ATLC

Business Context and Reporting Period

Company: CompuCredit Holdings Corporation (formerly CompuCredit Corporation)

Reporting Period: Fiscal year ended December 31, 2010

Business Overview: CompuCredit is a provider of credit and financial services to the financially underserved (sub-prime) market. Operations are divided into five segments: Credit Cards, Investments in Previously Charged-Off Receivables, Retail Micro-Loans, Auto Finance, and Internet Micro-Loans. The company is currently in a contraction phase, managing existing portfolios rather than originating significant new credit card receivables due to liquidity market dislocations.

Key Structural Changes:

• Accounting Change: Effective January 1, 2010, the company adopted new accounting rules (FASB 166/167) requiring the consolidation of previously off-balance-sheet securitization trusts. This significantly altered the presentation of assets, liabilities, and income.
• Discontinued Operations: On December 31, 2010, the company agreed to sell its U.K. Internet micro-loan subsidiary, Month End Money (MEM), to Dollar Financial Corp for $195.0 million. MEM operations are classified as "held for sale" and reported as discontinued operations.
• Spin-Off Consideration: The Board is evaluating a potential spin-off of its U.S. and U.K. micro-loan businesses into a separate entity, Purpose Financial Holdings, Inc., pending the MEM sale.

Key Financial Metrics

Note: 2010 results include significant non-cash fair value adjustments due to the consolidation of securitization trusts. The "Losses upon charge-off" line item reflects the de-securitization and consolidation of lower-tier portfolios.

Material Changes vs. Prior Period

• Revenue Presentation: Total interest income and fees increased significantly in 2010 compared to 2009. This is primarily due to the consolidation of securitization trusts, which brought previously off-balance-sheet finance charges and fees onto the income statement. Without this accounting change, underlying revenue would have declined due to portfolio liquidations.
• Operating Expenses: Total operating expenses decreased by approximately $154 million year-over-year. This reduction was driven by cost-cutting initiatives, including the outsourcing of customer service and collections, lease terminations, and reduced marketing spend as the company contracted its credit card portfolio.
• Goodwill Impairment: The company recorded a $19.7 million goodwill impairment charge in Q4 2010 related to the Retail Micro-Loans segment, reflecting contracting market comparables. In 2009, a $20.0 million charge was recorded for the same segment.
• Debt Repurchases: In 2010, the company repurchased $100.2 million in face value of convertible senior notes for approximately $57.8 million, recognizing a gain of $28.8 million. This reduced future interest expense obligations.
• Stock Repurchases: In May 2010, the company repurchased 12.2 million shares of common stock for $85.3 million.
• Legal Settlements: A $12.1 million gain was recognized in Q3 2010 from the settlement of litigation with Columbus Bank & Trust.

Guidance, Outlook, and Risks

Management Commentary & Outlook:

• Liquidity Focus: Management is prioritizing liquidity and de-leveraging. The company is not currently originating significant new credit cards in the U.S. and is managing existing portfolios to generate cash flows for debt repayment.
• MEM Sale: The pending sale of MEM is expected to generate approximately $160.0 million in net pre-tax proceeds, subject to regulatory approval and financing conditions, with a target closing in April 2011.
• Micro-Loan Spin-Off: The potential spin-off of micro-loan businesses remains under review. If completed, it would separate the company into a credit card/asset management entity and a micro-loan entity (Purpose Financial).
• Future Performance: The company expects continued net liquidations in credit card and auto finance receivables. While cost-cutting has improved the operating ratio, fixed costs remain a challenge relative to shrinking asset bases.

Key Risks & Contingencies:

• Regulatory Environment: The micro-loan business faces significant regulatory headwinds, including state-level database requirements (e.g., South Carolina, Kentucky, Wisconsin) and potential federal legislation (e.g., 36% APR caps) that could materially impact profitability.
• Liquidity Constraints: The company relies on third-party funding. Continued dislocation in the sub-prime lending market limits the ability to originate new loans or refinance existing facilities.
• Credit Quality: As a sub-prime lender, the company is highly sensitive to economic downturns, unemployment rates, and delinquency trends. Fair value measurements of receivables are subject to significant estimation risk.
• Legal Proceedings: The company is involved in various class-action lawsuits and regulatory proceedings regarding its lending and collection practices.

Investor Verification Checklist

• MEM Sale Closing: Verify the completion of the $195 million sale of MEM to Dollar Financial Corp and the actual net proceeds received.
• Spin-Off Status: Monitor the progress of the Purpose Financial spin-off, including SEC approval of the Form 10 registration and Board recommendations.
• Regulatory Actions: Track new state or federal legislation regarding micro-loans (payday lending) that could restrict operations in key states like Ohio, Kentucky, and South Carolina.
• Debt Maturities: Review the status of the $50 million CAR auto finance facility and the potential conversion/refinancing of remaining convertible senior notes due in 2025 and 2035.
• Portfolio Liquidation Rates: Assess the pace of receivable liquidations in the Credit Card and Auto Finance segments to ensure cash flows remain sufficient to cover fixed overhead costs.