**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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FORM 10-Q

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

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

 

**a Georgia 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).

Asof July 31, 2004, there were 45,941,009outstanding shares of CompuCredit’s Common Stock, no par value (the “CommonStock”).

 

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**COMPUCREDITCORPORATIONFORM 10-QTABLE OF CONTENTSJune 30, 2004**
|               | ** **            | ** **                                                                                  | **Page**                                                       | ** ** |
|---------------|-----------------------|---------------------------------------------------------------------------------------------|----------------------------------------------------------------|------------|
| PART I.  | FINANCIAL INFORMATION |                                                                                        |
|          | Item  1.              | Financial  Statements (Unaudited)                                                           | 1                                                              |
|          |                  |                                                                                        | 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 | 26                                                             |
|          | Item  3.              | Quantitative  and Qualitative Disclosures About Market Risk                                 | 46                                                             |
|          | Item 4.               | Controls and Procedures                                                                     | 47                                                             |
| PART II. | OTHER INFORMATION     |                                                                                        |
|          | Item 1.               | Legal Proceedings                                                                           | 48                                                             |
|          | Item  2.              | Changes  in Securities, Use of Proceeds and Issuer Purchases of Equity Securities           | 48                                                             |
|          | Item 3.               | Defaults Upon  Senior Securities                                                            | 48                                                             |
|          | Item  4.              | Submission  of Matters to a Vote of Security Holders                                        | 48                                                             |
|          | Item 5.               | Other Information                                                                           | 49                                                             |
|          | Item 6.               | Exhibits  and Reports on Form 8-K                                                      | 49                                                             |
|          |                  | Signatures                                                                                  | 50                                                             |

 

 

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**CompuCreditCorporation and SubsidiariesCondensed Consolidated Balance Sheets**
| ** **                                                                                                                           | ** ** | **June 30,  2004**              | ** ** | **December 31,  2003** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------|------------|
| ** **                                                                                                                           | ** ** | **(Unaudited)**                      | ** ** | ** **                  | ** ** |
| ** **                                                                                                                           | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                                                           |       |                                 |       |                        |       |   |   |   |   |
| Cash and cash  equivalents                                                                                                           |       |                                 | $          | 49,556                      |       |   |   | $ | 110,605 |   |   |
| Restricted cash                                                                                                                      |       |                                 | 10,154     |                        |       |   | 11,921 |   |   |
| Retained  interests in credit card receivables securitized                                                                           |       |                                 | 491,528    |                        |       |   | 538,961 |   |   |
| Amounts due from  securitization                                                                                                     |       |                                 | 16,790     |                        |       |   | 4,199 |   |   |
| Loans and fees  receivable, net                                                                                                      |       |                                 | 61,341     |                        |       |   | 16,271 |   |   |
| Deferred costs,  net                                                                                                                 |       |                                 | 35,971     |                        |       |   | 7,750 |   |   |
| Software,  furniture, fixtures and equipment, net                                                                                    |       |                                 | 25,790     |                        |       |   | 24,307 |   |   |
| Investment in  equity-method investee                                                                                                |       |                                 | 6,140      |                        |       |   | 6,577 |   |   |
| Investments in  previously charged off receivables                                                                                   |       |                                 | 16,691     |                        |       |   | 13,960 |   |   |
| Investments in  debt securities                                                                                                      |       |                                 | 19,694     |                        |       |   | 15,007 |   |   |
| Intangibles                                                                                                                          |       |                                 | 6,437      |                        |       |   | — |   |   |
| Goodwill                                                                                                                             |       |                                 | 83,133     |                        |       |   | — |   |   |
| Prepaid expenses  and other assets                                                                                                   |       |                                 | 18,644     |                        |       |   | 11,797 |   |   |
| Total assets                                                                                                                         |       |                                 | $          | 841,869                     |       |   |   | $ | 761,355 |   |   |
| **Liabilities**                                                                                                                      |       |                                 |       |                        |       |   |   |   |   |
| Accounts payable  and accrued expenses                                                                                               |       |                                 | $          | 32,312                      |       |   |   | $ | 26,436 |   |   |
| Notes payable                                                                                                                        |       |                                 | 56,898     |                        |       |   | 1,945 |   |   |
| Deferred revenue                                                                                                                     |       |                                 | 7,674      |                        |       |   | 9,895 |   |   |
| Income tax  liability                                                                                                                |       |                                 | 78,721     |                        |       |   | 96,491 |   |   |
| Total liabilities                                                                                                                    |       |                                 | 175,605    |                        |       |   | 134,767 |   |   |
| Minority interest                                                                                                                    |       |                                 | 58,120     |                        |       |   | 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 June 30, 2004 and December 31, 2003,  respectively |       |                                 | 31,358     |                        |       |   | 29,816 |   |   |
| Series B preferred stock, 10,000 shares issued  and outstanding at June 30, 2004 and December 31, 2003,  respectively |       |                                 | 12,797     |                        |       |   | 12,181 |   |   |
| Common stock, no par  value, 150,000,000 shares authorized:                                                                          |       |                                 |       |                        |       |   |   |   |   |
| 47,992,042 and 47,885,506 issued at June 30,  2004 and December 31, 2003, respectively                                     |       |                                 | —     |                        |       |   | — |   |   |
| Additional paid-in  capital                                                                                                          |       |                                 | 252,995    |                        |       |   | 250,943 |   |   |
| Treasury stock,  at cost, 1,896,500 and 872,900 shares at June 30, 2004 and  December 31, 2003, respectively               |       |                                 | (22,760    | )                           |       |   | (4,586 | ) |   |
| Deferred  compensation                                                                                                               |       |                                 | (468       | )                           |       |   | (593 | ) |   |
| Warrant                                                                                                                              |       |                                 | 16,498     |                        |       |   | — |   |   |
| Retained earnings                                                                                                                    |       |                                 | 317,724    |                        |       |   | 286,252 |   |   |
| Total  shareholders’ equity                                                                                                     |       |                                 | 608,144    |                        |       |   | 574,013 |   |   |
| Total liabilities and  shareholders’ equity                                                                                     |       |                                 | $          | 841,869                     |       |   |   | $ | 761,355 |   |   |

 

See accompanying notes.

1

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**CompuCreditCorporation and SubsidiariesCondensed Consolidated Statements of Operations (Unaudited)**
| ** **                                                             | ** ** | **For the three months ended  June 30,**                | ** ** | **For the six months ended  June 30,**            | ** ** |
|------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **      2004      ** | ** ** | **      2003     ** | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                             | ** ** | **(Dollars in thousands, except per share data)**  | ** ** |
| Interest income                                                        |       | $                                                                                | 11,492     |                                                                       | $          | 1,577 |   | $ | 19,197 |   | $ | 2,786 |   |
| Interest expense                                                       |       | (680                                                                             | )          | (2,981                                                                     | )          | (771 | ) | (6,279 | ) |
| Provision for  loan losses                                             |       | (14,885                                                                          | )          | (98                                                                        | )          | (24,000 | ) | (98 | ) |
| Net interest  expense after provision for loan losses                  |       | (4,073                                                                           | )          | (1,502                                                                     | )          | (5,574 | ) | (3,591 | ) |
| Other operating income:                                                |       |                                                                             |       |                                                                       |       |   |   |   |   |
| Income from retained interests in credit card  receivables securitized |       | 16,601                                                                           |       | 14,757                                                                     |       | 35,993 |   | 55,421 |   |
| Servicing income                                                       |       | 19,515                                                                           |       | 24,863                                                                     |       | 44,813 |   | 52,529 |   |
| Fees and other income                                                  |       | 64,573                                                                           |       | 39,259                                                                     |       | 120,837 |   | 67,263 |   |
| Equity in (loss) income of equity-method  investee                     |       | (223                                                                             | )          | 13,612                                                                     |       | (437 | ) | 27,908 |   |
| Total other  operating income                                          |       | 100,466                                                                          |       | 92,491                                                                     |       | 201,206 |   | 203,121 |   |
| Other operating expense:                                               |       |                                                                             |       |                                                                       |       |   |   |   |   |
| Salaries and benefits                                                  |       | 5,127                                                                            |       | 4,428                                                                      |       | 10,403 |   | 8,769 |   |
| Card and loan servicing                                                |       | 36,874                                                                           |       | 37,447                                                                     |       | 74,861 |   | 79,851 |   |
| Marketing and solicitation                                             |       | 9,030                                                                            |       | 2,827                                                                      |       | 14,729 |   | 4,414 |   |
| Depreciation                                                           |       | 3,959                                                                            |       | 3,905                                                                      |       | 7,952 |   | 7,770 |   |
| Other                                                                  |       | 10,857                                                                           |       | 8,685                                                                      |       | 20,772 |   | 17,224 |   |
| Total other  operating expense                                         |       | 65,847                                                                           |       | 57,292                                                                     |       | 128,717 |   | 118,028 |   |
| Income before  minority interest and income taxes                      |       | 30,546                                                                           |       | 33,697                                                                     |       | 66,915 |   | 81,502 |   |
| Minority interest                                                      |       | (6,754                                                                           | )          | —                                                                     |       | (13,047 | ) | — |   |
| Income before  income taxes                                            |       | 23,792                                                                           |       | 33,697                                                                     |       | 53,868 |   | 81,502 |   |
| Income taxes                                                           |       | (8,941                                                                           | )          | (11,927                                                                    | )          | (20,229 | ) | (29,137 | ) |
| Net income                                                             |       | $                                                                                | 14,851     |                                                                       | $          | 21,770 |   | $ | 33,639 |   | $ | 52,365 |   |
| Net income attributable to common shareholders                         |       | $                                                                                | 13,754     |                                                                       | $          | 20,664 |   | $ | 31,472 |   | $ | 50,151 |   |
| Net income per common share—basic                                 |       | $                                                                                | 0.29       |                                                                       | $          | 0.43 |   | $ | 0.65 |   | $ | 1.03 |   |
| Net income per  common share—diluted                              |       | $                                                                                | 0.28       |                                                                       | $          | 0.42 |   | $ | 0.64 |   | $ | 1.02 |   |

 

See accompanying notes.

2

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**CompuCreditCorporation and SubsidiariesCondensed Consolidated Statement of Shareholders’ Equity (Unaudited)For the Six Months Ended June 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 |       |                                 | —     |                  |       | 100,536                 |       |         | —     |         |       |             | 1,961      |                    |       | —                        |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 1,961 |   |   |
| Preferred dividends                              |       |                                 | —     |                  |       | —                  |       |         | —     |         |       |             | —     |                    |       | —                        |       |   | — |   |   |   | — |   |   |   | (2,167 | ) |   |   | (2,167 | ) |   |
| Accretion of preferred dividends                 |       |                                 | 2,158      |                  |       | —                  |       |         | —     |         |       |             | —     |                    |       | —                        |       |   | — |   |   |   | — |   |   |   | — |   |   |   | 2,158 |   |   |
| Issuance of warrant                              |       |                                 | —     |                  |       | —                  |       |         | —     |         |       |             | —     |                    |       | —                        |       |   | — |   |   |   | 16,498 |   |   |   | — |   |   |   | 16,498 |   |   |
| Amortization of deferred compensation            |       |                                 | —     |                  |       | —                  |       |         | —     |         |       |             | —     |                    |       | —                        |       |   | 216 |   |   |   | — |   |   |   | — |   |   |   | 216 |   |   |
| Issuance of restricted  stock                    |       |                                 | —     |                  |       | 6,000                   |       |         | —     |         |       |             | 91         |                    |       | —                        |       |   | (91 | ) |   |   | — |   |   |   | — |   |   |   | — |   |   |
| Purchase of treasury stock                       |       |                                 | —     |                  |       | —                  |       |         | —     |         |       |             | —     |                    |       | (18,174                       | )          |   | — |   |   |   | — |   |   |   | — |   |   |   | (18,174 | ) |   |
| Net income                                       |       |                                 | —     |                  |       | —                  |       |         | —     |         |       |             | —     |                    |       | —                        |       |   | — |   |   |   | — |   |   |   | 33,639 |   |   |   | 33,639 |   |   |
| Balance at  June 30, 2004                   |       |                                 | $          | 44,155                |       |                    | 47,992,042 |         |       | $            | —     |             |       |                    | $          | 252,995                       |       |   | $ | (22,760 | ) |   | $ | (468 | ) |   |   | $ | 16,498 |   |   |   | $ | 317,724 |   |   |   | $ | 608,144 |   |   |

 

See accompanying notes.

3

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**CompuCredit Corporationand SubsidiariesCondensed Consolidated Statements of Cash Flows (Unaudited)**
| ** **                                                                         | ** ** | **For the six months ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                         | ** ** | **2004**                                                        | ** ** | **2003** | ** ** |
| ** **                                                                         | ** ** | **(Dollars in thousands)**                            | ** ** |
| **Operating activities**                                                           |       |                                                            |       |   |   |
| Net income                                                                         |       | $                                                               | 33,639     |   | $ | 52,365 |   |
| Adjustments to reconcile net income to net cash  provided by operating Activities: |       |                                                            |       |   |   |
| Depreciation  expense                                                              |       | 7,952                                                           |       | 7,770 |   |
| Amortization  expense                                                              |       | 1,243                                                           |       | 3,401 |   |
| Amortization of  acquired servicing liability                                      |       | —                                                          |       | (26,238 | ) |
| Amortization of  deferred compensation                                             |       | 216                                                             |       | 210 |   |
| Minority interest                                                                  |       | 13,047                                                          |       | — |   |
| Retained interests  income adjustment, net                                         |       | 8,388                                                           |       | 17,725 |   |
| Loss or  distributions in excess of income associated with equity-method investee  |       | 437                                                             |       | 8,785 |   |
| Changes in assets and liabilities, exclusive of  business acquisition:             |       |                                                            |       |   |   |
| Decrease in  restricted cash                                                       |       | 1,820                                                           |       | — |   |
| Decrease  (increase) in accrued interest and fees                                  |       | 4,888                                                           |       | (25 | ) |
| Increase in  amounts due from securitization                                       |       | (12,591                                                         | )          | (7,010 | ) |
| Increase in  deferred costs                                                        |       | (21,641                                                         | )          | (2,932 | ) |
| Increase in  prepaid expenses and other assets                                     |       | (17,060                                                         | )          | 19,628 |   |
| Increase  (decrease) in accounts payable and accrued expenses                      |       | 4,450                                                           |       | (7,478 | ) |
| (Decrease)  increase in deferred revenue                                           |       | (2,221                                                          | )          | 964 |   |
| (Decrease)  increase in income tax liability                                       |       | (16,553                                                         | )          | 6,637 |   |
| Net cash provided  by operating activities                                         |       | 6,014                                                           |       | 73,802 |   |
| **Investing activities**                                                           |       |                                                            |       |   |   |
| Net (investment  in) proceeds from investments in debt securities                  |       | (4,688                                                          | )          | 2,350 |   |
| Purchases of  charged off receivables                                              |       | (21,718                                                         | )          | (24,339 | ) |
| Acquisition of  sub-prime lender’s assets                                     |       | (107,179                                                        | )          | 0 |   |
| Net loan payments                                                                  |       | 388,724                                                         |       | 52,164 |   |
| Recoveries of  receivables previously charged off                                  |       | 15,125                                                          |       | 11,321 |   |
| Net increase in  retained interest                                                 |       | (360,921                                                        | )          | (133,333 | ) |
| Purchases and  development of software, furniture, fixtures and equipment          |       | (3,912                                                          | )          | (4,257 | ) |
| Net cash used in  investing activities                                             |       | (94,569                                                         | )          | (96,094 | ) |
| **Financing activities**                                                           |       |                                                            |       |   |   |
| Minority interest  distributions, net                                              |       | (7,500                                                          | )          | — |   |
| Repayment of note  issued to purchase stock                                        |       | —                                                          |       | 398 |   |
| Proceeds from  exercise of stock options                                           |       | 738                                                             |       | 2,059 |   |
| Purchase of  treasury stock                                                        |       | (18,174                                                         | )          | (248 | ) |
| Proceeds from  borrowings                                                          |       | 55,818                                                          |       | — |   |
| Repayment of short-term  borrowings, net                                           |       | (3,376                                                          | )          | — |   |
| Net cash provided  by financing activities                                         |       | 27,506                                                          |       | 2,209 |   |
| **Net  decrease in cash**                                                          |       | (61,049                                                         | )          | (20,083 | ) |
| Cash and cash  equivalents at beginning of period                                  |       | 110,605                                                         |       | 120,416 |   |
| Cash and cash  equivalents at end of period                                        |       | $                                                               | 49,556     |   | $ | 100,333 |   |
| **Supplemental cash flow information**                                             |       |                                                            |       |   |   |
| Cash paid for  interest                                                            |       | $                                                               | 687        |   | $ | 6,279 |   |
| Cash paid for income  taxes                                                        |       | $                                                               | 36,783     |   | $ | 22,500 |   |
| Issuance of  warrant                                                               |       | $                                                               | 16,498     |   | $ | — |   |
| Note payable  associated with capital leases                                       |       | $                                                               | 2,444      |   | $ | 1,556 |   |
| Note payable  associated with bond investment                                      |       | $                                                               | 2,800      |   | $ | — |   |
| Accretion of  preferred stock dividends                                            |       | $                                                               | 2,158      |   | $ | 2,227 |   |

 

See accompanying notes.

4

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

**1. Organization and Basis of Presentation**

*General*

The condensed consolidated financial statementsinclude the accounts of CompuCredit Corporation and its wholly ownedsubsidiaries (collectively, the “Company”). The Company is a provider ofvarious credit and related financial services and products to or associatedwith the underserved (or sub-prime) consumer credit and “un-banked”consumer markets. Historically, the Company has served this market through itsmarketing and solicitation of credit card accounts and its servicing of variouscredit card receivables underlying both its originated accounts and itsportfolio acquisitions. Because only financial institutions can issue generalpurpose credit cards, the Company has a contractual arrangement with a third-partyfinancial institution pursuant to which the financial institution issuesgeneral purpose 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”). The Company also serves un-bankedconsumers through its offering of a stored-value (or debit) card throughvarious 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 forinterim 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 accounting principles generally accepted inthe United States of America (“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. Operatingresults for the three and six months ended June 30, 2004 are notnecessarily indicative of the results for the year ending December 31,2004. These condensed consolidated financial statements should be read inconjunction with the notes to the consolidated financial statements for theyear ended December 31, 2003 contained in the Company’s Annual Report on Form 10-Kfiled with the SEC. 

5

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

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 theconsolidated 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 has issued the letter of credit. Suchcash has been disclosed as restricted cash on the face of the consolidatedbalance sheet. Additionally, as of December 31, 2003, the restricted cashbalance included a portion ($1.9 million) of the servicing fee associated withthe Embarcadero Trust (see Note 5, “Embarcadero Acquisition”) that was thencontingent on the Company achieving certain milestones; these milestones wereachieved, and the Company received these proceeds in January 2004.Restricted cash balances at June 30, 2004 also include cash collateralbalances underlying standby letters of credit that have been issued in favor ofcertain regulators in connection with the Company’s new micro-lendingactivities.

*AssetSecuritization*

Substantially all of the Company’s credit cardreceivables are securitized. When the Company sells receivables insecuritizations, it retains certain undivided ownership interests, interest-only(“I/O”) strips and servicing rights. Although the Company continues to servicethe underlying credit card accounts and maintains the customer relationships,these securitizations are treated as sales, and the securitized receivables arenot reflected on the consolidated balance sheet. The retained ownershipinterests and the interest-only strips are included in retained interestsin credit card receivables securitized on the face of the consolidated balancesheet. 

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 at thetime of each sale. These gains or losses on sales of receivables depend in parton the previous carrying amount of the financial assets sold, as well as thefair 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 Companyinitially records a servicing liability within a securitization structure whenthe servicing fees the Company expects to receive do not provide adequatecompensation for servicing the receivables. The initial servicing liability isrecorded at estimated fair market value. The servicing liability is thenevaluated each quarter and carried at its estimated fair value. Changes inservicing 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 

6

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

operations as incurred.Because quoted market prices are generally not available for the Company’sservicing liabilities, the Company estimates fair value based on the estimatedpresent value of future cash flows using management’s best estimates of keyassumptions as outlined in Note 7, “Off Balance Sheet Arrangements.” Theservicing liability is netted against the value of the I/O strip and includedin retained interests in credit card receivables securitized on the Company’sconsolidated balance 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 inaccordance with Statement of Financial Accounting Standards No. 115, “Accountingfor Certain Investments in Debt and Equity Securities” (“Statement No. 115”).The estimates used to determine the gains and losses and the related fairvalues of I/O strips and retained ownership interests are influenced by factorsoutside of the Company’s control, and such estimates could materially changefrom quarter to quarter. 

Retained interests purchased by the Company during2002 are carried at the lower of amortized cost or fair market value, net of aservicing liability. In accordance with Emerging Issues Task Force Issue 99-20,“Recognition of Interest Income and Impairment on Purchased and RetainedBeneficial Interests in Securitized Financial Assets” (“EITF 99-20”),expected cash flows in excess of the costs of the purchased retained interestsare being amortized into income from retained interests in credit cardreceivables securitized using the effective interest method. 

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

*Loans and FeesReceivable, Net*

Loans and fees receivable, net represent credit cardreceivables that primarily relate to our fee-based card offering that theCompany has not securitized, as well as receivables associated with the Company’smicro-lending activities, both such receivables balances being shown netof deferred revenue and an allowance for uncollectible loans and fees. 

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 financial institution forwhich we provide services in the loan marketing and servicing areas. Theseloans and fees receivable are presented net of unearned fees in accordance withStatement of Financial 

7

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

Accounting Standards No. 91,“Accounting for Nonrefundable Fees and Costs Associated with Originating orAcquiring Receivables 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  Lender (Note 6)** | ** ** | **Balance at  June 30, 2004** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|---------------|------------|------------------|------------|---------------------------------------------------------------------|------------|----------------------------------------------|------------|
| Loans and fees  receivable, gross           |       |                                             | $          | 37.2          |       |             |       | $                                                                   | 54.6       |                                         |       |   | $ | (12.8 | ) |   |   | $ | 17.8 |   |   |   | $ | 96.8 |   |   |
| Deferred revenue                            |       |                                             | (13.8      | )             |       |             | (17.9      | )                                                                   |       |                                         | 16.2       |   |   |   | (1.7 | ) |   |   | (17.2 | ) |   |
| Allowance for  uncollectible loans and fees |       |                                             | (7.1       | )             |       |             | (24.0      | )                                                                   |       |                                         | 12.8       |   |   |   | — |   |   |   | (18.3 | ) |   |
| Loans and fees  receivable, net             |       |                                             | $          | 16.3          |       |             |       | $                                                                   | 12.7       |                                         |       |   | $ | 16.2 |   |   |   | $ | 16.1 |   |   |   | $ | 61.3 |   |   |

 

Reflected in interestincome on the consolidated statement of operations is $9.6 million, $15.6million, $0.0 and $0.0 of interest (or finance charge) income for the three andsix months ended June 30, 2004 and 2003, respectively. Reflected in feesand other income is $27.0 million, $43.4 million, $0.2 million and $0.2 millionof fee income associated with these loans and fees receivable for the three andsix months ended June 30, 2004 and 2003, respectively. As of June 30,2004, the weighted average remaining vesting period for the $17.2 million ofdeferred revenue reflected in the above table was 7 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 two 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; the Company has also participated with (and under the same terms aswith) other third-party purchasers to acquire some of its previouslycharged off receivables, thereby allowing the third-party purchasers toestablish a market for the purchases.

8

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 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 PB 6 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. The Company does not anticipatemeeting these criteria for use of the interest method for any particularacquired pool for the foreseeable future. 

Forthe three and six months ended June 30, 2004, the following table shows aroll-forward of the Company’s investments in previously charged offreceivables activities (in thousands of dollars): 
| ** **                                         | ** ** | **Three Months Ended  June 30, 2004** | ** ** | **Six Months Ended  June 30, 2004** | ** ** |
|----------------------------------------------------|------------|-----------------------------------------------------------|------------|---------------------------------------------------------|------------|
| Unrecovered balance at beginning of period         |       |                                                      | $          | 18,266                                                  |       |   |   | $ | 13,960 |   |   |
| Acquisitions of  defaulted accounts                |       |                                                      | 8,010      |                                                    |       |   | 21,718 |   |   |
| Cash collections                                   |       |                                                      | (22,616    | )                                                       |       |   | (45,974 | ) |   |
| Income recognized  on defaulted accounts           |       |                                                      | 13,031     |                                                    |       |   | 26,987 |   |   |
| Balance at  June 30, 2004                     |       |                                                      | $          | 16,691                                                  |       |   |   | $ | 16,691 |   |   |
| Estimated  remaining collections (“ERC”) |       |                                                      | $          | 64,290                                                  |       |   |   | $ | 64,290 |   |   |

 

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 77% of the ERC over the next twelvemonths, with the balance to be collected thereafter.

*Investments in DebtSecurities and Notes Payable*

In addition to the CSG Trust bonds held by the Companyand discussed in its Annual Report on Form 10-K for the year ended December 31,2003, during the first quarter of 2004, the Company acquired $6.7 million in Class Aand B bonds issued by the First Consumer Credit Card Master Business Trust inthe open market for a total purchase price of approximately $5.6 million andhas included this amount in investments in debt securities. The Class Aand Class B bonds earn interest at 1.40% and 2.19%, respectively. TheCompany financed a portion of the purchase of these bonds with $2.8 million inborrowed funds that accrue interest at 3.5%. These borrowed funds are includedin notes payable along with borrowings associated with certain vendor-financedacquisitions of software and equipment and 

9

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

$53.0 million of newnotes payable associated with the Company’s second quarter 2004 acquisition ofa complementary sub-prime lender (see Note 6, “Sub-prime Lender Acquisiton”).

The Class A and Class BFirst Consumer Credit Card Master Business Trust bonds acquired in the firstquarter of 2004 have been classified as trading securities. However, applyingthe principles of Statement No. 115, the Company has classified all of itsother bonds purchased prior to its first quarter of 2004 purchase asheld-to-maturity. Given the absence of an active market for these bonds and thegradual repayment of the bonds combined with the Company’s lack of arequirement for additional liquidity, management is of the opinion thatheld-to-maturity classification is appropriate.

*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 revisedestimates of useful lives or that indicate that an impairment exists. See Note 6, “Sub-prime Lender Acquisition,” forintangible balances and 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 assetsacquired and accounted for under the purchase method. Goodwill is tested atleast annually for impairment. See Note 6, “Sub-primeLender Acquisition,” for goodwill balances and related information.

*Treasury Stock*

TheCompany’s Board of Directors has authorized a program to repurchase up to5 million shares (approximately 10 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 SEC guidelines.These shares are carried at cost in the accompanying condensed consolidatedbalance sheet as a reduction to shareholders’ equity. During the second quarterof 2004, the Company repurchased 1,023,600 shares on the open market forapproximately $18.2 million. During the first quarter of 2003, the Companyrepurchased 40,000 shares on the open market for $0.2 million. No other shareswere repurchased during 2003 or 2004. Treasury stock repurchases occurredduring the following periods:
| ** ** | ** ** | **For the three and six months ended  June 30, 2004** | ** ** |
|------------|------------|-----------------------------------------------------------------------------------------------|------------|
| ** ** | ** ** | **Shares     repurchased   **                                   | ** ** | **   Average price     per share** | ** ** |
| ** ** | ** ** | **(In thousands)**                                                                       | ** ** | ** ** | ** ** |
| May        |       |                                                                                          | 722        |   |   |   | $ | 17.69 |   |   |
| June       |       |                                                                                          | 302        |   |   |   | 17.92 |   |   |
| Total      |       |                                                                                          | 1,024      |   |   |   | $ | 17.76 |   |   |

 

10

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

*Warrant*

In connection with a newsecuritization facility that was entered into during the first quarter of 2004,the Company issued to the investor a warrant to acquire 2.4 million shares ofthe Company’s common stock at a strike price of $22.45. The costs associatedwith this warrant were recorded within deferred costs, net, on the Company’sconsolidated balance sheet at fair value (approximately $16.5 milliondetermined using the Black-Scholes model), and the initial deferred cost amountis being amortized as an additional component of expense over the two-year termof the securitization facility.

*Stock Options*

The Company has four 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  June 30,**                   | ** ** | **For the  six months ended  June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|---------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2004**                                                                        | ** ** | **2003**                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                               | ** ** | **(Dollars in thousands, except per share data)** | ** ** |
| Net income attributable to common shareholders, as  reported                             |       | $                                                                               | 13,754     |                                                        | $          | 20,664 |   | $ | 31,472 |   | $ | 50,151 |   |
| Stock-based  employee compensation expense determined under fair value basis, net of tax |       | (149                                                                            | )          | (222                                                        | )          | (292 | ) | (441 | ) |
| Pro forma net  income                                                                    |       | $                                                                               | 13,605     |                                                        | $          | 20,442 |   | $ | 31,180 |   | $ | 49,710 |   |
| Earnings per share:                                                                      |       |                                                                            |       |                                                        |       |   |   |   |   |
| Basic—as reported                                                                   |       | $                                                                               | 0.29       |                                                        | $          | 0.43 |   | $ | 0.65 |   | $ | 1.03 |   |
| Basic—pro forma                                                                     |       | $                                                                               | 0.29       |                                                        | $          | 0.42 |   | $ | 0.65 |   | $ | 1.02 |   |
| Diluted—as reported                                                                 |       | $                                                                               | 0.28       |                                                        | $          | 0.42 |   | $ | 0.64 |   | $ | 1.02 |   |
| Diluted—pro forma                                                                   |       | $                                                                               | 0.28       |                                                        | $          | 0.42 |   | $ | 0.63 |   | $ | 1.01 |   |

 

11

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

Thepro forma results may not be indicative of the future effect on the results ofoperations due to a variety of factors including timing and number of awards.The following table summarizes the Black-Scholes value of the Company’soutstanding stock options on a per share basis, as well as the key assumptionsused in the Black-Scholes model.
| ** **               | ** ** | **For the  three months ended  June 30,** | ** ** | **For the  six months ended  June 30,** | ** ** |
|--------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **               | ** ** | **2004**                                                      | ** ** | **2003**                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| Fair value per share     |       | $                                                             | 7.34       |                                                        | $          | 5.18 |   | $ | 8.77 |   | $ | 3.96 |   |
| Dividend rate            |       | 0.0                                                           | %          | 0.0                                                         | %          | 0.0 | % | 0.0 | % |
| Risk free rate           |       | 4.0                                                           | %          | 2.4                                                         | %          | 3.0 | % | 2.8 | % |
| Expected  volatility     |       | 38.4                                                          | %          | 93.8                                                        | %          | 42.3 | % | 78.8 | % |
| Expected life of options |       | 5 years                                                       |       | 5 years                                                     |       | 5 years |   | 5 years |   |
|                          |            |                                                               |            |                                                             |            |  |  |  |  |  |  |  |  |

 

The Company’s shareholdersapproved its new restricted stock plan at this year’s annual meeting ofstockholders. 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 stockholders. Asa result, the Company expects to make restricted stock grants, rather thanoption grants, in most instances in the foreseeable future.

*Fees and Other Income*

Feesand other income consists of the following:
| ** **                                        | ** ** | **For the  three months ended  June 30,** | ** ** | **For the  six months ended  June 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                        | ** ** | **2004**                                                      | ** ** | **2003**                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands)**                          | ** ** |
| Fees on securitized receivables                   |       | $                                                             | 18,509     |                                                        | $          | 20,746 |   | $ | 39,803 |   | $ | 40,137 |   |
| Other fees                                        |       | 27,146                                                        |       | 214                                                         |       | 43,922 |   | 215 |   |
| Recoveries of  previously charged off receivables |       | 13,031                                                        |       | 13,375                                                      |       | 26,987 |   | 17,013 |   |
| Ancillary product  revenue                        |       | 1,702                                                         |       | 1,636                                                       |       | 2,757 |   | 3,498 |   |
| Interchange fees                                  |       | 4,185                                                         |       | 3,288                                                       |       | 7,368 |   | 6,400 |   |
| Total                                             |       | $                                                             | 64,573     |                                                        | $          | 39,259 |   | $ | 120,837 |   | $ | 67,263 |   |

 

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) various marketing,servicing, and lending fees associated with the Company’s new micro-lendingactivities. Fees are assessed on credit card accounts according to the terms ofthe related cardholder agreements and, except for annual membership andactivation fees, are recognized as revenue when charged to the cardholder’saccount. Annual fees are amortized into revenue on a straight-line basis overthe cardholder privilege period, which is twelve months, and activation feesare recognized over the estimated life of a customer (approximately one year).Direct receivables origination costs are amortized against fee income.

12

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

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 Financial Accounting StandardsBoard (“FASB”) issued an Exposure Draft for a proposed Statement of Financial Accounting Standards entitled “QualifyingSpecial Purpose Entities and Isolation of Transferred Assets, an Amendment ofStatement No. 140” (“The Exposure Draft”). The Exposure Draft is aproposal that is subject to change and, as such, is not yet authoritative. Ifthe proposal is promulgated in its current form, it will amend and clarifyStatement No. 140. Under the Exposure Draft, the renewal of certaincommercial paper facilities underlying the Company’s securitizations couldcause the Company to record on its books the assets and liabilities related tothe 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 25and 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.

**3. Equity MethodInvestment in 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 

13

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

receivables, which wereinitially purchased by the trust from Providian National Bank. The Companyaccounts for its interest in CSG using the equity method of accounting. TheCompany has a 50% interest in CSG and funded its initial $34.9 millioninvestment in CSG with cash of $3.5 million and by borrowing$31.4 million, which was repaid during the fourth quarter of 2002.Notwithstanding the Company’s repayment of this loan’s principal, the lendercontinues to receive a portion of excess cash flows received by the Companyfrom CSG. These payments are classified as interest expense.

During the three and six months ended June 30,2003, the Company received $17.1 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 six months ended June 30, 2004:
| ** **                                                 | ** ** | **As of  June 30, 2004** | ** ** |
|------------------------------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                 | ** ** | **(Dollars in  thousands)**        | ** ** |
| Retained interests in credit card receivables  securitized |       |                                    | $          | 1 |   |   |
| Total assets                                               |       |                                    | 12,414     |   |   |
| Total liabilities                                          |       |                                    | 134        |   |   |
| Members’ capital                                      |       |                                    | 12,281     |   |   |

 
| ** **                                                             | ** ** | **For the  three months ended  June 30, 2004** | ** ** | **For the  six months ended  June 30, 2004** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **(Dollars in thousands)**                                    | ** ** |
| Income from retained interests in credit card  receivables securitized |       |                                                                    | $          | 0                                                                     |       |   |   | $ | 0 |   |   |
| Total other  operating income                                          |       |                                                                    | 229        |                                                                  |       |   | 492 |   |   |
| Net income                                                             |       |                                                                    | (445       | )                                                                     |       |   | (874 | ) |   |

 

In exchange for servicing 100% of the receivablesowned by the CSG Trust, the Company receives a servicing fee from thesecuritization structure, which the Company considers adequate compensation forservicing.

14

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

**4. FingerhutAcquisition**

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. This portfolio will decrease overtime because payments and charge-offs from cardholders are expected to besignificantly greater than purchases and interest charges. In accordance withEITF 99-20, the Company has accounted for the retained interests it purchasedat the lower of amortized cost or fair market value, and the Company hasamortized remaining expected cash flows in excess of the costs of the purchasedretained interests into income from retained interests in credit cardreceivables securitized using the effective interest method. Also, pursuant toEITF 99-20, the Company has updated its EITF 99-20 model when there has been achange in its estimate of projected future cash flows. These updates can resultin the Company either (1) adjusting the prospective yield that it willrealize over future periods, or (2) reducing the carrying value of theCompany’s investment to fair value if a significant adverse change occurs. Todate, none of these updates has resulted in a reduction in the carrying valueof the Company’s investment.

The gross cash flows thatwere available to the Company through the securitization structure associatedwith the Fingerhut trust retained interests were $1.0 million and $2.8 millionduring the three and six months ended June 30, 2004, respectively, and $11.1million and $97.4 million during the three and six months ended June 30,2003, respectively. From date of acquisition through the third quarter of 2003,the portion of expected cash flows that exceeded the cost of the purchasedretained interests was amortized into income from retained interests in creditcard receivables securitized using the effective interest method ($10.9 millionand $76.3 million pre-tax was amortized into income during the threeand six months ended June 30, 2003). During thethird quarter of 2003, a third party acquired the Company’s retained interestin the Original Fingerhut Trust in exchange for $27.3 million and a retainedinterest in a new trust (the “Fingerhut Trust”), which owns a collateralsecurity interest in the Original Fingerhut Trust. Subsequent to this thirdquarter 2003 transaction, the effective interest method is also being used torecord income associated with the Company’s retained interest in the newFingerhut Trust; $1.0 million and $2.8 million of such pre-tax income isreflected in income from retained interests in credit card receivablessecuritized during the three and six months ended June 30, 2004. Forfurther discussion of this third quarter 2003 transaction and the Company’saccounting for its investment in the Fingerhut retained interests, see Note 7, “OffBalance Sheet Arrangements.”

**5. EmbarcaderoAcquisition**

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 

15

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

January 2004with a new 10-year amortizing term facility; Embarcadero now owns thesubordinated, certificated interest underlying the new 10-year amortizing term facility.The assets 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 consolidated statement of operations is not shown net of taxbecause Embarcadero is a pass-through entity for income tax purposes. For a feethat represents adequate compensation for servicing, the Company has agreed toservice the entire portfolio of credit card receivables underlying theEmbarcadero 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.

**6. Sub-prime LenderAcquisition**

During the second quarter of 2004, the Companyacquired substantially all of the assets of First American, a complementarysub-prime lender, for approximately $109 million, including transaction costs. Withover 300 retail branch locations, First American’s operations and footprintserve as the principal platform for the Company’s micro-lending activities.

The Company financed the First American acquisitionwith $55.9 million of cash and $53.0 million of debt financing. The Companystructured the First American acquisition through a new subsidiary, whichserves as a holding company for the acquired First American operations. All ofthe debt financing associated with the acquired First American operations isrecourse only as to the acquired assets and operations of First American. The$53.0 million 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 $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. Each of the notes bears interest at rates varying monthly witheither prime interest rates or LIBOR (at the election of the Company), withspreads above prime or LIBOR being based on the leverage ratios for FirstAmerican’s operations. As of June 30, 2004, the Class A Term and Class BTerm interest rates were 9.0% and 14.5%, respectively. The notes have requiredquarterly repayments beginning in January 2006 of $2 million; anyprepayments by the Company 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 a one-year extension available at theCompany’s option (subject, however, to the achievement of certain leverageratios). As of June 30, 2004, $1.3 million was outstanding under therevolving credit facility.

16

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

Thefollowing table summarizes the preliminary purchase price allocation for theFirst American asset acquisition:
| ** **                  | ** ** | **Dollars (in millions)** | ** ** | **Amortization Period** | ** ** |
|-----------------------------|------------|-------------------------------------|------------|------------------------------|------------|
| Purchase Price              |       |                                | $          | 108.9                        |       |   |   |   |   |   |
| Property and  equipment     |       |                                | (3.1       | )                            |       |   |   |   |   |
| Working capital             |       |                                | (16.2      | )                            |       |   |   |   |   |
| Customer  relationships     |       |                                | (2.3       | )                            |       |   | 3  years |   |   |
| Non-compete  agreement      |       |                                | (1.1       | )                            |       |   | 3  years |   |   |
| Trademarks and  trade names |       |                                | (3.1       | )                            |       |   | Indefinite  life |   |   |
| Goodwill                    |       |                                | $          | (83.1                        | )          |   |   |   |   |   |

 

The allocation ispreliminary and subject to adjustment up to one year from the date of close;however, management does not anticipate that the allocation will materiallychange. The results of operations for the three and six months ended June 30,2004 include $0.1 million of pre-tax amortization related to this acquisition. Theacquisition is not material to the financial statements of the Company.

**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. Additionally, during the third quarter of 2002, theCompany acquired retained interests in a credit card receivables trust. (SeeNote 4, “Fingerhut Acquisition.”) Further, during the third quarter of2003, the Company acquired receivables from a third-party and subsequentlysecuritized them. (See Note 5, “Embarcadero Acquisition.”)

In accordance withthe above, substantially all of the Company’s credit card receivables are heldby securitization trusts, and the exclusive interest of the Company in thesereceivables is in the form of retained interests. GAAP requires the Company totreat its transfers to the securitization trusts as sales, and the receivablesare removed from the Company’s consolidated balance sheet. Under Statement No. 140,an entity recognizes the assets it controls and liabilities it has incurred,and derecognizes the financial assets for which control has been surrenderedand all liabilities that have been extinguished. An entity is considered tohave surrendered control over the transferred assets and, therefore, to havesold the assets if the 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. 

17

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

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 before their maturity, or (ii) the ability to unilaterallycause the holder to return specific assets, other than through 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  June 30,** | ** ** | **For the  six months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2004**                                                      | ** ** | **2003**                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                | ** ** | **(Dollars in thousands)**                          | ** ** |
| Securitization Activity:                                                  |       |                                                          |       |                                                        |       |   |   |   |   |
| Gross amount of  receivables securitized at period end(1)                 |       | $                                                             | 1,854,918  |                                                        | $          | 1,897,764 |   | $ | 1,854,918 |   | $ | 1,897,764 |   |
| Proceeds from  collections reinvested in revolving period securitizations |       | 225,222                                                       |       | 230,668                                                     |       | 423,183 |   | 482,406 |   |
| Excess cash flows  received on retained interests                         |       | 54,251                                                        |       | 58,997                                                      |       | 127,508 |   | 193,823 |   |
| Income from retained  interests in credit card receivables securitized    |       | 16,601                                                        |       | 14,757                                                      |       | 35,993 |   | 55,421 |   |
|                                                                           |            |                                                               |            |                                                             |            |  |  |  |  |  |  |  |  |

----

(1)         Excludes CSG receivablesof $426 million (or $213 million attributable to the Company’s 50% CSGownership percentage) and $690 million (or $345 million attributable to theCompany’s 50% CSG ownership percentage) at June 30, 2004 and 2003,respectively, because such amounts are included in the Company’s equity methodinvestment and are therefore not reflected in the consolidated statement ofoperations or balance sheet items included herein. 

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 cardholdersremaining each month after making the various payments noted above are paid tothe Company on its retained interests.

18

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

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) are recorded at a discounted value. The cash flows are discountedbased on the timing of when the Company expects to receive the cash flows. Thediscount rates are based on management’s estimates of returns that would berequired by investors in an investment with similar terms and credit quality.Yields on the credit card receivables are estimated based on the stated annualpercentage rates in the credit card agreements. Estimated default and paymentrates are based on historical results, adjusted for expected changes based onthe Company’s credit risk models. Credit card receivables are typically chargedoff when the receivables become 180 days past due, although earlier chargeoffs may occur specifically related to accounts of bankrupt or deceasedcustomers. Bankrupt and deceased customers’ accounts are typically charged offwithin 30 days of verification. 

TheCompany’s retained interests in credit card receivables securitized include thefollowing: 
| ** **                                                 | ** ** | **June 30, 2004**          | ** ** | **December 31, 2003** | ** ** |
|------------------------------------------------------------|------------|--------------------------------------|------------|---------------------------------|------------|
| ** **                                                 | ** ** | **(Dollars in thousands)** | ** ** |
| I/O strip                                                  |       |                                 | $          | 100,235                         |       |   |   | $ | 98,158 |   |   |
| Accrued interest  and fees                                 |       |                                 | 14,142     |                            |       |   | 19,030 |   |   |
| Servicing  liability                                       |       |                                 | (43,990    | )                               |       |   | (50,125 | ) |   |
| Fair value of  retained interests                          |       |                                 | 421,141    |                            |       |   | 471,898 |   |   |
| Retained interests in  credit card receivables securitized |       |                                 | $          | 491,528                         |       |   |   | $ | 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 increased slightly during the firstsix months of 2004 principally due to the effects of lower charge offs and alower payment rate, offset by slightly lower yield and reductions inreceivables levels. The decrease in accrued interest and fees corresponds withreductions in receivables balances and slightly lower yields within theportfolios underlying the Company’s securitizations. The servicing liabilityreflects, for those securitization structures for which servicing compensationis not adequate, the fair value of the costs to service the receivables aboveand beyond the servicing income the Company expects to receive from thesecuritizations. The servicing liability decrease experienced thus far in 2004is consistent with reductions in receivables levels to which the servicingliability relates. The fair value of retained interests includes thoseinterests in Company-arranged securitizations, as well as the Company’spurchased interests in securitizations. The fair value of retained interestsdecreased between December 31, 2003 and June 30, 2004, principallydue to the currently liquidating nature of the Company’s managed receivablesportfolios. Also contributing to this decrease is the reduction in advancerates experienced by the Company thus far in 2004 (which has allowed forconversion of the Company’s retained interest in credit card receivablessecuritized into cash). 

19

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

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 Fingerhut Trust,which owns a collateral security interest in the Original Fingerhut Trustrepresenting an undivided interest in the receivables held by the OriginalFingerhut Trust. For accounting purposes,this transaction had no ramifications other than its effect on the timing ofincome recognition under the effective interest method of EITF 99-20 based onrevised cash flow timing. As a result of this transaction, with theexception of servicing fees, the Company received only negligible further cashflows from the Fingerhut Trust during the fourth quarter of 2003 and during thefirst six months of 2004. However, given repayment of the senior notes issuedby the Fingerhut Trust, which occurred during the third quarter of 2004, theCompany will begin to receive material cash flows associated with the Fingerhutreceivables beginning in the third quarter of 2004. The remaining excess cash flows that the Company expects to receive fromthe Fingerhut investment are currently estimated to be $120.0 million.Up until the pay-off of the Fingerhut Trust senior note holders early in thethird quarter of 2004, the Fingerhut Trust provided the Company with adequatecompensation for servicing the portfolio of credit card receivables underlyingthe Fingerhut Trust. As such, the Company’s original servicing liabilityassociated with the Original Fingerhut Trust was converted into a deferred gainupon the third quarter of 2003 Fingerhut retained interests exchange. TheCompany had no servicing liability associated with the Fingerhut Trust as of June 30,2004, and the deferred gain representing by the Original Fingerhut Trustservicing liability currently is being amortized into income using the EITF99-20 effective interest method.

The Company currently has no plans to re-securitizethe receivables underlying the Fingerhut Trust. Accordingly, during the thirdquarter of 2004, the Company will resume accounting ownership of thesereceivables at an approximately $0.0 carryover basis corresponding to itscurrent basis in its Fingerhut retained interests. As the Company receives itsexpected $120.0 million in excess cash flows from the Fingerhut receivables,the Company essentially will be reporting into GAAP income all of the cashflows that it receives in any particular accounting period, along with incomeassociated with amortization of the $35.1 million of deferred gain included inretained interests in credit card receivables securitized on the Company’sconsolidated balance sheet as of June 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 receivables the Company has securitizedare presented below: 
| ** **                              | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** | **June 30,  2003** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Yield  (annualized)                     |       |                    | 29.1       | %                           |       |                    | 29.5       | % |   |   | 31.0 | % |   |
| Payment rate  (monthly)                 |       |                    | 6.0        |                        |       |                    | 6.5        |   |   |   | 6.8 |   |   |
| Expected credit  loss rate (annualized) |       |                    | 13.2       |                        |       |                    | 15.0       |   |   |   | 18.0 |   |   |
| Residual cash  flows discount rate      |       |                    | 22.5       |                        |       |                    | 22.5       |   |   |   | 22.5 |   |   |
| Servicing liability  discount rate      |       |                    | 14.0       |                        |       |                    | 14.0       |   |   |   | 14.0 |   |   |

 

20

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

AtJune 30, 2004, the following illustrates the hypothetical effect of anadverse 5 and 10 percent change in key economic assumptions on theretained interests in credit card receivables securitized ($in thousands):
| **Yield (annualized)**                        |   | 29.1 | %       |
|-----------------------------------------------|--------|------|---------|
| *Impact  on fair value of 5% adverse change*  |   | $    | (8,329  | ) |
| *Impact  on fair value of 10% adverse change* |   | $    | (16,657 | ) |
| **Payment rate (monthly)**                    |   | 6.0  | %       |
| *Impact  on fair value of 5% adverse change*  |   | $    | (416    | ) |
| *Impact  on fair value of 10% adverse change* |   | $    | (242    | ) |
| **Expected credit loss rate (annualized)**    |   | 13.2 | %       |
| *Impact  on fair value of 5% adverse change*  |   | $    | (4,018  | ) |
| *Impact  on fair value of 10% adverse change* |   | $    | (8,036  | ) |
| **Residual cash flows discount rate**         |   | 22.5 | %       |
| *Impact  on fair value of 5% adverse change*  |   | $    | (1,846  | ) |
| *Impact  on fair value of 10% adverse change* |   | $    | (3,672  | ) |
| **Servicing discount rate**                   |   | 14.0 | %       |
| *Impact  on fair value of 5% adverse change*  |   | $    | (93     | ) |
| *Impact on fair value of 10%  adverse change* |   | $    | (186    | ) |

 

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.

As noted above, the Fingerhut Trust retained interestsare carried at the lower of amortized cost or fair market value, net of anyapplicable servicing liability. In accordance with EITF 99-20, expected cashflows in excess of the cost of the purchased retained interests are beingamortized into income from retained interests in credit card receivablessecuritized using the effective interest method.

21

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

TheCompany’s managed receivables portfolio underlying its securitizations(including its 50% and 62.5% ownership shares in the CSG and Embarcaderomanaged receivables, respectively) is comprised of retained interests in thecredit 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 in the securitizations.
| ** **                                   | ** ** | **June 30,  2004** | ** ** | **December 31,  2003** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                                   | ** ** | **(In thousands)** | ** ** |
| Total managed principal balance              |       | $                       | 1,644,995  |                        | $          | 2,083,320 |   |
| Total managed  finance charge balance        |       | 218,224                 |       | 257,578                     |       |
| Total managed  receivables                   |       | $                       | 1,863,219  |                        | $          | 2,340,898 |   |
| Receivables  delinquent—60 or more days |       | $                       | 166,677    |                        | $          | 280,312 |   |
| Net charge offs for the  three months ended  |       | $                       | 72,326     |                        | $          | 90,446 |   |

 

**8. EarningsPer Share**

Thefollowing table sets forth the computation of basic and diluted earnings pershare:
| ** **                                                                       | ** ** | **For the  three months ended  June 30,**               | ** ** | **For the  six months ended  June 30,** | ** ** |
|----------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                       | ** ** | **2004**                                                                    | ** ** | **2003**                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                       | ** ** | **(In thousands, except for per share data)** | ** ** |
| Numerator:                                                                       |       |                                                                        |       |                                                        |       |   |   |   |   |
| Net income                                                                       |       | $                                                                           | 14,851     |                                                        | $          | 21,770 |   | $ | 33,639 |   | $ | 52,365 |   |
| Preferred stock dividends                                                        |       | (1,097                                                                      | )          | (1,106                                                      | )          | (2,167 | ) | (2,214 | ) |
| Income attributable to common shareholders                                       |       | $                                                                           | 13,754     |                                                        | $          | 20,664 |   | $ | 31,472 |   | $ | 50,151 |   |
| Denominator:                                                                     |       |                                                                        |       |                                                        |       |   |   |   |   |
| Denominator for basic income per share—weighted-average  shares outstanding |       | 51,548                                                                      |       | 51,116                                                      |       | 51,648 |   | 51,032 |   |
| Effect of dilutive stock options                                                 |       | 841                                                                         |       | 492                                                         |       | 893 |   | 326 |   |
| Denominator for diluted income per share—adjusted  weighted-average shares  |       | 52,389                                                                      |       | 51,608                                                      |       | 52,541 |   | 51,358 |   |
| Basic income per share                                                           |       | $                                                                           | 0.29       |                                                        | $          | 0.43 |   | $ | 0.65 |   | $ | 1.03 |   |
| Diluted income  per share                                                        |       | $                                                                           | 0.28       |                                                        | $          | 0.42 |   | $ | 0.64 |   | $ | 1.02 |   |

 

The Company’s preferredshares, plus dividends that have been accreted thereon, are convertible intoapproximately 4.9 million shares of common stock at $9.14 per share as of June 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 second quarter and year-to-date 2004 earningper shares calculations are 2.4 million of warrants and 0.3 million of stockoptions as their effects are anti-dilutive.

22

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 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 $2.2 billion and $2.3 billion at June 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 any one time.

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 June 30, 2004, CSG would be obligated topurchase up to approximately $53.2 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 newnotes under the note purchase agreement. As of June 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 June 30, 2004 was 50%) times the total amountof the notes that CSG would be required to purchase. Therefore, as of June 30,2004, the maximum amount of the Company’s guarantee was approximately $26.6million. The Company currently does not have any liability recorded withrespect to this guarantee, but it will record one if events occur that make paymentprobable under the guarantee. The fair value of this guarantee is not material.

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 $58.9 million.These arrangements prevent the Company from using the $10.0 million ofcash for any other purpose, although the Company can substitute othercollateral for the pledged retained interests. The Company’s arrangements withthe financial institution expire in March 2006. If the Company were toterminate its service agreement with this institution, there would be penaltiesof approximately $0.9 million as of June 30, 2004. The Companycurrently does not have any liability recorded with respect to the guaranteesdiscussed in this paragraph, but it will record one if events occur that makepayment probable under the guarantees. The fair value of these guarantees isnot material.

Through what were formerly First American’s operations(see Note 6, “Sub-prime Lender Acquisition”), the Company has an agreement withanother third-party financial institution pursuant to which the Company marketsand services loans on behalf of the financial institution in exchange formarketing and servicing fees. These fees are “at-risk” for defaults on theseloans owned by the third-party 

23

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**CompuCredit Corporation and Subsidiaries Notes to Condensed Consolidated Financial Statements (Unaudited) (Continued) June 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 operations. Nevertheless, to further growth plans for theacquired First American operations, the Company has guaranteed up to $15.0million of potential liability to the financial institution under its marketingand servicing program with the Company. The Company currently does not have anyliability recorded with respect to the guarantee discussed in this paragraph,but it will record one if events occur that make payment probable under theguarantee. 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 June 30, 2004, the Company had: athree-year term securitization facility that it completed in July 2001, apaired series underlying the three-year term securitization facility, atwo-year variable funding securitization facility with renewal options and aone-year conduit securitization facility issued out of its originatedportfolio master trust; a ten-year amortizing term securitization facility issuedout of the Embarcadero Trust; and a three-year amortizing term securitizationissued out of the Fingerhut Trust. During the third quarter of 2004, all of thesenior note holders underlying the three-year term securitization facilityissued out of the originated portfolio master trust and the three-yearamortizing terms securitization issued out of the Fingerhut Trust were repaid.

For each portfolio of credit card receivablessecuritized by the Company, there has never been an early amortization period.The Company has experienced, however, early amortization events associated witheach of the securitization structures represented by the retained intereststhat the Company and CSG acquired in 2002—both of which were fully contemplatedin connection with the Company’s establishment of purchase prices for therespective acquisitions. In March 2003, the credit card receivablesunderlying the Original Fingerhut Trust dropped below a minimum receivablesbalance threshold, thereby causing the series issued by the Original FingerhutTrust to begin an early amortization period. Also, due to a reduction in theprincipal balance of the receivables within the CSG Trust (the retainedinterests in which are owned by the Company’s equity-method investee, CSG), aprincipal balance trigger occurred, and hence early amortization began, duringthe second quarter of 2003. The occurrence of this event caused CSG to ceaseits cash distributions to the Company in June 2003, although the Companyexpects that the CSG Trust will continue to provide adequate compensation tothe Company in cash for servicing the portfolio of receivables underlying theCSG Trust and will continue to make payments to the Company in respect of theCompany’s investment in CSG Trust bonds.

Finally, while the Company has never triggered anearly amortization within any of the series underlying Company-arrangedsecuritization facilities, and while the Company does not believe that it will,it is conceivable that, even with close management, the Company may trigger anearly amortization of one or more of the outstanding series within itssecuritization trusts.

As each securitization facility expires or comes upfor renewal, there can be no assurance that the facility will be renewed, or ifrenewed, there can be no assurance that the terms will be as favorable as theterms that currently exist. Either of these events could significantly increasethe Company’s need for additional liquidity.

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

The Company is subject tovarious legal proceedings and claims that arise in the ordinary course ofbusiness. There are no material pending legal proceedings to which the Companyis a party.

**10. SubsequentEvent**

Subsequent to the close of the second quarter of 2004,the Company acquired a sub-prime lender for $33.9 million includingtransaction costs; this acquisition will allow for further expansion of theCompany’s micro-lending activities. The Company financed this acquisition with $17.4 millionof cash and $16.5 million of debt financing.

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**ITEM 2.  MANAGEMENT’S DISCUSSION AND ANALYSIS OFFINANCIAL CONDITION AND RESULTS OF OPERATIONS**

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

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 related financialservices and products to or associated with the underserved, or sub-prime,consumer credit market, as well as to “un-banked” consumers. Historically, wehave served this market through our marketing and solicitation of credit cardaccounts and our servicing of various credit card receivables underlying bothour 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.,the percentage on a dollar that lenders will lend us, or the “advance rate”)that our securitization facilities provide against our originated credit cardreceivables is a critical factor in our ability to obtain the desired returnson equity for our shareholders. From the latter part of 2001 through the end of2003, the advance rates that securitization lenders were willing to provide uswith respect to our originated portfolio master trust were not adequate enoughfor us to earn the returns on equity that we demand for our shareholders. Accordingly,we did not 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 two significant acquisitions in 2002 and one in2003. Further, we also decided toexpand our business into the purchase and recovery of previously charged offreceivables, as well as micro-lending and 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. Accordingly, we are looking for new applications of our abilities, and webelieve that we can successfully extend our platform and expertise into othersub-prime asset classes and activities beyond credit card receivables.

Throughout 2004 and beyond, our shareholders shouldexpect us to evaluate and pursue other business activities and asset classesthat are complementary to our historic sub-prime credit card business,including acquisitions of sub-prime lenders.As a part of our strategy of complementary diversification, we began rollingout a stored-value card initiative during the first quarter of 2004. Moreover,we have recently expanded our product and service offerings to include the marketing,servicing and/or origination of small-balance, short-term loans (generally less than $500 for less than 30days) through various channels, including retail branch locations, directmarketing, telemarketing and the internet. We began these “micro-lending” activities in earnest during the secondquarter of 2004 through our acquisition of substantially all of the assets ofFirst American, a sub-prime lender with over 300 retail storefronts.

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 (loss), which may be material.(This occurred, for example, in the third quarter of 2003.) For furtherdiscussion of our historic results and the impact of securitization accountingon our results, see the “Results of Operations” and “Liquidity, Funding andCapital Resources” sections below, as well as our condensed consolidatedfinancial statements and the notes thereto.

**Results of Operations**

***Three and Six Months Ended June 30, 2004,Compared to Three and Six Months Ended June 30, 2003***

Ourresults of operations were as follows for the three and six months ended June 30,(in thousands except per share data):
| ** **                                      | ** ** | **For the three  months ended  June 30,**         | ** ** | **For the six  months ended  June 30,** | ** ** |
|-------------------------------------------------|------------|-----------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                      | ** ** | **2004**                                                              | ** ** | **2003**                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                      | ** ** | **(Dollars in millions,  except per share data)** | ** ** |
| Net income                                      |       | $                                                                     | 14.9       |                                                        | $          | 21.8 |   | $ | 33.6 |   | $ | 52.4 |   |
| Net income  attributable to common shareholders |       | $                                                                     | 13.8       |                                                        | $          | 20.7 |   | $ | 31.5 |   | $ | 50.2 |   |
| Diluted income per share                        |       | $                                                                     | 0.28       |                                                        | $          | 0.42 |   | $ | 0.64 |   | $ | 1.02 |   |

 

The decrease in ournet income for the second quarter of 2004 as compared to the second quarter of2003 was principally due to:

·        Increased 2004 marketing efforts aimed atgrowing account originations within our originated credit card receivablesportfolio, as well as within our debit card product offering (marketing costsof $9.0 million pre-tax for 2004, compared to $2.8 million pre-tax for 2003);

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·        A $14.9 million pre-tax provision for loanlosses in 2004, compared with only $0.1 million in 2003, associated withsignificant year-over-year growth in our on-balance sheet loans and feesreceivable related to our largely fee-based card offering to consumers at thelower end of the FICO scoring system and our new micro-lending activities;

·        The anticipated decline in income from ouracquired Fingerhut retained interests as a result of our third quarter 2003retained interest exchange transaction ($1.0 million of pre-tax income for2004, compared with $10.9 million pre-tax income for 2003);

·        As anticipated at the date of investment, adecline in income associated with our equity-method investment in CSG ($(0.2)million pre-tax loss for 2004, versus $13.6 million pre-tax income for 2003);

·        Ananticipated $5.3 million pre-tax decline in servicing income related todeclines in our originated portfolio master trust and Fingerhut customerbalances, partially offset by the addition of the Embarcadero portfolio; and

·        Increasesin card and loan servicing costs for our new stored-value card, micro-lendingand investments in previously charged off receivables activities ($13.1 millionpre-tax costs in 2004, compared to $7.0 million pre-tax costs in 2003).

These negativeeffects were partially offset, however, by:

·        An increase in interest income of $9.9 millionin 2004 primarily attributable to the Company’s largely fee-based card offeringto consumers at the lower end of the FICO scoring system;

·        A $24.7 million increase in fee income in 2004(even after the effects of declining Fingerhut and originated portfolio mastertrust receivables) largely attributable to our fee income generated by (1) theEmbarcadero Trust receivables, (2) our largely fee-based credit cardproduct offering to consumers at the lower end of the FICO scoring system, and (3) ournew stored-value card and micro-lending activities;

·        The performance of the receivables in theEmbarcadero Trust, an interest in which we acquired in the third quarter of2003 ($12.5 million Embarcadero pre-tax income from retained interests incredit card receivables and $5.0 million of pre-tax credit card fee and otherincome in 2004, both such amounts being offset by $7.1 million pre-taxEmbarcadero minority interest in 2004, with no corresponding income amounts orminority interest offsets for 2003);

·        A decline in interestexpense associated with our investment in CSG (no interest expense for 2004,versus $2.9 million of pre-tax interest expense for 2003); and

·        Decreases in card and loan servicing costsrelated to decreasing managed receivables levels within our originatedportfolio master trust and Fingerhut portfolios, offset by the addition of theEmbarcadero portfolio ($23.8 million pre-tax costs in 2004, compared to $30.4million pre-tax costs in 2003).

The decrease in ournet income for the six months ended June 30, 2004 as compared to theprior-year period was principally due to:

·        Increased 2004 marketing efforts aimed atgrowing account originations within our originated credit card receivablesportfolio, as well as within our debit card product offering (marketing costsof $14.7 million pre-tax for 2004, compared to $4.4 million pre-tax for 2003);

·        A $24.0 million pre-tax provision for loanlosses in 2004, compared with only $0.1 million in 2003, associated withsignificant year-over-year growth in our on-balance sheet loans and fees 

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receivable related to ourlargely fee-based card offering to consumers at the lower end of the FICOscoring system and our new micro-lending activities;

·        The anticipated decline in income from ouracquired Fingerhut retained interests as a result of our third quarter 2003retained interest exchange transaction (only $2.8 million of pre-taxincome for 2004, compared with $76.3 million pre-tax income for 2003);

·        As anticipated at the date of investment, adecline in income associated with our equity-method investment in CSG ($(0.4)million pre-tax loss for 2004, versus $27.9 million pre-tax income for 2003);

·        An anticipated $7.7 million pre-tax decline inservicing income related to declines in our originated portfolio master trustand Fingerhut customer balances partially offset by the addition of theEmbarcadero portfolio; and

·        Increases in card and loan servicing costs forour new stored-value card, micro-lending and investments in previously chargedoff receivables activities ($22.8 million pre-tax costs in 2004, compared to$12.1 million pre-tax costs in 2003).

These negativeeffects were partially offset, however, by:

·        An increase in interest income of $16.4 millionprimarily attributable to the Company’s largely fee-based card offering toconsumers at the lower end of the FICO scoring system;

·        A $43.4 million increase in fee income in 2004(even after the effects of declining Fingerhut and originated portfolio mastertrust receivables levels) largely attributable to our fee income generated by (1) theEmarcadero Trust receivables, (2) our largely fee-based credit cardproduct offering to consumers at the lower end of the FICO scoring system, and (3) ournew stored-value card and micro-lending activities;

·        Theperformance of the receivables in the Embarcadero Trust, an interest in whichwe acquired in the third quarter of 2003 ($23.9 million Embarcaderopre-tax income from retained interests in credit card receivables and $10.6million of pre-tax credit card fee and other income in 2004, both such amountsbeing offset by $13.4 million pre-tax Embarcadero minority interest in 2004, withno corresponding income amounts or minority interest offsets for 2003);

·        Theimproved performance of our retained interests in the originated portfoliomaster trust ($9.2 million of pre-tax income in 2004, compared to a $(26.6)million pre-tax loss in 2003);

·        A decline in interest expense associated withour investment in CSG (no interest expense for 2004, versus $6.1 million ofpre-tax interest expense for 2003);and

·        Decreases in card and loan servicing costsrelated to decreasing managed receivables levels within our originatedportfolio master trust and Fingerhut portfolios, partially offset by theaddition of the Embarcadero portfolio ($42.7 million pre-tax in 2004, comparedto $59.4 million pre-tax in 2003).

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***Net Interest Expense After Provision for Loan Losses***

Net interestexpense after provision for loan losses represents interest income earned oncash, cash equivalents and investments and finance charges and late fees earnedon any loans receivable that we have not securitized, less interest expense anda provision for loan losses. Exclusive of our provision for loan losses, we hadnet interest income of $10.8 million and $18.4 million for the three and sixmonths ended June 30, 2004, versus net interest expense of$1.4 million and $3.5 million for the three and six months ended June 30,2003. The factors accounting for this shift to net interest income exclusive ofthe provision for loan losses in 2004 from net interest expense in 2003include:

·        growthduring the latter quarters of 2003 and the first two quarters of 2004 in ourcredit card receivables associated with our principally 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

·        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).

As we continue to grow our principally fee-basedcredit card offering to consumers at the lower end of the FICO scoring system,and assuming that we do not securitize the credit card loans receivableunderlying this product offering in an off balance sheet arrangement, we expectto see continued growth in our interest income. However, because of the debtfinancing that we incurred late in the second quarter of 2004 associated withour acquisition of First American’s assets and operations (see Note 6, “Sub-primeLender Acquisition,” to our condensed consolidated financial statements), weexpect higher interest expense balances in future quarters during which thisdebt is outstanding.

Our $14.9 million and$24.0 million provision for loan losses for the three and six months ended June 30,2004 and $0.1 million for the three and six months ended June 30, 2003relates principally to those non-securitized receivables associated with ourlargely fee-based card offering to consumers at the lower end of the FICOscoring system and is provided to cover aggregate loss exposures on (1) principalloans receivable balances, (2) finance charges and late fees receivablesunderlying income amounts 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.

***Income from Retained Interests in Credit CardReceivables Securitized***

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

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Income(loss) from retained interests in credit card receivables securitized includesthe income earned on the retained interests and any changes in the fair valueof the retained interest in credit card receivables securitized in accordancewith Statement of Financial Accounting Standards No. 115, “Accounting forCertain Investments in Debt and Equity Securities,” as follows: 
| ** **                                                                      | ** ** | **For the three  months ended  June 30,** | ** ** | **For the six  months ended  June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2004**                                                      | ** ** | **2003**                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                                                      | ** ** | **(in millions)**                                        | ** ** |
| Income (loss)  from retained interests in credit card receivables securitized : |       |                                                          |       |                                                        |       |   |   |   |   |
| Originated portfolio                                                            |       | $                                                             | 3.1        |                                                        | $          | (0.9 | ) | $ | 9.2 |   | $ | (26.6 | ) |
| Purchased portfolio(1)                                                          |       | 13.5                                                          |       | 15.7                                                        |       | 26.8 |   | 82.0 |   |
| Total                                                                           |       | $                                                             | 16.6       |                                                        | $          | 14.8 |   | $ | 36.0 |   | $ | 55.4 |   |

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(1)         This amount includesapproximately $1.0 million and $2.8 million for the three and six months ended June 30,2004 related to the Fingerhut Trust and $10.9 million and $76.3 millionfor the three and six months ended June 30, 2003 related to the OriginalFingerhut Trust (as discussed below). It also includes approximately $12.6million and $24.0 million for the three and six months ended June 30, 2004related to the Embarcadero Trust.

Principallygiven improvements in the performance of the receivables within our originatedportfolio master trust, we have experienced higher income from retainedinterests in credit card receivables securitized during the second quarter of2004 as contrasted with the second quarter of 2003.

The expected decreasein year-to-date total income from retained interests in credit card receivablessecuritized between 2003 and 2004 is attributable to the performance of ouracquired Fingerhut retained interests (only $1.0 million and $2.8 million ofFingerhut pre-tax income from retained interests in credit card receivablessecuritized for the three and six months ended June 30, 2004 of Fingerhut,compared with $10.9 million and $76.3 million of Fingerhut pre-tax incomefrom retained interests in credit card receivables securitized for the threeand six months ended June 30, 2003), offset, however, by:

·        theperformance of our retained interests in the Embarcadero Trust, the receivablesunderlying which we acquired during the third quarter of 2003 ($12.5 millionand $23.9 million of pre-tax income for the three and six months ended June 30,2004, respectively); and

·        improvedperformance of our retained interests in the originated portfolio master trustassociated with (1) improved collection efforts with respect to the receivablesunderlying the trust, and (2) an improvement in the economy 

For discussion of thethird quarter 2003 Fingerhut retained interests exchange and our accounting forour investment in the Fingerhut retained interests, see Note 7, “Off BalanceSheet Arrangements,” to our condensed consolidated financial statements; asdiscussed in that note, we expect that the Fingerhut receivables will resumematerial cash flows to us (and associated income therewith) during the thirdquarter of 2004. The remaining excess cashflows that we expect to receive from the Fingerhut investment are currentlyestimated to be $120.0 million. We have noplans to re-securitize the receivables underlying the Fingerhut Trust. Accordingly,during the third quarter of 2004, we will resume on balance sheet ownership ofthese receivables at an approximately $0.0 carryover basis corresponding to ourcurrent basis in the Fingerhut retained interests. As we receive our expected$120.0 million in excess cash flows from the Fingerhut receivables, weessentially will be reporting into GAAP income all of the cash flows that wereceive in any particular accounting period, along with income associated withamortization of a $35.1 million deferred gain 

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included in retained interests in credit card receivablessecuritized on our consolidated balance sheet as of June 30, 2004. 

***Equity Method Investment in CSG***

Under the equity method ofaccounting for our CSG investment, we recorded approximately $(0.2) million and$(0.4) million of pretax loss and $13.6 million and $27.9 million ofpretax income during the three and six months ended June 30, 2004 and2003, respectively. This change relates to the anticipated principal balancetrigger that occurred, and hence, the early amortization that began during thesecond quarter of 2003 for the securitization facility underlying the CSGTrust, the retained interest in which was the principal income-earning asset ofCSG during the second quarter of 2003. While we received distributions from CSGthrough June 2003, the occurrence of the trigger event has caused CSG tocease its cash distributions to us, and distributions will not resume for theforeseeable future. Accordingly, all significant income from our equity-methodinvestment will cease until the distributions resume. The occurrence of thistrigger event should not impact, however, our expected future cash flowsassociated with our servicing of the CSG Trust receivables or our investment inCSG Trust notes. 

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

Theremaining components of our other operating income (i.e., beyond the incomefrom retained interests in credit card receivables securitized and equity inincome of equity-method investee items discussed above) are as follows:
| ** **                                        | ** ** | **For the  three months ended  June 30,** | ** ** | **For the  six months ended  June 30,** | ** ** |
|---------------------------------------------------|------------|---------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                                        | ** ** | **2004**                                                      | ** ** | **2003**                                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands)**                          | ** ** |
| Servicing income                                  |       | $                                                             | 19,515     |                                                   | $          | 24,863 |   | $ | 44,813 |   | $ | 52,529 |   |
| Fees on securitized receivables                   |       | 18,509                                                        |       | 20,746                                                 |       | 39,803 |   | 40,137 |   |
| Other fees                                        |       | 27,146                                                        |       | 214                                                    |       | 43,922 |   | 215 |   |
| Recoveries of  previously charged off receivables |       | 13,031                                                        |       | 13,375                                                 |       | 26,987 |   | 17,013 |   |
| Ancillary product  revenue                        |       | 1,702                                                         |       | 1,636                                                  |       | 2,757 |   | 3,498 |   |
| Interchange fees                                  |       | 4,185                                                         |       | 3,288                                                  |       | 7,368 |   | 6,400 |   |
| Fees and other income                             |       | $                                                             | 64,573     |                                                   | $          | 39,259 |   | $ | 120,837 |   | $ | 67,263 |   |

 

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. Fundamentally, the decline inservicing income between 2003 and 2004 results from reductions in managedreceivables balances underlying the CSG and Fingerhut trusts (andnotwithstanding our current efforts to again grow our originated portfoliomaster trust receivable, net year-over-year reductions in those managedreceivables), partially offset, however, by our management of additionalreceivables balances associated with our third quarter 2003 Embarcadero Trustsecuritization transaction. 

Unless we acquire additional receivables portfoliosand securitize them or acquire additional retained interests in existingsecuritization structures, our servicing income should gradually decline duringthe remainder of 2004 as we liquidate the receivables underlying the Fingerhut,CSG and Embarcadero trusts. We do not anticipate that servicing incomeassociated with our planned growth of receivables in the originated portfoliomaster trust will be sufficient to fully offset the servicing income reductionsthat we anticipate associated with these other trusts.

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Fees and other income haverisen in 2004 based on the strength of our fee income generated within theEmbarcadero Trust receivables, with respect to our largely fee-based creditcard product offering to consumers at the lower end of the FICO scoring system,and with respect to our new stored-value card and micro-lending activities.These fees and other income increases were partially offset, however, byrelative reductions in managed credit card receivables levels between 2003 and2004. We expect future quarter-over-quarter growth in our fees and otherincome category as we continue to grow our originated portfolio master trustreceivables, our largely fee-based credit card product offering to consumers atthe lower end of the FICO scoring system, and our stored-value card andmicro-lending activities.

***Other Operating Expense***

Otheroperating expense consists of the following for the periods indicated: 
| ** **                     | ** ** | **For the  three months ended  June 30,** | ** ** | **For the  six months ended  June 30,** | ** ** |
|--------------------------------|------------|---------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| ** **                     | ** ** | **2004**                                                      | ** ** | **2003**                                                    | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                     | ** ** | **(Dollars in thousands)**                          | ** ** |
| Salaries and benefits          |       | $                                                             | 5,127      |                                                        | $          | 4,428 |   | $ | 10,403 |   | $ | 8,769 |   |
| Card and loan  servicing       |       | 36,874                                                        |       | 37,447                                                      |       | 74,861 |   | 79,851 |   |
| Marketing and  solicitation    |       | 9,030                                                         |       | 2,827                                                       |       | 14,729 |   | 4,414 |   |
| Depreciation                   |       | 3,959                                                         |       | 3,905                                                       |       | 7,952 |   | 7,770 |   |
| Other                          |       | 10,857                                                        |       | 8,685                                                       |       | 20,772 |   | 17,224 |   |
| Total other  operating expense |       | $                                                             | 65,847     |                                                        | $          | 57,292 |   | $ | 128,717 |   | $ | 118,028 |   |

 

The increase in other operating expense for the threeand six months ended June 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 master trust and to diversify into other complementary productsand services (like our new stored-value card offering and micro-lendingproducts) that we can market to our sub-prime and un-banked customer base.Notwithstanding the higher expense levels associated with these efforts, we haverealized reductions in card and loan servicing expenses, which have declinedalong with the expected decline in our managed credit card receivables betweenthe second quarter of 2003 and the second quarter of 2004. While our creditcard servicing costs have been trending down in recent months along with thedecline in our managed receivables, this downward trend is also reflective ofour renegotiation of certain vendor servicing rates, other cost-cuttinginitiatives and lower overall delinquencies.

As we see the results of our renewed marketing effortsto grow the number of accounts and the associated receivables levels within theoriginated portfolio master trust, we anticipate that the current downwardtrends in monthly card and loan servicing costs will eventually reverse asgrowth in the receivables underlying the originated portfolio master trustoutstrips the reductions in receivables levels within the originated mastertrust portfolio, Embarcadero, CSG and Fingerhut trusts. 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.

The other expense categoryabove includes professional fees, net occupancy costs, ancillary productexpense, card-related fraud, travel and entertainment, insurance, hiringexpense, corporate communications, leased equipment expenses, office suppliesand other miscellaneous expenses. These expenses have generally increasedincrementally because we are adding infrastructure to support our 

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growthand diversification into other sub-prime products and services complementary toour traditional credit card activities. Our cardholder fraud expense includesthe expense of unauthorized use of the credit cards, including identity theftand purchases on lost or stolen cards. To date, we have experienced very littlefraud for unauthorized use, and the total expense has approximated 0.02% of ouraverage managed receivables in any given year. 

***Minority Interest***

The 37.5% ownershipinterest of the Merrill Lynch affiliate in Embarcadero is reflected as aminority interest in our operating results. The $6.8 million and $13.0 millionrecorded for the three and six months ended June 30, 2004, respectively,reflects Merrill Lynch’s portion of the Embarcadero results of operations.Prior to the third quarter of 2003, we did not have any minority interest.

***Income Taxes***

Our effective tax rate was37.6% for both the three and six months ended June 30, 2004, while it was35.4%, and 35.8% for the three and six months ended June 30, 2003,respectively. The increase 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 the 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 basis because this allows a comparison of CompuCredit to others withinthe specialty finance industry. Moreover, our management, analysts, investorsand others believe it is critical that they understand the credit performanceof the entire portfolio of our managed receivables because it revealsinformation concerning the quality of loan originations and the related creditrisks inherent within the securitized portfolios and our retained interests inour 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. Reconciliation of the managed receivables data to ourGAAP financial statements requires recognition that substantially all of ourcredit card receivables had been sold in securitization transactions as of June 30,2004; this reconciliation requires the removal of all but $96.8 million of themanaged receivables data from our books and records to yield only $96.8 millionof loan and fee receivables and associated statistics under GAAP, coupled withthe recording under GAAP of our retained interests in various securitizationstructures.

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 and 62.5% of the credit card receivablesunderlying the Embarcadero Trust, which reflects our 

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ownership percentage inEmbarcadero), the credit card receivables associated with retained intereststhat we have acquired (e.g., from Federated in 2002), 50% of the credit cardreceivables underlying the CSG Trust (which reflects our ownership percentagein CSG) and the $96.8 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 credit card 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 our Company toothers within the specialty finance 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 data associatedwith these excluded accounts are recoveries, which we include within thenumerator of the other income ratio computation, as well as the costs ofpursuing these recoveries, which we include within the numerator of theoperating ratio computation. Also, because acquisition prices for previouslycharged off credit card receivables range from less than a penny to just a fewpennies to the dollar of the face amount of the receivables, we exclude from the period-end and average managedreceivables data the face amount of the previously charged off credit cardreceivables 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 ratio computation.For a more detailed discussion of the rationale for both of these exclusionsfrom our managed receivables data, see the “Selected Credit Card Data” sectionwithin Management’s Discussion and Analysisof Financial Condition and Results of Operations in our Annual Report on Form 10-Kfor the year ended December 31, 2003.
| ** **                     | ** ** | **At or for the Three Months Ended** | ** ** |
|--------------------------------|------------|--------------------------------------------------------------------|------------|
| ** **                     | ** ** | **2004**                                                           | ** ** | **2003** | ** ** | **2002** | ** ** |
| ** **                     | ** ** | **Jun. 30**                                                   | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sep. 30** | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sep. 30** | ** ** |
| ** **                     | ** ** | **(In thousands; percentages annualized)**          | ** ** |
| Period-end managed receivables |       | $                                                                  | 1,959,811  |   | $ | 2,090,644 |   | $ | 2,340,898 |   | $ | 2,518,822 |   | $ | 2,242,542 |   | $ | 2,470,041 |   | $ | 2,795,888 |   | $ | 3,028,500 |   |
| Period-end managed accounts    |       | 2,222                                                              |       | 2,276 |   | 2,416 |   | 2,637 |   | 2,707 |   | 3,169 |   | 3,562 |   | 4,070 |   |
| Average managed receivables    |       | $                                                                  | 2,007,406  |   | $ | 2,219,537 |   | $ | 2,419,674 |   | $ | 2,469,194 |   | $ | 2,359,513 |   | $ | 2,636,728 |   | $ | 2,912,482 |   | $ | 3,090,254 |   |
| Net interest margin            |       | 20.2                                                               | %          | 19.9 | % | 22.1 | % | 22.4 | % | 18.4 | % | 17.8 | % | 17.1 | % | 21.4 | % |
| Other income ratio             |       | 11.1                                                               | %          | 8.9 | % | 7.3 | % | 7.3 | % | 7.3 | % | 5.9 | % | 6.0 | % | 6.2 | % |
| Operating ratio                |       | 11.3                                                               | %          | 10.0 | % | 8.3 | % | 8.8 | % | 8.5 | % | 8.4 | % | 8.3 | % | 8.0 | % |

 

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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 as well as accrued finance charge and late fee charge offs, and thedenominator 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 and the Embarcadero Trust, other than marketingand solicitation and ancillary product expenses, and the denominator of whichis average managed receivables.

We note that the net interest margin and operatingincome ratios for all prior periods reflect a reclassification of all feecharge offs (with the exception of late fees) as an offset to the operatingincome ratio, rather than the net interest margin. Given the growth that wehave experienced and will continue to experience with respect to our largelyfee-based card offering to consumers at the lower end of the FICO scoringsystem, this classification became necessary during the current quarter tobetter match fee charge offs against their respective income components.

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 increased ordecreased 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. Giventhe seasoning of the Embarcadero portfolio that has occurred since itsacquisition in the third quarter of last year, we are seeing greater stabilityin our net interest margins. We saw modest improvements in the second quarterand may see further improvements throughout the year based on repricing, theeffects of expected account additions within the originated portfolio mastertrust, and general improvements in the economy and the ability of our consumersto repay their obligations (i.e., resulting in fewer finance charge and latefee charge offs).

The other incomeratio increased during the second quarter of 2004 relative to the first quarterdue to:

·        higherfee income associated with our credit card product offering to consumers at thelower end of the FICO scoring system;

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·        newfees associated with our stored-value card product offering, which we rolledout during the first quarter of 2004; and

·        newlending, marketing and servicing fees associated with our micro-lending productofferings, which we rolled out in earnest during the second quarter of 2004.

Thisincrease was partially offset, however, by:

·        adecrease in ancillary product revenue given that we have not yet begun to seethe positive effects on ancillary product revenue of our renewed growth inaccounts and receivables underlying the originated portfolio master trust; and

·        lowerfees (principally over-limit and interchange) from our managed receivableswithin the originated portfolio master trust and the CSG Trust.

The investments we aremaking in our largely fee-based credit card offering to consumers at the lowerend of the FICO scoring system and our other complementary sub-prime financialservice-related activities and products (e.g., our stored-value card productand micro-lending activities) are expected to cause further growth in our otherincome ratio during the remainder of 2004 and beyond. We also expect theseinvestments to increase our operating ratio. These respective ratios shouldrise because some of our complementary products and activities (e.g., our stored-valuecard offering) are not expected to produce a corresponding increase in ouraverage managed receivables denominator used in these ratio calculations.Finally, with new account additions, we should see an increase in ancillaryproduct revenues as a component of our other income ratio.

***Asset Quality***

Our delinquency and chargeoff data at any point in time reflects the credit performance of our managedreceivables. The average age of our credit card and loan accounts, the timingof portfolio purchases, the success of our collection and recovery efforts andgeneral economic conditions all affect our delinquency and charge off rates.The average age of our credit card account portfolio also affects the stabilityof our delinquency and loss rates.

Our strategy for managingdelinquency and receivables losses consists of account management throughoutthe customer relationship. This strategy includes credit line management andpricing based on the risk of our credit card accounts. See also our discussion ofcollection strategies under the heading “How Do We Collect From Our Customers?”in Item I of our Annual Report on Form 10-K for the year ended December 31,2003.

The discussion belowfocuses on the change in our delinquency and charge off data as of and for thethree months ended June 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 managementstrategies that we use on our portfolio are intended to manage and, to theextent possible, reduce the higher delinquency rates that can be expected in amore mature managed portfolio such as ours. Examples of management strategiesinclude conservative credit line management, purging of inactive accounts andcollection strategies (described under the heading “How Do We Collect From OurCustomers?” in Item I of our Annual Report on Form 10-K for the year endedDecember 31, 2003) intended to optimize the effective account-to-collectorratio across delinquency buckets. We measure the success of these efforts bymeasuring delinquency rates. These rates exclude accounts that have beencharged off.

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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** | ** ** |
| ** **                                        | ** ** | **Jun. 30**                                                   | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sep. 30** | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sep. 30** | ** ** |
| ** **                                        | ** ** | **(Dollars in thousands; % of total)**    | ** ** |
| Receivables  delinquent:                          |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 30 to 59 days past due                            |       | $                                                                  | 84,474     |   | $ | 71,108 |   | $ | 104,380 |   | $ | 118,300 |   | $ | 111,452 |   | $ | 99,723 |   | $ | 155,615 |   | $ | 155,897 |   |
| 60 to 89 days past due                            |       | 60,780                                                             |       | 58,188 |   | 79,347 |   | 87,205 |   | 74,330 |   | 80,234 |   | 105,966 |   | 120,868 |   |
| 90 or more days past due                          |       | 126,505                                                            |       | 160,055 |   | 200,965 |   | 187,526 |   | 162,463 |   | 247,903 |   | 282,685 |   | 252,800 |   |
| Total 30 or more days past due                    |       | $                                                                  | 271,759    |   | $ | 289,351 |   | $ | 384,692 |   | $ | 393,031 |   | $ | 348,245 |   | $ | 427,860 |   | $ | 544,266 |   | $ | 529,565 |   |
| Total 60 or more days past due                    |       | $                                                                  | 187,285    |   | $ | 218,243 |   | $ | 280,312 |   | $ | 274,731 |   | $ | 236,793 |   | $ | 328,137 |   | $ | 388,651 |   | $ | 373,668 |   |
| Receivables delinquent as  % of period-end loans: |       |                                                               |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 30 to 59 days past due                            |       | 4.3                                                                | %          | 3.4 | % | 4.5 | % | 4.7 | % | 5.0 | % | 3.9 | % | 5.6 | % | 5.1 | % |
| 60 to 89 days past due                            |       | 3.1                                                                |       | 2.8 |   | 3.4 |   | 3.5 |   | 3.3 |   | 3.3 |   | 3.8 |   | 4.0 |   |
| 90 or more days past due                          |       | 6.5                                                                |       | 7.7 |   | 8.6 |   | 7.4 |   | 7.2 |   | 10.0 |   | 10.1 |   | 8.3 |   |
| Total 30 or more days past due                    |       | 13.9                                                               | %          | 13.9 | % | 16.5 | % | 15.6 | % | 15.5 | % | 17.2 | % | 19.5 | % | 17.4 | % |
| Total 60 or more  days past due                   |       | 9.6                                                                | %          | 10.5 | % | 12.0 | % | 10.9 | % | 10.5 | % | 13.3 | % | 13.9 | % | 12.3 | % |

 

The increases in our 30 to 59 and 60 to 89 days pastdue delinquency rates since March 31, 2004 reflect seasonal trends underwhich we typically experience higher payments, and hence lower delinquencies,during the first quarter of each year. As we move into the third quarter, wewill see some of these delinquencies roll into the 90 or more days past duedelinquency category. Nevertheless, a comparison of our lower across-the-boarddelinquency levels as of June 30, 2004 to those as of June 30, 2003supports our belief that we are seeing credit quality improvements within eachof our portfolios.

*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.)

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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.

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 managedreceivables so as to include only our 62.5% share), our 50% share of themanaged receivables of CSG, our equity-method investee, and the $96.8 millionface amount of receivables associated with our largely fee-based card offeringto consumers at the lower end of the FICO scoring system and our micro-lendingactivities, which have not been securitized.
| ** **                      | ** ** | **2004**         | ** ** | **2003**         | ** ** | **2002**         | ** ** |
|---------------------------------|------------|------------------|------------|------------------|------------|------------------|------------|
| ** **                      | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sep. 30** | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sep. 30** | ** ** |
| Gross yield ratio               |       | 29.5             | %          | 30.3             | %          | 31.3             | %          | 32.1 | % | 33.0 | % | 33.5 | % | 34.0 | % | 32.4 | % |
| Combined gross charge offs      |       | $                | 141,066    |             | $          | 165,815          |       | $ | 169,482 |   | $ | 161,746 |   | $ | 206,451 |   | $ | 240,336 |   | $ | 248,919 |   | $ | 182,964 |   |
| Net charge offs                 |       | $                | 74,482     |             | $          | 87,331           |       | $ | 90,446 |   | $ | 95,629 |   | $ | 123,062 |   | $ | 133,666 |   | $ | 123,877 |   | $ | 71,621 |   |
| Adjusted charge offs            |       | $                | 44,329     |             | $          | 45,294           |       | $ | 47,304 |   | $ | 54,798 |   | $ | 64,744 |   | $ | 67,180 |   | $ | 67,193 |   | $ | 64,080 |   |
| Combined gross charge off ratio |       | 28.1             | %          | 29.9             | %          | 28.0             | %          | 26.2 | % | 35.0 | % | 36.5 | % | 34.2 | % | 23.7 | % |
| Net charge off ratio            |       | 14.8             | %          | 15.7             | %          | 15.0             | %          | 15.5 | % | 20.9 | % | 20.3 | % | 17.0 | % | 9.3 | % |
| Adjusted charge  off ratio      |       | 8.8              | %          | 8.2              | %          | 7.8              | %          | 8.9 | % | 11.0 | % | 10.2 | % | 9.2 | % | 8.3 | % |

 

The principalfactor contributing to the lower gross yield ratio experienced during the firstand second quarters of 2004 is our improved across-the-board delinquency rateswithin each of our managed receivables portfolios. Lower delinquencies havetranslated directly into lower late fee billings. Observations with respect tothe remaining categories in the above table are as follows:

·        Thesignificant decline in combined gross charge offs and the combined gross chargeoff ratio reflects credit quality improvements within our portfolios and alsocorresponds to some degree with our lower first quarter of 2004 delinquencies;

·        Bothcredit quality improvements within our portfolios and our lower first quarterof 2004 delinquencies contributed to lower net charge offs and adjustedchargeoffs, as well as a lower net charge off ratio;

·        Ouradjusted charge off ratio rose because, given our efforts to grow our accountoriginations and receivables levels for both our traditional credit cardproduct and our largely fee-based card offering to consumers at the lower endof the FICO scoring system and given purchase activities and the commensurategeneration of new receivables by customers underlying our portfolioacquisitions, the pre-acquisition receivables balances within our acquiredportfolios (to which our credit quality discount at acquisition applies) havefallen as a relative percentage of our total portfolio of managed receivables;and

·        Theabove table indicates a substantial drop in finance charge and fee charge offsrelative to principal charge offs; this corresponds principally with theseasonal effects of lower first quarter 2004 delinquencies. As delinquenciesfall, there are far fewer late fees billed which could ever potentially chargeoff.

**Liquidity, Fundingand Capital Resources**

At June 30,2004, we had approximately $49.6 million in unrestricted cash. Because thecharacteristics of our assets and liabilities change, liquidity management is adynamic process affected by the pricing and 

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maturityof our assets and liabilities. We finance our business through cash flows fromoperations, asset backed securitizations and the issuance of debt and equity:

·        Duringthe first six months of 2004, we generated $6.0 million in cash flow fromoperations, compared to generating $73.8 million in cash flow fromoperations during the first six months of 2003. The $67.8 million decreaseis due primarily to (1) our higher first quarter 2004 payment on ourfederal income tax liability, and (2) costs associated with our new 2-yearvariable funding securitization facility within the originated portfolio mastertrust, as well as the new 10-year amortizing term securitization facilitywithin the Embarcadero Trust.

·        Duringthe first six months of 2004, we used $94.6 million of cash in investingactivities, compared to our use of approximately $96.1 million of cash ininvesting activities during the first six months of 2003. The $1.5 milliondecrease is due primarily to our reduced net use of collections received fromcardholders in meeting collateral, principal amortization and principal fundingaccount deposit requirements in the first and second quarter of 2004 relativeto the first and second quarter of 2003, offset by our acquisition of the FirstAmerican assets in the second quarter.

·        Duringthe first six months of 2004, we generated $27.5 million in cash fromfinancing, compared to generating $2.2 million in cash in financingactivities during the first six months of 2003. The $25.3 million increasein generated cash flow is primarily due the proceeds from borrowings used to acquirethe First American assets offset by purchases of treasury stock.

The reduction in our June 30, 2004 unrestrictedcash balance to $49.6 relative to the $69.3 million level at March 31,2004 and the $100-plus million levels experienced at quarter ends throughout2003 reflects our focus in 2004 on reducing the levels of our draws against ouravailable variable funding and conduit facilities within our originatedportfolio master trust so as to minimize the costs of funds that flow throughto affect our income from retained interests in credit card receivablessecuritized. To avoid incurring costs on funds not currently needed to fundinvestments or operations, we have focused in 2004 on reducing our unrestrictedcash balances to the minimal levels necessary to meet our daily operations andinvestment needs. Given the completion of our new $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 June 30, 2004,our collateral base within our originated portfolio master trust was sufficientto allow for additional cash draws of $116.6 million against our existingsecuritization facilities; as of July 15, 2004 (based on the July 15,2004 pay-off of our 3-year senior-subordinated 2001 term issuance), this amounthad risen to $171.5 million.

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 a new 10-year amortizing term securitization facility issuedout of the Embarcadero Trust in January 2004, we began to receive cashflows (beyond our compensation for servicing the portfolio) during the secondquarter of 2004.

As noted above, during the first quarter of 2004, wecompleted a two-year securitization facility with Merrill Lynch 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 

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amortization of thefacility at expiration in a manner that is expected to allow us to receive cashflows that are more than adequate to cover our servicing costs while amountsborrowed under the facility are repaid by the originated portfolio master trustand an advance rate against the originated portfolio master trust receivablesthat in management’s opinion is sufficient to allow us to begin to grow theoriginated portfolio and provide acceptable returns on equity from our creditcard receivables origination activities. In connection with this newsecuritization facility, we issued to the investor a warrant to acquire up to 2.4million shares of our common stock at a strike price 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 quarter of 2004, we acquired substantially allof the assets of First American, a sub-prime lender, for approximately $108.9million, including transaction costs. We financed the acquisition with $55.9million of cash and $53.0 million of debt financing. We structured the FirstAmerican acquisition through a new subsidiary, which serves as a holdingcompany for the acquired First American operations. All of the debt financingassociated with acquired First American operations is recourse only as to theacquired assets and operations of First American. The $53.0 million of debtfinancing incurred in connection with the First American acquisition wasfinanced under a $65 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 $23.0 million Class ATerm note; and (3) a $27.0 million Class B Term note. Each of thenotes bears interest at rates varying monthly with either prime interest ratesor LIBOR (at our election), with spreads above prime or LIBOR being based onthe leverage ratios for First American’s operations. As of June 30, 2004,the Class A Term and Class B Term interest rates were 9.0% and 14.5%,respectively. The notes have required quarterly repayments beginning in January 2006of $2 million; any prepayments by us are to be applied first against theprincipal balances outstanding on the Class A Term note. The revolvingcredit facility and swing-line facility each bear interest at the same rates asthe Class A Term note. The revolving credit facility, swing-line facilityand term loans mature in December 2006, with a one-year extensionavailable at our option (subject, however, to the achievement of certainleverage ratios). As of June 30, 2004, $1.3 million was outstanding underthe revolving credit facility.

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 immediately precedingthree-month period, then the holders of the preferred stock can require us topay the Series A and B preferred stock dividends in cash. If this occurs,it will require approximately $1.2 million in cash per quarter.

In the third quarter of 2002, our Board of Directorsauthorized a program under which we are authorized to repurchase up to5 million shares (approximately 10 percent of the outstanding shares)of our outstanding common stock. We repurchased 1,023,600 shares during thesecond quarter of 2004 for approximately $18.2 million and, to date through theend of the second quarter, we have purchased 1,896,500 shares in the aggregateunder this program. We will continue to evaluate our stock price relative toother investment opportunities and, to the extent that we believe that therepurchase of our stock represents the best return of capital, we willrepurchase additional shares of our stock.

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. Subsequent to thesecond quarter of 2004, we acquired a sub-prime lender for $33.9 millionincluding transaction costs; this acquisition will allow for further expansionof our micro-lending activities. We financed this acquisition with $17.4 millionof cash 

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and $16.5 million ofdebt financing. While we anticipate using some of our existing cash reserves(and draw potential against our existing variable funding and conduitsecuritization facilities) to fund potential acquisitions during 2004, andwhile these acquisitions may require the use of material amounts of cash or mayrequire us to incur material acquisition-related debt financing, we anticipatehaving more than adequate cash for our operations during 2004.

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 June 30, 2004, we hadtotal securitization facilities of $2.8 billion and had used approximately$1.5 billion of these facilities. The weighted-average borrowingrate on these facilities at June 30, 2004 was approximately 3.0%.The maturity terms of our securitizationsvary.

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 SheetArrangements,” to our condensed consolidated financial statements includedherein.

In thetable below, we have noted the securitization facilities, including astructurally subordinate facility, (along with their maturity dates) withrespect to which substantially all our managed credit card receivables servedas collateral as of June 30, 2004. Following the table are further detailsconcerning each of the facilities.
| **Maturity date** | ** ** | ** ** | ** ** | **Facility limit(1)**          | ** ** |
|------------------------|------------|------------|------------|-------------------------------------|------------|
| ** **             | ** ** | ** ** | ** ** | **(Dollars in millions)** | ** ** |
| July 2004(2)      |       |       | $          | 441.5                               |       |   |
| August 2004(3)    |       |       | 17.7       |                                |       |
| September 2004(4) |       |       | 673.5      |                                |       |
| January 2006(5)   |       |       | 1,250.0    |                                |       |
| January 2014(6)   |       |       | 362.9      |                                |       |
| Total                  |       |       | $          | 2,745.6                             |       |   |

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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 statement of operations or consolidatedbalance sheet items included herein.

(2)          Represents the principalpayment date of a $441.5 million three-year term facility. In October 2003,we began accumulating payments to redeem $432.5 million of notes in July 2004,which did in fact occur on July 15, 2004. In October 2003, we beganto fund a principal funding account, the monthly deposits into which we wereable to draw against at defined advance rates pursuant to an underlyingstructurally subordinate (or “paired” series) facility. From the date of itsissuance through June 30, 2004, we have drawn $309.2 million from thisstructurally subordinate facility (the “Paired Series”). Also on July 15,2004, the remaining $9 million of the $441.5 million notes that were notsubject to the accumulation period requirement were also redeemed.

(3)          Represents the finalprincipal payment date for the $17.7 million of bonds, which were outstandingunder an amortizing 2003-1 Series issued out of the Fingerhut Trustprior to their redemption early during our third quarter of 2004.

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(4)          Represents the end ofthe revolving period for a $306.0 million conduit facility (the “September 2004Facility”) and the maturity date for the $367.5 million Paired Series discussedin (2) above.

(5)          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. We have the abilityto draw down amounts under the $1.25 billion revolving period facility, toallow us, at investor request or direction, to repay at any time any amountsoutstanding under the September 2004 Facility or the Paired Series.

(6)          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 retained interests that weacquired in 2002 and that CSG acquired in 2002—both of which were contemplatedin connection with our establishment of purchase prices for the respectiveacquisitions. In March of 2003, the credit card receivables underlying theOriginal Fingerhut Trust dropped below a minimum receivables balance threshold,thereby causing the series issued by the Original Fingerhut Trust to begin anearly amortization period. This early amortization event was made irrelevant,however, by the Fingerhut retained interests exchange during the third quarterof 2003, which resulted in $27.3 million of net proceeds to us during thisquarter as well as an increase in our ongoing servicing compensation to anadequate level; see Note 7, “Off Balance Sheet Arrangements,” to our condensedconsolidated financial statements for further details. Also, due to a reductionin the principal balance of the receivables within the CSG Trust (the retainedinterests in which are owned by our equity-method investee, CSG), a principalbalance trigger occurred, and hence early amortization began, during the secondquarter of 2003. The occurrence of this event caused CSG to cease its cashdistributions to us in June of 2003, although we expect that the CSG Trustwill continue to provide adequate compensation to us in cash for servicing theportfolio of receivables underlying the CSG Trust and will continue to makepayments to us in respect of our investment in CSG Trust bonds held.

Finally, while we havenever triggered 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’s Discussion and Analysis of Financial Condition and Results ofOperations” in our Annual Report on Form 10-K for the year endedDecember 31, 2003. There have been no new material commitments enteredinto since that report 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 Merrill Lynch that was issued out of theoriginated portfolio master trust and a new Embarcadero ten-year amortizingterm facility;

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·        Duringthe second quarter of 2004, we undertook $53.0 million of debt financingincurred in connection with the First American acquisition. This $53.0 millionwas financed under a $65 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 $23.0 million Class ATerm note; and (3) a $27.0 million Class B Term note.

·        Subsequent to the second quarter of 2004, weundertook $16.5 million of debt financing incurred in connection with anacquisition of another sub-prime lender. A seller note represents$5.0 million of this debt financing. The remaining $11.5 million wasfinanced under the same $65 million syndication of commitments underlyingour earlier First American acquisition, amended to increase the Class A Termnote by $5 million and to increase the Class B Term note by$4.5 million. As such, the $11.5 million of debt financing is representedby: (1) $2 million drawn against the $10.0 million revolvingcredit facility; (2) a $5 million Class A Term note; and(3) a $4.5 million Class B Term note.

**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.

**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 ourfinancial statements. In many instances, the application of GAAP requiresmanagement to make estimates or to apply subjective principles to particularfacts and circumstances. 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 financialstatements included in this report, we updated a portion of our sensitivityanalysis with respect to 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 Executive Officer,David G. Hanna, and one of our directors, Frank J. Hanna, III. Thesublease rate is the same as the rate that we pay on the prime lease. Totalrent for the six months ended June 30, 2004 for the sublease wasapproximately $0.1 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 $0.4million, respectively, during the six months ended June 30, 2004.

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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 inthis quarterly report concerning our operating, earnings and liquidityexpectations for 2004 and all other statements regarding our future performance(including those using words such as “believe,” “estimate,” “project,” “anticipate,or “predict”) are forward-looking statements. These forward-lookingstatements are not guarantees of future performance and are subject to variousassumptions, risks and other factors that could cause our actual results todiffer materially from those suggested by these forward-lookingstatements. These factors include, among others, the following risks and othersset forth under the caption “Risk Factors” in our Annual Report on Form 10-Kfor the year ended December 31, 2003:

(1)   The cashflows we receive from our retained interests drive our financial performance andare 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 delinquent. To the extent we have overestimated collectibility, in all likelihood we have over estimated ourfinancial performance.

(2)   We aresubstantially dependent upon securitizations and other borrowed funds in orderto fund the credit card receivables that we originate or purchase. All of oursecuritization facilities are of finite duration (and ultimately will need tobe extended or replaced) and contain conditions that must be fulfilled in orderfor funding to be available. In the event that advance rates for securitizationsare reduced, investors in securitizations require a greater rate of return, wefail to meet the requirements for continued funding or large-scalesecuritizations otherwise become unavailable to us, we may not be able tomaintain or grow our base of credit card receivables or it may be moreexpensive for us to do so. In addition, a portion of our credit cardreceivables cannot be financed through securitizations because of advance ratelimitations and must be financed through equity that either is the result ofprofitable operations or is raised from third parties or through funds borrowedelsewhere. The cost and availability of equity and borrowed funds is dependentupon our financial performance, the performance of our industry generally, andgeneral economic and market conditions, and recently has been both expensiveand 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, customerservice representatives, collectors and computer capacity to accommodateexpected growth. However, we are dependent on labor markets to supply qualified

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employees at appropriatecompensation when needed. To the extent that growth occurs unexpectedly, or thelabor markets are tight at that time, we may encounter difficulties inaccommodating that growth effectively.

(5)   We operatein a heavily regulated industry. Changes in bankruptcy, privacy or otherconsumer protection laws may adversely affect our ability to collect creditcard account and other loan and fee balances or otherwise adversely affect ourbusiness or expose us to litigation. Similarly, regulatory changes 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 produce the expected level of profitability from the acquired businessor assets. As a result, the impact of any acquisition on our future performancemay not be as favorable as expected 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 ANDQUALITATIVE DISCLOSURES ABOUT 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 securitizationtrust facilities reprices monthly; whereas, our receivables do not adjustunless we specifically adjust them with appropriate notification. This gaprisk, however, is relatively minor as we can reprice the substantial majorityof our receivables 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 corresponding liabilities.The impact of interest rate fluctuations on our securitized receivables isreflected in the valuation of our retained interests in credit card receivablessecuritized. This risk arises from continuous changes in our asset andliability mix, changes in market interest rates (including such changes thatare caused by fluctuations in prevailing interest rates, payment trends on ourinterest-earning assets and payment requirements on our 

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interest-bearingliabilities) and the general timing of all other cash flows. To manage ourdirect risk to interest rates, management actively monitors interest rates andthe interest sensitive components of our securitization structures. Managementseeks to minimize the impact of changes in interest rates on the fair value ofassets, net income and cash flows primarily by matching asset and liabilityrepricings. There can be no assurance, however, that we will be successful inour attempts to manage such risks.

At June 30, 2004, a substantial portion of ourmanaged credit card receivables, including those related to our investment inthe CSG Trust, and other interest-earning assets had variable ratepricing, with receivables carrying annual percentage rates at a spread over theprime rate (4.0% at June 30, 2004), subject to interest rate floors. At June 30,2004, approximately $370.9 million of our total managed receivables werepriced at their floor rate, and $297.7 million of these receivables wereclosed and therefore ineligible to be repriced. The remaining $73.2 millionof these receivables that were priced at their floor rate at June 30, 2004represented market interest rate risk to us to the extent that the floor rateis in excess of the rate that would exist for the receivables if no floor ratewere in effect. Assuming that we were not successful in repricing any of thesereceivables, a 10% increase in commercial paper rates or LIBOR would have anapproximate $0.5 million after-tax negative impact on our annual cashflows.

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

**ITEM 4.**          CONTROLS AND PROCEDURES

(a)   Disclosurecontrols and procedures.

As of the end ofthe period covered by this report, we carried out an evaluation, under thesupervision and with the participation of our Chief Executive Officer and ChiefFinancial Officer, of the effectiveness of disclosure controls and proceduresas defined in Rules 13a-15(e) and 15d-15(e) of theSecurities Exchange Act of 1934, as amended (the “Exchange Act”). Based on suchevaluation, our Chief Executive Officer and Chief Financial Officer haveconcluded that as of the end of the period covered by this report, ourdisclosure controls and procedures were effective at meeting their 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—OTHERINFORMATION**

**ITEM1.**          LEGAL PROCEEDINGS

None.

**ITEM2.**          CHANGESIN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASE OF EQUITY SECURITIES

The following table provides information with respectto purchases we made of our common stock during the first half of our 2004fiscal year: 
| ** **                            | ** ** | **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 |   |   |   | 4,127,100 |   |   |
| May 2004                         |       |                                                       | 722,100    |                                                   |       |                                                                                                                                                        | $          | 17.69                                                                                                                                                                                                           |       |   |   | 722,100 |   |   |   | 3,405,000 |   |   |
| June 2004                        |       |                                                       | 301,500    |                                                   |       |                                                                                                                                                        | $          | 17.92                                                                                                                                                                                                           |       |   |   | 301,500 |   |   |   | 3,103,500 |   |   |
| Total                                 |       |                                                       | 1,896,500  |                                                   |       |                                                                                                                                                        | $          | 17.76                                                                                                                                                                                                           |       |   |   | 1,896,500 |   |   |   | 3,103,500 |   |   |

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(1)          Under the repurchaseprogram authorized by the Board of Directors, the Company is authorized torepurchase up to 5 million shares of its outstanding common stock.

**ITEM3.**          DEFAULTSUPON SENIOR SECURITIES

None.

**ITEM4.**          SUBMISSIONOF MATTERS TO A VOTE OF SECURITY HOLDERS

We held our annualshareholders meeting on May 5, 2004. Proxies for the meeting weresolicited pursuant to Section 14(a) of the Securities Exchange Act of1934, and there was no solicitation in opposition to management’s solicitations.The matters submitted to a vote and the results thereof are set forth below.

(1)         Proposalto elect eight directors to hold office for a term of one year and until theirrespective successors are duly elected and qualified.
| **Nominee**                 | ** ** | ** ** | ** ** | **For**   | ** ** | **Withheld** | ** ** |
|-----------------------------|------------|------------|------------|-----------|------------|--------------|------------|
| David G. Hanna              |       | 42,627,602 |       | 1,129,997 |       |
| Richard W.  Gilbert         |       | 42,514,236 |       | 1,243,363 |       |
| Frank J.  Hanna, III   |       | 42,583,997 |       | 1,173,602 |       |
| Richard R.  House, Jr. |       | 42,513,770 |       | 1,243,829 |       |
| Gregory J. Corona           |       | 42,708,691 |       | 1,048,908 |       |
| Deal W. Hudson              |       | 42,780,008 |       | 977,591   |       |
| Mack F. Mattingly           |       | 43,311,784 |       | 445,815   |       |
| Thomas G. Rosencrants       |       | 43,130,757 |       | 626,842   |       |

 

(2)         The holders of the Series APreferred Stock submitted a unanimous written consent re-electing Nicholas B.Paumgarten as the Series A Director.

(3)         Proposalto approve CompuCredit’s 2003 Stock Option Plan.
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 40,264,549 |       | 1,502,998   |       | 19,424      |       |

 

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(4)         Proposal to approve CompuCredit’s 2004 Restricted StockPlan.
| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 40,236,251 |       | 1,537,936   |       | 12,783      |       |

 

**ITEM5.**          OTHERINFORMATION

None.

**ITEM6.**          EXHIBITSAND REPORTS ON FORM 8-K

(a)           Exhibits
| Exhibit  Number | ** ** | ** **                                                                                                                                          | ** ** | ** **     | **Description of Exhibit** | ** ** | ** ** | **Incorporated by  reference from  CompuCredit’s SEC  filings unless  otherwise indicated:** |
|-----------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------|------------|----------------|----------------------------|------------|------------|---------------------------------------------------------------------------------------------------|
| 10.16 (a)       |       | Asset Purchase Agreement I by and among Valued  Services Acquisitions Company LLC, certain sellers and guarantors, dated as  of April 9, 2004  |       | Filed herewith |
| 10.16 (b)       |       | Asset Purchase Agreement II by and among Valued  Services Acquisitions Company LLC, certain sellers and guarantors, dated as  of April 9, 2004 |       | Filed herewith |
| 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 |

 

(b)          Reportson Form 8-K

During the quarter ended June 30,2004, we filed four current reports on Form 8-K:
| **Filing Date** | ** ** | ** ** | ** ** | ** ** | **Items Reported** | ** ** | ** ** | ** ** | **Financial Statements** | ** ** |
|----------------------|------------|------------|------------|------------|--------------------|------------|------------|------------|--------------------------|------------|
| April 15, 2004  |       | 7  and 12  |       | None       |
| May 4, 2004     |       | 7  and 12  |       | None       |
| May 17, 2004    |       | 7  and 12  |       | None       |
| June 16, 2004   |       | 7 and 12   |       | None       |

 

 

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**SIGNATURES**

Pursuant to therequirements of the Securities Exchange Act of 1934, the registrant has dulycaused this report to be signed on its behalf by the undersigned thereunto dulyauthorized.
|                     | CompuCredit Corporation |
|---------------------|-------------------------|
| August 3, 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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