3.0%
60 to 89 days...... 12,684 2.4 16,155 2.4 20,573 2.3 23,995 2.4
90 or more......... 21,248 4.0 27,775 4.2 37,061 4.1 46,554 4.5
------- ---- ------- ---- ------- ---- -------- ----
Total 30 or more..... $54,438 10.3% $68,057 10.2% $87,334 9.7% $101,819 9.9%
======= ==== ======= ==== ======= ==== ======== ====
Total 60 or more..... $33,932 6.4% $43,930 6.6% $57,634 6.4% $ 70,549 6.9%
======= ==== ======= ==== ======= ==== ======== ====

<CAPTION>
AT THE QUARTER ENDED
-----------------------------------------
JUNE 30, SEPTEMBER 30,
2000 2000
------------------- -------------------
% OF % OF
AMOUNT TOTAL AMOUNT TOTAL
-------- -------- -------- --------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C>
Loans Delinquent:
30 to 59 days...... $ 40,256 3.4% $ 50,313 3.8%
60 to 89 days...... 28,028 2.4 37,324 2.8
90 or more......... 57,552 4.9 78,753 6.0
-------- ---- -------- ----
Total 30 or more..... $125,836 10.7% $166,390 12.6%
======== ==== ======== ====
Total 60 or more..... $ 85,580 7.3% $116,077 8.8%
======== ==== ======== ====
</TABLE>

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

<TABLE>
<CAPTION>
% OF TOTAL
AT THE QUARTER ENDED
------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1999 1999 1999 2000 2000 2000
-------- --------- -------- --------- -------- ---------
<S> <C> <C> <C> <C> <C> <C>
ORIGINATED PORTFOLIO
Loans Delinquent:
30 to 59 days............... 2.3% 2.4% 2.6% 2.7% 3.3% 3.6%
60 to 89 days............... 1.5 1.6 1.8 2.1 2.3 2.7
90 or more.................. 3.0 2.6 3.0 4.0 4.8 6.0
---- ---- ---- ---- ---- ----
Total 30 or more.............. 6.8% 6.6% 7.4% 8.8% 10.4% 12.3%
==== ==== ==== ==== ==== ====
Total 60 or more.............. 4.5% 4.2% 4.8% 6.1% 7.1% 8.7%
==== ==== ==== ==== ==== ====
PURCHASED PORTFOLIO
Loans Delinquent:
30 to 59 days............... 5.2% 5.4% 5.4% 4.4% 4.3% 5.4%
60 to 89 days............... 3.2 3.7 3.7 3.4 2.8 3.6
90 or more.................. 4.9 6.5 7.1 6.4 5.5 5.7
---- ---- ---- ---- ---- ----
Total 30 or more.............. 13.3% 15.6% 16.2% 14.2% 12.6% 14.7%
==== ==== ==== ==== ==== ====
Total 60 or more.............. 8.1% 10.2% 10.8% 9.8% 8.3% 9.3%
==== ==== ==== ==== ==== ====
</TABLE>

16
<PAGE>
In general, as the average age of an originated credit card receivables
portfolio increases, delinquency rates can be expected first to increase and
then to stabilize. Due primarily to the significant growth in new receivables
during the three months ended June 30, 1999, and the three months ended
September 30, 1999, delinquency rates on our originated portfolio declined for
those periods. During the three months ended December 31, 1999, March 31, 2000,
June 30, 2000 and September 30, 2000, delinquency rates on our originated
portfolio as compared to the prior periods increased due primarily to the
seasoning of the portfolio and seasonality. We are using our account management
strategies on our originated portfolio, which are intended to reduce the
expected increase in delinquency rates as our originated portfolio matures.

The purchased portfolio delinquency rate increased during the September 30,
2000 quarter compared to the June 30, 2000 quarter primarily due to seasonality.
We continue to aggressively manage account activity using behavioral scoring,
credit file data and our proprietary risk evaluation models.

NET CHARGE-OFFS. Net charge-offs include the principal amount of losses
from clients unwilling or unable to pay their loan balance, as well as bankrupt
and deceased clients, less current period recoveries. Net charge-offs exclude
accrued finance charges and fees, which are charged against the related income
at the time of charge-off. Losses from fraudulent activity in accounts are also
excluded from net charge-offs and are included separately in other operating
expenses. We generally charge off loans during the period in which the loan
becomes contractually 180 days past due. However, bankrupt accounts and the
accounts of deceased clients without a surviving, contractually liable
individual or an estate large enough to pay the debt in full are charged off
within 30 days of notification of the client's bankruptcy or death.

Approximately $87.5 million of the discount on our portfolio purchases
during 1998 related to the credit quality of the remaining loans in the
portfolio and reflects the difference between the purchased face amount and the
future cash collections management expects to receive with respect to the
purchased face amount. For purposes of reporting pro forma charge-off ratios on
managed loans below, this discount related to credit quality has been utilized
to offset a portion of actual net charge-offs. The following table presents our
net charge-offs for the periods indicated on a managed loan portfolio basis:

<TABLE>
<CAPTION>
FOR THE QUARTER ENDED
---------------------------------------------------------------------
JUNE 30, SEPT. 30, DEC. 31, MARCH 31, JUNE 30, SEPT. 30,
1999 1999 1999 2000 2000 2000
-------- --------- -------- --------- ---------- ----------
(DOLLARS IN THOUSANDS)
<S> <C> <C> <C> <C> <C> <C>
TOTAL MANAGED LOAN PORTFOLIO:
Average managed loan portfolio............ $496,859 $592,379 $769,624 $963,939 $1,097,610 $1,256,239
Net charge-offs........................... 22,723 17,412 17,985 23,605 26,302 35,678
Pro forma net charge-offs................. 5,094 7,353 10,828 20,229 25,346 34,525
Net charge-off ratio (annualized)......... 18.3% 11.8% 9.3% 9.8% 9.6% 11.4%
Pro forma charge-off ratio (annualized)... 4.1 5.0 5.6 8.4 9.2 11.0
</TABLE>

As our portfolio continues to mature, we expect charge-off rates to increase
and then stabilize. Our pro forma charge-off ratio increased to 11.0% for the
third quarter of 2000 from 9.2% for the second quarter of 2000 primarily due to
seasoning of our portfolio. We plan to continue to focus our resources on
refining our credit underwriting standards for new accounts and to increase our
focus on collection and post charge-off recovery efforts to minimize losses.

CREDIT LOSSES. For securitized receivables, anticipated credit losses are
reflected in the calculations of net securitization income and income from
retained interests in credit card receivables securitized. In evaluating credit
losses, we take into consideration several factors, including (1) historical
charge-off and recovery activity by receivables portfolio, (2) recent and
expected delinquency and collection trends by receivables portfolio, (3) the
impact of current economic conditions and recent economic trends on

17
<PAGE>
the clients' ability to repay and (4) the risk characteristics of the
portfolios. Substantially all of our credit card receivables have been
securitized. As we have securitized our receivables we have removed them from
our balance sheet and have also relieved any allowance for loan losses on our
balance sheet.

INTEREST RATE SENSITIVITY AND MARKET RISK

Interest rate sensitivity is comprised of basis risk and gap risk. Basis
risk is caused by the difference in the interest rate indices used to price
assets and liabilities. Gap risk is caused by the difference in repricing
intervals between assets and liabilities. Market risk is the risk of loss from
adverse changes in market prices and rates. Our principal market risk is related
to changes in interest rates. This affects us directly in our lending and
borrowing activities, as well as indirectly as interest rates may impact the
payment performance of our clients.

We incur basis risk because we fund managed assets at a spread over the
commercial paper rate while the rates on the underlying assets are indexed to
the prime rate. This basis risk results from the potential variability in the
spread between the prime rate and the commercial paper rate over time. We have
not hedged our basis risk due to the cost of hedging this risk versus the
benefits from elimination of this risk.

We attempt to minimize the impact of market interest rate fluctuations on
net interest income and net income by regularly evaluating the risk inherent in
our asset and liability structure, especially our off-balance sheet assets and
liabilities such as securitized receivables. The impact of market interest rate
fluctuations on our securitized receivables is reflected in the valuation of our
retained interests in credit card receivables securitized. This risk arises from
continuous changes in our asset and liability mix, changes in market interest
rates, including changes affected by fluctuations in prevailing interest rates,
payment trends on our interest-bearing assets and payment requirements on our
interest-bearing liabilities, and the general timing of all other cash flows. To
manage our direct risk to market interest rates, management actively monitors
market interest rates and the interest sensitive components of our
securitization structures. Management seeks to minimize the impact of changes in
interest rates on the fair value of assets, net income and cash flow primarily
by matching asset and liability repricings. There can be no assurance that
management will be successful in its attempt to manage such risks.

At September 30, 2000, all of our credit card receivables and other
interest-bearing assets had variable rate pricing, with receivables carrying
annual percentage rates at a spread over the prime rate, subject to certain
interest rate floors. At September 30, 2000, our securitizations had
$1.087 billion in variable rate, interest-bearing liabilities, payable to our
investors. Since both our managed interest-earning assets and our managed
interest-bearing liabilities reprice every 30 days, we believe that the impact
of a change in interest rates would not be material to our financial
performance.

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

LIQUIDITY, FUNDING AND CAPITAL RESOURCES

Our goal is to maintain an adequate level of liquidity through active
management of assets and liabilities. Because the characteristics of our assets
and liabilities change, liquidity management is a dynamic process affected by
the pricing and maturity of our assets and liabilities.

A significant source of liquidity for us has been the securitization of
credit card receivables. We received proceeds of $432.2 million during the nine
months ended September 30, 2000 and $236.4 million during the nine months ended
September 30, 1999 from sales of our credit card receivables through
securitizations. During September 2000, we completed a floating rate three-year
term securitization totaling approximately $600 million. We have used cash
generated from these transactions to fund further credit card receivables
growth.

18
<PAGE>
The maturity terms of our securitizations vary. With the exception of the
three year securitization described above, most are one year securitizations.
Once repayment begins, payments from clients on credit card receivables are
accumulated for the investors in our securitizations and are no longer
reinvested in new credit card receivables. At that time, our funding
requirements for new credit card receivables will increase accordingly. The
occurrence of certain events, or the failure to comply with certain covenants,
may also cause the securitization transactions to amortize earlier than
scheduled. In the case of our Master Trust, a decline in the portfolio's annual
yield or a decline in the payment rate, in each case, below certain rates, or an
increase in delinquencies above certain rates, will cause early amortization.
The portfolio's annual yield typically includes finance charges and past due
fees earned on the receivables less servicing fees and credit losses. In the
case of our other securitization programs, such events include an increase in
the charge-off rates above a certain rate or a decline in the payment rates
below a certain rate. These events would accelerate the need to utilize
alternative funding sources. Under each of our securitization structures, there
has not been an early amortization period. We believe that securitizations will
continue to be an important source of funding but can give no assurance that
securitizations will provide sufficient funding. As of September 30, 2000, we
had total securitization facilities of $1.835 billion and had utilized
approximately $1.087 billion of these facilities.

In April 1999, we completed our initial public offering and received net
proceeds of $62.8 million. We used these net proceeds for marketing and
solicitation costs, receivables growth and working capital purposes.

In January 2000, we entered into an agreement providing for a one year,
$25.0 million revolving credit facility under which we may request advances from
time to time which will bear interest at floating rates based on the London
Interbank Offered Rate ("LIBOR"). Advances under the facility will be secured by
our assets other than credit card receivables and other assets relating to our
securitization transactions. As of September 30, 2000, no advances were
outstanding under this facility.

In February 2000, we completed a follow-on public offering and received net
proceeds of $145.2 million. We may use a portion of the net proceeds from this
offering to charter a bank with up to $20.0 million in capital contributions and
a deposit of up to an additional $5.0 million. We plan to use the remaining net
proceeds of the offering to finance our growth through the origination and
purchase of credit card receivables, for marketing costs, working capital and
other corporate purposes.

In September 2000, we completed a floating rate three-year term
securitization totaling approximately $600 million. The floating rate is indexed
to the one-month LIBOR. The principal is expected to be paid in full on the
September 2003 distribution date. We are scheduled to begin accumulating
collections of principal receivables in September 2002. However, under certain
circumstances, we may begin accumulating at a date later than September 2002.

YEAR 2000

As of September 30, 2000, we have not experienced any significant year 2000
problems, and we are not aware of any year 2000 problems experienced by our
vendors that have affected us; however unforeseen problems could arise in the
year 2000 which could cause delays and malfunctions which would have a material
adverse effect on our results of operations and financial condition. We will
continue to monitor internal systems and vendor issues related to the year 2000
throughout the year.

FORWARD-LOOKING INFORMATION

This report includes "forward-looking statements". The words "expect,"
"anticipate," "intend," "plan," "believe," "seek," "estimate" and similar
expressions are intended to identify such forward-looking statements; however,
this report also contains other forward-looking statements that may not be so
identified. Forward looking statements include our expectations with respect to
delinquency rates, charge-off rates, our efforts to manage our portfolio and the
information under "Liquidity Funding and

19
<PAGE>
Capital Resources." Forward-looking statements are subject to a number of risks
and uncertainties, many of which are beyond CompuCredit's control. Actual
results may differ materially from those indicated in the forward-looking
statements; accordingly, there can be no assurance that such indicated results
will be realized. Among the important factors that could cause actual results to
differ materially from those indicated by such forward-looking statements are
(1) the effect of any disruption of our outsourcing relationship with Columbus
Bank and Trust and its affiliates, including Total Systems Services, Inc.,
(2) our ability to evaluate the creditworthiness of our clients and price our
credit products accordingly, (3) the effect of increases in interest rates on
our cost of funds and the payment performance of our clients, (4) compliance
with and changes in laws and regulations, including consumer protection laws,
laws relating to the interest rates, charges or terms and conditions of our
credit card accounts or other laws regulating the credit card, consumer loan or
financial services industry, (5) the impact of intense competition for credit
card customers on CompuCredit's efforts to market the Aspire Visa credit card,
(6) the ability of CompuCredit to continue to securitize receivables and to
otherwise access the capital markets on acceptable terms to fund its operations
and future growth, (7) the impact of unexpected economic changes and other
factors on the performance of our credit card receivables and securitizations,
and the factors set forth under the caption "Risk Factors" in the Company's
Form 10-K for the year ended December 31, 1999 filed with the Securities and
Exchange Commission (the "Commission"). By making these forward-looking
statements, CompuCredit Corporation disclaims any obligation to update them in
any manner except as may be required by applicable laws.

ITEM 3. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

The information required under this item is provided under the caption
"Interest Rate Sensitivity and Market Risk" under Item 2. Management's
Discussion and Analysis of Financial Condition and Results of Operations.

20
<PAGE>
PART II--OTHER INFORMATION

ITEM 1. LEGAL PROCEEDINGS

A number of purported class action lawsuits seeking unspecified compensatory
damages have been filed against the Company and David G. Hanna, its chairman and
chief executive officer, in the U.S. District Court for the Northern District of
Georgia by persons who acquired the Company's common stock during the period of
September 12, 2000 through October 24, 2000. The plaintiffs allege violations of
the Federal securities laws in connection with statements made concerning the
Company's charge off rates for its customer accounts. The Company believes it
has meritorious defenses and intends to defend these actions vigorously.

ITEM 2. CHANGES IN SECURITIES AND USE OF PROCEEDS.

(a) Not applicable.

(b) Not applicable.

ITEM 3. DEFAULTS UPON SENIOR SECURITIES.

None.

ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS.

None.

ITEM 5. OTHER INFORMATION.

None.

ITEM 6. EXHIBITS AND REPORTS ON FORM 8-K.

(a) Exhibits

<TABLE>
<CAPTION>
EXHIBIT NO. DESCRIPTION
----------- ------------------------------------------------------------
<C> <S>
3.2 Second Amended and Restated Bylaws of CompuCredit
Corporation.

10.1 Master Indenture, dated as of July 14, 2000, among
CompuCredit Credit Card Master Note Business Trust, as
Issuer, The Bank of New York, as Indenture Trustee, and
CompuCredit Corporation, as Servicer.

10.1(a) First Amendment to Master Indenture, dated as of
September 7, 2000, among CompuCredit Credit Card Master Note
Business Trust, The Bank of New York and CompuCredit
Corporation.

10.2 Transfer and Servicing Agreement, dated as of July 14, 2000,
among CompuCredit Funding Corp., as Transferor, CompuCredit
Corporation, as Servicer, CompuCredit Credit Card Master
Note Business Trust, as Issuer and The Bank of New York, as
Indenture Trustee.

10.2(a) First Amendment to Transfer and Servicing Agreement, dated
as of September 7, 2000, among CompuCredit Funding
Corporation, CompuCredit Corporation, CompuCredit Credit
Card Master Note Business Trust and The Bank of New York.

27 Financial Data Schedule (for SEC use only).
</TABLE>

(b) Reports on Form 8-K

None.

21
<PAGE>
SIGNATURES

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

<TABLE>
<S> <C> <C>
COMPUCREDIT CORPORATION

By: /s/ BRETT M. SAMSKY
-----------------------------------------
Brett M. Samsky
CHIEF FINANCIAL OFFICER
(DULY AUTHORIZED OFFICER AND
November 13, 2000 PRINCIPAL FINANCIAL OFFICER)
</TABLE>

22
<PAGE>
EXHIBIT INDEX

<TABLE>
<CAPTION>
EXHIBIT
NO. DESCRIPTION
--------------------- ------------------------------------------------------------
<C> <S>
3.2 Second Amended and Restated Bylaws of CompuCredit
Corporation.

10.1(a) First Amendment to Master Indenture, dated as of
September 7, 2000, among CompuCredit Credit Card Master Note
Business Trust, The Bank of New York and CompuCredit
Corporation.

27 Financial Data Schedule (for SEC use only).
</TABLE>