**UNITED STATESSECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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FORM 10-Q

**ForThe Quarterly Period Ended September 30, 2004**

| **COMPUCREDIT CORPORATION** |  |
|----------------------------------|--|

 

**aGeorgia CorporationIRS Employer Identification No. 58-2336689SEC File Number 0-25751**

**245Perimeter Center Parkway, Suite 600Atlanta, Georgia 30346(770) 206-6200**

CompuCredit has (1) filedall reports required to be filed by Section 13 or 15(d) of theSecurities Exchange Act of 1934 during the preceding 12 months, and (2) beensubject to such filing requirements for the past 90 days.

CompuCredit is anaccelerated filer (as defined by Rule 12b-2 of the Exchange Act).

As of October 31,2004, there were 45,801,614  outstanding shares ofCompuCredit’s Common Stock, no par value (the “Common Stock”).

 

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**COMPUCREDITCORPORATIONFORM 10-QTABLE OF CONTENTSSeptember 30, 2004**
|               | ** **            | ** **                                                                                  | **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 |                                                           | 25         |   |
|          | Item  3.              | Quantitative  and Qualitative Disclosures About Market Risk                                 |                                                           | 48         |   |
|          | Item 4.               | Controls and  Procedures                                                                    |                                                           | 49         |   |
| PART II. | OTHER INFORMATION     |                                                                                        |                                                           |       |
|          | Item 1.               | Legal Proceedings                                                                           |                                                           | 50         |   |
|          | Item 2.               | Changes  in Securities, Use of Proceeds and Issuer Purchases of Equity Securities           |                                                           | 50         |   |
|          | Item  3.              | Defaults  Upon Senior Securities                                                            |                                                           | 50         |   |
|          | Item 4.               | Submission  of Matters to a Vote of Security Holders                                        |                                                           | 50         |   |
|          | Item 5.               | Other Information                                                                           |                                                           | 50         |   |
|          | Item 6.               | Exhibits  and Reports on Form 8-K                                                      |                                                           | 50         |   |
|          |                  | Signatures                                                                                  |                                                           | 52         |   |

 

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**CompuCreditCorporation and SubsidiariesCondensed Consolidated Balance Sheets**
| ** **                                                                                                                                | ** ** | **September 30,  2004**         | ** ** | **December 31,  2003** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                                | ** ** | **(Unaudited)**                      | ** ** | ** **                  | ** ** |
| ** **                                                                                                                                | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                                                                |       |                                 |       |                        |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                                |       |                                 | $          | 46,481                      |       |   |   | $ | 110,605 |   |   |
| Restricted cash                                                                                                                           |       |                                 | 10,255     |                        |       |   | 11,921 |   |   |
| Retained interests in  credit card receivables securitized                                                                                |       |                                 | 578,342    |                        |       |   | 538,961 |   |   |
| Amounts due from  securitization                                                                                                          |       |                                 | 7,624      |                        |       |   | 4,199 |   |   |
| Loans and fees  receivable, net                                                                                                           |       |                                 | 82,298     |                        |       |   | 16,271 |   |   |
| Deferred costs, net                                                                                                                       |       |                                 | 32,786     |                        |       |   | 7,750 |   |   |
| Software, furniture,  fixtures and equipment, net                                                                                         |       |                                 | 29,129     |                        |       |   | 24,307 |   |   |
| Investment in  equity-method investee                                                                                                     |       |                                 | 5,971      |                        |       |   | 6,577 |   |   |
| Investments in  previously charged off receivables                                                                                        |       |                                 | 13,896     |                        |       |   | 13,960 |   |   |
| Investments in debt  securities                                                                                                           |       |                                 | 17,984     |                        |       |   | 15,007 |   |   |
| Intangibles                                                                                                                               |       |                                 | 11,314     |                        |       |   | — |   |   |
| Goodwill                                                                                                                                  |       |                                 | 100,686    |                        |       |   | — |   |   |
| Prepaid expenses and  other assets                                                                                                        |       |                                 | 10,394     |                        |       |   | 11,797 |   |   |
| Total assets                                                                                                                              |       |                                 | $          | 947,160                     |       |   |   | $ | 761,355 |   |   |
| **Liabilities**                                                                                                                           |       |                                 |       |                        |       |   |   |   |   |
| Accounts payable and  accrued expenses                                                                                                    |       |                                 | $          | 35,929                      |       |   |   | $ | 26,436 |   |   |
| Notes payable                                                                                                                             |       |                                 | 75,469     |                        |       |   | 1,945 |   |   |
| Deferred revenue                                                                                                                          |       |                                 | 6,317      |                        |       |   | 9,895 |   |   |
| Deferred gain on  Fingerhut receivables                                                                                                   |       |                                 | 29,927     |                        |       |   | — |   |   |
| Income tax liability                                                                                                                      |       |                                 | 99,447     |                        |       |   | 96,491 |   |   |
| Total liabilities                                                                                                                         |       |                                 | 247,089    |                        |       |   | 134,767 |   |   |
| Minority interests                                                                                                                        |       |                                 | 57,931     |                        |       |   | 52,575 |   |   |
| **Shareholders’ equity**                                                                                                             |       |                                 |       |                        |       |   |   |   |   |
| Preferred stock, no par value, 10,000,000 shares  authorized:                                                                             |       |                                 |       |                        |       |   |   |   |   |
| Series A preferred  stock, 25,000 shares issued and outstanding at September 30, 2004 and  December 31, 2003, respectively |       |                                 | 32,157     |                        |       |   | 29,816 |   |   |
| Series B preferred  stock, 10,000 shares issued and outstanding at September 30, 2004 and  December 31, 2003, respectively |       |                                 | 13,117     |                        |       |   | 12,181 |   |   |
| Common stock, no par value, 150,000,000 shares  authorized:                                                                               |       |                                 |       |                        |       |   |   |   |   |
| 48,018,242 and  47,885,506 issued at September 30, 2004 and December 31, 2003,  respectively                                    |       |                                 | —     |                        |       |   | — |   |   |
| Additional paid-in  capital                                                                                                               |       |                                 | 253,570    |                        |       |   | 250,943 |   |   |
| Treasury stock, at cost,  2,248,500 and 872,900 shares at September 30, 2004 and December 31,  2003, respectively               |       |                                 | (28,459    | )                           |       |   | (4,586 | ) |   |
| Deferred compensation                                                                                                                     |       |                                 | (354       | )                           |       |   | (593 | ) |   |
| Warrant                                                                                                                                   |       |                                 | 16,498     |                        |       |   | — |   |   |
| Retained earnings                                                                                                                         |       |                                 | 355,611    |                        |       |   | 286,252 |   |   |
| Total shareholders’  equity                                                                                                          |       |                                 | 642,140    |                        |       |   | 574,013 |   |   |
| Total liabilities and shareholders’ equity                                                                                           |       |                                 | $          | 947,160                     |       |   |   | $ | 761,355 |   |   |

 

See accompanying notes.

1

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**CompuCreditCorporation and SubsidiariesCondensed Consolidated Statements of Operations (Unaudited)**
| ** **                                                             | ** ** | **For the three months ended  September 30,**                       | ** ** | **For the nine months ended  September 30,**                        | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** | **       2004       ** | ** ** | **       2003       ** | ** ** |
| ** **                                                             | ** ** | **(Dollars in thousands, except per share data)**              | ** ** |
| Interest income                                                        |       |                                                                                         | $          | 13,926                                                                                       |       |   |   | $ | 3,156 |   |   |   | $ | 33,123 |   |   |   | $ | 5,942 |   |   |
| Interest expense                                                       |       |                                                                                         | (1,951     | )                                                                                            |       |   | (130 | ) |   |   | (2,722 | ) |   |   | (6,409 | ) |   |
| Provision for  loan losses                                             |       |                                                                                         | (27,221    | )                                                                                            |       |   | (2,280 | ) |   |   | (51,221 | ) |   |   | (2,378 | ) |   |
| Net interest  (expense) income after provision for loan losses         |       |                                                                                         | (15,246    | )                                                                                            |       |   | 746 |   |   |   | (20,820 | ) |   |   | (2,845 | ) |   |
| Other operating income:                                                |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Securitization income                                                  |       |                                                                                         | 1,651      |                                                                                         |       |   | 31,385 |   |   |   | 1,651 |   |   |   | 31,385 |   |   |
| Income from retained interests in credit card  receivables securitized |       |                                                                                         | 33,609     |                                                                                         |       |   | 80,771 |   |   |   | 69,602 |   |   |   | 136,192 |   |   |
| Servicing income                                                       |       |                                                                                         | 15,693     |                                                                                         |       |   | 21,303 |   |   |   | 60,506 |   |   |   | 73,832 |   |   |
| Fees and other income                                                  |       |                                                                                         | 117,553    |                                                                                         |       |   | 41,747 |   |   |   | 238,390 |   |   |   | 109,010 |   |   |
| Equity in (loss) income of equity-method  investee                |       |                                                                                         | (169       | )                                                                                            |       |   | (269 | ) |   |   | (606 | ) |   |   | 27,639 |   |   |
| Total other  operating income                                          |       |                                                                                         | 168,337    |                                                                                         |       |   | 174,937 |   |   |   | 369,543 |   |   |   | 378,058 |   |   |
| Other operating expense:                                               |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |   |   |   |   |
| Salaries and benefits                                                  |       |                                                                                         | 5,744      |                                                                                         |       |   | 5,619 |   |   |   | 16,147 |   |   |   | 14,388 |   |   |
| Card and loan servicing                                                |       |                                                                                         | 42,505     |                                                                                         |       |   | 38,725 |   |   |   | 117,366 |   |   |   | 118,576 |   |   |
| Marketing and solicitation                                             |       |                                                                                         | 12,251     |                                                                                         |       |   | 2,646 |   |   |   | 26,980 |   |   |   | 7,060 |   |   |
| Depreciation                                                           |       |                                                                                         | 4,094      |                                                                                         |       |   | 3,906 |   |   |   | 12,046 |   |   |   | 11,676 |   |   |
| Other                                                                  |       |                                                                                         | 21,347     |                                                                                         |       |   | 9,108 |   |   |   | 42,119 |   |   |   | 26,332 |   |   |
| Total other  operating expense                                         |       |                                                                                         | 85,941     |                                                                                         |       |   | 60,004 |   |   |   | 214,658 |   |   |   | 178,032 |   |   |
| Income before  minority interests and income  taxes                    |       |                                                                                         | 67,150     |                                                                                         |       |   | 115,679 |   |   |   | 134,065 |   |   |   | 197,181 |   |   |
| Minority  interests                                                    |       |                                                                                         | (7,131     | )                                                                                            |       |   | (26,938 | ) |   |   | (20,178 | ) |   |   | (26,938 | ) |   |
| Income before  income taxes                                            |       |                                                                                         | 60,019     |                                                                                         |       |   | 88,741 |   |   |   | 113,887 |   |   |   | 170,243 |   |   |
| Income taxes                                                           |       |                                                                                         | (21,007    | )                                                                                            |       |   | (31,221 | ) |   |   | (41,236 | ) |   |   | (60,358 | ) |   |
| Net income                                                             |       |                                                                                         | $          | 39,012                                                                                       |       |   |   | $ | 57,520 |   |   |   | $ | 72,651 |   |   |   | $ | 109,885 |   |   |
| Net income attributable to common  shareholders                        |       |                                                                                         | $          | 37,887                                                                                       |       |   |   | $ | 56,496 |   |   |   | $ | 69,359 |   |   |   | $ | 106,647 |   |   |
| Net income per common share—basic                                 |       |                                                                                         | $          | 0.77                                                                                         |       |   |   | $ | 1.12 |   |   |   | $ | 1.41 |   |   |   | $ | 2.15 |   |   |
| Net income per  common share—diluted                              |       |                                                                                         | $          | 0.75                                                                                         |       |   |   | $ | 1.11 |   |   |   | $ | 1.39 |   |   |   | $ | 2.13 |   |   |

 

See accompanying notes.

2

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**CompuCredit Corporation and SubsidiariesCondensed Consolidated Statement of Shareholders’ Equity(Unaudited)For the Nine Months Ended September 30, 2004**
| ** **                                        | ** ** | ** Preferred **            | ** ** | **Common Stock** | ** ** | ** Additional   Paid-In** | ** ** | **Treasury** | ** ** | **Deferred** | ** ** | ** **       | ** ** | **Retained** | ** ** | **Total  Shareholders’**        | ** ** |
|---------------------------------------------------|------------|--------------------------------------|------------|-----------------------|------------|-------------------------------------|------------|--------------|------------|--------------|------------|------------------|------------|--------------|------------|--------------------------------------|------------|
| ** **                                        | ** ** | **Stock**                            | ** ** | **Shares**            | ** ** | **Amount**                          | ** ** | **Capital**  | ** ** | **Stock**    | ** ** | **Compensation** | ** ** | **Warrant**  | ** ** | **  Earnings  ** | ** ** | **Equity** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands)** | ** ** |
| Balance at December 31, 2003                 |       |                                 | $          | 41,997                |       |                                | 47,885,506 |         |       | $            | —     |             |       |         | $          | 250,943                              |       |   | $ | (4,586 | ) |   | $ | (593 | ) |   | $ | — |   |   | $ | 286,252 |   |   |   | $ | 574,013 |   |   |
| Exercise of stock options, including  tax benefit |       |                                 | —     |                  |       | 126,736                             |       |         | —     |         |       |             | 2,536      |         |       | —                               |       |   | — |   |   | — |   |   | — |   |   |   | 2,536 |   |   |
| Preferred dividends                               |       |                                 | —     |                  |       | —                              |       |         | —     |         |       |             | —     |         |       | —                               |       |   | — |   |   | — |   |   | (3,292 | ) |   |   | (3,292 | ) |   |
| Accretion of preferred dividends                  |       |                                 | 3,277      |                  |       | —                              |       |         | —     |         |       |             | —     |         |       | —                               |       |   | — |   |   | — |   |   | — |   |   |   | 3,277 |   |   |
| Issuance of warrant                               |       |                                 | —     |                  |       | —                              |       |         | —     |         |       |             | —     |         |       | —                               |       |   | — |   |   | 16,498 |   |   | — |   |   |   | 16,498 |   |   |
| Amortization of deferred  compensation            |       |                                 | —     |                  |       | —                              |       |         | —     |         |       |             | —     |         |       | —                               |       |   | 330 |   |   | — |   |   | — |   |   |   | 330 |   |   |
| Issuance of restricted stock                      |       |                                 | —     |                  |       | 6,000                               |       |         | —     |         |       |             | 91         |         |       | —                               |       |   | (91 | ) |   | — |   |   | — |   |   |   | — |   |   |
| Purchase of treasury stock                        |       |                                 | —     |                  |       | —                              |       |         | —     |         |       |             | —     |         |       | (23,873                              | )          |   | — |   |   | — |   |   | — |   |   |   | (23,873 | ) |   |
| Net income                                        |       |                                 | —     |                  |       | —                              |       |         | —     |         |       |             | —     |         |       | —                               |       |   | — |   |   | — |   |   | 72,651 |   |   |   | 72,651 |   |   |
| Balance at  September 30, 2004               |       |                                 | $          | 45,274                |       |                                | 48,018,242 |         |       | $            | —     |             |       |         | $          | 253,570                              |       |   | $ | (28,459 | ) |   | $ | (354 | ) |   | $ | 16,498 |   |   | $ | 355,611 |   |   |   | $ | 642,140 |   |   |

 

See accompanying notes.

3

 

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**CompuCredit Corporation and SubsidiariesCondensed Consolidated Statements of Cash Flows (Unaudited)**
| ** **                                                                            | ** ** | **For the nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                                            | ** ** | **2004**                                                              | ** ** | **2003** | ** ** |
| ** **                                                                            | ** ** | **(Dollars in thousands)**                                  | ** ** |
| **Operating activities**                                                              |       |                                                                  |       |   |   |
| Net income                                                                            |       | $                                                                     | 72,651     |   | $ | 109,885 |   |
| Adjustments to reconcile net income to net cash  provided by operating activities:    |       |                                                                  |       |   |   |
| Depreciation  expense                                                                 |       | 12,046                                                                |       | 11,676 |   |
| Amortization  expense                                                                 |       | 2,146                                                                 |       | 4,139 |   |
| Amortization of  deferred gain and acquired servicing liability                       |       | (5,212                                                                | )          | (31,732 | ) |
| Amortization of  deferred compensation                                                |       | 330                                                                   |       | 315 |   |
| Minority interests                                                                    |       | 20,178                                                                |       | 26,938 |   |
| Securitization  income                                                                |       | (1,651                                                                | )          | (31,385 | ) |
| Retained interests  income adjustment, net                                            |       | (5,178                                                                | )          | 221,197 |   |
| Loss or  distributions in excess of income associated with equity-method investee     |       | 606                                                                   |       | 9,052 |   |
| Changes in assets and  liabilities, exclusive of business acquisitions:               |       |                                                                  |       |   |   |
| Decrease  (increase) in restricted cash                                               |       | 1,718                                                                 |       | (416 | ) |
| Decrease  (increase) in accrued interest and fees                                     |       | 5,618                                                                 |       | (4,629 | ) |
| Increase in  amounts due from securitization                                          |       | (3,425                                                                | )          | (47,040 | ) |
| Increase in  deferred costs                                                           |       | (23,253                                                               | )          | (14,568 | ) |
| Increase in  prepaid expenses and other assets                                        |       | (1,598                                                                | )          | (1,640 | ) |
| Increase in  accounts payable and accrued expenses                                    |       | 7,103                                                                 |       | 731 |   |
| Decrease in  deferred revenue                                                         |       | (3,577                                                                | )          | (952 | ) |
| Increase in income  tax liability                                                     |       | 4,453                                                                 |       | 37,859 |   |
| Other                                                                                 |       | 2,876                                                                 |       | 3,675 |   |
| Net cash provided  by operating activities                                            |       | 85,831                                                                |       | 293,105 |   |
| **Investing activities**                                                              |       |                                                                  |       |   |   |
| Net proceeds from  investments in debt securities                                     |       | 948                                                                   |       | 1,203 |   |
| Purchases of  charged off receivables                                                 |       | (27,095                                                               | )          | (28,968 | ) |
| Payments on  charged off receivables                                                  |       | 27,159                                                                |       | 22,110 |   |
| Acquisitions of  sub-prime lenders’ assets                                       |       | (135,790                                                              | )          | — |   |
| Net (purchases on)  or payments from securitized receivables                          |       | (202,687                                                              | )          | (262,002 | ) |
| Purchases on  unsecuritized receivables                                               |       | (240,571                                                              | )          | (7,207 | ) |
| Payments from  unsecuritized receivables                                              |       | 198,183                                                               |       | 1,412 |   |
| Purchases of  credit card portfolios                                                  |       | (79,090                                                               | )          | (651,883 | ) |
| Recoveries of  receivables previously charged off                                     |       | 16,220                                                                |       | 16,541 |   |
| Net proceeds from  securitization                                                     |       | 73,853                                                                |       | 621,860 |   |
| Net decrease  (increase) in retained interests in credit card receivables securitized |       | 201,879                                                               |       | (39,316 | ) |
| Purchases and  development of software, furniture, fixtures and equipment             |       | (19,007                                                               | )          | (4,831 | ) |
| Net cash used in  investing activities                                                |       | (185,998                                                              | )          | (331,081 | ) |
| **Financing activities**                                                              |       |                                                                  |       |   |   |
| Minority interests  (distributions) contributions, net                                |       | (14,822                                                               | )          | 15,689 |   |
| Repayment of note  issued to purchase stock                                           |       | —                                                                |       | 398 |   |
| Proceeds from  exercises of stock options                                             |       | 1,036                                                                 |       | 2,519 |   |
| Purchases of  treasury stock                                                          |       | (23,873                                                               | )          | (248 | ) |
| Proceeds from  borrowings                                                             |       | 87,378                                                                |       | — |   |
| Repayment of short-term  borrowings, net                                              |       | (13,676                                                               | )          | (464 | ) |
| Net cash provided  by financing activities                                            |       | 36,043                                                                |       | 17,894 |   |
| **Net  decrease in cash**                                                             |       | (64,124                                                               | )          | (20,082 | ) |
| Cash and cash  equivalents at beginning of period                                     |       | 110,605                                                               |       | 120,416 |   |
| Cash and cash  equivalents at end of period                                           |       | $                                                                     | 46,481     |   | $ | 100,334 |   |
| **Supplemental cash flow information**                                                |       |                                                                  |       |   |   |
| Cash paid for  interest                                                               |       | $                                                                     | 757        |   | $ | 6,409 |   |
| Cash paid for  income taxes                                                           |       | $                                                                     | 36,775     |   | $ | 22,500 |   |
| Issuance of  warrant                                                                  |       | $                                                                     | 16,498     |   | $ | — |   |
| Note payable  associated with capital leases                                          |       | $                                                                     | 7,516      |   | $ | 1,481 |   |
| Notes payable  associated with bond investment                                        |       | $                                                                     | —     |   | $ | 6,185 |   |
| Accretion of preferred  stock dividends                                               |       | $                                                                     | 3,277      |   | $ | 3,248 |   |

 

See accompanying notes.

4

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) September 30, 2004**

**1. Organization and Basis of Presentation**

*General*

The condensed consolidated financial statementsinclude the accounts of CompuCredit Corporation and its consolidated subsidiaries(collectively, the “Company”). The Company is a provider of various credit andrelated financial services and products to, or associated with, the underserved(or sub-prime)and “un-banked” consumer markets. Historically, the Company has servedthis market through its marketing and solicitation of credit card accounts andits servicing of various credit card receivables underlying both its originatedaccounts and its portfolio acquisitions. Because only financial institutionscan issue general purpose credit cards, the Company has contractualarrangements with third-party financialinstitutions pursuantto which the financial institutionsissue generalpurpose Visa and MasterCard credit cards, and the Company purchases thereceivables relating to such accounts on a daily basis. The Company markets toits cardholders other fee-based products including card registration,memberships in preferred buying clubs, travel services and credit life,disability and unemployment insurance. The Company has recently expanded itsproduct and service offerings to include the marketing, servicing and/ororigination of small-balance, short-term loans (generally less than$500 for less than 30 days) through various channels, including retail branchlocations, direct marketing, telemarketing and the Internet; these “micro-lending”activities began for the Company during the second quarter of 2004 principallythrough the Company’s acquisition of substantially all of the assets of anothersub-prime lender with over 300 retail storefronts operating under thenames of First American Cash Advance and First Southern Cash Advance(collectively “First American”). During the third quarter of 2004, the Companycontinued to expand its presence in this market through its acquisition ofsubstantially all the assets of Venture Services of Kentucky, Inc. (“VentureServices”), which added approximately 166 branch locations. The Company alsoserves un-banked consumers through its offering of a stored-value(or debit) card through various retail branch locations.

The accompanying unaudited condensed consolidatedfinancial statements of the Company have been prepared in accordance withaccounting principles generally accepted in the United States of America (“GAAP”)for interim financial information and with the instructions to Form 10-Qand Article 10 of Securities and Exchange Commission (“SEC”)Regulation S-X. Accordingly, they do not include all of theinformation and notes required by GAAP for complete consolidated financialstatements. In the opinion of management, all normal recurring adjustmentsconsidered necessary to fairly state the results for the interim periodspresented have been included. The preparation of condensed consolidatedfinancial statements in conformity with accounting principles generallyaccepted in the United States of America requires management to make estimatesand assumptions that affect the reported amounts of assets and liabilities anddisclosure of contingent assets and liabilities at the date of the financialstatements, as well as the reported amounts of revenues and expenses during thereporting period. Actual results could differ from these estimates. Certainestimates, such as credit losses, payments, discount rates and the yield earnedon securitized receivables, have a significant impact on the gains and lossesrecorded on securitizations and the value of retained interests in credit cardreceivables securitized; additionally, estimates of future credit losses on theCompany’s un-securitized loans and fees receivable have a significantimpact on the provision for loan losses and loans and fees receivable, net.Operating results for the three and nine months ended September 30, 2004are not necessarily indicative of the results for the year ending December 31,2004. These condensed consolidated financial statements should be read in 

5

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

conjunction with the notesto the consolidated financial statements for the year ended December 31,2003 contained in the Company’s Annual Report on Form 10-K filedwith the SEC.

Certain amounts in priorperiod financial statements have been reclassified to conform to the currentperiod presentation. All significant intercompany balances and transactionshave been eliminated for financial reporting purposes.

**2. SignificantAccounting Policies**

The following is a summaryof significant accounting policies followed in the preparation of the condensedconsolidated financial statements:

*Restricted Cash*

The Company provides anirrevocable standby letter of credit agreement for $10.0 million toColumbus Bank & Trust, the financial institution that issues thecredit cards marketed by the Company. The purpose of the letter of credit is toprotect the financial institution from non-payment by the Company of itsobligation to purchase receivables arising in the credit card accounts on adaily basis. The Company is required to maintain a minimum cash balance of$10.0 million with the bank that issued the letter of credit. Such cashhas been disclosed as restricted cash on the face of the consolidated balancesheet. Additionally, as of December 31, 2003, the restricted cash balanceincluded a portion ($1.9 million) of the servicing fee associated with theEmbarcadero Trust (see Note 5, “Credit Card Receivables Acquisitions”) that wasthen contingent on the Company achieving certain milestones; these milestoneswere achieved, and the Company received these proceeds in January 2004.Restricted cash balances at September 30, 2004 also include cashcollateral balances underlying standby letters of credit that have been issuedin favor of certain regulators in connection with the Company’s new micro-lendingactivities.

*AssetSecuritizations*

A significant majority of theCompany’s credit card receivables are securitized. When the Company sellsreceivables in securitizations, it retains certain undivided ownershipinterests, interest-only (“I/O”) strips and servicing rights. Althoughthe Company continues to service the underlying credit card accounts andmaintains the customer relationships, these securitizations are treated assales, and the securitized receivables are not reflected on the consolidatedbalance sheet. The retained ownership interests and the interest-onlystrips are included in retained interests in credit card receivablessecuritized 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 Extinguishmentsof Liabilities” (“Statement No. 140”), gains and losses are recognized atthe time of each sale. These gains or losses on sales of receivables depend inpart on the previous carrying amount of the financial assets sold, as well asthe fair value of the assets and cash proceeds received. The cash flows used tomeasure the gains and losses represent estimates of finance charges and latefees, servicing fees, costs of funds paid to investors, payment rates, creditlosses and any required amortizing principal payments to investors.

The Company initially records a servicing liabilitywithin a securitization structure when the servicing fees the Company expectsto receive do not provide adequate compensation for servicing the receivables. 

6

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

The initial servicingliability is recorded at estimated fair market value. The servicing liabilityis then evaluated each quarter and carried at its estimated fair value. Changesin servicing liability fair value are included as a component of the Company’sincome from retained interests in credit card receivables securitized, withactual servicing expenses being recorded into operations as incurred. Becausequoted market prices are generally not available for the Company’s servicingliabilities, the Company estimates fair value based on the estimated presentvalue of future cash flows using management’s best estimates of key assumptionsas outlined in Note 7, “Off Balance Sheet Arrangements.” The servicingliability is netted against the value of the I/O strip and included in retainedinterests in credit card receivables securitized on the Company’s consolidatedbalance sheet. In accordance with Statement No. 140 and FASBInterpretation No. 46, “Consolidated Financial Statements” (“InterpretationNo. 46”), the Company does not consolidate any of the qualifying specialpurpose entities (“QSPEs”) in its securitizations.

The retained interests for portfolios securitized bythe Company are accounted for as trading securities and reported at estimatedfair market value, with changes in fair value included in operations in accordance with Statement ofFinancial Accounting Standards No. 115, “Accounting for CertainInvestments in Debt and Equity Securities” (“Statement No. 115”). Theestimates used to determine the gains and losses and the related fair values ofI/O strips and retained interests are influenced by factors outside of theCompany’s control, and such estimates could materially change from quarter toquarter. Consequently, during the third quarter of 2004, the Company had areduction in the residual cash flows discount rate used to value its I/O stripsand retained interests based on new market conditions that became apparent as aresult of its negotiation of two new term securitization facilities; theaggregated favorable pre-tax effect of this change was $21.7 million. (See Note 7, “OffBalance Sheet Arrangements,” for further discussion.)

Amounts due fromsecuritization include payments recently received on the securitizedreceivables by the securitization structures that are due and payable to theCompany within 30 days.

*Loans and FeesReceivable, Net*

Loans and fees receivable, net include receivablesassociated with the Company’s largely fee-basedcredit card offering to consumers at the lower end of the FICO scoring system, which have not beensecuritized, as well as receivables associated with the Company’s micro-lendingactivities; thesereceivables are shown net of deferred revenue and an allowance foruncollectible loans and fees. Because the Company has a zero basis in certainde-securitized Fingerhut receivables (see Note 4, “Fingerhut Trust andDe-Securitization”), the Fingerhut receivables are not reflected within loansand fees receivable, net (or the tables or discussion thereof included herein).

The credit card receivables included within loans andfees receivable, net are derived principally from the Company’s largely fee-basedcard offering to consumers at the lower end of the FICO scoring system andconsist of finance charges and fees, as well as principal balances receivablefrom this class of customer. In addition to finance charges on principalbalances, the fees associated with this particular product offering consistprincipally of activation, annual, monthly maintenance, over-limit, cashadvance and returned check fees. The activation fees are recognized over theestimated life of a customer (approximately one year), and the annual fees arerecognized over the year to which they apply. The loans and fees receivableassociated with the Company’s micro-lending activities include principalbalances and associated fees due from consumers, as well as marketing andservicing fees receivable from a third-party 

7

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

financial institution forwhich the Company provides services in the loan marketing and servicing areas.These loans and fees receivable are presented net of unearned fees inaccordance with Statement of Financial Accounting Standards No. 91, “Accountingfor Nonrefundable Fees and Costs Associated with Originating or AcquiringReceivables and Initial Direct Costs of Leases.”

Theallowance for uncollectible loans and fees is provided for that portion of theloans and fees receivable that management believes will not ultimately becollected based on historical experience. Included within the allowance foruncollectible loans and fees is an allowance for the estimated amount of themarketing and servicing fees from the third-party financial institutionthat are “at-risk” based on the performance of the loans that the Companymarkets and services on behalf of the financial institution. These fees are at-riskfor defaults on such loans owned by the third-party financialinstitution, and the Company’s allowance for uncollectible loans and fees takesinto account loan loss histories experienced by the financial institution withrespect to those loans that the Company has marketed and serviced for thefinancial institution. The components of loans and fees receivable, net are asfollows (in millions):
| ** **                                 | ** ** | **Balance at  December 31, 2003** | ** ** | **Additions** | ** ** | **Subtractions** | ** ** | **Acquisition of   Sub-prime  Lenders (Note 6)** | ** ** | **Balance at  September 30, 2004** | ** ** |
|--------------------------------------------|------------|--------------------------------------------------|------------|---------------|------------|------------------|------------|----------------------------------------------------------------------|------------|---------------------------------------------------|------------|
| Loans and fees receivable, gross           |       |                                             | $          | 37.2          |       |             |       | $                                                                    | 329.0      |                                              |       |   | $ | (264.0 | ) |   |   | $ | 29.6 |   |   |   | $ | 131.8 |   |   |
| Deferred revenue                           |       |                                             | (13.8      | )             |       |             | (36.1      | )                                                                    |       |                                              | 32.9       |   |   |   | (2.3 | ) |   |   | (19.3 | ) |   |
| Allowance for uncollectible loans and fees |       |                                             | (7.1       | )             |       |             | (51.2      | )                                                                    |       |                                              | 28.1       |   |   |   | — |   |   |   | (30.2 | ) |   |
| Loans and fees  receivable, net            |       |                                             | $          | 16.3          |       |             |       | $                                                                    | 241.7      |                                              |       |   | $ | (203.0 | ) |   |   | $ | 27.3 |   |   |   | $ | 82.3 |   |   |

 

Reflected in interestincome on the consolidated statement of operations is $11.7 million, $27.3million, $0.5 million and $0.5 million of finance charge income associated withthese loans and fees receivable for the three and nine months ended September 30,2004 and 2003, respectively. Reflected in fees and other income is $48.9million, $92.8 million, $3.4 million and $3.6 million of fee income associatedwith these loans and fees receivable for the three and nine months ended September 30,2004 and 2003, respectively. As of September 30, 2004, the weightedaverage remaining amortization period for the $19.3 million of deferred revenuereflected in the above table was 6.4 months.

*Investments inPreviously Charged Off Receivables*

In late 2002, the Company formed a new debtcollections subsidiary and began the process of obtaining the appropriate statelicenses and meeting the applicable regulatory requirements necessary for theCompany to hold itself out as a debt collector and a buyer of defaulted creditcard accounts. Through this subsidiary, the Company now pursues, competitivelybids for and acquires previously charged off credit card receivables. Asignificant majority of the Company’s acquisitions of previously charged offcredit card receivables during the first three quarters of 2004 and all but oneof the acquisitions during 2003 have been from the securitization trustsunderlying the Company’s retained interests investments. The Company iscontinually evaluating acquisition opportunities, but only at appropriatepricing. Further, the sales of the receivables serviced by the Company aresubject to a strict competitive bid process involving other potential third-partyportfolio purchasers to ensure that all acquisitions have been at fair marketprices.

8

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

Static pools consisting of homogenous accounts andreceivables are established for each acquisition. Once a static pool isestablished, the receivables within the pool are not changed. Each static poolis recorded at cost and is accounted for as a single unit for paymentapplication and income recognition purposes. The Company accounts for itsinvestments in previously charged off receivables by applying the cost recoverymethod on a portfolio-by-portfolio basis under the guidance ofPractice Bulletin 6, “Amortization of Discounts on Certain Acquired Loans”(“PB 6”). Under the cost recovery method, income associated with a particularportfolio is not recognized until cash collections have exceeded theinvestment. Additionally, until such time as cash collected for a particularportfolio exceeds the Company’s investment in the portfolio, the Company willincur commission costs and other internal and external servicing costsassociated with the cash collections on the portfolio investment that will becharged as an operating expense without any offsetting income amounts.

The Company will use the cost recovery method for eachparticular static pool until such time that its experience with that pool issufficient to justify use of the interest method (such method being one bywhich income associated with each static pool is accrued monthly based on eachstatic pool’s effective interest rate) based on criteria communicated to theCompany during 2003 by the Staff of the SEC.

For thethree and nine months ended September 30, 2004, the following table showsa roll-forward of the Company’s investments in previously charged offreceivables activities (in thousands of dollars): 
| ** **                                         | ** ** | **Three Months Ended  September 30, 2004** | ** ** | **Nine Months Ended  September 30, 2004** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------------------------|------------|---------------------------------------------------------------|------------|
| Unrecovered balance at beginning of period         |       |                                                           | $          | 16,691                                                        |       |   |   | $ | 13,960 |   |   |
| Acquisitions of  defaulted accounts                |       |                                                           | 5,377      |                                                          |       |   | 27,095 |   |   |
| Cash collections                                   |       |                                                           | (22,043    | )                                                             |       |   | (68,017 | ) |   |
| Income recognized  on defaulted accounts           |       |                                                           | 13,871     |                                                          |       |   | 40,858 |   |   |
| Balance at  September 30, 2004                |       |                                                           | $          | 13,896                                                        |       |   |   | $ | 13,896 |   |   |
| Estimated remaining  collections (“ERC”) |       |                                                           | $          | 64,491                                                        |       |   |   | $ | 64,491 |   |   |

 

At the time ofacquisition, the life of each pool generally is estimated to be between 24 and36 months based upon the proprietary models of the Company. The Companyanticipates collecting approximately 68% of the ERC over the next twelvemonths, with the balance to be collected thereafter.

*Investments in DebtSecurities*

In addition to the CSGTrust bonds held by the Company and discussed in its Annual Report on Form 10-Kfor the year ended December 31, 2003, the Company will periodically investin the open market in debt securities that the Company feels will provide itwith an adequate return on its investment. Generally, these bonds will bepurchased outright or partially funded using existing margin accounts. TheCompany’s investments in bonds are generally classified as trading securitiesand are recorded at their net purchase price. However, applying the principlesof Statement No. 115, the Company has classified all of its investment inthe CSG Trust bonds as held to maturity. Given the absence of an active marketfor these bonds and the gradual repayment of the bonds combined with theCompany’s lack of a requirement for additional liquidity, management is of theopinion that held-to-maturity classification is appropriate.

9

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

*Intangibles*

Intangible assets areamortized using the straight-line method over their estimated period of benefitof three years. For those intangible assets that were determined to have anindefinite benefit period, no amortization expense is recorded. The Companyperiodically (at least annually) evaluates the recoverability of intangibleassets and takes into account events or circumstances that warrant revised estimatesof useful lives or that indicate impairment. See Note 6, “Sub-prime Lender Acquisitions,” for intangible balancesand related information.

*Goodwill*

Goodwill represents theexcess of the purchase price and related costs over the value assigned to thenet tangible and identifiable intangible assets of the First American andVenture Services assets acquired and accounted for under the purchase method.Goodwill is tested at least annually for impairment. See Note 6, “Sub-prime Lender Acquisitions,” forgoodwill balances and related information.

*Notes Payable*

As of September 30,2004, the Company’s notes payable balances included $68.0 million of notespayable associated with the Company’s second and third quarter 2004 sub-primelender acquisitions (see Note 6, “Sub-primeLender Acquisitions”) and approximately $7.5 million of borrowingsassociated with certain vendor-financed acquisitions of software andequipment.

*Treasury Stock*

TheCompany’s Board of Directors has authorized a program to repurchase up to10 million shares (approximately 21 percent of the outstanding total)of the Company’s outstanding common stock. Under the plan, the Companyrepurchases shares of its common stock from time to time either on the openmarket or through privately negotiated transactions in compliance with SECguidelines. These shares are carried at cost in the accompanying condensedconsolidated balance sheet as a reduction to shareholders’ equity. The Companyrepurchased 352,000 and 1,375,600 shares on the open market for approximately$5.7 million and $23.9 million during the three and nine months ended September 30,2004, respectively.During the first quarter of 2003, the Company repurchased 40,000 shares on theopen market for $0.2 million. No other shares were repurchased during 2003 or2004. Treasury stock repurchases occurred during the following periods in 2004:
| ** **     | ** ** | **For the nine months ended  September 30, 2004** | ** ** |
|----------------|------------|---------------------------------------------------------------------------------|------------|
| ** **     | ** ** | **Shares   repurchased**                                                   | ** ** | **Average price  per share** | ** ** |
| ** **     | ** ** | **(In thousands)**                                                         | ** ** | ** ** | ** ** |
| Second Quarter |       |                                                                            | 1,024      |   |   |   | $ | 17.71 |   |   |
| Third Quarter  |       |                                                                            | 352        |   |   |   | 16.15 |   |   |
| Total          |       |                                                                            | 1,376      |   |   |   | $ | 17.31 |   |   |

 

As part of the repurchaseprogram, the Company has written and, contingent uponfavorable market conditions, will continue to write put options in its ownshares through the open market. The put options 

10

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

allowthe Company to settle the options in either stock or cash. The Company iscurrently obligated to purchase 500,000 shares under these put option contracts.As of September 30, 2004, none of these put options represented aliability to the Company based on the then existing share price.

*Warrant*

In connection with a securitization facility thatwas entered into during the first quarter of 2004, the Company issued to theinvestor a warrant to acquire 2.4 million shares of the Company’s common stockat a strike price of $22.45. The costs associated with this warrant wererecorded within deferred costs, net, on the Company’s condensed consolidatedbalance sheet at fair value (approximately $16.5 million determined using the Black-Scholesmodel), and the initial deferred cost amount is being amortized as anadditional component of expense over the two-year term of the securitizationfacility.

*Stock Options*

The Company has five stock-based employeecompensation plans (an employee stock purchase plan, three stock option plansand a restricted stock plan). As permitted by Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation” (“StatementNo. 123”), the Company accounts for its stock option plans under therecognition and measurement principles of Accounting Principles Board Opinion No. 25,“Accounting for Stock Issued to Employees” (“APB 25”), and its relatedinterpretations. Because all options granted under the Company’s plans had anexercise price equal to the market value of the underlying common stock on thedate of grant, no stock-based compensation cost is reflected in netincome under the Company’s application of APB 25. Additionally, the Company didnot issue any options to non-employees who were not directors during 2003 or2004.

Thefollowing table presents the effects on net income and net income per share ifthe Company had recognized compensation expense under the fair valuerecognition provisions of Statement No. 123:
| ** **                                                                               | ** ** | **For the  three months ended  September 30,**              | ** ** | **For the  nine months ended  September 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2004**                                                                        | ** ** | **2003**                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                               | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Net income attributable to common shareholders, as  reported                             |       | $                                                                               | 37,887     |                                                              | $          | 56,496 |   | $ | 69,359 |   | $ | 106,647 |   |
| Stock-based  employee compensation expense determined under fair value basis, net of tax |       | (187                                                                            | )          | (229                                                              | )          | (527 | ) | (670 | ) |
| Pro forma net  income                                                                    |       | $                                                                               | 37,700     |                                                              | $          | 56,267 |   | $ | 68,832 |   | $ | 105,977 |   |
| Earnings per share:                                                                      |       |                                                                            |       |                                                              |       |   |   |   |   |
| Basic—as reported                                                                   |       | $                                                                               | 0.77       |                                                              | $          | 1.12 |   | $ | 1.41 |   | $ | 2.15 |   |
| Basic—pro forma                                                                     |       | $                                                                               | 0.76       |                                                              | $          | 1.12 |   | $ | 1.40 |   | $ | 2.14 |   |
| Diluted—as reported                                                                 |       | $                                                                               | 0.75       |                                                              | $          | 1.11 |   | $ | 1.39 |   | $ | 2.13 |   |
| Diluted—pro forma                                                                   |       | $                                                                               | 0.75       |                                                              | $          | 1.10 |   | $ | 1.38 |   | $ | 2.12 |   |

 

11

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

Thepro forma results may not be indicative of the future effect on the results ofoperations due to a variety of factors including thetiming and number of awards. The following table summarizes the Black-Scholesvalue of the Company’s outstanding stock options on a per share basis, as wellas the key assumptions used in the Black-Scholes model.
| ** **               | ** ** | **For the  three months ended  September 30,** | ** ** | **For the  nine months ended  September 30,** | ** ** |
|--------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **               | ** ** | **2004**                                                           | ** ** | **2003**                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Fair value per share     |       | $                                                                  | 11.51      |                                                              | $          | 5.90 |   | $ | 14.28 |   | $ | 4.24 |   |
| Dividend rate            |       | 0.0                                                                | %          | 0.0                                                               | %          | 0.0 | % | 0.0 | % |
| Risk free rate           |       | 3.4                                                                | %          | 2.9                                                               | %          | 3.0 | % | 2.8 | % |
| Expected  volatility     |       | 84.6                                                               | %          | 53.5                                                              | %          | 86.6 | % | 75.2 | % |
| Expected life of options |       | 5 Years                                                            |       | 5 Years                                                           |       | 5 Years |   | 5 Years |   |
|                          |            |                                                                    |            |                                                                   |            |  |  |  |  |  |  |  |  |

 

The Company’s shareholdersapproved the new restricted stock plan at the 2004 annual meeting ofshareholders. The Company believes that grants of restricted stock under thisplan generally will be more effective than grants of stock options at aligningthe interests of the grantees and with those of the Company’s shareholders. Asa result, the Company expects to make restricted stock grants, rather thanoption grants, in most instances in the foreseeable future.

*Fees and OtherIncome*

Feesand other income consists of the following:
| ** **                                        | ** ** | **For the  three months ended  September 30,** | ** ** | **For the  nine months ended  September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2004**                                                           | ** ** | **2003**                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands)**                               | ** ** |
| Fees on securitized credit card receivables       |       | $                                                                  | 19,126     |                                                              | $          | 24,362 |   | $ | 58,929 |   | $ | 64,499 |   |
| Other fees                                        |       | 49,741                                                             |       | 3,383                                                             |       | 93,663 |   | 3,597 |   |
| Income on  de-securitized Fingerhut receivables   |       | 28,660                                                             |       | —                                                            |       | 28,660 |   | — |   |
| Recoveries of  previously charged off receivables |       | 13,871                                                             |       | 10,922                                                            |       | 40,858 |   | 27,936 |   |
| Ancillary product  revenue                        |       | 1,817                                                              |       | (716                                                              | )          | 4,574 |   | 2,782 |   |
| Interchange fees                                  |       | 4,338                                                              |       | 3,796                                                             |       | 11,706 |   | 10,196 |   |
| Total                                             |       | $                                                                  | 117,553    |                                                              | $          | 41,747 |   | $ | 238,390 |   | $ | 109,010 |   |

 

Fees include (1) annual membership, over-limit,cash advance, returned check, activation, monthly maintenance, transaction andother fees associated with the Company’s card products and (2) variousmarketing, servicing, and lending fees associated with the Company’s newmicro-lending activities. Fees are assessed on credit card accounts accordingto the terms of the related cardholder agreements and, except for annualmembership and activation fees, are recognized as revenue when charged to thecardholder’s account. Annual membership fees are amortized into revenue on astraight-line basis over the cardholder privilege period, which is twelvemonths, and activation fees are recognized over the estimated 

12

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

life of a customer(approximately one year). Direct receivables origination costs are amortizedagainst fee income.

The Company offers variousfee-based products and services (ancillary products) to its customers,including memberships, insurance products and subscription services. When theCompany markets its own products, the fees, net of estimated cancellations, arerecorded as deferred revenue upon the customer’s acceptance of the product andare amortized on a straight-line basis over the life of the product (whichranges from one to twelve months). When the Company markets products for thirdparties under commission arrangements, the revenue is recognized when earned,which is generally during the same month the product is sold to the customer.The Company considers revenue to be earned once delivery has occurred (i.e.,when there is no further performance obligation), the commission is fixed andcollectibility is reasonably assured. Once these conditions are satisfied, theCompany recognizes its commission as ancillary product revenue.

*Recent AccountingPronouncements*

In June 2003, the FinancialAccounting Standards Board (“FASB”) issued an Exposure Draft for a proposed Statement of Financial Accounting Standardsentitled “Qualifying Special Purpose Entities and Isolation of TransferredAssets, an Amendment of Statement No. 140.”TheExposure Draft is a proposal that is subject to change and, as such, is not yetauthoritative. The FASB intends to reissue this exposure draft during the firstquarter of 2005. If the proposal is promulgated in its current form, it willamend and clarify Statement No. 140. Under the Exposure Draft, the renewalof certain commercial paper facilities underlying the Company’s securitizationscould cause the Company to record on its books the assets and liabilitiesrelated to the securitizations.

In December 2003, the American Institute ofCertified Public Accountants Accounting Standards Executive Committee issuedStatement of Position 03-3, “Accounting for Certain Loans or Debt SecuritiesAcquired in a Transfer” (“SOP 03-3”). SOP 03-3 addresses accounting fordifferences between contractual cash flows and cash flows expected to becollected from an investor’s initial investment in loans or debt securities(loans) acquired in a transfer if those differences are attributable, at leastin part, to credit quality. It applies to loans acquired, but does not apply toloans originated by the entity. SOP 03-3 is effective for loans acquired infiscal years beginning after December 15, 2004, with early adoptionencouraged. The Company does not anticipate that the adoption of SOP 03-3 willhave a material impact on its financial statements.

In March 2004, theFASB issued an Exposure Draft for a proposed Statement of Financial AccountingStandards Statement to address the accounting for stock-based employee plans.The proposed statement, in its current form, would eliminate the ability toaccount for share-based compensation transactions using APB 25**and instead require that suchtransactions be accounted for using a fair-value-based method of accounting.The adoption of this statement, in its current form, would result in incomestatement effects similar to what is currently disclosed using pro-formafinancials (see the discussion under the caption “*Stock Options*” above) as allowed under Statement No. 123.The adoption of this proposed statement in its current form is not expected tohave a material impact on the Company’s financial statements.

13

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

**3. Equity Method Investmentin CSG, LLC**

CSG, LLC (“CSG”) was formed during the second quarterof 2002 by affiliates of Goldman, Sachs & Co., Salomon Smith Barneyand a wholly owned subsidiary of the Company to acquire notes and asubordinated, certificated interest issued by a trust (“CSG Trust”) that owns aportfolio of credit card receivables, which were initially purchased by thetrust from Providian National Bank. The Company accounts for its interest inCSG using the equity method of accounting. The Company has a 50% interest inCSG and funded its initial $34.9 million investment in CSG with cash of$3.5 million and by borrowing $31.4 million, which was repaid duringthe fourth quarter of 2002. Notwithstanding the Company’s repayment of thisloan’s principal, the lender continues to receive a portion of excess cashflows received by the Company from CSG. These payments are classified asinterest expense.

During the three and nine months ended September 30,2003, the Company received $0.0 million and $36.7 million, respectively, incash distributions from CSG. The Company has received no cash distributionsfrom CSG during 2004. During the second quarter of 2003, and as expected at thetime of CSG’s acquisition of its interests in the CSG Trust, a principalbalance trigger occurred, and hence an early amortization began. While CSG madedistributions to the Company through June 2003, the occurrence of thistrigger event caused CSG to cease its cash distributions to the Company, and itwill not resume these distributions until approximately the middle of 2006.Accordingly, all significant income from the Company’s equity-method investmentwill cease until distributions resume in 2006.

Thefollowing represents condensed results of operations of CSG as of and for thethree and nine months ended September 30, 2004:
| ** **                                                 | ** ** | **As of  September 30, 2004** | ** ** |
|------------------------------------------------------------|------------|----------------------------------------------|------------|
| ** **                                                 | ** ** | **(Dollars in  thousands)**             | ** ** |
| Retained interests in credit card receivables  securitized |       |                                         | $          | 1 |   |   |
| Total assets                                               |       |                                         | 11,970     |   |   |
| Total liabilities                                          |       |                                         | 28         |   |   |
| Members’ capital                                      |       |                                         | $          | 11,942 |   |   |

 
| ** **                                                             | ** ** | **For the  three months ended  September 30, 2004** | ** ** | **For the  nine months ended  September 30, 2004** | ** ** |
|------------------------------------------------------------------------|------------|------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(Dollars in thousands)**                                         | ** ** |
| Income from  retained interests in credit card receivables securitized |       |                                                                         | $          | 0                                                                           |       |   |   | $ | 0 |   |   |
| Total other  operating income                                          |       |                                                                         | 206        |                                                                        |       |   | 698 |   |   |
| Net income                                                             |       |                                                                         | $          | (338                                                                        | )          |   |   | $ | (1,212 | ) |   |

 

Retained interests purchased by CSG during 2002 arecarried at the lower of amortized cost or fair market value. Inaccordance with Emerging Issues Task Force Issue 99-20, “Recognition ofInterest Income and Impairment on Purchased and Retained Beneficial Interestsin Securitized Financial Assets” (“EITF 99-20”), expected cash flows inexcess of the costs of the purchased CSG retained interests are being amortizedinto income from retained interests in credit card receivables securitizedusing the effective interest method.

14

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

In exchange for servicing100% of the receivables owned by the CSG Trust, the Company receives aservicing fee from the securitization structure, which the Company considersadequate compensation for servicing.

**4. Fingerhut Trustand De-Securitization**

In July 2002, the Company completed a transactionwith Federated Department Stores, Inc. in which the Company purchased for$75.2 million plus an assumed $95.8 million servicing liability the retainedinterests in a trust (the “Original Fingerhut Trust”) that owned approximately$1.0 billion in face amount of receivables. The receivables included in thetrust were those generated by private label revolving credit cards used topurchase items from the Fingerhut catalog.

During the third quarter of 2003, a third partyacquired the Company’s retained interest in the Original Fingerhut Trust inexchange for $27.3 million and a retained interest in a new trust (the “FingerhutTrust”), which owned a collateral security interest in the Original FingerhutTrust. Subsequent to this third quarter 2003 transaction, the effectiveinterest method of EITF 99-20 was used to record income associated with theCompany’s retained interest in the new Fingerhut Trust; $5.9 million and $8.7million of such pre-tax income is reflected in income from retained interestsin credit card receivables securitized during the three and nine months ended September 30,2004.

On August 15, 2004, the remaining debt underlyingthe Fingerhut Trust was repaid from cash collections within the trust through July 31,2004. In accordance with Statement No. 140, the Company resumed accountingownership of these Fingerhut receivables at an approximate $0.0 carryover basiscorresponding to the Company’s then-existing basis in the Fingerhut retainedinterests. Accordingly, all cash collections received on these “de-securitized”Fingerhut receivables subsequent to July 31, 2004 are recognized intoincome as fees and other income on the Company’s condensed consolidatedstatements of operations. Total income recognized relating to these cash flowson the de-securitized Fingerhut receivables was $23.5 million for the three andnine months ended September 30, 2004. Theremaining excess cash flows that the Company expects to receive from thede-securitized Fingerhut receivables through December of 2008 are currentlyestimated to be $129.0 million, with approximately 68% of such receivablesexpected to be collected in the next 12 months.

Prior to the pay-off ofthe Fingerhut Trust senior note holders on August 15,2004, the Fingerhut Trust provided the Company with adequate compensation forservicing the portfolio of credit card receivables underlying the FingerhutTrust. As such, the Company’s original servicing liability associated with theOriginal Fingerhut Trust was converted into a deferred gain upon the thirdquarter of 2003 Fingerhut retained interests exchange; this deferred gainbalance was netted against retained interests in credit card receivablessecuritized in prior periods. Because of the de-securitization of the Fingerhutreceivables during the third quarter of 2004, this deferred gain is nowpresented as a separate liability on the Company’s condensed consolidatedbalance sheet as of September 30, 2004. This deferred gain is beingamortized into fees and other income on the Company’s condensed consolidatedstatements of operations in a manner that corresponds with actual andanticipated future cash collections on the de-securitized Fingerhutreceivables; the income associated with amortization of this deferred gaintotaled approximately $5.2 million for the three and nine months ended September 30,2004.

15

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

**5. Credit CardReceivables Acquisitions**

On August 27, 2004, the Company purchased a 75.1%interest in Bluestem Holdings, LLC (“Bluestem”) for approximately $3.9 million,including transaction costs. Bluestem was formed by an affiliate of MerrillLynch and one of the Company’s wholly owned subsidiaries in connection with theacquisition of approximately $92 million (face amount) in credit cardreceivables. These receivables were then transferred to Goldenrod Funding, LLC(“Goldenrod”), a wholly owned subsidiary of Bluestem, and then on to a trustpursuant to a Statement No. 140 transfer in exchange for notes and asubordinated, certificated interest issued by the trust (“Goldenrod Trust”),thereby resulting in securitization income of $1.7 million. (See Note 7, “OffBalance Sheet Arrangements,” for further discussion.) The assets and liabilitiesof Bluestem and Goldenrod, and their associated earnings from operations, arepresented as part of the Company’s condensed consolidated financial statementswith a minority interest being shown to reflect the Merrill Lynch affiliate’sportion of the operations. The minority interest on the condensed consolidatedstatement of operations is not shown net of tax because Goldenrod is apass-through entity for income tax purposes. For a fee that represents adequatecompensation for servicing, the Company has agreed to service the entireportfolio of credit card receivables underlying the Goldenrod Trust. Inaddition, Goldenrod is obligated to provide for the purchase of receivables inthe unlikely event that the Goldenrod Trust is unable to fund such receivables.To date, there have been no, and management does not expect any, borrowingsrelated to this obligation.

On August 1, 2003,the Company purchased a 62.5% interest in Embarcadero Holdings, LLC (“EmbarcaderoHoldings”) for $26.5 million. Embarcadero Holdings was formed by an affiliateof Merrill Lynch and one of the Company’s wholly owned subsidiaries inconnection with the acquisition of approximately $824 million (face amount) incredit card receivables from Providian Bank. These receivables were thentransferred to Embarcadero, LLC (“Embarcadero”), a wholly owned subsidiary ofEmbarcadero Holdings, and then on to a trust pursuant to a Statement No. 140transfer in exchange for notes and a subordinated, certificated interest issuedby the trust (“Embarcadero Trust”), thereby resulting in securitization incomeof $31.4 million. (See Note 7, “Off Balance Sheet Arrangements,” for furtherdiscussion.) Embarcadero retained the subordinated, certificated interestoriginally issued by the Embarcadero Trust until the initial conduit facilityunderlying the securitization was replaced in January 2004 with a new10-year amortizing term facility; Embarcadero now owns the subordinated,certificated interest underlying the new 10-year amortizing term facility. Theassets and liabilities of Embarcadero Holdings and Embarcadero, and theirassociated earnings from operations, are presented as part of the Company’sconsolidated financial statements with a minority interest being shown toreflect the Merrill Lynch affiliate’s portion of the operations. The minorityinterest on the condensed consolidated statement of operations is not shown netof tax because Embarcadero is a pass-through entity for income tax purposes.For a fee that represents adequate compensation for servicing, the Company hasagreed to service the entire portfolio of credit card receivables underlyingthe Embarcadero Trust. In addition, Embarcadero is obligated to provide for thepurchase of receivables in the unlikely event that the Embarcadero Trust isunable to fund such receivables. To date, there have been no, and managementdoes not expect any, borrowings related to this obligation.

16

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

**6. Sub-prime LenderAcquisitions**

During the second quarter of 2004, the Companyacquired substantially all of the assets of First American, a complementarysub-prime lender, for approximately $108.9 million, including transactioncosts. With over 300 retail branch locations, First American’s operations andfootprint serve as the principal platform for the Company’s micro-lendingactivities.

During the third quarter of 2004, the Company acquiredanother complementary sub-prime lender, Venture Services, for approximately$33.9 million, including transaction costs. The acquisition of Venture Servicesadded an additional 166 retail branch locations to the Company’s micro-lendingbase.

The Company financed both the First Americanacquisition and the Venture Services acquisition (the “Micro-Lending”acquisitions) with an aggregate of $73.3 million of cash and $69.5 million of debtfinancing. The Company structured the Micro-Lending acquisitions through a newsubsidiary, which serves as a holding company for both operations. All of thedebt financing associated with the acquisitions is recourse only as to theacquired assets and operations of the Micro-Lending acquisitions. Some $53.0million of debt financing incurred in connection with the First Americanacquisition was financed under a $65.0 million syndication of commitmentsconsisting of: (1) a $10.0 million revolving credit facility (of which$3.0 million was drawn at closing) and a $5.0 million swing-line facility(which provides working capital funding during peak seasonal periods); (2) a$23.0 million Term Loan A note; and (3) a $27.0 million Term Loan B note(collectively “the Term Loans notes”).

Subsequently, in connection with the closing of theVenture Services acquisition, the Term Loan A note was increased by $5.0million to $28.0 million and the Term Loan B note was increased by $4.5 millionto $31.5 million, resulting in total commitments of $74.5 million (includingthe $10.0 million revolving credit facility and the $5.0 million swing-linefacility). Each of the Term Loan notes bears interest at rates varying monthlywith either prime interest rates or LIBOR (at the election of the Company),with spreads above prime or LIBOR being based on the leverage ratios for theacquired operations. As of September 30, 2004, the Class A Term and Class BTerm interest rates were 7.0% and 12.5%, respectively. The notes require quarterlyrepayments beginning in January 2006 of $2.4 million; any prepayments bythe Company are to be applied first against the principal balances outstandingon the Class A Term note. The revolving credit facility and swing-linefacility each bear interest at the same rates as the Class A Term note.The revolving credit facility, swing-line facility and term loans mature in December 2006,with an one-year extension available at the Company’s option (subject,however, to the achievement of certain leverage ratios). As of September 30,2004, $3.5 million was outstanding under the revolving credit facility.

An additional $5.0 million in debt financing wasincurred in connection with the Venture Services acquisition through asubordinated promissory note, which was issued to the seller in the transaction.The $5.0 million subordinated promissory note bears interest at 10% per annumand matures on July 31, 2007.

17

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

Thefollowing table summarizes the preliminary purchase price allocation for theMicro-Lending acquisitions:
| ** **                  | ** ** | **Dollars**            | ** ** | **Amortization Period** | ** ** |
|-----------------------------|------------|------------------------|------------|------------------------------|------------|
| ** **                  | ** ** | **(in millions)** | ** ** | ** **                   | ** ** |
| Purchase price              |       |                   | $          | 142.8                        |       |   |   |   |   |   |
| Property and  equipment     |       |                   | (4.8       | )                            |       |   |   |   |   |
| Working capital             |       |                   | (25.4      | )                            |       |   |   |   |   |
| Customer  relationships     |       |                   | (5.2       | )                            |       |   | 3  years |   |   |
| Non-compete  agreement      |       |                   | (2.8       | )                            |       |   | 3 years |   |   |
| Trademarks and  trade names |       |                   | (3.9       | )                            |       |   | Indefinite  life |   |   |
| Goodwill                    |       |                   | $          | (100.7                       | )          |   |   |   |   |   |

 

The allocation ispreliminary and subject to adjustment up to one year from the respective dates of close; however, managementdoes not anticipate that the allocation will materially change.

**7. Off BalanceSheet Arrangements**

The Company securitizes through a master trust all ofits credit card receivables originated on a daily basis under its primarythird-party financial institution relationship (the “originated portfolio”),except for those credit card receivables underlying the Company’s largelyfee-based card offering to consumers at the lower end of the FICO scoringsystem. The securitized credit card receivables are transferred to a mastertrust, which issues notes representing undivided ownership interests in theassets of the master trust. During the third quarter of 2003 and again duringthe third quarter of 2004, the Company acquired receivables from third partiesand subsequently securitized them. (See Note 5, “Credit Card ReceivablesAcquisitions.”)

All of the Company’s credit card receivables, with theexception of the de-securitized Fingerhut receivables (see Note 4, “FingerhutTrust and De-Securitization”) and those receivables associated with its largelyfee-based card offering to consumers at the lower end of the FICO scoringsystem, are held by securitization trusts, and the exclusive interest of theCompany in these securitized receivables is in the form of retained interests.GAAP requires the Company to treat its transfers to the securitization trustsas sales, and the receivables are removed from the Company’s condensedconsolidated balance sheet. Under Statement No. 140, an entity recognizesthe assets it controls and liabilities it has incurred, and derecognizes thefinancial assets for which control has been surrendered and all liabilitiesthat have been extinguished. An entity is considered to have surrenderedcontrol over the transferred assets and, therefore, to have sold the assets ifthe following conditions are met:

1.                The transferredassets have been isolated from the transferor and put presumptively beyond thereach of the transferor and its creditors.

2.                Each transfereehas the right to pledge or exchange the assets it has received, and nocondition both constrains the transferee from taking advantage of its right topledge or exchange and provides more than a trivial benefit to the transferor.

3.                The transferordoes not maintain effective control over the transferred assets through either (i) anagreement that both entitles and obligates the transferor to repurchase orredeem them 

18

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

before their maturity, or (ii) theability to unilaterally cause the holder to return specific assets, other thanthrough a clean-up call.

The securitization transactions do not affect therelationship the Company has with its customers, and the Company continues toservice the securitized credit card receivables.

Thetable below summarizes the Company’s securitization activity for the periodspresented. It does not include any of the receivables managed by or thesecuritization facility of CSG, the Company’s 50%-owned equity-methodinvestee:
| ** **                                                                | ** ** | **For the  three months ended  September 30,** | ** ** | **For the  nine months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2004**                                                           | ** ** | **2003**                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                | ** ** | **(Dollars in thousands)**                               | ** ** |
| Securitization Activity:                                                  |       |                                                               |       |                                                              |       |   |   |   |   |
| Gross amount of  receivables (at face value) securitized at period end    |       | $                                                                  | 1,710,585  |                                                              | $          | 2,464,619 |   | $ | 1,710,585 |   | $ | 2,464,619 |   |
| Proceeds from  collections reinvested in revolving period securitizations |       | 243,898                                                            |       | 241,399                                                           |       | 667,081 |   | 723,804 |   |
| Excess cash flows  received on retained interests                         |       | 72,303                                                             |       | 95,803                                                            |       | 207,523 |   | 289,626 |   |
| Pre-tax  securitization income                                            |       | 1,651                                                              |       | 31,385                                                            |       | 1,651 |   | 31,385 |   |
| Income from  retained interests in credit card receivables securitized    |       | 33,609                                                             |       | 80,771                                                            |       | 69,602 |   | 136,192 |   |
|                                                                           |            |                                                                    |            |                                                                   |            |  |  |  |  |  |  |  |  |

 

The investors in the Company’s securitizationtransactions have no recourse against the Company for its customers’ failure topay their credit card receivables. However, most of the Company’s retainedinterests are subordinated to the investors’ interests until the investors havebeen fully paid.

Generally, all collections received from thecardholders underlying each securitization are included in the securitizationcash flows. This includes collections from the cardholders for interest, feesand other charges on the accounts and collections from the cardholders repayingthe principal portion of their account balances. In general, the cash flows arethen distributed to the Company as servicer for its servicing fee, to theinvestors as interest on their outstanding notes, to the investors to repay anyportion of their outstanding notes that become due and payable and to theCompany as the seller to fund new purchases. Any collections from cardholders remainingeach month after making the various payments noted above are paid to theCompany on its retained interests.

The retained interests associated with the credit cardreceivables that the Company has securitized are carried at estimated fairmarket value, and because they are classified as trading securities, anychanges in fair value are included in income. Because quoted market prices forthe Company’s retained interests are generally not available, the Companyestimates fair value based on the estimated present value of future cash flowsusing management’s best estimates of key assumptions.

The measurements of retained interests associated withCompany-arranged securitizations are dependent upon management’s estimates offuture cash flows using the cash-out method. Under the cash-out method,the future cash flows (including the release of any cash related to creditenhancements) 

19

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

are recorded at adiscounted value. The cash flows are discounted based on the timing of when theCompany expects to receive the cash flows. The discount rates are based onmanagement’s estimates of returns that would be required by investors in aninvestment with similar terms and credit quality. Yields on the credit cardreceivables are estimated based on the stated annual percentage rates in thecredit card agreements. Estimated default and payment rates are based onhistorical results, adjusted for expected changes based on the Company’s creditrisk models. Credit card receivables are typically charged off when thereceivables become 180 days past due, although earlier charge offs mayoccur specifically related to accounts of bankrupt or deceased customers.Bankrupt and deceased customers’ accounts are typically charged off within30 days of verification.

TheCompany’s retained interests in credit card receivables securitized include thefollowing: 
| ** **                                                 | ** ** | **September 30, 2004**     | ** ** | **December 31, 2003** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **(Dollars in thousands)** | ** ** |
| I/O strip                                                  |       |                                 | $          | 89,852                          |       |   |   | $ | 98,158 |   |   |
| Accrued interest  and fees                                 |       |                                 | 13,411     |                            |       |   | 19,030 |   |   |
| Servicing  liability                                       |       |                                 | (38,191    | )                               |       |   | (50,125 | ) |   |
| Fair value of  retained interests                          |       |                                 | 513,270    |                            |       |   | 471,898 |   |   |
| Retained interests in  credit card receivables securitized |       |                                 | $          | 578,342                         |       |   |   | $ | 538,961 |   |   |

 

The I/O strip reflects the fair value of the Company’srights to future income from Company-arranged securitizations and includescertain credit enhancements. The I/O strip decreased slightly during the firstnine months of 2004 principally due to the effects of lower overall receivablebalances and a slight reduction in the yield, offset by some degree, by areduction in the residual cash flow discount rate. The decrease in accruedinterest and fees corresponds with reductions in receivables balances andslightly lower yields within the portfolios underlying the Company’ssecuritizations. The servicing liability reflects, for those securitizationstructures for which servicing compensation is not adequate, the fair value ofthe costs to service the receivables above and beyond the servicing income theCompany expects to receive from the securitizations. The servicing liabilitydecrease experienced thus far in 2004 is consistent with reductions inreceivables levels to which the servicing liability relates. The fair value ofretained interests includes those interests in Company-arranged securitizations,as well as the Company’s purchased interests in securitizations. The fair valueof retained interests increased between December 31, 2003 and September 30,2004, principally due to the effects of: (1) a reduction in the Company’sresidual cash flows discount rate based on new market conditions that becameapparent to the Company in the third quarter of 2004 as a result of itsnegotiation of two new term securitization facilities ($21.7 million aggregate pre-taxeffect, including the effects on the I/O strip valuation mentioned above); and (2) thede-securitization of the Fingerhut receivables, which resulted in separateliability classification of the Fingerhut deferred gain (see Note 4, “FingerhutTrust and De-Securitization”) in the amount of **$**29.9 million****asof September 30, 2004, versus presentation of this Fingerhut deferred gainas a net against the fair value of retained interests in the amount of **$**35.1  millionas ofDecember 31, 2003.

 

20

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

 

Changesin any of the assumptions used to value the Company’s retained interests inCompany-arranged securitizations could impact the Company’s fair valueestimates. The weighted average key assumptions used to estimate the fair valueof the Company’s retained interests in the receivablesit has securitized are presentedbelow: 
| ** **                              | ** ** | **September 30,  2004** | ** ** | **December 31,  2003** | ** ** | **September 30,  2003** | ** ** |
|-----------------------------------------|------------|------------------------------|------------|-----------------------------|------------|------------------------------|------------|
| Yield (annualized)                      |       |                         | 28.9       | %                           |       |                         | 29.5       | % |   |   | 31.0 | % |   |
| Payment rate  (monthly)                 |       |                         | 6.4        |                        |       |                         | 6.5        |   |   |   | 6.8 |   |   |
| Expected credit  loss rate (annualized) |       |                         | 13.0       |                        |       |                         | 15.0       |   |   |   | 18.0 |   |   |
| Residual cash  flows discount rate      |       |                         | 15.5       |                        |       |                         | 22.5       |   |   |   | 22.5 |   |   |
| Servicing liability  discount rate      |       |                         | 14.0       |                        |       |                         | 14.0       |   |   |   | 14.0 |   |   |

 

The following illustrates thehypothetical effect of an adverse 5 and 10 percent change in key economicassumptions on the retained interests in credit card receivables securitized at September 30, 2004 ($ inthousands):
| **Yield  (annualized)**                       |   | 28.9 | %       |
|-----------------------------------------------|--------|------|---------|
| *Impact  on fair value of 5% adverse change*  |   | $    | (7,422  | ) |
| *Impact  on fair value of 10% adverse change* |   | $    | (14,621 | ) |
| **Payment rate (monthly)**                    |   | 6.4  | %       |
| *Impact  on fair value of 5% adverse change*  |   | $    | (380    | ) |
| *Impact  on fair value of 10% adverse change* |   | $    | (1,219  | ) |
| **Expected credit loss rate (annualized)**    |   | 13.0 | %       |
| *Impact  on fair value of 5% adverse change*  |   | $    | (3,255  | ) |
| *Impact  on fair value of 10% adverse change* |   | $    | (6,955  | ) |
| **Residual cash flows discount rate**         |   | 15.5 | %       |
| *Impact  on fair value of 5% adverse change*  |   | $    | (1,389  | ) |
| *Impact  on fair value of 10% adverse change* |   | $    | (2,981  | ) |
| **Servicing discount rate**                   |   | 14.0 | %       |
| *Impact  on fair value of 5% adverse change*  |   | $    | 150     |   |
| *Impact on fair value of 10%  adverse change* |   | $    | 78      |   |

 

These sensitivities are hypothetical and should beused with caution. As the figures indicate, changes in fair value based on a 5%and a 10% variation in assumptions generally cannot be extrapolated because therelationship of the change in assumption to the change in fair value of theretained interests in credit card receivables securitized may not be linear.Also, in this table, the effect of a variation in a particular assumption onthe fair value of the retained interest is calculated without changing anyother assumptions; in reality, changes in one assumption may result in changesin another. For example, increases in market interest rates may result in lowerprepayments and increased credit losses, which could magnify or counteract thesensitivities.

21

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

TheCompany’s managed receivables portfolio underlying its securitizations(including its 62.5% and 75.1% ownership shares in the Embarcadero andGoldenrod managed receivables, respectively) is comprised of retained interestsin the credit card receivables securitized and the investors’ shares of thesesecuritized receivables. The investors’ shares of securitized credit cardreceivables are not assets of the Company. The following table summarizes thebalances included in the Company’s managed receivables portfolio underlying itsretained interests credit card receivables securitized.
| ** **                                                       | ** ** | ** September 30,   2004** | ** ** | ** December 31,   2003** | ** ** |
|------------------------------------------------------------------|------------|------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                       | ** ** | **(In thousands)**                  | ** ** |
| Total managed principal balance underlying  securitizations      |       |                                     | $          | 1,541,834                               |       |   |   | $ | 2,071,521 |   |   |
| Total managed  finance charge balance underlying securitizations |       |                                     | 168,751    |                                    |       |   | 211,282 |   |   |
| Total managed  receivables underlying  securitizations           |       |                                     | $          | 1,710,585                               |       |   |   | $ | 2,282,803 |   |   |
| Receivables  delinquent—60 or more days                     |       |                                     | $          | 153,223                                 |       |   |   | $ | 259,504 |   |   |
| Net charge offs for the  three months ended                      |       |                                     | $          | 47,745                                  |       |   |   | $ | 76,964 |   |   |

 

**8. EarningsPer Share**

Thefollowing table sets forth the computation of basic and diluted earnings pershare:
| ** **                                                                             | ** ** | **For the  three months ended  September 30,**          | ** ** | **For the  nine months ended  September 30,** | ** ** |
|----------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                             | ** ** | **2004**                                                                    | ** ** | **2003**                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                             | ** ** | **(In thousands, except for per share data)** | ** ** |
| Numerator:                                                                             |       |                                                                        |       |                                                              |       |   |   |   |   |
| Net income                                                                             |       | $                                                                           | 39,012     |                                                              | $          | 57,520 |   | $ | 72,651 |   | $ | 109,885 |   |
| Preferred stock dividends                                                              |       | (1,125                                                                      | )          | (1,024                                                            | )          | (3,292 | ) | (3,238 | ) |
| Income attributable to common shareholders                                             |       | $                                                                           | 37,887     |                                                              | $          | 56,496 |   | $ | 69,359 |   | $ | 106,647 |   |
| Denominator:                                                                           |       |                                                                        |       |                                                              |       |   |   |   |   |
| Denominator for basic income per share—weighted  average  shares outstanding |       | 50,876                                                                      |       | 51,299                                                            |       | 51,387 |   | 51,118 |   |
| Effect of dilutive stock options                                                       |       | 810                                                                         |       | 571                                                               |       | 860 |   | 449 |   |
| Denominator for diluted income per share—adjusted  weighted  average shares  |       | 51,686                                                                      |       | 51,870                                                            |       | 52,247 |   | 51,567 |   |
| Basic income per share                                                                 |       | $                                                                           | 0.77       |                                                              | $          | 1.12 |   | $ | 1.41 |   | $ | 2.15 |   |
| Diluted income  per share                                                              |       | $                                                                           | 0.75       |                                                              | $          | 1.11 |   | $ | 1.39 |   | $ | 2.13 |   |

 

The Company’s preferredshares, plus dividends that have been accreted thereon, are convertible intoapproximately 5.0 million shares of common stock at $9.14 per share as of September 30,2004. The common shares into which these preferred shares are convertible havebeen included in the weighted average shares outstanding in the abovecomputations. Excluded from the third quarter and year-to-date 2004 earningsper share calculations are 2.4 million of warrants and 0.3 million of stockoptions as their effects are anti-dilutive.

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

**9. Commitmentsand Contingencies**

In the normal course of business through theorigination of unsecured credit card receivables, the Company incurs offbalance sheet risks. These financial instruments consist of commitments toextend credit totaling approximately $2.6 billion and $2.3 billion at September 30,2004 and December 31, 2003, respectively. These instruments involve, tovarying degrees, elements of credit risk in excess of the amounts securitized.The principal amount of these instruments reflects the maximum exposure theCompany has in the instruments. The Company has not experienced and does notanticipate that all of its customers will exercise their entire available lineof credit at any given point in time. The Company has the right to reduce orcancel these available lines of credit at anytime.

The Company is an equity member of CSG. (See Note 3,****“Equity MethodInvestment in CSG, LLC.”) During the second quarter of 2002, CSG enteredinto a note purchase agreement whereby it agreed to buy additional interests ina portfolio of credit card receivables owned by CSG Trust should there be netnew growth in the receivables or should collections not be available to fundnew cardholder purchases. As of September 30, 2004, CSG would be obligatedto purchase up to approximately $57.7 million of new notes from the CSG Trustshould this contingency arise. In general, this contingency amount will declineas the amount of credit available to cardholders for future purchases declines.The portfolio has declined and is expected to continue to decline during thelife of the CSG Trust as payments are expected to exceed new purchases eachmonth. As a member of CSG, the Company has agreed to guarantee the payment ofthe purchase price of the aforementioned new notes if the events giving rise tothis contingency arise, but only if CSG itself should fail to purchase the new notesunder the note purchase agreement. As of September 30, 2004, CSG had notpurchased and was not required to purchase any additional notes under the notepurchase agreement. The Company’s guarantee is limited to its ownershippercentage in CSG (which at September 30, 2004 was 50%) times the totalamount of the notes that CSG would be required to purchase. Therefore, as of September 30,2004, the maximum amount of the Company’s guarantee was approximately $28.9million. The Company currently does not have any liability recorded withrespect to this guarantee, but it will record one if events occur that makepayment probable under the guarantee. The fair value of this guarantee is notmaterial.

The Company’s agreement with its principal third-partyoriginating financial institution requires the Company to purchase on a dailybasis the credit card receivables that are originated in the accountsmaintained for the Company’s benefit. To secure this obligation, the Companyprovides the financial institution a $10.0 million cash-collateralizedletter of credit and has pledged retained interests carried at approximately$64.1 million. These arrangements prevent the Company from using the$10.0 million of cash for any other purpose, although the Company cansubstitute other collateral for the pledged retained interests. The Company’sarrangements with the financial institution expire in March 2006. If theCompany were to terminate its service agreement with this institution, therewould be penalties of approximately $1.0 million as of September 30, 2004.The Company currently does not have any liability recorded with respect to theguarantees discussed in this paragraph, but it will record one if events occurthat make payment probable under the guarantees. The fair value of theseguarantees is not material.

Through what were formerly First American’s operations(see Note 6, “Sub-prime Lender Acquisitions”), the Company has an agreementwith another third-party financial institution pursuant to which the Companymarkets and services loans on behalf of the financial institution in exchangefor marketing and servicing fees. These fees are “at-risk” for defaults onthese loans owned by the third-party 

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) September 30, 2004**

financial institution (seethe discussion under the caption “*Loans andFees Receivable, Net*,” in Note 2, “Significant Accounting Policies”).All legal liability associated with any of the obligations (including theat-risk portion of the marketing and servicing fees) of the acquired FirstAmerican operations is limited to the legal entities comprising the acquiredFirst American and Venture Services operations. Nevertheless, to further growthplans for the acquired First American operations, the Company has guaranteed upto $15.0 million of potential liability to the financial institution under itsmarketing and servicing program with the Company. The Company currently doesnot have any liability recorded with respect to the guarantee discussed in thisparagraph, but it will record one if events occur that make payment probable underthe guarantee. The fair value of this guarantee is not material.

The Company’s most significant source of liquidity isthe securitization of credit card receivables. The maturity terms of theCompany’s securitizations vary. As of September 30, 2004, the Company had:a two-year variable funding securitization facility with renewal options andtwo one-year conduit securitization facilities issued out of itsoriginated portfolio master trust; a ten-year amortizing term securitizationfacility issued out of the Embarcadero Trust; and a one-year variable fundingsecuritization facility issued out of the Goldenrod Trust. While the Companyhas never triggered an early amortization within any of the series underlyingCompany-arranged securitization facilities, and while the Company does notbelieve that it will, it is conceivable that, even with close management, theCompany may trigger an early amortization of one or more of the outstandingseries within its securitization trusts. As each securitization facilityexpires or comes up for renewal, there can be no assurance that the facilitywill be renewed, or if renewed, there can be no assurance that the terms willbe as favorable as the terms that currently exist. Either of these events couldsignificantly increase the Company’s need for additional liquidity.

The Company is subject to various legal proceedingsand claims that arise in the ordinary course of business. There are no materialpending legal proceedings to which the Company is a party.

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**ITEM 2.   MANAGEMENT’SDISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS**

*The followingdiscussion should be read in conjunction with our condensed consolidatedfinancial statements and the related notes included therein where certain termshave been defined.*

This Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincludes forward-looking statements. We have based these forward-lookingstatements on our current plans, expectations and beliefs about future events.In light of the risks, uncertainties and assumptions discussed under thecaption “Risk Factors” in “Item 1. Business” of our Annual Report on Form 10-Kfor the year ended December 31, 2003 filed with the Securities andExchange Commission (“SEC”) and other factors discussed in that section, thereis a risk that our actual experience will differ materially from theexpectations and beliefs reflected in the forward-looking statements inthis section and elsewhere in this report.

**Overview**

We are a provider of various credit and relatedfinancial services and products to or associated with the underserved, orsub-prime, consumer credit market, as well as to “un-banked” consumers.Historically, we have served this market through our marketing and solicitationof credit card accounts and our servicing of various credit card receivablesunderlying both our originated accounts and our portfolio acquisitions.

We generally have financed our credit card originationactivities through the securitization of the receivables underlying theaccounts we originate and the portfolios that we purchase. The leverage (i.e., thepercentage on a dollar that lenders will lend us, or the “advance rate”) thatour securitization facilities provide against our credit card receivables is acritical factor in our ability to obtain the desired returns on equity for ourshareholders. From the latter part of 2001 through the end of 2003, the advancerates that securitization lenders were willing to provide us with respect toour originated portfolio master trust were not adequate enough for us to earnthe returns on equity that we demand for our shareholders. Accordingly, we didnot originate a significant number of accounts during that time period.

In January 2004, however, we completed a two-yearsecuritization facility in connection with our originated portfolio mastertrust at advance rates that allow us to earn acceptable returns on equity fromaccount originations to our traditional customer base. This facility providesfor an initial one-year committed funding level of $1.25 billion, growth inthat committed funding level to $1.5 billion in the second year (subject tocertain conditions precedent), one-year renewal periods (subject to certainconditions precedent) at the expiration of the initial two-year term and anorderly amortization of the facility at expiration in a manner that we expectwill allow us to receive cash flows that will adequately cover our servicingcosts while amounts borrowed under the facility are repaid by the originatedportfolio master trust. Accordingly, during the first quarter of 2004, we beganto market our card offerings so that we can begin growing our traditionaloriginated credit card business in 2004 and beyond.

During the period between late 2001 through the end of2003, while we were not originating significant numbers of accounts, we soughtto diversify our product offerings. We initially focused on portfolioacquisition as a significant growth channel for our overall credit cardreceivables portfolio. Through this channel, we were able to obtain sufficientleverage against our discounted purchase prices to allow us to earn our desiredreturns on equity. We completed three significant acquisitions in 2002 and 2003. Further, we also decided to expand ourbusiness into the purchase and recovery of previously charged off receivables,as well as the marketing and servicing of micro loansand stored-value (or debit) cards.

Our portfolio acquisitions and our charged offreceivables recovery operations have been very successful and have fit withinour longstanding strategy of maximizing shareholder returns through 

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high-return businessactivities, while growing only to the extent that we have the liquidity inplace to profitably do so. We believe that we have achieved our goals to dateby maintaining flexibility and seeking opportunities where others might not,and we believe that these traits are essential for our continued success. Thus,our focus is on how we can efficiently deploy our risk modeling, underwriting,servicing and collection platform and expertise, irrespective of the particularvehicle through which we obtain the receivables to which we apply our skillset.

Throughout 2004 and beyond, our shareholders shouldexpect us to evaluate and pursue additional credit card receivables portfoliosand other business activities and asset classes that are complementary to ourhistoric sub-prime credit card business, including acquisitions of sub-prime lenders. As a part of our strategy ofcomplementary diversification, we began rolling out a stored-value cardinitiative during the first quarter of 2004. Moreover, we have recentlyexpanded our product and service offerings to include the marketing, servicingand/or origination of small-balance,short-term loans (generally less than $500 for less than 30 days) throughvarious channels, including our own retail branch locations, grocery andconvenience store chains, direct marketing, telemarketing and the Internet. Webegan these micro-lending activitiesin earnest during the second quarter of 2004 through our acquisition ofsubstantially all of the assets of First American, a sub-prime lender with over300 retail storefronts, and we continued our expansion in this area with ouracquisition of Venture Services, another complementary sub-prime lender with anadditional 166 stores. We also partnered with Merrill Lynch to acquire approximately$92 million (face amount) in credit card receivables during the third quarterof this year.

We remain focused onmaking good economic decisions that will result in high returns on equity toour shareholders over a long-term horizon. While our decisions may makeeconomic sense, they may also result in volatile earnings under GAAP as aresult of the accounting requirements for securitizations under Statement ofFinancial Accounting Standards No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities” (“Statement No. 140”).To the extent that we grow our overall portfolio of credit card receivables(through origination, acquisition or other new channels) and then securitizethese assets, we will have securitization income or loss, which may bematerial. (This occurred, for example, in the third quarters of 2003 and 2004.)For further discussion of our historic results and the impact of securitizationaccounting on our results, see the “Results of Operations” and “Liquidity,Funding and Capital Resources” sections below, as well as our condensedconsolidated financial statements and the notes thereto.

**Results of Operations**

***Three and NineMonths Ended September 30, 2004, Compared to Three and Nine Months Ended September 30,2003***

Ourresults of operations were as follows for the three and nine months ended September 30 (in thousands except per sharedata):
| ** **                                      | ** ** | **For the three  months ended  September 30,** | ** ** | **For the nine  months ended  September 30,** | ** ** |
|-------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2004**                                                           | ** ** | **2003**                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| Net income                                      |       | $                                                                  | 39,012     |                                                              | $          | 57,520 |   | $ | 72,651 |   | $ | 109,885 |   |
| Net income  attributable to common shareholders |       | $                                                                  | 37,887     |                                                              | $          | 56,496 |   | $ | 69,359 |   | $ | 106,647 |   |
| Diluted income per share                        |       | $                                                                  | 0.75       |                                                              | $          | 1.11 |   | $ | 1.39 |   | $ | 2.13 |   |

 

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***Three-Month Comparison***

Highlights of ourresults of operations for the three months ended September 30, 2004compared to the three months ended September 30, 2003 are as follows:

*Interestincome.**  *Interestincome increased by $10.8 million in 2004 primarily from our largelyfee-based card offering to consumers at the lower end of the FICO scoringsystem.

*Provisionfor loan losses.**  *Ourprovision for loan losses increased to $27.2 million in 2004, from $2.3 millionin 2003. The $24.9 million increase is principally due to our significantyear-over-year growth in our on balance sheet loans and fees receivable relatedto our largely fee-based card offering to consumers at the lower end of theFICO scoring system and our new micro-lending activities.

*Securitizationincome.**  *Theinitial purchase and subsequent securitization of the Embarcadero Trustreceivables in the third quarter of 2003 generated $29.4 million more incomethan the initial purchase and subsequent securitization of the Goldenrod Trustreceivables in the third quarter of 2004.

*Incomefrom retained interests in credit card receivables securitized.**  *Income from retained interests incredit card receivables securitized decreased by $47.1 million, principally dueto an anticipated decline in income from our acquired Fingerhut retainedinterests as a result of our third quarter 2003 retained interest exchangetransaction ($5.9 million of pre-tax income for 2004, compared with$49.6 million pre-tax income for 2003). This 2003 transaction had theeffect of increasing our servicing compensation levels from the Fingerhutreceivables, while significantly reducing other cash flows to us associatedwith the Fingerhut retained interests while investor notes underlying asecuritization facility issued in connection with the exchange were beingrepaid through a “rapid amortization” structure. The decrease in income fromthe Fingerhut retained interests was partially offset during the three monthsended September 30, 2004 by an increase in fees and other incomeattributable to income earned upon the de-securitization of the Fingerhutreceivables during this same period.

Additionally, ignoring the third quarter 2004 effectsof the residual cash flows discount rate change discussed below, the fair valuemeasurement of the securitized Embarcadero Trust receivables in the thirdquarter of 2003 generated an additional $30.5 million in income from retainedinterests in that quarter than in the third quarter of 2004.The above decreasesin income from retained interests in credit card receivables securitized wereoffset principally by a change in the estimated residual cash flows discountrate used to value retained interests, which increased income from retainedinterests in credit card receivables securitized by $21.7 million in the threemonths ended September 30, 2004.

*Servicingincome.**  *Servicingincome declined an anticipated $5.6 million, pre-tax, due to declines in theoriginated portfolio master trust and CSG Trust managed receivables and thede-securitization of the Fingerhut receivables. The de-securitization of theFingerhut receivables had the effect of eliminating servicing income as arevenue source related to the Fingerhut receivables. This decline was partiallyoffset, however, by 2004 servicing income from the Embarcadero Trustreceivables securitized during the third quarter of 2003.

*Feesand other income.**  *Feesand other income increased by $75.8 million dueto a $84.6 million increase in fee income in 2004 largely attributable to feeincome generated by the Embarcadero Trust receivables, our largely fee-basedcredit card product offering to consumers at the lower end of the FICO scoringsystem, our new stored-value card and micro-lending activities, our income onthe de-securitized Fingerhut receivables, and our investment in previouslycharged off receivables. This increase was partially offset by an anticipated$8.8 million decline in other credit card fees related to the originatedportfolio due to a decline in the managed receivables underlying the originatedportfolio master trust.

*Cardand loan servicing costs.*   Card and loanservicing costs increased $3.8 million primarily related to our newstored-value card, micro-lending and investments in previously charged offreceivables activities 

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($19.2 million pre-taxcosts in 2004, compared to $6.1 million pre-tax costs in 2003). This increasewas partially offset by declines related to decreasing managed receivableslevels within the originated portfolio master trust and Fingerhut portfolios,offset by costs associated with the addition of the Embarcadero portfolio in September 2003and the Goldenrod portfolio in August 2004 (see Note 5, “Credit CardReceivables Acquisitions,” to our condensed consolidated financial statements)and increases in the receivables underlying our largely fee-based card offeringto consumers at the lower end of the FICO scoring system ($23.3 million pre-taxcosts in 2004, compared to $32.6 million pre-tax costs in 2003).

*Marketing and Solicitation.**  *Marketing and solicitationincreased by $9.6 million (marketing costs of $12.3 million pre-tax for the three months ended 2004,compared to $2.6 million pre-tax for the threemonths ended 2003) primarily due to increased 2004 marketingefforts aimed at growing account originations within our originated portfoliomaster trust, as well as with our stored-value card product offering andmicro-lending activities.

***Nine-month Comparison***

Highlights of our results of operations for the ninemonths ended September 30, 2004 compared to the nine months ended September 30,2003 are as follows:

*Interestincome.**  *Interestincome increased by $27.2 million in 2004 primarily from our largelyfee-based card offering to consumers at the lower end of the FICO scoringsystem.

*Interestexpense.**  *Interestexpense declined $3.4 million due to our investment in CSG ($0.2 millionpre-tax interest expense for 2004, versus $6.3 million of pre-tax interestexpense for 2003), offset by interest expense associated with the debtfinancing of our sub-prime lender acquisitions.

*Provisionfor loan losses.**  *Ourprovision for loan losses increased to $51.2 million in 2004, from $2.4 millionin 2003. The $48.8 million increase is principally due to our significantyear-over-year growth in our on balance sheet loans and fees receivable relatedto our largely fee-based card offering to consumers at the lower end of theFICO scoring system and our new micro-lending activities.

*Securitizationincome.**  *Theinitial purchase and subsequent securitization of the Embarcadero Trustreceivables in the third quarter of 2003 generated $29.4 million more incomethan the initial purchase and subsequent securitization of the Goldenrod Trustreceivables in the third quarter of 2004.

*Incomefrom retained interests in credit card receivables securitized.**  *Income from retained interests incredit card receivables securitized decreased by $66.6 million, principally dueto an anticipated decline in income from our acquired Fingerhut retainedinterests as a result of our third quarter 2003 retained interest exchangetransaction ($8.7 million of pre-tax income for 2004, compared with$128.2 million pre-tax income for 2003). This 2003 transaction had theeffect of increasing our servicing compensation levels from the Fingerhutreceivables, while significantly reducing other cash flows to us associatedwith the Fingerhut retained interests while investor notes underlying a newsecuritization facility issued in connection with the exchange were beingrepaid through a “rapid amortization” structure. The decrease in income fromthe Fingerhut retained interests was partially offset during the nine monthsended September 30, 2004 by an increase in fees and other incomeattributable to income earned upon the de-securitization of the Fingerhutreceivables during this same period.

The above decreases in income from retained interestsin credit card receivables securitized were offset principally by a change inthe estimated residual cash flows discount rate used to value retainedinterests, which increased income from retained interests in credit cardreceivables securitized by $21.7 million in the three and nine months ended September 30,2004. Additionally, the improved performance of our retained interests in theoriginated portfolio master trust ($4.8 million of pre-tax income in 2004, ascalculated before the positive effects of the change in the residual cash flowsdiscount rate discussed above, compared to a $(34.4) million pre-tax loss in2003) also helped to offset the decrease discussed above.

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*Servicingincome.**  *Servicingincome decreased an anticipated $13.3 million,pre-tax, due to declines in theoriginated portfolio master trust and CSG Trust managed receivables and thede-securitization of the Fingerhut receivables. The de-securitization of theFingerhut receivables had the effect of eliminating servicing income as arevenue source related to the Fingerhut receivables. This decline was partiallyoffset, however, by 2004 servicingincome associated with the addition of the Embarcadero Trust receivables  securitized during the third quarter of 2003.

*Feesand other income.**  *Feesand other income increased by $129.4 dueto a $149.1 million increase in fee income in 2004 largely attributable to feeincome generated by the Embarcadero Trust receivables, our largely fee-basedcredit card product offering to consumers at the lower end of the FICO scoringsystem, our new stored-value card and micro-lending activities, our income onthe de-securitized Fingerhut receivables, and our investment in previouslycharged off receivables. This increase was partially offset by an anticipated$19.7 million decline in other credit card fees related to the originatedportfolio due to a decline in the managed receivables underlying the originatedportfolio master trust.

*Equityin (loss) income of equity-method investee.**  *Equity in (loss) income ofequity-method investee declined $28.2 million, as anticipated at the date ofinvestment, due to the effects of the second quarter of 2003 early amortizationevent experienced by CSG with respect to its investment in CSG Trust retainedinterests; this event caused the CSG Trust to cease cash flows to CSG withrespect to its retained interest in the CSG Trust, which in turn adverselyaffected CSG’s income levels in 2004.

*Cardand loan servicing costs.**  *Card and loan servicing costs decreased $1.2 millionprimarily from decreasing managed receivables levels within the originatedportfolio master trust and Fingerhut portfolios, partially offset by costsassociated with the addition of the Embarcadero portfolio and increases in thereceivables underlying our largely fee-based card offering to consumers at thelower end of the FICO scoring system ($75.3 million pre-tax in 2004, comparedto $100.4 million pre-tax in 2003). These decreases were partially offset byincrease in card and loan servicing with respect to our stored-value card,micro-lending and investments in previously charged off receivables activities($42.0 million pre-tax costs in 2004, compared to $18.2 million pre-tax costsin 2003).

*Marketing and Solicitation.**  *Marketing and solicitationincreased by $19.9 million (marketing costs of $27.0 million pre-tax for the nine  monthsended 2004, compared to $7.1 million pre-tax for the nine  monthsended 2003) primarily due to increased 2004 marketing effortsaimed at growing account originations within our originated portfolio mastertrust, as well as within our stored-value card product offering andmicro-lending activities.

***Net Interest (Expense) Income After Provision for LoanLosses***

Net interest(expense) income after provision for loan losses represents interest incomeearned on cash, cash equivalents and investments and finance charges and latefees earned on any loans receivable that we have not securitized, less interestexpense and a provision for loan losses. Exclusive of our provision for loanlosses, we had net interest income of $12.0 million and $30.4 million for thethree and nine months ended September 30, 2004, versus net interest income(expense) of $3.0 million and $(0.5) million for the three and nine monthsended September 30, 2003. The factors accounting for this shift to netinterest income exclusive of the provision for loan losses in 2004 from netinterest income (expense) in 2003 include:

·       growthduring the latter quarters of 2003 and the first three quarters of 2004 in ourcredit card receivables associated with our largely fee-based credit cardproduct offering to consumers at the lower end of the FICO scoring system, noneof which we have securitized;

·       interestincome that we have received in 2004 on our subordinated, certificated interestin the Embarcadero Trust; and

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·       thesuspension of interest expense payments associated with debt that we undertookin 2002 to acquire our interest in CSG, such suspension occurring in connectionwith the early amortization trigger experienced on the CSG Trust securitizationfacility during the second quarter of 2003 (as discussed in further detail inthe “Liquidity, Funding, and Capital Resources” section of our Annual Report onForm 10-K for the year ended December 31, 2003).

These positive effects were partially offset, however,by interest expense associated with the debt financing of our two sub-primelender acquisitions during 2004.

As we continue to grow our largely fee-based creditcard offering to consumers at the lower end of the FICO scoring system, andassuming that we do not securitize the credit card loans receivable underlyingthis product offering in an off balance sheet arrangement, we expect to seecontinued growth in our interest income. However, because of the debt financingthat we incurred late in the second quarter and again in the third quarter of2004 associated with our sub-prime lender acquisitions (see Note 6, “Sub-primeLender Acquisitions,” to our condensed consolidated financial statements), weexpect higher interest expense balances in future quarters during which thisdebt is outstanding.

Our $27.2 million and$51.2 million provision for loan losses for the three and nine months ended September 30,2004 and $2.3 million and $2.4 million provision for loan losses for the threeand nine months ended September 30, 2003 relate principally to thosenon-securitized receivables associated with our largely fee-based card offeringto consumers at the lower end of the FICO scoring system and are providedto cover aggregate loss exposures on (1) principal loans receivablebalances, (2) finance charges and late fees receivables underlying incomeamounts included within our interest income category, and (3) feesreceivable underlying fee income included within our fees and other incomecategory. Prior to the third quarter of 2003, substantially all of ourreceivables were securitized in off balance sheet qualifying securitizations.

***Securitization Income and Income from RetainedInterests in Credit Card Receivables Securitized***

See Note 7, “Off BalanceSheet Arrangements,” to our condensed consolidated financial statements for adescription of our securitizations.

Securitizationincome amounts during each respective three and nine-month period ending September 30,2004 and 2003 reflect the securitization of the Goldenrod receivables in thethird quarter of 2004 and the securitization of the Embarcadero receivables inthe third quarter of 2003—the Goldenrod receivables acquisition being a smalleracquisition than the Embarcadero receivables acquisition. Income (loss) fromretained interests in credit card receivables securitized includes the incomeearned on the retained interests and any changes in the fair value of theretained interestsin accordance with Statement of Financial Accounting Standards No. 115, “Accountingfor Certain Investments in Debt and Equity Securities,” as follows: 
| ** **                                                                      | ** ** | **For the three  months ended  September 30,** | ** ** | **For the nine  months ended  September 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                                                           | ** ** | **2003**                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                      | ** ** | **(in millions)**                                             | ** ** |
| Income (loss)  from retained interests in credit card receivables securitized : |       |                                                               |       |                                                              |       |   |   |   |   |
| Originated portfolio                                                            |       | $                                                                  | 15.0       |                                                              | $          | (8.1 | ) | $ | 24.2 |   | $ | (34.4 | ) |
| Purchased portfolio(1)                                                          |       | 18.6                                                               |       | 88.9                                                              |       | 45.4 |   | 170.6 |   |
| Total                                                                           |       | $                                                                  | 33.6       |                                                              | $          | 80.8 |   | $ | 69.6 |   | $ | 136.2 |   |

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(1)          This amount includesapproximately $5.9 million and $8.7 million for the three and nine months endedSeptember 30, 2004 related to the Fingerhut Trust and $49.6 millionand $128.2 million for the 

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three and nine monthsended September 30, 2003 related to the Fingerhut Trust (as discussedbelow). It also includes approximately $11.0 million, $35.0 million, $39.3million and $39.3 million for the three and nine months ended September 30,2004 and 2003, respectively, related to the Embarcadero Trust.

Two factors contributed to the growth in income fromour retained interests in the originated portfolio master trust experienced inthe three and nine-month periods ending September 30,2004 as compared to similar periods ending September 30, 2003. First, wehave experienced improvements in the performance of the receivables within ouroriginated portfolio master trust. Additionally, our third quarter 2004 incomefrom these retained interests was positively influenced by a reduction in the residual cashflows discount rate applied to value these retained interests as of September 30,2004.

The expected decrease in income from retainedinterests in the purchased portfolio trusts in the three and nine-monthperiods ending September 30, 2004 as compared to similar periods ending September 30,2003 is principally attributable to the performance of our acquired Fingerhutretained interests (only $5.9 million and $8.7 million of Fingerhut pre-taxincome from retained interests in credit card receivables securitized for thethree and nine months ended September 30, 2004, compared with$49.6 million and $128.2 million of Fingerhut pre-tax income from retainedinterests in credit card receivables securitized for the three and nine monthsended September 30, 2003). This disparity in Fingerhut retained interestsincome levels reflects the third quarter 2003 Fingerhut retained interestsexchange transaction, which had the effect of increasing our servicing compensationlevels from the Fingerhut receivables, while significantly reducing other cashflows to us associated with the Fingerhut retained interests while investornotes underlying a new securitization facility issued in connection with theexchange were being repaid through a “rapid amortization” structure. TheFingerhut securitization facility was repaid in its entirety in August 2004,thereby resulting in a de-securitization of the Fingerhut receivables. As such,beginning in August 2004, we no longer have any Fingerhut retainedinterests from which income can be expected in the future. Instead, incomeassociated with the de-securitized Fingerhut receivables is reflected in ourfees and other income category within our condensed consolidated statements of operationsas cash is received.

Principally reflecting reductions in managedreceivables levels within the Embarcadero Trust as they are liquidated, ourincome from retained interests in the Embarcadero Trust for the three and ninemonth periods ending September 30, 2004 has also declined relative tocomparable periods ending September 30, 2003. This trend is expected tocontinue in future quarters as well.

Finally, while not asignificant factor affecting the comparison of 2004 versus 2003 levels ofincome from our retained interests in the purchased portfolio trusts, our thirdquarter 2004 income includes $1.7 million of income from the Goldenrod Trustretained interests, which was not present in the third quarter of 2003.

***Equity Method Investment in CSG***

Under the equity method ofaccounting for our CSG investment, we recorded approximately $(0.2) million and$(0.6) million of pretax loss and $(0.3) million and $27.6 million ofpretax (loss) income during the three and nine months ended September 30,2004 and 2003, respectively. This change relates to the anticipated principalbalance trigger that occurred, and hence, the early amortization that beganduring the second quarter of 2003 for the securitization facility underlyingthe CSG Trust, the retained interest in which was the principal income-earningasset of CSG during 2003. While we received distributions from CSG through September 2003,the occurrence of the trigger event has caused CSG to cease its cashdistributions to us, and distributions will not resume for the foreseeablefuture. Accordingly, all significant income from our equity-method investmentwill cease until the distributions resume. The occurrence of this trigger eventshould not impact, however, our expected future cash flows associated with ourservicing of the CSG Trust receivables or our investment in CSG Trust notes.

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***Servicing Income and Fees and Other Income***

Our servicing income is typically based on negotiatedservicing rates applied to the principal balances of the receivables that wemanage on behalf of our securitization trusts. The servicing income declinebetween 2003 and 2004 results from reductions in managed receivables balancesunderlying the CSG and Fingerhut trusts (and notwithstanding our currentefforts to again grow our originated portfolio master trust receivables, net year-over-year reductionsin those managed receivables as well), as well as the de-securitization of theFingerhut receivables during the middle of the third quarter of 2004. Thisdecline is partially offset, however, by our management of additionalreceivables balances associated with our third quarter 2003 Embarcadero Trustsecuritization transaction and to a lesser extent our third quarter 2004Goldenrod Trust securitization transaction.

Two term securitization facilities issuedby the originated portfolio master trust subsequent to thethird quarter of 2004 increased our servicing rates to 4% (i.e., from the .10%level that we have historically experienced for facilities issued out of ouroriginated portfolio master trust). This increase in our servicing compensationlevels for these two facilities issued out of the originated portfolio willhave the effects of (1) causing a shift in future periods of some of ourincome from retained interests in the originated portfolio master trust to aservicing income category and (2) offsetting some of the future reductionsin servicing income that we otherwise might expect given the liquidation of thereceivables underlying our purchased portfolios.

Adetail of the components of our fees and other income category follows:
| ** **                                        | ** ** | **For the  three months ended  September 30,** | ** ** | **For the  nine months ended  September 30,** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2004**                                                           | ** ** | **2003**                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands)**                               | ** ** |
| Fees on securitized credit card receivables       |       | $                                                                  | 19,126     |                                                              | $          | 24,362 |   | $ | 58,929 |   | $ | 64,499 |   |
| Other fees                                        |       | 49,741                                                             |       | 3,383                                                             |       | 93,663 |   | 3,597 |   |
| Income on  de-securitized Fingerhut receivables   |       | 28,660                                                             |       | —                                                            |       | 28,660 |   | — |   |
| Recoveries of  previously charged off receivables |       | 13,871                                                             |       | 10,922                                                            |       | 40,858 |   | 27,936 |   |
| Ancillary product  revenue (expense), net         |       | 1,817                                                              |       | (716                                                              | )          | 4,574 |   | 2,782 |   |
| Interchange fees                                  |       | 4,338                                                              |       | 3,796                                                             |       | 11,706 |   | 10,196 |   |
| Total                                             |       | $                                                                  | 117,553    |                                                              | $          | 41,747 |   | $ | 238,390 |   | $ | 109,010 |   |

 

Fees and other income have risen in 2004 based on thestrength of our fee income generated within the Embarcadero Trust receivables (included in fees onsecuritized credit card receivables, above),with respect to our investment in previously charged off receivables, withrespect to our largely fee-based credit card product offering to consumers atthe lower end of the FICO scoring system(included in other fees, above),with respect to our new stored-value card and micro-lending activities (included in other fees, above) andwith respect to the recognition of cash flows received from the de-securitizedFingerhut receivables. These fees and other income increases were partiallyoffset, however, by relative reductions in managed credit card receivableslevels between 2003 and 2004. We expect future quarter-over-quartergrowth in our fees and other income category as we continue to grow ouroriginated portfolio master trust receivables, our largely fee-based creditcard product offering to consumers at the lower end of the FICO scoring system,and our stored-value card and micro-lending activities.

As noted in our prior discussion of securitizationincome and income from retained interests in credit card receivablessecuritized, the $28.7 million of income from de-securitized Fingerhutreceivables in the table above is new to our financial statements and relatesto the repayment of a Fingerhut securitization facility in its entirety in August 2004,thereby resulting in a de-securitization of the Fingerhut receivables.Accordingly, during the third quarter of 2004, we resumed on balance sheetownership of these receivables 

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at an approximately $0.0carryover basis corresponding to our then-existing basis in the Fingerhutretained interests. We have no plans to re-securitize the receivablesunderlying the Fingerhut Trust, and the remaining excess cash flows that weexpect to receive from the Fingerhut receivables through December of 2008are currently estimated to be $129.0 million. Because of our $0.0 basis in thede-securitized Fingerhut receivables, as we receive our expected $129.0 millionin excess cash flows from the Fingerhut receivables, we essentially will bereporting into GAAP income (as fees and other income) all of the cash flowsthat we receive in any particular accounting period. Total income recognizedrelating to these cash flows on the de-securitized Fingerhut receivables was$23.5 million for the three and nine months ended September 30, 2004.

Also reflected in the$28.7 million of income from de-securitized Fingerhut receivables is post-de-securitization-related deferred gainamortization. Prior to the pay-off of the Fingerhut securitization facility in August of2004, the Fingerhut Trust provided us with adequate compensation for servicingthe portfolio of credit card receivables underlying the Fingerhut Trust. Assuch, our original servicing liability associated with an Original FingerhutTrust was converted into a deferred gain upon a third quarter of 2003 Fingerhutretained interests exchange. This deferred gain is now being amortized intofees and other income on our condensed consolidated statements of operations ina manner that corresponds with actual and anticipated future cash collectionson the de-securitized Fingerhut receivables; the post-de-securitization  income associated withamortization of this deferred gain totaled approximately $5.2 million for thethree and nine months ended September 30, 2004. As of September 30,2004, an additional $29.9 million of this deferred gain on Fingerhutreceivables remains to be amortized into fees and other income in futureperiods.

***Other Operating Expense***

Otheroperating expense consists of the following for the periods indicated: 
| ** **                     | ** ** | **For the  three months ended  September 30,** | ** ** | **For the  nine months ended  September 30,** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2004**                                                           | ** ** | **2003**                                                          | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **(Dollars in thousands)**                               | ** ** |
| Salaries and benefits          |       | $                                                                  | 5,744      |                                                              | $          | 5,619 |   | $ | 16,147 |   | $ | 14,388 |   |
| Card and loan servicing        |       | 42,505                                                             |       | 38,725                                                            |       | 117,366 |   | 118,576 |   |
| Marketing and solicitation     |       | 12,251                                                             |       | 2,646                                                             |       | 26,980 |   | 7,060 |   |
| Depreciation                   |       | 4,094                                                              |       | 3,906                                                             |       | 12,046 |   | 11,676 |   |
| Other                          |       | 21,347                                                             |       | 9,108                                                             |       | 42,119 |   | 26,332 |   |
| Total other  operating expense |       | $                                                                  | 85,941     |                                                              | $          | 60,004 |   | $ | 214,658 |   | $ | 178,032 |   |

 

The increase in other operating expense for the threeand nine months ended September 30, 2004, versus the same periods for 2003reflects investments (e.g., salaries and benefits associated with new hiring,capital expenditures resulting in greater depreciation levels and marketing andsolicitation) that we are making to renew growth in the receivables underlyingour originated portfolio mastertrust and to diversify into other complementary products and services (like ournew stored-value card offering and micro-lending products) that we can marketto our sub-prime and un-banked customer base. As we continue to aggressivelymarket our largely fee-based product offering to consumers at the lower end ofthe FICO scoring system, our traditional credit card offering within ouroriginated portfolio master trust, our stored-value card offerings andmicro-lending products, we expect a continued trend of heightened marketing andsolicitation costs throughout 2004.

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While our credit card servicing costs have beentrending down in recent months along with the decline in our managedreceivables and based on our renegotiation of certain vendor servicing rates,other cost-cutting initiatives and lower overall delinquencies, the expansionof our micro-lending activities has caused a net increase in our third quarter2004 card and loan servicing costs relative to 2003 levels. We expect toexperience a trend of increasing card and loan servicing costs as we see theresults of our renewed marketing efforts to grow the number of accounts and theassociated receivables levels within the originated portfolio master trust aswell as our largely fee-based credit card offering to consumers at the lower end of the FICO scoringsystem and as we further expand our stored-value card andmicro-lending activities.

The other expense categoryabove includes professional fees, net occupancy costs, ancillary productexpense, card-related fraud, travel and entertainment, insurance, hiring expense,corporate communications, leased equipment expenses, office supplies and othermiscellaneous expenses. These expenses have generally increased incrementallybecause we are adding infrastructure to support our growth and diversificationinto other sub-prime products and services complementary to our traditionalcredit card activities. Our cardholder fraud expense includes the expense ofunauthorized use of the credit cards, including identity theft and purchases onlost or stolen cards. To date, we have experienced very little fraud forunauthorized use, and the total expense has approximated 0.04% of our averagemanaged receivables in any given year. The increase in our other expensecategory from last year’s third quarter to this year’s third quarter alsoreflects a $4.5 million pre-tax loss that we took into account during the thirdquarter of this year based on the impairment of certain notes receivable fromone of our strategic marketing vendor relationships.

***Minority Interest***

The 37.5% and 24.9% ownershipinterest of the Merrill Lynch affiliate in the Embarcadero Holdings andBluestem partnerships, respectively, is reflected as a minority interest in ouroperating results. The $7.1 million and $20.2 million recorded for the threeand nine months ended September 30, 2004, respectively, reflects MerrillLynch’s portion of the Embarcadero results of operations. Prior to the thirdquarter of 2003, we did not have any minority interest.

***Income Taxes***

Our effective tax rate was35.0% and 36.2% for the three and nine months ended September 30, 2004,while it was 35.2%, and 35.5% for the three and nine months ended September 30,2003, respectively. The increase in our effective tax rate for the nine monthsended September 30, 2004 is reflective of our growth and expansion intoseveral new jurisdictions in which we are subject to various state incometaxes.

**Selected Receivables Data**

As noted above, our credit card securitizations aretreated as sales under GAAP. As such, we remove the securitized receivablesfrom our consolidated balance sheet. The performance of the underlying creditcard receivables will nevertheless affect the future cash flows we actuallyreceive.

Various references within this report are to ourmanaged receivables, which include our non-securitized receivables, aswell as the receivables underlying our off balance sheet securitizationfacilities. Performance metrics and data based on these aggregate managedreceivables are key to any evaluation of our performance in managing (includingunderwriting, valuing purchased receivables, servicing and collecting) theaggregate of the portfolios of receivables reflected on our balance sheet andunderlying our securitization facilities. In allocating our resources andmanaging our business, management relies heavily upon financial data andresults prepared on a so-called “managed basis.” It is also important toanalysts, investors and others that we provide selected metrics and data on amanaged 

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basis because this allowsa comparison of us to others within the specialty finance industry. Moreover,our management, analysts, investors and others believe it is critical that theyunderstand the credit performance of the entire portfolio of our managedreceivables because it reveals information concerning the quality of loanoriginations and the related credit risks inherent within the securitizedportfolios and our retained interests in our securitization facilities.

Managed receivables data assumes that none of thecredit card receivables underlying our off balance sheet securitizationfacilities were ever transferred to securitization facilities and presents thenet credit losses and delinquent balances on the receivables as if we stillowned the receivables. Included in managed receivables data is our ownership inthe trust and non-trust receivables.

Reconciliation of the managed receivables data to ourGAAP financial statements requires: (1) recognition that a significant majority of ourcredit card receivables (i.e., all but the credit card receivables associatedwith our largely fee-based card offering to consumers at the lower end of theFICO scoring system) had been sold in securitization transactions as of September 30,2004; (2) a look-through to the receivables that we manage for CSG, theeconomics of which support our investment in equity-method investee on ourcondensed consolidated balance sheets; and (3) recognition that thede-securitized Fingerhut managed receivables are recorded at a $0.0 basis inour GAAP financial statements. This reconciliation results in the removal ofall but $131.8 million of the managed receivables data from our books andrecords to yield only $131.8 million of loan and fee receivables and associatedstatistics under GAAP, coupled with the recording under GAAP of our retainedinterests in various securitization structures. (See Note 2, “SignificantAccounting Policies,” in the notes to the condensed consolidated financialstatements.)

The information in the following tables is presentedto reflect only the receivables, or portions thereof, in which we have aneconomic interest—that is, the receivables underlying our interest inCompany-arranged securitizations (e.g., 100% of the credit card receivables ofthe originated portfolio master trust, 62.5% of the credit card receivablesunderlying the Embarcadero Trust and 75.1% of the credit card receivablesunderlying the Goldenrod Trust, which reflects our ownership percentage inEmbarcadero Holdings and Bluestem, respectively), the credit card receivablesassociated with our Fingerhut transactions, 50% of the credit cardreceivables underlying the CSG Trust (which reflects our ownership percentagein CSG), and the $131.8 million of receivables associated with our largelyfee-based card offering to consumers at the lower end of the FICO scoringsystem and our micro-lending activities which have not beensecuritized—together, our “managed receivables” as discussed above. Forexample, we have included 50% of the managed receivables underlying the CSGTrust because we have a 50% economic interest in CSG, which owns the retainedinterest in the CSG Trust. CSG’s cash flows and income are dependent on how thereceivables in the CSG Trust perform, and therefore, our cash flows and income(other than with respect to our servicing fee, which we earn with respect to100% of the receivables underlying the CSG Trust) are dependent upon only 50%of the managed receivables.

We provide the selected receivables data includedwithin this section so that readers can evaluate our performance as a servicerwith respect to the portfolios of credit card and loan and fee receivables thatwe manage. As noted above, performancemetrics and data based on these managed receivables are key to any evaluationof our performance in managing (including underwriting, valuing purchasedreceivables, servicing and collecting) the aggregate of the portfolios ofreceivables reflected on our balance sheet and underlying our off balance sheetsecuritization facilities, as well as to any comparison of us to others within the specialtyfinance industry.

Theperiod-end and average managed receivables data (as well as delinquency andcharge-off statistics) that follow within this section exclude the receivablesassociated with all accounts in late delinquency status in sellers’ hands as ofthe dates of our acquisitions of the receivables or interests therein. Pursuantto this treatment, the only activity within the following statistical dataassociated with 

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these excluded accounts are recoveries, which weinclude within the numerator of the other income ratio computation, as well asthe costs of pursuing these recoveries, which we include within the numeratorof the operating ratio computation. Also, because acquisition prices forpreviously charged off credit card receivables range from less than a penny tojust a few pennies to the dollar of the face amount of the receivables, weexclude from the period-end andaverage managed receivables data the face amount of the previously charged offcredit card receivables that our subsidiary, JeffersonCapital, acquires. The recovery income from Jefferson Capital’s recoveryoperations (like that of our excluded late-delinquency-stage receivables atacquisition) has been included within the numerator of the other incomeratio computation. Likewise, the costs associated with pursuing theserecoveries are included within the numerator of the operating ratiocomputation. For a more detailed discussion of the rationale for both of theseexclusions from our managed receivables data, see the “Selected Credit CardData” section within Management’s Discussionand Analysis of Financial Condition and Results of Operations in our AnnualReport on Form 10-K for the year ended December 31, 2003.
| ** **                     | ** ** | **At or for the Three Months Ended** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                     | ** ** | **Sep. 30**                                                   | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sep. 30** | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** |
| ** **                     | ** ** | **(In thousands; percentages annualized)**          | ** ** |
| Period-end managed receivables |       | $                                                                  | 1,958,735  |   | $ | 1,959,811 |   | $ | 2,090,644 |   | $ | 2,340,898 |   | $ | 2,518,822 |   | $ | 2,242,542 |   | $ | 2,470,041 |   | $ | 2,795,888 |   |
| Period-end managed accounts    |       | 2,388                                                              |       | 2,222 |   | 2,276 |   | 2,416 |   | 2,637 |   | 2,707 |   | 3,169 |   | 3,562 |   |
| Average managed receivables    |       | $                                                                  | 1,947,009  |   | $ | 2,007,406 |   | $ | 2,219,537 |   | $ | 2,419,674 |   | $ | 2,469,194 |   | $ | 2,359,513 |   | $ | 2,636,728 |   | $ | 2,912,482 |   |
| Net interest margin            |       | 21.2                                                               | %          | 20.2 | % | 19.9 | % | 22.1 | % | 22.4 | % | 18.4 | % | 17.8 | % | 17.1 | % |
| Other income ratio             |       | 15.8                                                               | %          | 11.1 | % | 8.9 | % | 7.3 | % | 7.3 | % | 7.3 | % | 5.9 | % | 6.0 | % |
| Operating ratio                |       | 15.0                                                               | %          | 11.3 | % | 10.0 | % | 8.3 | % | 8.8 | % | 8.5 | % | 8.4 | % | 8.3 | % |

 

The following aredefinitions related to the table above:

·       Netinterest margin represents an annualized fraction, the numerator of whichincludes all accrued finance charge and late fee income billed on alloutstanding receivables, plus amortization of the accretable yield component ofour acquisition discounts for portfolio purchases (discussed in more detail inthe “Selected Credit Card Data” section within Management’s Discussion andAnalysis of Financial Condition and Results of Operations in our Annual Reporton Form 10-K for the year ended December 31, 2003), less interestexpense associated withsecuritization facilities and accrued finance charge and latefee charge offs, and the denominator of which is average managed receivables;

·       Otherincome ratio represents an annualized fraction, the numerator of which includescredit card fees (including over-limit fees, cash advance fees, returned checkfees and interchange income), stored-value card fees (including transactionfees and monthly maintenance fees), and micro-lending fees (includinglending, marketing and servicing fees), plus earned, amortized amounts ofannual membership fees and activation fees with respect to certain of ourcredit card products, plus ancillary product income, plus recoveries ofacquired defaulted receivables, less all fee charge offs (with the exception oflate fee charge offs, which are netted against the net interest margin), andthe denominator of which is average managed receivables; and

·       Operatingratio represents an annualized fraction, the numerator of which includes allexpenses associated with our business, net of any servicing income we receiveas servicer for the CSG Trust, the Embarcadero Trust and the Goldenrod Trust, other thanmarketing and solicitation and ancillary product expenses, and the denominatorof which is average managed receivables.

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Our net interest margins are influenced by a number offactors, including (1) the level of accrued finance charges and late feesbilled, (2) the weighted average cost of funds within our securitizationstructures, (3) amortization of the accretable yield component of ouracquisition discounts for portfolio purchases and (4) the level of ouraccrued finance charge and late fee charge offs. On a routine basis, generallyno less frequently than quarterly, we re-underwrite our portfolio to price ourproducts to appropriately reflect the level of each customer’s credit risk. Aspart of this underwriting process, existing customers may be offered increasedor decreased pricing depending on their credit risk, as well as their supply ofand demand for credit. Increases in pricing may increase our net interestmargin, while decreases in pricing may reduce our net interest margin. Theseasoning of the Embarcadero portfolio that has occurred since its acquisitionin the third quarter of last year is the principal reason for the drop in ournet interest margin gradually from its peak in that quarter through the firstquarter of this year.

The improvements that we have seen in our net interestmargin during second and third quarters of this year principally reflect theeffects of lower finance charge and late fee charge offs that we haveexperienced in these quarters; some of these improvements represent absoluteimprovements that we are seeing year over year in the credit quality of ourportfolios, while much of the improvement in the third quarter of this year isalso attributed to lower seasonal delinquencies experienced during the firstquarter of 2004. We do not expect the effects of the lower first quarterseasonal delinquencies to carry over into the fourth quarter; as such, weexpect a lower net interest margin in the fourth quarter relative to what weachieved in the third quarter of this year. Moreover, because the fourthquarter of 2003’s net interest margin was favorably influenced by the lack ofseasoning at the time of our then recently acquired Embarcadero portfolio, welikewise anticipate an appreciably lower net interest margin in the fourthquarter of 2004 as compared with the fourth quarter of 2003.

The other income ratiocontinued its increasing trend during the third quarter of 2004 principally dueto new lending, marketing and servicing fees associated with our micro-lendingproduct offerings and new fees associated with our stored-value card productoffering. The investments we are making in our largely fee-based credit cardoffering to consumers at the lower end of the FICO scoring system and our othercomplementary sub-prime financial service-related activities and products(e.g., our stored-value card product and micro-lending activities) are expectedto cause further growth in our other income ratio during the remainder of 2004and beyond. We also expect these investments to increase our operating ratio.Additionally, these respective ratios can also be expected to continue theirrising trends because some of our complementary products and activities (e.g.,our stored-value card offering) are not expected to produce a corresponding increasein our average managed receivables denominator used in these ratiocalculations. Finally, with new account additions, we should see furtherincreases in ancillary product revenues as a component of our other incomeratio.

***Asset Quality***

Our delinquency and charge off data at any point intime reflects the credit performance of our managed receivables. The averageage of our credit card and loan accounts, the timing of portfolio purchases,the success of our collection and recovery efforts and general economicconditions all affect our delinquency and charge off rates. The average age ofour credit card account portfolio also affects the stability of our delinquencyand loss rates.

Our strategy for managing delinquency and receivableslosses consists of account management throughout the customer relationship.This strategy includes credit line management and pricing based on the risk ofour credit card accounts. See also our discussion of collection strategiesunder the heading “How Do We Collect From Our Customers?” in Item I of ourAnnual Report on Form 10-K for the year ended December 31, 2003.

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The discussion below focuses on the change in ourdelinquency and charge off data as of and for the three months ended September 30,2004.

*Delinquencies.**  *Delinquencies have the potential toimpact net income in the form of net credit and loan losses. Delinquencies arealso costly in terms of the personnel and resources dedicated to resolvingthem. A credit card account is contractually delinquent if the minimum paymentis not received by the specified date on the customer’s statement. It is ourpolicy to continue to accrue interest and fee income on all credit cardaccounts, except in limited circumstances, until the account and all relatedreceivables, interest and other fees are charged off. See the “Charge offs”discussion as well.

The account management strategies that we use on ourportfolio are intended to manage and, to the extent possible, reduce the higherdelinquency rates that can be expected in a more mature managed portfolio suchas ours. Examples of management strategies include conservative credit linemanagement, purging of inactive accounts and collection strategies (describedunder the heading “How Do We Collect From Our Customers?” in Item I of ourAnnual Report on Form 10-K for the year ended December 31, 2003)intended to optimize the effective account-to-collector ratio acrossdelinquency buckets. We measure the success of these efforts by measuringdelinquency rates. These rates exclude accounts that have been charged off.

Thefollowing table presents the delinquency trends of our credit card receivableson a managed receivables portfolio basis:
| ** **                                        | ** ** | **At or for the Three Months Ended** | ** ** |
|---------------------------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                                        | ** ** | **Sep. 30**                                                   | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sep. 30** | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands; % of total)**    | ** ** |
| Receivables delinquent:                           |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 30 to 59 days past due                            |       | $                                                                  | 76,028     |   | $ | 84,474 |   | $ | 71,108 |   | $ | 104,380 |   | $ | 118,300 |   | $ | 111,452 |   | $ | 99,723 |   | $ | 155,615 |   |
| 60 to 89 days past due                            |       | 61,485                                                             |       | 60,780 |   | 58,188 |   | 79,347 |   | 87,205 |   | 74,330 |   | 80,234 |   | 105,966 |   |
| 90 or more days past due                          |       | 148,132                                                            |       | 126,505 |   | 160,055 |   | 200,965 |   | 187,526 |   | 162,463 |   | 247,903 |   | 282,685 |   |
| Total 30 or more days past due                    |       | $                                                                  | 285,645    |   | $ | 271,759 |   | $ | 289,351 |   | $ | 384,692 |   | $ | 393,031 |   | $ | 348,245 |   | $ | 427,860 |   | $ | 544,266 |   |
| Total 60 or more days past due                    |       | $                                                                  | 209,617    |   | $ | 187,285 |   | $ | 218,243 |   | $ | 280,312 |   | $ | 274,731 |   | $ | 236,793 |   | $ | 328,137 |   | $ | 388,651 |   |
| Receivables delinquent as  % of period-end loans: |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 30 to 59 days past due                            |       | 3.9                                                                | %          | 4.3 | % | 3.4 | % | 4.5 | % | 4.7 | % | 5.0 | % | 3.9 | % | 5.6 | % |
| 60 to 89 days past due                            |       | 3.1                                                                |       | 3.1 |   | 2.8 |   | 3.4 |   | 3.5 |   | 3.3 |   | 3.3 |   | 3.8 |   |
| 90 or more days past due                          |       | 7.6                                                                |       | 6.5 |   | 7.7 |   | 8.6 |   | 7.4 |   | 7.2 |   | 10.0 |   | 10.1 |   |
| Total 30 or more days past due                    |       | 14.6                                                               | %          | 13.9 | % | 13.9 | % | 16.5 | % | 15.6 | % | 15.5 | % | 17.2 | % | 19.5 | % |
| Total 60 or more  days past due                   |       | 10.7                                                               | %          | 9.6 | % | 10.5 | % | 12.0 | % | 10.9 | % | 10.5 | % | 13.3 | % | 13.9 | % |

 

The increase in our 90 or more days past duedelinquency rate since June 30, 2004 reflects the trail off of theseasonal trend under which we typically experience higher payments, and hencelower delinquencies, during the first quarter of each year. Higher delinquencyrates during the second quarter in the 30 to 59 days past due and 60 to 89 dayspast due categories resulted in a higher 90 or more days past due delinquencyrate during the third quarter of 2004. Nevertheless, a comparison of our lowerdelinquency rates in the 30 to 59 days past due and 60 to 89 days past duecategories as of September 30, 2004 to those as of September 30, 2003supports our belief that we are seeing credit quality improvements within ourportfolios. We also see support for this belief in the 90 or more days past duedelinquency category, even though the delinquency rate for this category at September 30,2004 is 20 basis points higher than it was at September 30, 2003; this isbecause of the denominator effect of the Embarcadero acquisition in the thirdquarter of 2003. That is, our September 30, 2003 managed receivables dataexcluded all receivables associated with accounts that were at or near chargeoff at the time of our acquisition of the Embarcadero receivables portfolio. Accordingly,there was a large third quarter 2003 increase in our average managed 

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receivables balance forthe receivables acquired by Embarcadero, without a corresponding increase inthe receivables associated with the excluded delinquent accounts. Although weemployed a similar method of accumulating data associated with the receivablesacquired by Goldenrod in the third quarter of 2004, that acquisition is farless material than the Embarcadero acquisition, and the Goldenrod acquisitionhas had no material effects on our delinquency rates.

*Charge offs.**  *For the following table, thesedefinitions apply:

·       Grossyield ratio represents billed finance charges and late fees as a percentage ofaverage managed receivables;

·       Combinedgross charge offs represent the aggregate amounts of accrued finance charge, fee,and principal losses from customers unwilling or unable to pay theirreceivables balances, as well as bankrupt and deceased customers, less currentperiod recoveries;

·       Netcharge offs include only the principal amount of losses, net of recoveries (andthey exclude accrued finance charges and fee charge offs, which are chargedagainst the related income item at the time of charge off, as well as lossesfrom fraudulent activity in accounts, which are included separately in otheroperating expenses); and

·       Adjustedcharge offs apply a discount related to the credit quality of acquiredportfolios to offset a portion of actual net charge offs. (Historically, uponour acquisitions of credit card receivables, a portion of the discountreflected within our acquisition prices relates to the credit quality of theacquired receivables—that portion representing the excess of the face amount ofthe receivables acquired over the expected future principal cash flows expectedto be collected from the receivables. Because we treat the credit qualitydiscount component of our acquisition discount as related exclusively toacquired principal balances, the difference between our net charge offs and ouradjusted charge offs for each respective reporting period represents the totaldollar amount of our charge offs that were charged against our credit qualitydiscount during each respective reporting period.)

We generally charge off credit card receivables whenthey become contractually 180 days past due or within 30 days of notificationand confirmation of a customer’s bankruptcy or death. In some cases of death,however, receivables are not charged off if, with respect to the deceasedcustomer’s account, there is a surviving, contractually liable individual or anestate large enough to pay the debt in full. Other loans and fees receivablegenerally are charged off when they become contractually 90 days past due.

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Thefollowing table presents the charge off data for all of the credit cardreceivables underlying the securitizations of our consolidated subsidiaries(adjusted for minority interest in the case of the Embarcadero and Goldenrodmanaged receivables so as to include only our 62.5% and 75.1% shares,respectively), our 50% share of the managed receivables of CSG, our equity-methodinvestee, the de-securitizedFingerhut receivablesand the $131.8 million face amount of receivables associated with our largelyfee-based card offering to consumers at the lower end of the FICO scoringsystem and our micro-lending activities, which have not been securitized.
| ** **                            | ** ** | **2004**                                                               | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|---------------------------------------|------------|------------------------------------------------------------------------|------------|------------------|------------|------------------|------------|
| ** **                            | ** ** | **Sep. 30**                                                       | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sep. 30** | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** |
| ** **                            | ** ** | **(Dollars in thousands; percentages annualized)** | ** ** |
| Gross yield ratio                     |       | 29.5                                                                   | %          | 29.5             | %          | 30.3             | %          | 31.3 | % | 32.1 | % | 33.0 | % | 33.5 | % | 34.0 | % |
| Combined gross charge offs            |       | $                                                                      | 124,140    |             | $          | 141,066          |       | $ | 165,815 |   | $ | 169,482 |   | $ | 161,746 |   | $ | 206,451 |   | $ | 240,336 |   | $ | 248,919 |   |
| Net charge offs                       |       | $                                                                      | 63,369     |             | $          | 74,482           |       | $ | 87,331 |   | $ | 90,446 |   | $ | 95,629 |   | $ | 123,062 |   | $ | 133,666 |   | $ | 123,877 |   |
| Adjusted charge offs                  |       | $                                                                      | 40,457     |             | $          | 44,329           |       | $ | 45,294 |   | $ | 47,304 |   | $ | 54,798 |   | $ | 64,744 |   | $ | 67,180 |   | $ | 67,193 |   |
| Combined gross charge off ratio  |       | 25.5                                                                   | %          | 28.1             | %          | 29.9             | %          | 28.0 | % | 26.2 | % | 35.0 | % | 36.5 | % | 34.2 | % |
| Net charge off ratio                  |       | 13.0                                                                   | %          | 14.8             | %          | 15.7             | %          | 15.0 | % | 15.5 | % | 20.9 | % | 20.3 | % | 17.0 | % |
| Adjusted charge  off ratio            |       | 8.3                                                                    | %          | 8.8              | %          | 8.2              | %          | 7.8 | % | 8.9 | % | 11.0 | % | 10.2 | % | 9.2 | % |

 

The principalfactor contributing to the lower gross yield ratio experienced during the firstnine months of 2004 is our improved across-the-board delinquency rates withineach of our managed receivables portfolios. Lower delinquencies have translateddirectly into lower late fee billings. Observations with respect to theremaining categories in the above table are as follows:

·       Thesignificant decline in combined gross charge offs and the combined gross chargeoff ratio principally reflects credit quality improvements within ourportfolios;

·       Bothcredit quality improvements within our portfolios and our lower delinquencieshave contributed to trending lower net charge offs and adjusted charge offs, aswell as a lower net charge off ratio;

·       Third quarter and fourthquarter of 2003 combined gross charge off, net charge off and adjusted chargeoff ratios all benefited materially from the effects of the Embarcaderoacquisition in the third quarter of 2003. That is to say that our September 30,2003 managed receivables data excluded all receivables associated with accountsthat were at or near charge off at the time of our acquisition of theEmbarcadero receivables portfolio; the exclusion of these late stage orseverely delinquent accounts at the time of acquisition meant that there wereno charge-offs on the Embarcadero receivables until the portfolio seasonedthrough its delinquency buckets in the months following the acquisition. Magnifyingthis beneficial effect was the fact that while there were no charge-offs ofEmbarcadero receivables until the portfolio seasoned through its delinquencybuckets, the denominator of the various charge off ratio computations wasincreased to include all of the Embarcadero receivables that were not at ornear charge off at the time of acquisition; in prior filings we have sometimesreferred to this effect as the “denominator effect;”

·       Ourcombined gross charge offs and net charge offs, as well as their associatedratios, are expected to increase during our fourth quarter of 2004 due to theseasonality of payment rates and borrowings during the second quarter; and

·       Untilwe close one or more material receivables portfolio acquisitions, we expectthat the gap between our net charge offs and adjusted charge offs, as well astheir associated ratios, will continue to narrow as it has in recent quarters. Givenour efforts to grow our account originations and receivables levels for bothour traditional credit card product and our largely fee-based card offering toconsumers at the lower end of the FICO scoring system and given cardholderpurchase 

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    activities and the commensurate generation of new receivables bycustomers underlying our portfolio acquisitions, the pre-acquisitionreceivables balances within our acquired portfolios (to which our creditquality discount at acquisition applies) have fallen and (absent one or morematerial acquisitions in the future)should continue to fall as a relative percentage of our total portfolio ofmanaged receivables.

**Liquidity, Fundingand Capital Resources**

At September 30,2004, we had approximately $46.5 million in unrestricted cash. Because thecharacteristics of our assets and liabilities change, liquidity management is adynamic process affected by the pricing and maturity of our assets andliabilities. We finance our business through cash flows from operations, assetbacked securitizations and the issuance of debt and equity:

·       Duringthe first nine months of 2004, we generated $85.8 million in cash flowfrom operations, compared to generating $293.1 million in cash flowfrom operations during the first nine months of 2003. The $207.3 million decrease is dueprimarily to (1) our higher first quarter 2004 payment on our federalincome tax liability, (2) a material reduction in 2004 in the level ofcash flows to us from the Fingerhut retained interests, (3) thecessation in mid-2003 of cash flows to CSG on its interest in the CSG Trustretained interests and hence its mid-2003 cessation of cash flows to us inconnection with our investment in CSG, and (4) the declining balances inour originated and purchased portfolios.

·       Duringthe first nine months of 2004, we used $186.0 million of cash ininvesting activities, compared to our use of approximately $331.1 million of cash ininvesting activities during the first nine months of 2003. The $145.1 million decrease is dueprimarily to a $311.2 million swing from required investments in our retainedinterests during the nine months ended September 30, 2003 to meetthen-heightened collateral enhancement requirements and principal amortizationand principal funding account deposit requirements to net decreases in ourinvestment in retained interests thus far during 2004 based on significantlyreduced collateral enhancement requirements and the fact that we currently haveno principal funding account deposit requirements at September 30, 2004,offset, however, by the $135.8 million of cash used in connection with ouracquisition of the First American and Venture Services assets in the second andthird quarters of 2004.

·       Duringthe first nine months of 2004, we generated $36.0 million in cash fromfinancing, compared to generating $17.9 million in cash from financingactivities during the first nine months of 2003. The $18.1 millionincrease in generated cash flow is primarily due to the proceeds from borrowingsused to acquire the First American and Venture Services assets offset bypurchases of treasury stock and distributions in 2004 to our minority interestholders (versus contributions from them in 2003).

The reduction in our September 30, 2004unrestricted cash balance to $46.5 million relative to the $100-plus millionlevels experienced at quarter ends throughout 2003 reflects our focus in 2004on reducing the levels of our draws against our available variable funding andconduit facilities within our originated portfolio master trust to minimize the costs offunds that flow through to affect our income from retained interests in creditcard receivables securitized. To avoid incurring costs on funds not currentlyneeded to fund investments or operations, we have focused in 2004 on reducingour unrestricted cash balances to the minimal levels necessary to meet ourdaily operations and investment needs. Given the completion of our $1.25 billion 2-year variablefunding facility in January of 2004, we are confident in our ability todraw additional cash from this facility (as well as our other facilities) tomeet our liquidity needs as they arise during 2004. As of September 30,2004, our collateral base within our originated portfolio master trust wassufficient to allow for additional cash draws of $216.3 million against ourexisting securitization facilities.

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On August 27, 2004, we purchased a 75.1% interestin Bluestem forapproximately $3.9 million, including transaction costs. Bluestem was formed byan affiliate of Merrill Lynch and one of our wholly owned subsidiaries inconnection with the acquisition of approximately $92 million (face amount) incredit card receivables. These receivables were then transferred to Goldenrod,a wholly owned subsidiary of Bluestem, and then on to the Goldenrod Trustpursuant to a Statement No. 140 transfer in exchange for notes and asubordinated, certificated interest issued by the trust. For a fee thatrepresents adequate compensation for servicing, we have agreed to service theentire portfolio of credit card receivables underlying the Goldenrod Trust.

On August 1, 2003, we purchased a 62.5% interestin Embarcadero Holdings for $26.5 million in cash. As noted previously,Embarcadero Holdings was formed by an affiliate of Merrill Lynch and one of ourwholly owned subsidiaries in connection with the acquisition of approximately$824 million (face amount) in credit card receivables from Providian Bank.These receivables were then transferred through Embarcadero to the EmbarcaderoTrust pursuant to a Statement No. 140 transfer in exchange for notes and asubordinated, certificated interest issued by the trust. For a fee thatrepresents adequate compensation for servicing, we have agreed to service theentire portfolio of credit card receivables underlying the Embarcadero Trust.Under the terms of a10-year amortizing term securitization facility issued out of the EmbarcaderoTrust in January 2004, we began to receive cash flows (beyond ourcompensation for servicing the portfolio) during the second quarter of 2004.

As noted above, during the first quarter of 2004, wecompleted a two-year securitization facility with an investor that was issuedout of the originated portfolio master trust. This securitization facilityprovides for an initial one-year committed funding level of $1.25 billion,growing to a committed funding level to $1.5 billion in the second year(subject to certain conditions precedent), one-year renewal periods (subject tocertain conditions precedent) at the expiration of the initial two-year term,an orderly amortization of the facility at expiration in a manner that isexpected to allow us to receive cash flows that are more than adequate to coverour servicing costs while amounts borrowed under the facility are repaid by theoriginated portfolio master trust and an advance rate against the originatedportfolio master trust receivables that in management’s opinion is sufficientto allow us to begin to grow the originated portfolio and provide acceptablereturns on equity from our credit card receivables origination activities. Inconnection with this new securitization facility, we issued to the investor awarrant to acquire up to 2.4 million shares of our common stock at a strikeprice of $22.45.

During 2004, we have evaluated, and will continue toevaluate, various opportunities to expand our sub-prime product offerings vianew organic growth initiatives (like our stored-value card initiative) andacquisitions. During the second and third quarter of 2004, we acquiredsubstantially all of the assets of First American and Venture Services (the “Micro-Lending acquisitions”), for approximately $142.8million, including transaction costs. We financed the acquisitions with $73.3 million of cash and$69.5 million of debt financing. We structured the acquisitions through a newsubsidiary, which serves as a holding company for both operations. All of thedebt financing associated with acquired operations is recourse only as to theacquired assets and operations of the Micro-Lending acquisitions. The $53.0million of debt financing incurred in connection with the First Americanacquisition was financed under a $65 million syndication of commitmentsconsisting of: (1) a $10.0 million revolving credit facility (of which $3million was drawn at closing) and a $5.0 million swing-line facility (whichprovides working capital funding during peak seasonal periods); (2) a$23.0 million Class A Term note; and (3) a $27.0 million Class BTerm note.

Subsequently, in connection with the closing of theVenture Services acquisition, the Term Loan A note was increased by $5.0million to $28.0 million and the Term Loan B note was increased by $4.5 millionto $31.5 million, resulting in total commitments of $74.5 million (includingthe $10.0 million revolving credit facility and the $5.0 million swing-linefacility). Each of the Term Loan notes bears interest at rates varying monthlywith either prime interest rates or LIBOR (at our election), with spreads above

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prime or LIBOR being basedon the leverage ratios for the acquired operations. As of September 30,2004, the Class A Term and Class B Term interest rates were 7.0% and12.5%, respectively. The Term Loan noteshave required quarterly repayments beginning in January 2006 of $2.4million; any prepayments by us are to be applied first against the principalbalances outstanding on the Class A Term note. The revolving creditfacility and swing-line facility each bear interest at the same rates as the Class ATerm note. The revolving credit facility, swing-line facility and term loansmature in December 2006, with an one-year extension available at ouroption (subject, however, to the achievement of certain leverage ratios). As ofSeptember 30, 2004, $3.5 million was outstanding under the revolvingcredit facility.

An additional $5.0 million in debt financing wasincurred in connection with the Venture Services acquisition through asubordinated promissory note, which was issued to the seller in the transaction.The $5.0 million subordinated promissory note bears interest at 10% per annumand matures on July 31, 2007.

Another potential use of cash in 2004 may arise inconnection with our Series A and B preferred stock issuances. To date, wehave paid the dividends on our Series A and B preferred stock inadditional shares of preferred stock. If, beginning on December 17, 2003and measured on the 17th of each following March, June, September andDecember, the volume-weighted share price of the common stock for theimmediately preceding 20 trading days is less than 106% of the correspondingvolume-weighted share price of the common stock for the immediatelypreceding three-month period, then the holders of the preferred stock canrequire us to pay the Series A and B preferred stock dividends in cash. Ifthis occurs, it will require approximately $1.2 million in cash per quarter.

Our Boardof Directors has authorizeda program under which we are authorized to repurchase up to 10 millionshares (approximately 21 percent of the outstanding shares) of ouroutstanding common stock. We repurchased 352,000 shares during the thirdquarter of 2004 for approximately $5.7 million and, year to date through the end ofthe third quarter, we have purchased 1,375,600 shares in the aggregate underthis program. We will continue to evaluate our stock price relative to otherinvestment opportunities and, to the extent we believe that the repurchase ofour stock represents an appropriate return of capital, we will repurchaseadditional shares of our stock.

As part of the repurchase program, we have written and, contingent uponfavorable market conditions, will continue to write put options in our shares. The putoptions allow us to settle the options in either stock or cash. We arecurrently obligated to purchase 500,000 shares under these put option contracts.As of September 30, 2004, none of these put options represented aliability to us based on the then existing share price.

During the remainder of 2004, we will continue ourefforts to acquire other credit card receivables portfolios and our expansioninto complementary product and service offerings to our sub-prime consumermarket, both through organic growth and through acquisitions. While weanticipate using some of our existing cash reserves (and draw potential againstour existing variable funding and conduit securitization facilities) to fundpotential acquisitions during 2004, and while these acquisitions may requirethe use of material amounts of cash or may require us to incur materialacquisition-related debt financing, we anticipate having more than adequatecash for our operations during 2004 and for the foreseeable future.

For more on our uses ofcash, see the “Liquidity, Funding, and Capital Resources” section of our AnnualReport on Form 10-K for the year ended December 31, 2003.

***Securitization Facilities***

Our most significant source of liquidity is thesecuritization of credit card receivables. As of September 30, 2004, wehad total securitization facilities of approximately $2.4 billion and had usedapproximately $1.2 billion of these facilities. The weighted-averageborrowing rate on these facilities at September 30, 2004 was approximately3.6%.****The maturity terms of oursecuritizations vary.

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For more on our securitization facilities andpractices, see the “Securitization Facilities” section of our Annual Report on Form 10-Kfor the year ended December 31, 2003 and Note 7, “Off Balance Sheet Arrangements,”to our condensed consolidated financial statements included herein.

In thetable below, we have noted the securitization facilities (along with theirmaturity dates) with respect to which a substantial majority of our managedcredit card receivables served as collateral as of September 30, 2004(i.e., all credit card receivables other than the de-securitized Fingerhutreceivables and the receivables associated with our largely fee-based creditcard offering to consumers at the lower end of the FICO scoring system).Following the table are further details concerning each of the facilities.
| **Maturity date** | ** ** | ** **                          | ** ** | **Facility limit(1)(2)** | ** ** |
|------------------------|------------|-------------------------------------|------------|-------------------------------|------------|
| ** **             | ** ** | **(Dollars in millions)** | ** ** |
| October 2004(3)   |       |                                | 367.5      |                          |       |
| August 2005(4)    |       |                                | 74.4       |                          |       |
| September 2005(5) |       |                                | 306.0      |                          |       |
| January 2006(6)   |       |                                | 1,250.0    |                          |       |
| January 2014(7)   |       |                                | 362.9      |                          |       |
| Total                  |       |                                | $          | 2,360.8                       |       |   |
|                        |            |                                     |            |                               |            |  |  |  |

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(1)          Excludes securitizationfacilities related to receivables managed by CSG because such receivables andtheir related securitization facilities relate to CSG, our 50%-ownedequity-method investee, and therefore are appropriately excluded from directpresentation in the consolidated statementsof operations or consolidated balance sheet items included herein.

(2)          On October 8, 2004,we completed two new termsecuritization facilities, which were issued out of our originated portfolio mastertrust: a 5-year facility represented by $322.0 million aggregateprincipal notes and a 6-year facility also represented by $322.0 millionaggregate principal notes; these facilities are not summarized in the abovetable.

(3)          This $367.5 millionpaired series facility was extended to October 2004 to facilitate itsextension and renewal. In October 2004, this facility was amended from a structurallysubordinated facility to a pari passu structure, and the maturity date wasextended to October 2005. In addition, the size of the facility wasreduced to $200 million.

(4)          In August 2004, aninvestor provided a $74.4 million variable funding securitization facility tothe Goldenrod Trust in connection with Goldenrod’s securitization of itspurchased receivables portfolio.

(5)          Represents the end ofthe revolving period for a $306.0 million conduit facility.

(6)          Represents the initialone-year committed funding level of $1.25 billion. The committed funding levelwill grow to $1.5 billion in the second year (subject to certain conditionsprecedent). The facility also contains one-year renewal periods (subject tocertain conditions precedent) at the expiration of the initial two-year termand an orderly amortization of the facility at expiration.

(7)          Represents a ten-yearamortizing term series issued out of the Embarcadero Trust.

For each portfolio of credit card receivables that wehave securitized, there has never been an early amortization period. We haveexperienced, however, early amortization events associated with each of thesecuritization structures represented by the Fingerhut retained interests thatwe acquired in 2002 and the retained interests that CSG acquired in 2002—bothof which were contemplated in connection with our establishment of purchaseprices for the respective acquisitions. While the Fingerhut early amortizationevent was made inconsequential to us first by a Fingerhut retained interestsexchange during the third quarter of 2003 and then again by our third quarter2004 de-securitization of the Fingerhut receivables, the CSG early amortizationevent has ongoing consequences for us. Due to a reduction in the principal 

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balance of the receivableswithin the CSG Trust (the retained interests in which are owned by ourequity-method investee, CSG), a principal balance trigger occurred, and henceearly amortization began, during the second quarter of 2003. The occurrence ofthis event caused CSG to cease its cash distributions to us in June of2003, although we expect that the CSG Trust will continue to provide adequatecompensation to us in cash for servicing the portfolio of receivablesunderlying the CSG Trust and will continue to make payments to us in respect ofour investment in CSG Trust bonds held.

While we have nevertriggered an early amortization within any of the series underlying ouroriginated portfolio master trust securitization and while we do not believethat we will, it is conceivable that, even with close management, we maytrigger an early amortization of one or more of the outstanding series withinthis trust. Early amortization for any of the originated portfolio master trustsecuritization series would have adverse effects on our liquidity, certainlyduring the early amortization period and potentially beyond repayment of anysuch series because potential investors could tend to shy away from futureCompuCredit-backed issuances.

**ContractualObligations, Commitments and Off Balance Sheet Arrangements**

See Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inour Annual Report on Form 10-K for the year ended December 31,2003. There have been no new material commitments entered into since December 31, 2003 other than:

·       InJanuary 2004, as discussed above and in our Annual Report on Form 10-Kfor the year ended December 31, 2003, we completed a two-yearsecuritization facility with an investorthat was issued out of the originated portfolio master trust and a newEmbarcadero ten-year amortizing term facility;

·       Duringthe second and third quarters of 2004, we undertook an aggregate of $69.5million of debt financing in connection with the Micro-Lending acquisitions. Of this debt, $64.5was financed under a $74.5 million syndication of commitments consisting of: (1) a$10.0 million revolving credit facility (of which $3 million was drawn atclosing) and a $5.0 million swing-line facility (which provides working capitalfunding during peak seasonal periods); (2) a $28.0 million TermLoan A; and (3) a $31.5 million Term Loan B. The additional$5.0 million in debt financing is represented by a subordinated promissory noteissued to the seller in one of the Micro-Lending acquisition transactions; and

·       OnAugust 27, 2004, we purchased a 75.1% interest in Bluestem forapproximately $3.9 million, including transaction costs. Bluestem was formed byan affiliate of Merrill Lynch and one of our wholly owned subsidiaries inconnection with the acquisition of approximately $92 million (face amount) incredit card receivables. These receivables were then transferred to Goldenrod,a wholly owned subsidiary of Bluestem, and then on to the Goldenrod Trustpursuant to a Statement No. 140 transfer in exchange for notes and asubordinated, certificated interest issued by the trust. For a fee thatrepresents adequate compensation for servicing, we have agreed to service theentire portfolio of credit card receivables underlying the Goldenrod Trust. Inaddition, Goldenrod is obligated to provide for the purchase of receivables inthe unlikely event that the Goldenrod Trust is unable to fund such receivables.To date, there have been no, and management does not expect any, borrowingsrelated to this obligation.

**Commitments and Contingencies**

We also have certaincontractual arrangements that would require us to make payments or providefunding if certain circumstances occur (“contingent commitments”). We do notcurrently expect that these contingent commitments will result in any amountsbeing paid by us. See Note 9, “Commitments and Contingencies,” to our condensedconsolidated financial statements for further discussion of these matters.

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**Recent Accounting Pronouncements**

See Note 2, “SignificantAccounting Policies,” to our condensed consolidated financial statements for adiscussion of recent accounting pronouncements.

**Critical Accounting Policies**

Our financial statementsare prepared in accordance with GAAP. These principles are numerous andcomplex. Our significant accounting policies are summarized in the notes to ourcondensed consolidated financialstatements. In many instances, the application of GAAP requires management tomake estimates or to apply subjective principles to particular facts andcircumstances. A variance in the estimates used or a variance in theapplication or interpretation of GAAP could yield a materially differentaccounting result. It is impracticable for us to summarize every accountingprinciple that requires us to use judgment or estimates in its application. Inour Annual Report on Form 10-K for the year ended December 31,2003, we discuss the two areas, valuation of retained interests andnon-consolidation of qualifying special purpose entities, where we believe thatthe estimations, judgments or interpretations that we have made, if different,would have yielded the most significant differences in our financialstatements, and we urge you to review that discussion. In addition, inNote 7, “Off Balance Sheet Arrangements,”to the condensed consolidated financialstatements included in this report, we have updated a portion of oursensitivity analysis with respect to retained interest valuations.

**Related Party Transactions**

During 2001, we began subleasing 7,316 square feet ofexcess office space to Frank J. Hanna, Jr., for $21.50 per square foot.Frank J. Hanna, Jr. is the father of our Chairman and Chief ExecutiveOfficer, David G. Hanna, and one of our directors, Frank J. Hanna, III.The sublease rate is the same as the rate that we pay on the prime lease. Totalrent for the nine months ended September 30, 2004 for the sublease wasapproximately $0.2 million. Additionally, entities owned by Frank J. Hanna, Jr.provide certain collection services to us and rent to us a plane for businessusage at market rates for which we paid approximately $0.2 million and $0.5 million,respectively, during the nine months ended September 30, 2004.

See Note 2, “SignificantAccounting Policies,” for a discussion of the acquisition of previouslydefaulted receivables by Jefferson Capital from trusts serviced by us.

**Forward-Looking Information**

All statements in this quarterly report concerning ouroperations, earnings and liquidity expectations for 2004 and all otherstatements regarding our future performance (including those using words suchas “believe,” “estimate,” “project,” “anticipate, or “predict”) are forward-lookingstatements. These forward-looking statements are not guarantees of futureperformance and are subject to various assumptions, risks and other factorsthat could cause our actual results to differ materially from those suggestedby these forward-looking statements. These factors include, among others,the following risks and others set forth under the caption “Risk Factors” inour Annual Report on Form 10-K for the year ended December 31,2003:

(1)   The cashflows we receive from our retained interests drive our financial performanceand are dependent upon the cash flows received on the credit card receivablesunderlying our securitizations. The collectibility of the receivablesunderlying our securitizations is a function of many factors including thecriteria used to select who is issued a credit card, the pricing of the creditproducts, the length of the relationship with each cardholder, general economicconditions, the rate at which cardholders repay their accounts and the rate atwhich cardholders change or become 

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delinquent. To the extentwe have over estimated collectibility, in all likelihood we have over estimatedour financial performance.

(2)   We aresubstantially dependent upon securitizations and other borrowed funds to fund the credit cardreceivables that we originate or purchase. All of our securitization facilitiesare of finite duration (and ultimately will need to be extended or replaced)and contain conditions that must be fulfilled in order for funding to beavailable. In the event that advance rates for securitizations are reduced,investors in securitizations require a greater rate of return, we fail to meetthe requirements for continued funding or large-scale securitizationsotherwise become unavailable to us, we may not be able to maintain or grow ourbase of credit card receivables or it may be more expensive for us to do so. Inaddition, a portion of our credit card receivables cannot be financed throughsecuritizations because of advance rate limitations and must be financedthrough equity that either is the result of profitable operations or is raisedfrom third parties or through funds borrowed elsewhere. The cost and availabilityof equity and borrowed funds is dependent upon our financial performance, theperformance of our industry generally, and general economic and marketconditions, and recently has been both expensive and difficult to obtain.

(3)   Ourfinancial performance is, in part, a function of the aggregate amount of creditcard receivables that we have outstanding. In turn, this is a function of manyfactors including interest rates, seasonality, general economic conditions,competition from other credit card issuers and other sources of consumerfinancing, access to funding as noted above and the success of our marketingefforts. To the extent that we have over-estimated the size or growth of ourcredit card receivables, in all likelihood we have over-estimated our futureperformance.

(4)   Ouroperating expenses and our ability to effectively service our credit cardaccounts is dependent on our ability to estimate the future size and generalgrowth rate of the portfolio. One of our servicing agreements causes us to makeadditional payments if we overestimate the size or growth of our business.These additional payments are to compensate the servicer for increased staffingexpenses it incurs in anticipation of our growth. If we grow slower thananticipated, we may still have higher servicing expenses than we actually need,thus reducing our net income. We generally have sufficient office space,customer service representatives, collectors and computer capacity toaccommodate expected growth. However, we are dependent on labor markets tosupply qualified employees at appropriate compensation when needed. To theextent that growth occurs unexpectedly, or the labor markets are tight at thattime, we may encounter difficulties in accommodating that growth effectively.

(5)   We operatein a heavily regulated industry. Changes in bankruptcy, privacy or otherconsumer protection laws, including laws thatregulate the creation and enforcement of consumer loans, orchanges in the interpretation thereof, may adversely affect ourability to collect credit card account, microloans  and other loanand fee balances or otherwise adversely affect our business or expose us tolitigation. Similarly, regulatory changes orchanges in interpretation of existing regulations couldadversely affect our ability to market credit cards, stored-value cards, micro-loansor other products and services to our customers.

(6)   Theaccounting rules that govern our business are exceedingly complex,difficult to apply and in a state of flux. As a result, how we value our creditcard receivables and otherwise account for our business (including whether weconsolidate our securitizations) is subject to change depending upon theinterpretation of, and changes in, those rules.

(7)   Weroutinely explore various opportunities to grow our business, including thepurchase of credit card receivable portfolios and other businesses. There are anumber of risks attendant to any acquisition, including the possibility that wewill overvalue the assets to be purchased, that we will not be able tosuccessfully integrate the acquired business or assets, and that we will not beable to 

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produce the expected levelof profitability from the acquired business or assets. As a result, the impactof any acquisition on our future performance may not be as favorable asexpected and actually may be adverse.

We expressly disclaim anyobligation to update or revise any forward-looking statements, whether asa result of new information, future events or otherwise, except as required bylaw.

**ITEM 3.   QUANTITATIVE AND QUALITATIVE DISCLOSURESABOUT MARKET RISK**

**Interest Rate Sensitivity and Market Risk**

Interest rate sensitivity is comprised of basis risk,gap risk and market risk. Basis risk is caused by the difference in theinterest rate indices used to price assets and liabilities. Gap risk is causedby the difference in repricing intervals between assets and liabilities. Marketrisk is the risk of loss from adverse changes in market prices and rates. Ourprincipal market risk is related to changes in interest rates. This affects usdirectly in our lending and borrowing activities, as well as indirectly asinterest rates may impact the payment performance of our customers.

We incur basis risk because we fund managed assets ata spread over commercial paper rates or LIBOR, while the rates on theunderlying managed assets are indexed to the prime rate. This basis riskresults from the potential variability over time in the spread between theprime rate and commercial paper rates, on the one hand, and LIBOR, on the otherhand. We have not hedged our basis risk because we believe that the cost ofhedging this risk is greater than the benefits we would get from elimination ofthis risk. We incur gap risk because the debt underlying our securitization trustfacilities reprices monthly; whereas, our receivables do not adjust unless wespecifically adjust them with appropriate notification. This gap risk, however,is relatively minor as we can reprice the substantial majority of ourreceivables very quickly in response to a rate change.

As to the issue of market risk, we attempt to minimizethe impact of interest rate fluctuations on net income by regularly evaluatingthe risk inherent within our asset and liability structure, especially our offbalance sheet assets (such as securitized receivables) and their correspondingliabilities. The impact of interest rate fluctuations on our securitizedreceivables is reflected in the valuation of our retained interests in creditcard receivables securitized. This risk arises from continuous changes in ourasset and liability mix, changes in market interest rates (including suchchanges that are caused by fluctuations in prevailing interest rates, paymenttrends on our interest-earning assets and payment requirements on ourinterest-bearing liabilities) and the general timing of all other cashflows. To manage our direct risk to interest rates, management activelymonitors interest rates and the interest sensitive components of oursecuritization structures. Management seeks to minimize the impact of changesin interest rates on the fair value of assets, net income and cash flowsprimarily by matching asset and liability repricings. There can be noassurance, however, that we will be successful in our attempts to manage suchrisks.

At September 30, 2004, a substantial portion ofour managed credit card receivables, including those related to our investmentin the CSG Trust, and other interest-earning assets had variable ratepricing, with receivables carrying annual percentage rates at a spread over theprime rate (4.75% at September 30, 2004), subject to interest rate floors.At September 30, 2004, approximately $188.5 million of our totalmanaged receivables were priced at their floor rate, and $128.2 million ofthese receivables were closed and therefore ineligible to be repriced. Theremaining $60.3 million of these receivables that were priced at theirfloor rate at September 30, 2004 represented market interest rate risk tous to the extent that the floor rate is in excess of the rate that would existfor the receivables if no floor rate were in effect. Assuming that we were notsuccessful in repricing any of these receivables, a 10% increase in commercialpaper rates or LIBOR would have an approximate $0.2 million after-taxnegative impact on our annual cash flows.

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We believe we are notexposed to any material foreign currency exchange rate risk or commodity pricerisk.

**ITEM 4.   CONTROLS AND PROCEDURES**

(a)   Disclosure controls and procedures.

As of the end of the period covered by this report, wecarried out an evaluation, under the supervision and with the participation ofour Chief Executive Officer and Chief Financial Officer, of the effectivenessof disclosure controls and procedures as defined in Rules 13a-15(e) and15d-15(e) of the Securities Exchange Act of 1934, as amended (the “ExchangeAct”). Based on such evaluation, our Chief Executive Officer and ChiefFinancial Officer have concluded that as of the end of the period covered bythis report, our disclosure controls and procedures were effective at meetingtheir objectives.

(b)   Internalcontrol over financial reporting.

There have not been any changes in our internalcontrol over financial reporting (as such term is defined in Rules 13a-15(f) and15d-15(f) under the Exchange Act) during the fiscal quarter to whichthis report relates that have materially affected, or are reasonably likely tomaterially affect, our internal control over financial reporting.

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**PART II—OTHER INFORMATION**

**ITEM 1.   LEGAL PROCEEDINGS**

None.

**ITEM 2.**   CHANGES INSECURITIES, USE OF PROCEEDS AND ISSUER PURCHASE OF EQUITY SECURITIES

Thefollowing table provides information with respect to purchases we made of ourcommon stock during the nine months ended September 30, 2004: 
| ** **                            | ** ** | **Total Number of   Shares Purchased** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of   Shares Purchased as  Part of Publicly  Announced Plans or  Programs(1)** | ** ** | **Maximum Number of  Shares (or  Approximate Dollar  Value) That May Yet  Be Purchased Under  the Plans or Programs** | ** ** |
|---------------------------------------|------------|------------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Balance as of  December 31, 2003 |       |                                                       | 872,900    |                                             |       |                                                                                                                                      | $          | 5.25                                                                                                                                                                              |       |   |   | 872,900 |   |   |   | 9,127,100 |   |   |
| May 2004                         |       |                                                       | 722,100    |                                             |       |                                                                                                                                      | $          | 17.69                                                                                                                                                                             |       |   |   | 722,100 |   |   |   | 8,405,000 |   |   |
| June 2004                        |       |                                                       | 301,500    |                                             |       |                                                                                                                                      | $          | 17.92                                                                                                                                                                             |       |   |   | 301,500 |   |   |   | 8,103,500 |   |   |
| July 2004                        |       |                                                       | 156,000    |                                             |       |                                                                                                                                      | $          | 16.39                                                                                                                                                                             |       |   |   | 156,000 |   |   |   | 7,947,500 |   |   |
| August 2004                      |       |                                                       | 196,000    |                                             |       |                                                                                                                                      | $          | 15.85                                                                                                                                                                             |       |   |   | 196,000 |   |   |   | 7,751,500 |   |   |
| Total                                 |       |                                                       | 2,248,500  |                                             |       |                                                                                                                                      | $          | 12.6331                                                                                                                                                                           |       |   |   | 2,248,500 |   |   |   | 7,751,500 |   |   |

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(1)          Underthe repurchase program authorized by the Board of Directors, we are authorizedto repurchase up to 10 million shares of our outstanding common stock.

**ITEM 3.   DEFAULTS UPON SENIOR SECURITIES**

None.

**ITEM 4.   SUBMISSION OF MATTERS TO A VOTE OFSECURITY HOLDER**

None

**ITEM 5.   OTHER INFORMATION**

None.

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

(a)     Exhibits
| Exhibit  Number | ** ** | ** **                                                                                                              | ** ** | **Description of Exhibit** | ** ** | **Incorporated by  reference from  CompuCredit’s SEC  filings unless  otherwise indicated:** |
|-----------------|------------|-------------------------------------------------------------------------------------------------------------------------|------------|----------------------------|------------|---------------------------------------------------------------------------------------------------|
| 31.1            |       | Certification per Section 302 of the  Sarbanes-Oxley Act of 2002 for David G. Hanna                                |       | Filed herewith             |
| 31.2            |       | Certification per Section 302 of the  Sarbanes-Oxley Act of 2002 for J.Paul Whitehead, III                    |       | Filed herewith             |
| 32.1            |       | Certification per Section 906 of the  Sarbanes-Oxley Act of 2002 for David G. Hanna and J.Paul Whitehead, III |       | Filed herewith             |

 

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(b)    Reports on Form 8-K

During the quarter ended September 30, 2004, wefiled two current reports on Form 8-K:
| **Filing Date** | ** ** | ** ** | ** ** | **Items Reported** | ** ** | **Financial Statements** | ** ** |
|----------------------|------------|------------|------------|-------------------------|------------|-------------------------------|------------|
| July 15,  2004  |       |       | 7 and 12   |                    |       |                          | None       |   |   |
| August 3, 2004  |       |       | 7 and 12   |                    |       |                          | None       |   |   |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                        | COMPUCREDIT CORPORATION |
|------------------------|-------------------------|
| November 2,  2004 | By                      | /s/  J.PAUL WHITEHEAD, III |
|                   |                    | J.Paul  Whitehead, III |
| * *               | * *                | *Chief  Financial Officer* |
| * *               | * *                | *(duly  authorized officer and principal  financial officer)* |

 

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