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SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

FORM 10-K

For the fiscal year ended December 31, 2002

of

COMPUCREDIT CORPORATION

a Georgia Corporation
IRS Employer Identification No. 58-2336689
SEC File Number 0-25751

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

        CompuCredit's Common Stock, no par value per share, is registered pursuant to Section 12(g) of the Act.

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

        CompuCredit believes that during the 2002 fiscal year its executive officers, directors and 10% beneficial owners subject to Section 16(a) of the Securities Exchanged Act of 1934 complied with all applicable filing requirements, except as set forth under the caption "Section 16(a) Beneficial Ownership Reporting Compliance" in CompuCredit's Proxy Statement for the 2003 Annual Meeting of Shareholders.

        CompuCredit is an accelerated filer (as defined in Exchange Act Rule 12b-2). The aggregate market value of the registrant's Common Stock (based upon the closing sales price quoted on the Nasdaq National Market) held by nonaffiliates as of June 28, 2002, was $98,634,134, for this purpose, directors, officers and 5% shareholders have been assumed to be affiliates.

        The aggregate market value of the registrant's Common Stock (based upon the closing sales price quoted on the Nasdaq National Market) held by nonaffiliates as of March 3, 2003, was $52,492,184, for this purpose, directors, officers and 5% shareholders have been assumed to be affiliates. As of March 3, 2003, 45,976,265 shares of CompuCredit's Common Stock were outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

        Portions of CompuCredit's Proxy Statement for the 2003 Annual Meeting of Shareholders are incorporated by reference into Part III.

Table of Contents

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Cautionary Notice Regarding Forward-Looking Statements

        This Report includes forward-looking statements, including, in particular, forward-looking statements under the headings "Item 1. Business" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." The words "expect," "anticipate," "intend," "plan," "believe," "seek," "estimate" and similar expressions are intended to identify such forward-looking statements; however, this report also contains other forward-looking statements that may not be so identified. Forward-looking statements are subject to a number of risks and uncertainties, many of which are beyond CompuCredit's control. Actual results may differ materially from those suggested by the forward-looking statements. Accordingly, there can be no assurance that such indicated results will be realized. Among the important factors that could cause actual results to differ materially from those indicated by such forward-looking statements are the factors set forth below in "Item 1. Business—Risk Factors." CompuCredit expressly disclaims any obligation to update any forward-looking statements in any manner except as may be required by its disclosure obligations in filings it makes with the Securities and Exchange Commission (the "SEC") under the Federal securities laws.

        In this Report, the words "Company," "CompuCredit," "we," "our," "ours," and "us" refer to CompuCredit and its subsidiaries and predecessors. CompuCredit owns the Aspire®, CompuCredit® and other trademarks in the United States.

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PART I

ITEM 1. BUSINESS

General

        CompuCredit is a credit card company that uses analytical techniques to serve consumers who we believe are underserved by traditional grantors of credit and to price for acquisition portfolios of receivables generally arising within this same consumer base. Some of these consumers have had delinquencies, a default or a bankruptcy in their credit histories, but have, in our view, demonstrated recovery. Others in our target market are establishing or expanding their credit. Our predictive credit models analyze credit bureau data to assist us in determining if someone has demonstrated an ability to repay us. The criteria are empirically derived from hundreds of credit bureau attributes. Examples include months since last delinquency, months since bankruptcy, recent performance on current trade lines (including recent payment trends) and total dollars of past due amounts. We have developed and enhanced our techniques by continually testing our products and operating practices and by continually analyzing credit bureau data and the results of our lending experience. Moreover, our continual testing of our products and operating practices has enabled us to begin to include origination activity for consumers at the lower end of traditional credit quality indices. We believe that our analytical approach allows us to:

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Better assess credit and bankruptcy risk, enabling us to identify consumers in the underserved market that are more creditworthy;

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Price our products to appropriately reflect the level of a consumer's credit risk and demand for credit;

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Increase the likelihood that a consumer will accept our offer of credit, which improves our response rates and reduces our marketing costs per account;

•

Continually monitor customer performance and actively manage accounts in order to refine our product offerings to reflect the changing risk of our customers; and

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Effectively evaluate the collectibility of delinquent accounts, which enables us to efficiently deploy our collection resources.

        We market unsecured general-purpose Visa and MasterCard credit cards, including our Aspire Visa credit card, Emerge Mastercard and Freedom card MasterCard, through direct mail and telemarketing and, to a limited extent, television and the internet. We market credit cards generally under an agreement with Columbus Bank and Trust Company ("CB&T"), a Georgia state chartered banking subsidiary of Synovus Financial Corporation. Under this agreement, CB&T, as the issuer, owns the credit card accounts. Similarly, with respect to the securitized retained interests we acquired from Federated Department Stores, Inc. ("Federated") in July 2002, the credit card accounts underlying that securitization are owned by Axsys National Bank. We also maintain a substantially less significant account ownership relationship with one other bank and may establish additional relationships in the future.

        On a daily basis, we purchase credit card receivables generated in the accounts originated by banks—primarily CB&T—under an agreement with us. We in turn securitize all of the receivables each day by selling the receivables to trusts or into multi-seller commercial paper conduits administered by national banking institutions. The receivables that are sold through securitizations are removed from our balance sheet for financial reporting purposes. When we sell the receivables, we receive cash proceeds and a retained interest in the receivables. The cash proceeds that we receive from investors when we sell receivables in our securitizations are less than the cash we use to initially purchase the credit card receivables. The retained interest we receive equals this difference and is a use of our cash. Our retained interests are subordinate to the other investors' interests. The receivables that are sold in our securitizations generate future cash flows as cardholders remit payments on their accounts. These payments are remitted to the securitization trusts and then disbursed in accordance with the

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securitization agreements. We receive all of the excess cash flows from the securitizations, which represent collections on the accounts in excess of the interest paid to the investors, servicing fees, credit losses and required amortization payments. We use the cash proceeds that we receive when we sell the receivables to help fund the new receivables generated in the accounts. We use cash flows generated from operations, as well as cash from the issuance of debt and equity, to fund our seller's interests in the receivables generated in the accounts.

        The timing and amount of cash flows received from the receivables that are sold to the securitizations are dependent upon the performance of our cardholders in the aggregate. Cardholders make purchases or receive cash advances on their credit card accounts, which increase their receivable balances. Each cardholder is assessed a combination of fees on their account based on the terms of their cardholder agreement and based on their payment performance on the account. Examples include annual fees, interest, late fees, overlimit fees and cash advance fees. We determine the level and combination of fees that we charge a cardholder using our "target marketing system" as more fully described later in this section. Cardholders are required to make monthly payments on their accounts, which decrease their receivable balance. Cardholders who fail to make their required payments become delinquent. Receivables that become more than 180 days delinquent and receivables of cardholders that file for bankruptcy or become deceased are charged off for accounting purposes.

        We develop criteria to determine who is issued a credit card and the terms of the cardholder agreement for the credit card. The terms of the agreement include the size of the credit line on the card, the fees that will be charged to the cardholder and the payment terms of the card. Although we securitize all of the credit card receivables, we are responsible for servicing the credit card receivables. We either perform the servicing ourselves or we outsource the servicing to other parties. We describe our material outsourced services in more detail in the "Outsourcing" discussion under the "Account and Portfolio Management" subheading later in this section. We also market to our cardholders fee-based products including card registration, memberships in preferred buying clubs, magazines, travel services and credit life, disability and unemployment insurance. Our fee-based products and services are described in more detail later in this section.

        Because we securitize the receivables, we own retained interests, which generate cash flow as the underlying receivables generate income. The receivables generate income when the total interest and fees charged to cardholders exceeds the total of the interest paid to the investors, the cost of servicing the receivables and charge offs. Because we no longer own the credit card receivables that have been sold, a large portion of our income is the cash that is generated by the receivables in the trusts and is recorded in our statement of operations as Income from Retained Interests. Further, because we securitize all of our credit card receivables, our financial statements reflect the amount of income from the securitization structures rather than many of the individual components of income that would otherwise be reflected in our statement of operations separately if we did not securitize the receivables. These components would include net interest income, servicing expenses paid to subservicers of our retained interest and charge offs. Servicing income, other credit card fees and interchange fees are part of the securitization structures and are disclosed separately on our statement of operations. Our net income is dependent on the performance of the underlying credit card receivables. Therefore, we provide selected credit card data including gross yield, net interest margin, servicing and charge offs in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations." This data reflects the underlying performance of the credit card receivables that have been sold under our securitization programs.

        We use securitization because we believe it is our most efficient source of financing. If our securitization facilities are not renewed, they begin to accumulate cash to repay investors. If we are unable to obtain additional sources of liquidity such as other securitization facilities that are structurally subordinate to the facilities accumulating cash, or if we are unable to issue additional debt or equity, we would begin to prohibit new purchases in some or all of our customers' credit card accounts and thus reduce our need for additional cash. Any prohibition of new purchases is likely to negatively

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impact our ability to collect existing balances because card users, in making payments, tend to favor the card companies that are willing to extend them additional credit. As of March 2003, our current securitizations facilities are scheduled to expire between April 2003 and July 2004. See "Item 1. Business—Off Balance Sheet Arrangements" and "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations-Off Balance Sheet Arrangements and Liquidity, Funding and Capital Resources."

        As of December 31, 2002, and including our 50% interest in our equity method investee, CSG, LLC ("CSG"), our managed receivables were comprised of $2.8 billion of credit card receivables outstanding in approximately 3.6 million credit card accounts, substantially all of which are considered "sub-prime" based on guidance issued by the agencies that regulate the banking industry. While we are not a bank and are not directly regulated by any financial regulator, we generally follow guidance that has been issued by those agencies that regulate credit card lending activity within the banking industry. We grow our business by adding accounts and by increasing the credit card receivables outstanding in the accounts. We add accounts through marketing campaigns or by purchasing portfolios. In either case, we use our same proprietary models and target marketing system to evaluate each individual customer using credit bureau and market information from a variety of sources.

        The balance of this section includes an overview of several aspects of our business as well as a discussion of recent business developments that we believe will assist you in understanding our financial performance. These sections include:

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Our Database System


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Target Marketing System


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Target Marketing in Portfolio Acquisitions


•

Direct Mail and Telemarketing Solicitation


•

Application Processing


•

Fee-Based Products and Services


•

Account and Portfolio Management


•

Collections and Delinquency Management


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Off Balance Sheet Arrangements


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Consumer and Debtor Protection Laws and Regulations


•

Competition


•

Business Developments


•

Employees


•

Trademarks


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Proprietary Rights and Licenses

        CompuCredit was formed in 1996 by David G. Hanna, Chairman and Chief Executive Officer, and Richard W. Gilbert, Vice Chairman and Chief Operating Officer, after completing almost two years of research and development in the area of consumer finance.

        CompuCredit is incorporated in Georgia. Its principal executive offices are located at 245 Perimeter Center Parkway, Suite 600, Atlanta, Georgia 30346, its telephone number at that address is (770) 206-6200, and its internet address is www.compucredit.com. CompuCredit makes available free of charge on its internet website its annual reports on Form 10-K, quarterly reports on Form10-Q, current reports on Form 8-K, and amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities and Exchange Act of 1934 as soon as reasonably practicable after it electronically files such material with, or furnishes it to, the SEC.

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Our Database System

        We have developed a proprietary database management system which supports the decision-making functions, including target marketing, solicitation, application processing, account management and collections activities. The database system is an information warehouse that maintains information regarding a customer throughout the customer's relationship with us. The system's purpose is to gather, store and analyze the data necessary to facilitate our target marketing and risk management decisions.

        Our database system captures combinations of customer information gathered either from prior owners of our acquired receivables or in the target marketing and solicitation phases of an originated customer relationship and additional data gathered throughout the remainder of our relationship with the customer, including customer behavior patterns. By combining this information, we have established an analytical database linking static historical data with actual customer performance. Our intranet interface allows management to access the database management system.

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        The use of a single database system for all phases of the customer relationship enables us to continuously refine target marketing and portfolio management decisions on the basis of continuous feedback. We believe that this capability has been critical in identifying underserved segments.

        We believe that the information that we collect in our database system, as well as the ability that we have to access, study and model this information, provides us with a more efficient and complete process to effectively price our products. We believe that we have priced our products such that over time the income we earn from the cardholders who are not charged off is sufficient to cover our marketing expense, our servicing expenses, our costs of funds and our losses from cardholders who fail to make their payments and are charged off.

Target Marketing System

        Since 1996, we have worked with national credit bureaus to develop proprietary risk evaluation systems using credit bureau data. Initially, we developed the systems using randomly selected historical data sets of payment history on all types of consumer loans. Since March 1997, these proprietary risk evaluation systems have included the specific behavior of our customers. Our systems enable us to segment customers into narrower ranges within each FICO score range. The FICO score, developed by Fair, Isaac & Co., Inc., is the most commonly used credit risk score in the consumer credit industry. The purpose of the FICO score is to rank-order consumers relative to their probability of non-payment on a consumer loan. We believe that sub-segmenting our market within FICO score ranges enables us to better evaluate credit risk and to price our products effectively.

        Within each FICO score range, we evaluate potential customers using credit and marketing segmentation methods derived from a variety of data sources. We place potential customers into product offering segments based upon combinations of factors reflecting our assessment of credit risk, bankruptcy risk, supply of revolving credit, demand for revolving credit, payment capacity and revenue potential, among other factors. These product-offering segments are chosen to meet the following primary target marketing strategies:

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Marketing to those underserved customer segments who have acceptable credit and bankruptcy risk and who have the highest income potential within those segments;



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Providing a variety of general-purpose credit cards offerings to satisfy the different financial needs of various segments of the underserved market; and



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Providing a variety of fee-based ancillary products and services to leverage our relationship with the underserved customer.

        We focus our marketing programs on those customer segments that appear to have high income potential when compared to other segments and demonstrate acceptable credit and bankruptcy risk. We seek to accomplish this by establishing, for each customer segment, the appropriate risk-based pricing level that will maintain an acceptable response rate to our direct mail and telemarketing campaigns. The key to our efforts is the use of our systems to evaluate credit risk more effectively than the use of FICO scores alone.

        Our customer solicitation strategy is to test several differently priced products against pools of potential customers with similar risk characteristics. The results of direct mail, telemarketing, internet and limited television campaigns are continuously monitored and analyzed using our proprietary database system.

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        Product offerings for a particular customer are determined by examining a number of factors in the customer's credit file based upon the criteria described above. We offer a variety of product offerings within our originated portfolio, varying by the amount of the credit line, the interest rate and the annual fee:

        The average credit line within our originated portfolio decreased during 2002 due primarily to our credit line management. We were able to increase the average APR within our originated portfolio during 2002 through our active account management. The reduction in our average annual fee within the originated portfolio in 2002 reflects our diminished marketing in 2002 in general, as well as our diminished marketing in 2002 of a higher fee product that we tested rather extensively in 2001. With our reduced marketing in 2002, we added a smaller number of new accounts compared to 2001, and new accounts typically bear higher annual fees than more mature accounts. We use our target marketing strategies to assess the type of product offering to be made to each potential customer. In our marketing campaigns, we continually test combinations of interest rates, fees, and credit limits directed at specific customer segments in order to evaluate response rates and further refine our pricing strategies.

Target Marketing in Portfolio Acquisitions

        Our principal source of account additions in 2002 was portfolio acquisition, and we anticipate that this will be our principal source of account growth during 2003 as well. In June 2002, we purchased a 50% interest in a $1.2 billion portfolio and in July 2002 we purchased a $1.0 billion portfolio. We did not acquire any portfolios in 1999, 2000, or 2001. We also generated new account additions in 2002 as well as in prior years through the use of our target marketing system to originate customers through direct mail, telemarketing internet, and limited television campaigns. Depending on relative competitive and liquidity environments for portfolio acquisition versus origination, we may use either or both of these methods of account growth to varying degrees. We believe that the current competitive and liquidity environments favor growth through acquisition, rather than origination, for our entire underserved customer base, except for a rather narrow category of sub-prime consumers at the lower end of the FICO scoring system. As such, we plan to grow during 2003 principally through acquisition, rather than origination, for all of those segments of our underserved market except for a segment of sub-prime consumers at the lower end of the FICO scoring system to which we plan to offer a largely fee-based card product during 2003.

        A key to our purchased portfolio strategy is our use of credit and marketing segmentation methods to select those customers to which our credit card will be issued and to use our proprietary account management systems to enhance the performance of the portfolio and to market fee-based ancillary products and services to the new customers. As with the account origination process, each customer is evaluated using credit and marketing segmentation methods derived from a variety of data sources. Customers are placed into product offering segments based upon combinations of factors reflecting their credit risk, bankruptcy risk, supply of revolving credit, demand for revolving credit, payment capacity and revenue potential, among other factors. Core to our growth and profitability strategy is our regular evaluation of potential portfolio acquisitions.

        Our target marketing system is intended to provide the same competitive advantage when evaluating portfolios as when originating customers through our marketing campaigns. We believe that our ability to evaluate credit risk within FICO score ranges enables us to more accurately determine the portfolio's overall credit risk than many portfolio sellers and many other companies that may bid on

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portfolio purchases. This risk evaluation expertise is designed to enable us to avoid portfolio purchases in which the final purchase premium or discount does not accurately reflect the credit risk of the portfolio. Conversely, we may bid more aggressively for portfolios in which the perceived credit risk, as reflected by the FICO scores, is significantly higher than our forecast of credit risk.

        Our target marketing system, which combines our proprietary risk evaluation system with sophisticated techniques for estimating supply of revolving credit, demand for revolving credit and bankruptcy risk, is designed to provide us with a competitive advantage in evaluating the potential profitability of target customers, whether originated by us or purchased. We continuously seek to refine our target marketing system through the development of new analytical segmentation tools and the evaluation of the system's effectiveness on previous marketing campaigns and portfolio acquisitions.

Direct Mail and Telemarketing Solicitation

        We use our target marketing strategies to identify potential customers and to assess the type of product offering to be made to each potential customer. In our direct mail or telemarketing campaigns, we have experimented with several combinations of rates, fees and credit limits directed at specific customer segments in order to evaluate response rates and further refine our pricing strategies within each customer segment and for all customer segments as a group. Third party print production facilities produce our direct mail campaigns, and we contract with third party telemarketing providers for our telemarketing campaigns. Responses to both direct mail and telemarketing campaigns are then forwarded to us for application processing. The response data received is also integrated into our database system for future analysis and response modeling. To date, we have done most of our marketing through direct mail and telemarketing channels; we have conducted only limited programs and tests through internet and television marketing channels.

Application Processing

        We contract with third party providers for the data entry of credit card applications resulting from our direct mail solicitations. We also use telemarketing vendors to input application data for customers who respond to solicitations via the telephone. Entered application data is electronically transmitted in batches to us for processing by our application processing system.

        We have developed proprietary methods of evaluating applications using an application processing system that automates the evaluation of customer application data. The system uses pre-defined criteria to review applicant-provided information and to compare the information to the applicant's original solicitation data and to data from an online credit file that is automatically requested for each applicant. The system performs a series of comparisons of identification information, such as name, address and social security number, from the three data sources to verify that customer-supplied information is complete and accurate. Potentially fraudulent applications are declined or held for further review.

        The applicant's online credit file that is obtained after the receipt of his or her application is further evaluated by the system to ensure that the applicant still meets the creditworthiness criteria applied during the original pre-screening process. The same credit criteria, proprietary custom models and credit bureau data items used during the initial pre-screen selection process are recalculated for each applicant. Applicants still meeting our creditworthiness criteria are designated as "approvals" and assigned a final credit offer.

        Statistics related to response rates and final offers and terms are captured daily for all processed applications and are transferred to our proprietary database for ongoing tracking and analysis.

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Fee-Based Products and Services

        We offer fee-based products and services to our customers, including memberships, card registration, insurance products and subscription services. Memberships include preferred buying clubs, travel services and credit monitoring programs. Insurance products feature supplemental, non-compulsory products, such as credit life, unemployment insurance and disability policies. Subscription services include recurring consumer products such as magazine subscriptions, telephone service, and internet service provider access. These fee-based products and services are offered throughout our relationship with a customer. Our three largest providers of fee-based products are American Consumer Alliance, which provides most membership products, and the Assurant Group and Union Fidelity Life Insurance Company, a subsidiary of General Electric, both of which provide supplemental insurance products to our customers. We provide a billing platform for these third party providers, and they pay us commissions based upon the services they provide to our customers and/or the quantity of products sold to our customers. These third party providers are fully responsible for the fulfillment of the products they offer. Our responsibility is to ensure that enrollment and cancellation of the products purchased by our customers are properly processed and billed to the customers at the rates established by the provider.

        The success of our fee-based business is a function of the number and variety of our fee-based product offerings, the marketing channels leveraged to sell fee-based products and the customers to whom we market these products. The profitability of our fee-based products and services is affected by new credit card account growth, the response rates to product solicitations, the volume and frequency of the marketing programs, the claim rates for products, the operating expenses associated with the programs and ultimately the commission rates that we receive from the product providers. Although a wide-range of our customers purchase fee-based products and services, fee-based product and service sales generally are higher to new customers and tend to diminish throughout our relationship with our cardholders. As a result, we anticipate that during periods of low new account growth, our profitability from fee-based products and services will either grow at a reduced rate or decline.

Account and Portfolio Management

        Ongoing Account Management.    Our management strategy is to manage account activity using behavioral scoring, credit file data and our proprietary risk evaluation systems. These strategies include the management of transaction authorizations, account renewals, over-limit accounts and credit line modifications. We use an adaptive control system to translate our strategies into the account management processes. The system enables us to develop and test multiple strategies simultaneously, which allows us to continually refine our account management activities. We have incorporated our proprietary risk scores into the control system, in addition to standard behavior scores used widely in the industry, in order to segment, evaluate and manage the accounts. We believe that by combining external credit file data along with historical and current customer activity, we are able to better predict the true risk associated with current and delinquent accounts.

        We monitor authorizations for all accounts. Customer credit availability is limited for transaction types that we believe present higher risks, such as foreign transactions and cash advances. We manage credit lines to reward underserved customers who are performing well and to mitigate losses from delinquent customer segments. Accounts exhibiting favorable credit characteristics are periodically reviewed for credit line increases, and strategies are in place to reduce credit lines for customers demonstrating indicators of increased credit or bankruptcy risk. Data relating to account performance is captured and loaded into our proprietary database for ongoing analysis. We adjust account management strategies as necessary, based on the results of such analyses. Additionally, we use industry-standard fraud detection software to manage the portfolio. We route accounts to manual work queues and suspend charging privileges if the transaction-based fraud models indicate a high probability of fraudulent card use.

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        Client Advisory Services.    We have an advisory program to assist our customers in understanding the prudent use of general-purpose credit cards. We use our proprietary systems to identify customers who are not delinquent but are exhibiting credit behavior likely to result in delinquency in the future. We assign these accounts to our credit advisors who actively review all account activity and, if necessary, contact the customers via letter or telephone. Actions taken by us may include customer-friendly advice concerning the prudent use of credit, temporary or permanent reduction in credit line availability, review of the customer's full credit report, debts and income and establishing repayment terms to assist the customer in avoiding becoming over-extended.

        Management believes this customer advisory strategy is not widely practiced in the credit card industry. Our advisory program allows us to enhance our relationship with our customers by providing valuable and meaningful assistance while simultaneously contributing to prudent risk management strategies to reduce bad debt losses.

        Outsourcing.    Many account functions including card embossing/mailing, cycle billing/payment processing and transaction processing/authorization are performed by third parties, including CB&T and Total Systems, both subsidiaries of Synovus Financial Corporation. In January 1997, we entered into an Affinity Card Agreement with CB&T that provides for the issuance of our credit cards and the performance of the outsourced functions noted above. During the third quarter of 2002, we extended this agreement from December 2003 to March 2006. Synovus Financial Corporation and its affiliates are our largest service providers and, during 2002, we paid them approximately $40.0 million.

        Data processing and development services, services related to the evaluation of customer application data and marketing services are outsourced to Visionary Systems, Inc. ("VSI"). Pursuant to agreements with VSI that will expire in July, 2004, we pay VSI on a monthly basis for those services. During 2002, we paid approximately $11.2 million to VSI and its subsidiaries for software development, account origination, and consulting services. Two of our officers have an indirect investment in VSI. For more information regarding this relationship with VSI, see "Item 13. Relationships and Related Transactions."

Collections and Delinquency Management

        Management considers its prior experience in operating professional collection agencies, coupled with our proprietary systems, to be a competitive advantage in minimizing delinquencies, bad debt losses and operating expenses associated with the collection process. We use our systems to develop proprietary collection strategies and techniques to be employed in our operations. We analyze the output from these systems to identify the collection activity that we believe is most likely to result in curing the delinquency cost-effectively, rather than treating all accounts the same based on the mere passage of time.

        As in all aspects of our risk management strategies, we routinely test alternative strategies and compare the results with existing collection strategies. Results are measured based on delinquency rates, expected losses and costs to collect. Existing strategies are then adjusted as suggested by these results. Management believes that maintaining the ongoing discipline of testing, measuring and adjusting collection strategies will result in minimized bad debt losses and operating expenses. We believe this approach differs from the approach taken by the vast majority of credit grantors that implement collection strategies based on commonly accepted peer group practices.

        For further explanation, see the discussion of "Collection Strategies" under the "Asset Quality" subheading in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Selected Credit Card Data."

        We have six collection facilities: two in metro Atlanta, Georgia totaling approximately 36,000 square feet; one in North Wilkesboro, North Carolina totaling approximately 32,000 square feet; two in

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the St. Cloud, Minnesota area totaling approximately 117,000 square feet; and one in Salt Lake City, Utah totaling approximately 21,000 square feet. In addition to our full-time staff, we outsource some of our collection activities. We continuously monitor the performance of our third party providers against that of our staff to determine which, in our view, is more effective.

Off Balance Sheet Arrangements

        We began marketing and servicing credit card accounts in February 1997. CB&T originates certain of its VISA and MasterCard revolving credit card accounts under an agreement with us. On a daily basis, CB&T sells us an interest in the receivables created that day in these accounts. Similarly, with respect to the securitized retained interests we acquired from Federated in July 2002, the credit card accounts underlying that securitization are owned by Axsys National Bank. Each day, upon our acquisition of that day's receivables, we, in turn, sell our interest in the receivables to trusts or to multi-seller commercial paper conduits administered by national banking institutions ("conduits"). Our sales meet the criteria of Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("Statement No. 140"). The receivables that are sold through securitization are removed from our balance sheet for financial reporting purposes.

        The trusts or the conduits purchase receivables from us by raising proceeds from investors. The proceeds raised are part of series of notes issued by the trust or the conduits. These notes are similar to bank loan agreements as they have a note balance, a maturity date, an interest rate and contain standard representations, warranties and performance covenants that are contained in most loan agreements. The proceeds from the investors are then remitted to us as part of the purchase price of the receivables. We had the following total commitments and outstanding notes in our securitizations for each year presented:

        As indicated in the table below, as of March 2003, our securitization facilities and their respective maturity dates were as follows:

(1)

Excludes securitization facilities related to receivables managed by CSG, because such receivables and their related securitization facilities relate to CSG as our 50%-owned equity method investee, and therefore are appropriately excluded from direct presentation in the statement of operations or balance sheet items included herein for CompuCredit. Filed as an

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exhibit to the CompuCredit 10-K are audited financial statements for CSG, which contain disclosures related to CSG's securitized receivables and their associated securitization facilities.

(2)

Represents the expected principal payment date of this amount. With respect to $627.4 million of this principal amount, beginning in December 2002, we began accumulating payments to redeem the $600 million of Class A notes in September 2003, and the $27.4 million of Class B-1 notes in October 2003. In December 2002, we funded a principal funding account with an allocated amount of collections, and based on the cash deposited in the principal funding account, we can draw up to $53.3 million per month from an underlying structurally subordinate facility. During December 2002, we drew $53.3 million from this facility. The gross amount available to be drawn from this facility is $527.5 million.

        We try to structure our securitization funding sources by having commitments in excess of our current growth plans so that we have investors who will purchase notes from the trusts, which in turn allows the trusts to purchase the receivables from us. We believe we have structured our securitization program to reduce our reliance on any one series of notes by generally staggering the maturity dates of the notes issued by the trusts. At appropriate times, including the current environment, we have slowed our growth when we have not had any assurance that when any series of notes matured, they would be renewed on terms that were favorable to us, or at all. This is more fully discussed in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Funding and Capital Resources."

        When we sell the receivables, we receive cash proceeds and a seller's interest in the receivables. Our seller's interests are subordinate to the other investors in the trusts or the investors in the commercial paper conduits. The receivables that are sold in our securitizations generate future cash flows as cardholders remit payments on their accounts. These payments are remitted to the securitization trusts and then disbursed in accordance with the securitization agreements. We receive all of the excess cash flows from the securitizations, which represent collections on the accounts in excess of the interest paid to the investors, servicing fees, credit losses and required amortization payments. We use the cash proceeds that we receive when we sell the receivables as well as the future cash flows we receive from the performance of the receivables to fund our operations and to purchase new receivables generated in the accounts.

        We include in our consolidated financial statements all of our wholly owned subsidiaries. However, in accordance with Statement No. 140, we do not consolidate any of the trusts, all of which are qualifying special purpose entities ("QSPEs"). We are required to service the receivables that have been sold. We also perform the administrative functions for the trusts including preparing daily and monthly reports relating to the receivables. We do this pursuant to an administration agreement between the trustees of the trusts and us. The investors do not have any recourse against us for the cardholders' failure to pay their credit card balances; however, most of our retained interests are subordinate to the investors' interests. Under our securitization agreements, our retained interests would absorb losses due to the cardholders' failure to pay before the investors would have to absorb these losses. In addition, if the receivables within the trusts were to perform poorly, our ability to securitize receivables in the future could be adversely impacted.

        We further detail our securitization program in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Off Balance Sheet Arrangements."

Consumer and Debtor Protection Laws and Regulations

        Our business is regulated directly and indirectly under various federal and state consumer protection and other laws, rules and regulations, including the federal Truth-In-Lending Act, the federal Equal Credit Opportunity Act, the federal Fair Credit Reporting Act, the federal Fair Debt Collection Practices Act, the federal Gramm-Leach-Biley Act and the federal Telemarketing and Consumer Fraud

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and Abuse Prevention Act. These statutes and their enabling regulations, among other things, impose disclosure requirements when a consumer credit loan is advertised, when the account is opened and when monthly billing statements are sent. In addition, various statutes limit the liability of credit cardholders for unauthorized use, prohibit discriminatory practices in extending credit and impose limitations on the types of charges that may be assessed and restrict the use of consumer credit reports and other account-related information.

        Changes in any of these laws or regulations, or in their interpretation or application, could significantly impact our operations. Various proposals which could affect our business have been introduced in Congress in recent years, including, among others, proposals relating to imposing a statutory cap on credit card interest rates, substantially revising the laws governing consumer bankruptcy, limiting the use of social security numbers and regulating the internet. There have also been proposals in state legislatures in recent years to restrict telemarketing and internet activities, impose statutory caps on consumer interest rates, limit the use of social security numbers and expand consumer protection laws. It is impossible to determine whether any of these proposals will become law and, if so, what impact they will have on us.

        In 1999, Congress enacted the Gramm-Leach-Bliley Act. Among other things, the Gramm-Leach-Bliley Act establishes new federal privacy requirements applicable to all financial institutions. Financial institutions are required to establish a privacy policy and to disclose the policy at the start of a customer relationship and once a year thereafter. Additionally, financial institutions must give a customer the opportunity to block the sharing of the customer's nonpublic personal information with unaffiliated third parties, except in limited circumstances. Further, financial institutions are barred from sharing credit card numbers, account numbers or access numbers of customers with third-party marketers. Federal law does not preempt state laws that provide a greater degree of privacy protection than federal law.

        Although we believe that the banks that originate credit card accounts under an agreement with us and we are currently in compliance with applicable statutes and regulations, there can be no assurance that these banks or we will be able to maintain such compliance. Failure to comply with applicable statutes or regulations could result in significant harm to our results of operations or financial condition. In addition, because of the consumer-oriented nature of the credit card industry, there is a risk that we or other industry participants may be named as defendants in litigation involving alleged violations of federal and state laws and regulations, including consumer protection laws, and consumer law torts, including fraud. The institution of any material litigation or a significant judgment against these banks or us or within the industry in connection with any such litigation could have a material adverse effect on our results of operations or financial condition.

        The National Bank Act of 1864 authorizes national banks to charge customers interest at the rates allowed by the laws of the state in which the bank is located, regardless of any inconsistent law of the state in which the bank's customers are located. A similar right is granted to state institutions in the Depository Institutions Deregulation and Monetary Control Act of 1980. In 1996, the United States Supreme Court held that late payment fees are "interest" and therefore can be "exported" under the National Bank Act, deferring to the Comptroller of the Currency's interpretation that interest includes late payment fees, insufficient funds fees, over-limit fees and other fees and charges associated with credit card accounts. This decision does not directly apply to state institutions, such as CB&T. Although several courts have upheld the ability of state institutions to export some types of fees, a number of lawsuits have been filed alleging that the laws of some states prohibit the imposition of late fees. If the courts do not follow existing precedents, the ability of state institutions to impose some fees could be adversely affected, which could result in significant harm to our results of operations or financial condition.

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        We do not currently own a bank. In October 1998, we applied for a bank charter, but we withdrew the application in June 2001, because we then believed that it would be difficult for us to charter a bank in the prevailing regulatory environment. More recently, we applied to acquire a bank in connection with our acquisition of a credit card portfolio, but we do not know whether that application ultimately will be successful. If we were able to charter or acquire a bank, we would expect that the bank would become the issuer of a portion of the credit cards we market. Any bank we charter would be subject to the various state and federal laws and regulations generally applicable to such institutions, including laws and regulations like those referenced above.

Competition

        We face competition, the intensity of which varies depending upon economic and liquidity cycles, from other consumer lenders. Our credit card business competes with national, regional and local bank card issuers, and with other general-purpose credit card issuers, including American Express®, Discover® and other issuers of Visa® and MasterCard®. We also compete with retail credit card issuers, such as department stores and oil companies, and other providers of unsecured credit. Large credit card issuers, including but not limited to Capital One, Providian and Metris, may compete with us for customers by offering lower interest rates and fees. Many of these competitors are substantially larger than we are and have greater financial resources. Customers choose credit card issuers largely on the basis of price, including interest rates and fees, credit limit and other product features. For this reason, customer loyalty is often limited. We may lose entire accounts, or may lose account balances, to competing credit card issuers.

        Our competitors are continually introducing new strategies to attract customers and increase their market share. The most heavily used techniques are advertising, target marketing, balance transfers, price competition, incentive programs and using the name of a sports team or a professional association on their credit cards, known as "co-branding." In response to competition, some issuers of credit cards have lowered interest rates and offered incentives to retain existing customers and attract new ones. These competitive practices, as well as competition that may develop in the future, could harm our ability to obtain customers and maintain profitability.

        The Gramm-Leach-Bliley Act repeals the Glass-Steagall Act of 1933, which separated commercial and investment banking, and eliminates the Bank Holding Company Act's prohibition on insurance underwriting activities by bank holding companies. As a result, the Gramm-Leach-Bliley Act permits the affiliation of commercial banks, insurance companies and securities firms. This change may increase the ability of insurance companies and securities firms to acquire, or otherwise affiliate with, commercial banks and likely will increase the number of competitors in the banking industry and the level of competition for banking products, including credit cards.

Business Developments

        We began marketing credit cards issued by CB&T in 1997. During our first four years, we saw robust growth rates and surpassed two million cardholders. We believe that in the latter part of 2000 the national economy began to slow and that traditional credit card companies began to increase their marketing to our underserved target market. We believe the economy further slid into a recession in the first quarter of 2001 and that consumer spending in general slowed. In response to the decrease in the average usage of our cards, our perception of the competitive landscape, and external events such as those of September 11, 2001, the receivership of NextCard and the effect of Providian's performance on our industry, we decided to decrease our marketing for new credit card accounts during late 2001.

        In 2002, the credit card industry faced even more challenges. Several competitors encountered regulatory problems. An economy that we hoped would improve during 2002 continued to worsen. Finally, an unease in the consumer spending habits was made even worse with the growing potential for

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a war in Iraq. Throughout 2002, we continued with our disciplined approach of slowing originated portfolio growth. As a result, new accounts decreased from 1.3 million accounts in 2000, to 670,000 accounts in 2001, to 545,000 accounts in 2002. While targeting a lower number of new accounts decreases our marketing expense, it also reduces the growth of our average managed receivables.

        The very factors described above that have caused problems for other credit card issuers and us have, at the same time, provided opportunities for us. We purchased interests in two large portfolios of receivables during 2002. These purchases were not our first experience with buying portfolios. In 1998, CompuCredit successfully purchased two portfolios as well. We intend to grow by purchasing portfolios when the environment is favorable for that opportunity, such as it is now, and to grow organically when we see a favorable environment for organic growth.

        Although we securitize all of our credit card receivables, our financial performance is a function of the performance of the aggregate amount of credit card receivables that are outstanding. This aggregate amount is a function of many factors including purchase rates, payment rates, interest rates, charge off rates, seasonality, general economic conditions, competition from other credit card companies and other sources of consumer financing, access to funding including access to securitizations and the success of our marketing efforts, including our fee-based products. We cannot precisely estimate the future performance of these individual factors or the impact of the factors working in combination, although they directly impact the size or growth of the credit card receivables and our future performance. We continually study and monitor these factors to determine the day-to-day decisions we make in running our business. Given the uncertainty in these factors, we have slowed our organic growth and are waiting to increase our growth until we believe we have more clarity as to these factors and their impact on the performance of credit card receivables.

        Due to the current liquidity environment in which we are experiencing declining advance rates (i.e., the portion of the securitizations that are funded with funds from investors), we intend to shrink our traditional originated under-served business for the remainder of the 2003 year so that we can free up capital to deploy in more attractive areas. It is our belief that as the economy turns, we may once again see attractive advance rates that make it feasible to grow this portion of our business again. However, at current advance rate levels, we believe our capital is currently best deployed acquiring portfolios.

        We continue, however, to explore a wide range of options for liquidity to prepare us for growth, as well as, for adverse changes in the securitization marketplace. These options include revolving lines of credit, selling a subordinate interest in one or more of our securitizations and the issuance of debt or equity.

        We discuss the performance of the credit card receivables underlying our securitizations in more detail in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Selected Credit Card Data."

        As we wait to see how the economy and consumers will respond to the challenges of 2003, we will concentrate on objectives that are more in our control such as reducing our operating expenses, evaluating portfolios to purchase and providing excellent customer service to our consumers. We also plan to increase our marketing focus in 2003 on a rather narrow category of sub-prime consumers at the lower end of the FICO scoring system to which we plan to offer a largely fee-based card product during 2003. Based on the testing of this sub-prime market sector that we have performed over the past two years, we believe that this category offers us superior returns on equity that are more within our control. We have experienced strong returns on equity within this category, even on an unleveraged basis; as such, we are better able to control our desired returns on equity within this category without being as constrained by the unfavorable liquidity terms and advance rates that we are seeing in the asset backed securities markets.

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Employees

        As of December 31, 2002, we had approximately 1,650 employees, substantially all of whom are located in Georgia, North Carolina, Minnesota and Utah. No collective bargaining agreement exists for any of our employees. We consider our relations with our employees to be good.

Trademarks

        CompuCredit, Aspire, Aspire A Mas, Aspire Diamond, Aspire Rapid Miles, For Everything You Aspire To Be, Get On Get Yours, It's Your Credit Take Charge of It, One Screen, Para Todo Lo Que Aspira A' Ser and Transforming Information into Value are registered trademarks of CompuCredit. AspireCard, Aspire Ahora, Aspire2It, Aspire Bank, Aspire Financial Management, Aspire Life, and In Charge are common law trademarks of CompuCredit. We consider these trademarks to be readily identifiable with, and valuable to, our business. This Annual Report on Form 10-K also contains trade names and trademarks of other companies that are the property of their respective owners.

Proprietary Rights and Licenses

        We regard our database management system and our customer selection and risk evaluation criteria as confidential and proprietary. We initially developed our pre-screen customer selection criteria under a contract with a national credit bureau; however, we own all intellectual property rights in the resulting model. Our database management system was developed by Visionary Systems, Inc. and VSx Corporation under a contract pursuant to which we held an exclusive, perpetual license to use, copy, execute, display and reproduce the software constituting our database management system. In May 2001, we purchased from VSx Corporation the components of the data management system known as the "Brain," and we entered into a license agreement with VSI, which continues to own one component of the software known as the "Switch." Pursuant to our agreement with VSI, we were granted a nonexclusive license to use, copy, execute or display for internal use the Switch, a system that automates the evaluation of customer application data and, among other things, provides us with real-time access to credit information concerning our target market and our customers. In addition, VSI continues to provide substantially all of the computer software design and implementation services we require in the continuing refinement and use of our computer software systems. VSI has granted to us a right of first refusal during the term of the agreement in the event the developer wishes to sell or otherwise transfer any of its ownership rights in the Switch. During 2002, we paid approximately $11.2 million to VSI and its subsidiaries for software development, account origination, and consulting services. Two of our officers have an indirect investment in VSI. For more information regarding our relationship with VSI, see "Item 13. Relationships and Related Transactions."

RISK FACTORS

        In addition to other factors and matters discussed elsewhere in this Annual Report on Form 10-K, set forth below are factors that we believe may affect our performance or cause actual results to differ materially from forward-looking statements that we have made or may make in the future. The risks and uncertainties described below are not the only risks we face. These risks are the ones we consider to be the most significant at this time. We might be wrong. There may be risks that you in particular view differently than we do, and there are other risks and uncertainties that are not presently known to us or that we currently consider less significant, but that may in fact impair our business operations. If any of the following risks actually occur, our business, results of operations and financial condition could be seriously harmed and the trading price of our common stock could decline.

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The cash flows we receive from our retained interests drive our financial performance and are dependent upon the cash flows received on the credit card receivables underlying our securitizations.

        The collectibility of the receivables underlying our securitizations is a function of many factors including the criteria used to select who is issued a credit card, the pricing of the credit products, the length of the relationship with each cardholder, general economic conditions, the rate at which cardholders repay their accounts, and the rate at which cardholders charge off or become delinquent. To the extent we have over estimated collectibility, in all likelihood we have over estimated our financial performance. Some of these concerns are discussed more fully below.

        We may not successfully evaluate the creditworthiness of our customers and may not price our credit products so as to remain profitable.    The creditworthiness of our target market is generally considered "sub-prime," based on guidance issued by the agencies that regulate the banking industry. Thus, our customers generally have a higher risk of nonpayment, higher frequencies of delinquencies and higher credit losses than consumers who are served by more traditional providers of consumer credit. Some of the consumers included in our target market are consumers who are dependent upon finance companies, consumers with only retail store credit cards and/or lacking general-purpose credit cards, consumers who are establishing or expanding their credit and consumers who may have had a delinquency, a default or, in some instances, a bankruptcy in their credit histories, but have, in our view, demonstrated recovery. We price our credit products taking into account the risk level of our target customers. If our estimates are incorrect, customer default rates will be higher, we will receive less cash from our securitizations, which will result in a decrease in the value of our retained interests (which are based on expected future cash flows), and we will experience reduced levels of net income.

        The lack of seasoning of our credit card portfolio makes it difficult to predict the performance of our business.     A portfolio of older accounts generally behaves more predictably than a newly originated portfolio. In general, as the average age of an originated credit card receivables portfolio increases, delinquency and charge off rates can be expected to increase and then stabilize. Any increases in delinquencies and charge offs beyond our expectations will decrease the value of our retained interests in securitization transactions resulting in a decrease in our net income. This also may reduce the funds available for our future growth and may hinder our ability to complete other securitizations in the future. Our delinquency rates (the percentage of our accounts more than 60 days past due) have increased over the last several years from 6.4% at December 31, 1999, to 9.5% at December 31, 2000, to 11.1% at December 31, 2001 and to 13.9% at December 31, 2002. The majority of our charge offs occur when the account becomes contractually 180 days delinquent. Thus, increased charge offs would generally follow increased delinquencies, absent significant changes in collection activities. During the fourth quarter of 2000 and throughout 2001 and 2002 a greater than expected charge off ratio adversely impacted our business.

        An economic slowdown could increase credit losses and/or decrease our growth.    Because our business is directly related to consumer spending, any period of economic slowdown or recession could make it more difficult for us to add or retain accounts or account balances. In addition, during periods of economic slowdown or recession, we expect to experience an increase in rates of delinquencies and the frequency and severity of credit losses. Our actual rates of delinquencies and frequency and severity of credit losses may be higher under adverse economic conditions than those experienced in the consumer finance industry generally because of our focus on the underserved sub-prime market.

        Because a significant portion of our reported income is based on our management's estimates of the performance of securitized receivables, differences between actual and expected performance of the receivables may cause fluctuations in net income.    Income from the sale of receivables in securitization transactions and income from retained interests in credit card receivables securitized have constituted, and are likely to continue to constitute, a significant portion of our income. Portions of this income are based primarily on management's estimates of cash flows we expect to receive from the interests that we

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retain when we securitize receivables. Differences between actual and expected performance of the receivables may cause fluctuations in our net income. The expected cash flows are based on management's estimates of interest rates, default rates, payment rates, new purchases, costs of funds paid to investors in the securitizations, servicing costs, discount rates and required amortization payments. These estimates are based on a variety of factors, many of which are not within our control. As a result, these estimates will differ from actual performance. During the fourth quarter of 2001, we increased the discount rate used to value our retained interests from 14.2% used at September 30, 2001, to 34.9%. This resulted in a substantial loss. We increased our discount rate primarily to reflect the higher rate of return required by investors. We sold retained interests in two transactions during the fourth quarter of 2001. The first was during November, and the internal rate of return required by the purchaser was approximately 22%. The second transaction was in December, and the internal rate of return required by the purchaser was approximately 35%. We attribute the increase to a general economic slowdown, the repercussions from the events of September 11, 2001, uncertainty in the liquidity markets in general, concerns surrounding the poor performance of our competitors, our lack of negotiating leverage (due to our need for funds), and our failure to meet analysts' expectations given the slowdown in the growth of our managed receivables. Please see "Year Ended December 31, 2001, Compared to Year Ended December 31, 2000" in "Results of Operations" of our MD&A section of our Annual Report on Form 10-K for the year ended December 31, 2001. During the second quarter of 2002, the Company hired an independent financial advisory firm to assist in the Company's evaluation of its estimate of the residual cash flow discount rate. The independent financial advisory firm advised that the appropriate residual cash flow discount rate was 22.5%. The Company adopted that recommendation and revised the estimate for the residual cash flow discount rate to 22.5%, from 34.9% at March 31, 2002. This resulted in an increase in the value of our retained interests of approximately $22.8 million and a corresponding increase in pretax income of approximately $22.8 million. We attribute the change to a lessening of market place concern regarding the performance of other credit card issuers and our improved liquidity. This change emphasizes, however, that the discount rate may be volatile.

        Increases in expected losses and delinquencies may prevent us from continuing to securitize receivables in the future on similar terms.    Greater than expected delinquencies and losses could also impact our ability to complete other securitization transactions on acceptable terms or at all, thereby decreasing our liquidity and forcing us to either decrease or stop our growth or rely on alternative, and potentially more expensive funding sources to the extent available.

        Increased utilization of existing credit lines by cardholders would require us to establish additional securitization facilities or curtail credit lines.    Our existing commitments to extend credit to cardholders exceeded our commitments for securitizations by over 1.6 to 1 at December 31, 2002. If all of our cardholders were to use their entire lines of credit at the same time, we would not have sufficient capacity to fund card use. However, in that event, we could either reduce our cardholders' available credit lines or establish additional securitization facilities. This would subject us to several of the other risks that we have described in this section.

        Increases in expected losses and delinquencies may cause us to incur losses on our retained interests.    If the actual amounts of delinquencies and losses that occur in our securitized receivables are greater than our expectations, the value of our retained interests in the securitization transactions will be decreased. Since we derive a portion of our income from these retained interests, higher than expected rates of delinquency and loss could cause our net income to be lower than expected. In addition, under the terms of our securitizations agreements, levels of loss and delinquency could result in us being required to repay our securitizations investors earlier than expected, reducing funds available to us for future growth.

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        Our portfolio of credit card receivables is not diversified and originates from cardholders whose creditworthiness is considered sub-prime.    We obtain the receivables that we securitize in one of two ways—we either originate receivables (through our relationship with credit card issuers) or purchase receivables from other credit card issuers. In either case, substantially all of our securitized receivables originate from sub-prime borrowers. Our reliance on sub-prime receivables has in the past (and may in the future) negatively impacted our performance. For example, in the fourth quarter of 2001, we suffered a substantial loss after we increased our discount rate to reflect the higher rate of return required by investors in sub-prime markets. Because our receivables portfolios are all of substantially the same character (i.e., sub-prime), the increased discount rate resulted in a decrease in the value of our various receivables portfolios. These losses may have been mitigated if our portfolios consisted of higher-grade receivables in addition to our sub-prime receivables. Since our portfolios are undiversified, negative market forces have the potential to cause a widespread adverse impact, and we have no immediate plans to issue or acquire receivables of a higher quality.

        Seasonal consumer spending may result in fluctuations in our net income.    Our quarterly income may substantially fluctuate as a result of seasonal consumer spending. In particular, our customers may charge more and carry higher balances during the year-end holiday season and before the beginning of the school year, resulting in corresponding increases in managed receivables and receivables securitized during those periods.

        Increases in interest rates may increase our cost of funds and may reduce the payment performance of our customers.    Increases in interest rates may increase our cost of funds, which could significantly affect our results of operations and financial condition. Our credit card accounts have variable interest rates. Significant increases in these variable interest rates may reduce the payment performance of our customers.

        Due to the lack of historical experience with internet customers, we may not be able to successfully target these customers or evaluate their creditworthiness.    There is less historical experience with respect to the credit risk and performance of credit card customers acquired over the internet. As part of our growth strategy, we may expand our origination of credit card accounts over the internet; however, we may not be able to successfully target and evaluate the creditworthiness of these potential customers. Therefore, we may encounter difficulties managing the expected delinquencies and losses and appropriately pricing our products.

We are substantially dependent upon securitizations and other borrowed funds in order to fund the credit card receivables that we originate or purchase.

        All of our securitization facilities are of finite duration (and ultimately will need to be extended or replaced) and contain conditions that must be fulfilled in order for funding to be available. In the event that advance rates for securitizations are reduced, investors in securitizations require a greater rate of return, we fail to meet the requirements for continued funding, or securitizations otherwise become unavailable to us, we may not be able to maintain or grow our base of credit card receivables or it may be more expensive for us to do so. In addition, because of advance rate limitations, we maintain retained interests in our securitizations that must be funded through profitable operations, equity raised from third parties, or funds borrowed elsewhere. The cost and availability of equity and borrowed funds is dependent upon our financial performance, the performance of our industry generally, and general economic and market conditions, and recently has been both expensive and difficult to obtain. Some of these concerns are discussed more fully below.

        Our growth is dependent on our ability to add new securitization facilities.    We finance all of our receivables through securitizations. To the extent we grow our receivables significantly, our cash requirements are likely to exceed the amount of cash we generate from operations, thus requiring us to add new securitization facilities. Our historic and projected performance impact whether, on what terms

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and at what cost we can sell interests in our securitizations. If additional securitization facilities are not available on terms we consider acceptable, or if existing securitization facilities are not renewed on terms as favorable as we have now or are not renewed at all, we may not be able to grow. One of the reasons that we have slowed our growth plans is because a significant portion of our securitizations have or will mature in the near future, and we do not have any assurances that we will be able to obtain new securitizations on satisfactory terms.

        As our securitization facilities mature, they will be required to accumulate cash that therefore will not be available for operations.    Repayment for our securitization facilities begins as early as one year prior to their maturity dates. Once repayment begins and until the facility is paid, payments from customers on credit card receivables are accumulated to repay the investors and are no longer reinvested in new credit card receivables. At that time, our funding requirements for new credit card receivables increase accordingly. If our securitization facilities begin to accumulate cash and we also are unable to obtain additional sources of liquidity, such as debt, equity or new securitization facilities that are structurally subordinate to the facilities accumulating cash, we may be forced to prohibit new purchases in some or all of our credit card accounts in order to significantly reduce our need for any additional cash. When a facility matures, the underlying trust continues to own the credit card receivables and effectively the maturing facility maintains its priority in its right to receive payments from collections on the underlying credit card receivables until it is repaid in full. As a result, new purchases need to be funded using debt, equity or a replacement facility subordinate to the maturiting facility's interest in the underlying credit card receivables. Although this subordination historically has not made it more difficult to obtain replacement facilities, it may do so in the future.

        We may be unable to obtain capital from third parties needed to fund our existing securitizations or may be forced to rely on more expensive funding sources.    We need equity or debt capital to fund our retained interests in our securitizations. Investors should be aware of our dependence on third parties for funding and our exposure to increases in costs for that funding. External factors, including the general economy, impact our ability to obtain funds. In late 2001, we needed additional liquidity to fund our operations as well as the growth in the retained interests in our securitizations, and we had a difficult time obtaining those needed funds. We were not able to issue common stock at a price we deemed acceptable due to a variety of factors, including a general economic slowdown, the repercussions from the events of September 11, 2001, uncertainty in the liquidity markets in general, concerns surrounding the poor performance of our competitors and our failure to meet analysts' expectations given the slowdown in the growth of our managed receivables. At the same time, due to many of these factors, we were able to sell our retained interests in our securitization only at a dramatically increased rate of return to the investors. During the fourth quarter of 2001, we utilized our revolving credit facility to fund the portion of our receivables growth that could not be funded through securitization. To date, we have not replaced our revolving credit facility, which expired in January 2002. If in the future we need to replace that facility or otherwise raise cash by issuing additional debt or equity or by selling a portion of our retained interests, there is no certainty that we will be able to do so or that we will be able to do so on favorable terms. Our ability to replace our credit facility or otherwise raise cash will depend on factors such as our performance and creditworthiness, the performance of our industry, the performance of issuers of other non-credit card based asset backed securities, and the general economy.

        The timing and size of securitizations may cause fluctuations in quarterly income.    Substantial fluctuations in the timing or the volume of receivables securitized will cause fluctuations in our quarterly income. Factors that affect the timing or volume of securitizations include the growth in our receivables, market conditions and the approval by all parties of the terms of the securitization.

        The performance of our competitors may impact the costs of our securitization.    Investors in our securitizations compare us to Capital One, Providian, Metris, and other sub-prime credit card issuers and, to a degree, our performance is tied to their performance. Generally speaking, our securitizations'

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investors also invest in our competitors' securitizations. These investors broadly invest in the credit card industry, and when they evaluate their investments, they typically do so on the basis of overall industry performance. Thus, when our competitors perform poorly, we typically experience negative investor sentiment, and the investors in our securitizations require greater returns, particularly with respect to subordinated interests. In the fourth quarter of 2001, for instance, investors demanded unprecedented returns. In the event that investors unexpectedly require higher returns and we sell our retained interests at that time, the total return to the buyer may be greater than the discount rate we are using to value the retained interests in our financial statements. This would result in a loss for us at the time of the sale, as the total proceeds from the sale would be less than the carrying amount of the retained interests in our financial statements. We would also potentially increase the discount rate used to value all of our other retained interests which would also result in further losses. Conversely, if we sold our retained interests for a total return to the investor that was less than our current discount rate, we would record income from the sale, and we would potentially decrease the discount rate used to value all of our other retained interests which would result in additional income.

        We may be required to pay to investors in our securitizations an amount equal to the amount of securitized receivables if representations and warranties made to us by sellers of the receivables are inaccurate.    The representations and warranties made to us by sellers of receivables we purchased may be inaccurate. We rely on these representations and warranties when we securitize these purchased receivables. Our securitization transactions involve us making representations and warranties to investors and, generally speaking, if there is a breach of our representations and warranties, then under the terms of the applicable investment agreement, we could be required to pay the investors a sum equal to the amount of the securitized receivables. Thus, our reliance on a representation or warranty of a receivables seller, which proves to be false and causes a breach of one of our representations or warranties, could subject us to a potentially costly liability.

Our financial performance is, in part, a function of the aggregate amount of credit card receivables that are outstanding.

        This aggregate amount is a function of many factors including purchase rates, payment rates, interest rates, seasonality, general economic conditions, competition from other credit card issuers and other sources of consumer financing, access to funding as noted above, and the success of our marketing efforts. To the extent that we have over estimated the size or growth of our credit card receivables, in all likelihood we have over estimated our future financial performance.

        Intense competition for credit card customers may cause us to lose accounts or account balances to competitors.    We may lose entire accounts, or may lose account balances, to competing card issuers that offer lower interest rates and fees or other more attractive terms or features. We believe that customers choose credit card issuers largely on the basis of interest rates, fees, credit limits and other product features. For this reason, customer loyalty is often limited. Our future growth depends largely upon the success of our marketing programs and strategies. Our credit card business competes with national, regional and local bank card issuers and with other general-purpose credit card issuers, including American Express®, Discover® and issuers of Visa® and MasterCard® credit cards. Some of these competitors may already use or may begin using many of the programs and strategies that we have used to attract new accounts. In addition, many of our competitors are substantially larger than we are and have greater financial resources. Further, the Gramm-Leach-Bliley Act of 1999, which permits the affiliation of commercial banks, insurance companies and securities firms, may increase the level of competition in the financial services market, including the credit card business.

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        We may be unable to sustain and manage our growth.    We may experience fluctuations in net income or sustain net losses if we are not able to sustain or effectively manage our growth. Growth is a product of a combination of factors, many of which are not in our control. Factors include:

•

growth in both existing and new account balances;



•

the degree to which we lose accounts and account balances to competing credit card issuers;



•

levels of delinquencies and credit losses;



•

the availability of funding, including securitizations, on favorable terms;



•

our ability to sell retained interests at favorable terms;



•

our ability to attract new customers through originations or portfolio purchases;



•

the level of costs of soliciting new customers;



•

the level of response to our solicitations;



•

our ability to employ and train new personnel;



•

our ability to maintain adequate management systems, collection procedures, internal controls and automated systems; and



•

general economic and other factors beyond our control.

Currently, we are not aggressively pursuing growth in our originated portfolio because of a number of factors, including securitization costs and terms and general economic conditions.

        Our decisions regarding marketing can have a significant impact on our growth.    We can increase or decrease, as the case may be, the size of our outstanding receivables balances by increasing or decreasing our marketing efforts. Marketing is expensive, and during periods when we have less liquidity than we like or when prospects for continued liquidity in the future do not look promising, we may decide to limit our marketing and thereby our growth. A decline in size of our receivables would reduce our net income in future periods. We have decreased our marketing plans for 2003 as compared to 2002.

        Our operating expenses and our ability to effectively service our credit card accounts is dependent on our ability to estimate the future size and general growth rate of the portfolio.    One of our servicing agreements causes us to make additional payments if we overestimate the size or growth of our business. These additional payments compensate the servicer for increased staffing expenses it incurs in anticipation of our growth. If we grow more slowly than anticipated, we may still have higher servicing expenses than we actually need, thus reducing our net income.

        We operate in a heavily regulated industry.    Changes in bankruptcy, privacy or other consumer protection laws may adversely affect our ability to collect credit card account balances or otherwise adversely affect our business or expose us to litigation. Similarly, regulatory changes could adversely affect our ability to market credit cards and other products and services to our customers. The accounting rules that govern our business are exceedingly complex, difficult to apply, and in a state of flux. As a result, how we value our credit card receivables and otherwise account for our business (including whether we consolidate our securitizations) is subject to change depending upon the interpretation of, and changes in, those rules. Some of these issues are discussed more fully below.

        Consumer protection laws may make collection of credit card account balances more difficult or may expose us to the risk of litigation.    Any failure to comply with legal requirements by CB&T, as the primary issuer of our credit cards, or by us or CB&T, as the servicer of our credit card accounts, could significantly impair our ability to collect the full amount of the credit card account balances. Further,

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any such failure to comply with the law could expose us or CB&T to the risk of litigation under state and federal consumer protection statutes, rules and regulations. Our operations and the operations of CB&T are regulated by federal, state and local government authorities and are subject to various laws, rules and regulations, as well as judicial and administrative decisions imposing requirements and restrictions on our business. Due to the consumer-oriented nature of the credit industry, there is a risk that we or other industry participants may be named as defendants in litigation involving alleged violations of federal and state laws and regulations, including consumer protection laws. There is always a risk that new legislation or regulations could place additional requirements and restrictions on our business. However, this risk is amplified since our target market consists almost entirely of "sub-prime" borrowers, and lawmakers and regulators have recently shown an interest in increasing the regulation of this segment in order to protect the customers of and investors in sub-prime lenders. The institution of any litigation of this nature or any judgment against us or any other industry participant in any litigation of this nature could adversely affect our business and financial condition in a variety of ways. For more information regarding consumer and debtor protection laws applicable to CB&T and us, see "Item 1. Business—Consumer and Debtor Protection Laws and Regulations."

        Changes in law may increase our credit losses and administrative expenses, restrict the amount of interest and other charges imposed on the credit card accounts or limit our ability to make changes to existing accounts.    Numerous legislative and regulatory proposals are advanced each year which, if adopted, could harm our profitability or limit the manner in which we conduct our activities. Changes in federal and state bankruptcy and debtor relief laws may increase our credit losses and administrative expenses. More restrictive laws, rules and regulations may be adopted in the future which could make compliance more difficult or expensive, further restrict the amount of interest and other charges we can impose on the credit card accounts we originate or market, target sub-prime lenders, limit our ability to make changes to the terms on existing accounts or otherwise significantly harm our business.

        Negative publicity may impair acceptance of our products.    Critics of the credit card industry have in the past focused on marketing practices that they claim encourage consumers to borrow more money than they should, as well as on pricing practices that they claim are either confusing or result in prices that are too high. Increased criticism of the industry or criticism of us in the future could hurt customer acceptance of our products or lead to changes in the law or regulatory environment, either of which would significantly harm our business.

        Internet security breaches could damage our reputation and business.    Internet security breaches could damage our reputation and business. As part of our growth strategy, we may expand our origination of credit card accounts over the internet. The secure transmission of confidential information over the internet is essential to maintaining consumer confidence in our products and services offered online. Advances in computer capabilities, new discoveries or other developments could result in a compromise or breach of the technology used by us to protect customer application and transaction data transmitted over the internet. Security breaches could damage our reputation and expose us to a risk of loss or litigation. Moreover, consumers generally are concerned with security and privacy on the internet, and any publicized security problems could inhibit the growth of the internet as a means of conducting commercial transactions. Our ability to solicit new account holders over the internet would be severely impeded if consumers become unwilling to transmit confidential information online.

We routinely explore various opportunities to grow our business, including the purchase of credit card receivable portfolios and other businesses.

        There are a number of risks attendant to any acquisition, including the possibility that we will overvalue the assets to be purchased, that we will not be able to successfully integrate the acquired business or assets, and that we will not be able to produce the expected level of profitability from the

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acquired business or assets. As a result, the impact of any acquisition on our future performance may not be as favorable as expected and actually may be adverse.

        Our portfolio purchases may cause fluctuations in reported managed receivables data, which may reduce the usefulness of historical managed loan data in evaluating our business. Our reported managed receivables data may fluctuate substantially from quarter to quarter as a result of recent and future portfolio acquisitions. As of December 31, 2002, portfolio acquisitions account for 43% of our total portfolio.

        Credit card receivables included in purchased portfolios may have been originated using credit criteria different from our criteria. As a result, some of these receivables have a different credit quality than receivables we originated. Receivables included in any particular purchased portfolio may have significantly different delinquency rates and charge off rates than the receivables previously originated and purchased by us. These receivables may also earn different interest rates and fees as compared to other similar receivables in our receivables portfolio. These variables could cause our reported managed receivables data to fluctuate substantially in future periods making the evaluation of our business more difficult.

Other Risks.

        We also face a number of other uncertainties. These include:

        The existence of the preferred stock could adversely impact holders of common stock.    As of March 15, 2003, the Series A Preferred Stock and Series B Preferred Stock in the aggregate could be converted into approximately 4.9 million shares of common stock, or 10.6% of the number of shares that would be outstanding immediately following conversion. Additionally, dividends on the Preferred Stock will generally be paid in additional shares of Preferred Stock on a quarterly basis, which means that over time the holders of the Preferred Stock will be entitled to convert their shares into an even greater percentage of our Common Stock. For example, assuming that no dividends are paid in cash, none of the stockholders exercise their conversion rights and the antidilution rights of the preferred stockholders are not triggered, then five years after issuance (December 2006) the preferred stock could be converted into approximately 15.4% of the common stock outstanding at the time of issuance. In addition, the holders of the preferred stock have the right to vote separately on various items—including material corporate transactions—and may not vote in a manner beneficial to the interests of the common stock where the interests of the two classes are different.

        Unless we obtain a bank charter, we cannot issue credit cards other than through an agreement with a bank.     Because we do not have a bank charter, we currently cannot issue credit cards other than through an agreement with a bank. We issue our credit cards under an agreement with CB&T. In October 1998, we applied for a bank charter, but we withdrew the application in June 2001, because, given the failure of a significant sub-prime lender, we believed that it would be difficult for us to charter a bank in the regulatory environment which existed at that time. However, we are open to obtaining a bank charter and are currently pursuing the acquisition of a bank, but if we pursue these options it is likely our status as a sub-prime lender will have an adverse effect on our efforts. Unless we obtain a bank charter, we will continue to rely upon CB&T to issue credit cards to our customers. If our agreement with CB&T were terminated or otherwise disrupted, there is a risk that we would not be able to enter into an agreement with an alternate provider on terms that we consider favorable or in a timely manner without disruption of our business. Additionally, any bank we charter would be subject to the various state and federal regulations and restrictions generally applicable to such institutions.

        Because we outsource account-processing functions that are integral to our business, any disruption or termination of that outsourcing relationship could harm our business.    We outsource account and payment processing pursuant to agreements with CB&T and its affiliates. In 2002 we paid CB&T and its

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affiliates approximately $40.0 million for these services. If these agreements were terminated or the services provided to us otherwise disrupted, we would have to obtain these services from an alternative provider. There is a risk that we would not be able to enter into a similar agreement with an alternate provider on terms that we consider favorable or in a timely manner without disruption of our business.

        We rely on Visionary Systems, Inc. for software design and support, and any disruption of our relationship with Visionary Systems would negatively impact our business.    VSI is a privately owned designer of computer software and provider of processing and other computer services. Two of our officers, Richard R. House, Jr. and Richard W. Gilbert, each indirectly own 13.0% of its stock. During 2002, we paid VSI approximately $11.2 million for software development, account origination, consulting services, intellectual property and two patents. In the event that VSI no longer provides us with software and support, our business would be negatively impacted until we retained replacement vendors. We believe that a number of vendors are qualified to perform the services performed by VSI and believe that this impact would only be temporary.

        If we obtain a bank charter, any changes in applicable state or federal laws could adversely affect our business.    In the future, we may apply for a bank charter. If we obtain a bank charter, we will be subject to the various state and federal regulations generally applicable to similar institutions, including restrictions on the ability of the banking subsidiary to pay dividends to us. We are unable to predict the effect of any future changes of applicable state and federal laws or regulations, but such changes could adversely affect the bank's business and operations.

        In the event that our stock price does not increase, we may be required to pay the dividends on our preferred stock in cash.    The terms of the Series A Preferred Stock and Series B Preferred Stock initially permit us, at our election, to pay the required dividends in either additional shares of preferred stock or in cash. However, commencing in September 2003, in the event that our stock price does not increase by 6% per quarter thereafter, the holders may require that we pay dividends in cash. If we assume dividends are paid through increasing the redemption price (called the "accreted value") of the preferred stock until September 2003, the cash dividends at that time would initially be approximately $1.2 million per quarter.

We expressly disclaim any obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise, except as required by law.

ITEM 2. PROPERTIES

        Our principal executive offices, comprising approximately 137,000 square feet, and our operations centers and collection facilities, comprising approximately 237,000 square feet, are located in leased premises in Atlanta, Georgia; Monticello, Minnesota; St. Cloud, Minnesota; North Wilkesboro, North Carolina; and Salt Lake City, Utah. We believe that our facilities are suitable to our business and that we will be able to lease or purchase additional facilities as our needs require.

ITEM 3. LEGAL PROCEEDINGS

        The Company is involved in various legal proceedings that are incidental to the conduct of its business. The Company is not involved in any pending or threatened legal proceedings which the Company believes could reasonably be expected to have a material adverse effect on the Company's financial condition or results of operations.

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

        No matters were submitted to a vote of security holders during the quarter ended December 31, 2002.

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PART II

ITEM 5. MARKET FOR THE REGISTRANT'S COMMON STOCK AND RELATED SHAREHOLDER MATTERS

        Our common stock has traded on the Nasdaq National Market under the symbol "CCRT" since our initial public offering in April 1999. The following table sets forth, for the periods indicated, the high and low sales prices per share of our common stock as reported on the Nasdaq National Market. As of March 3, 2003, there were approximately 481 holders of our common stock, not including persons whose stock is held in nominee or "street name" accounts through brokers.

        The closing price of our common stock on the Nasdaq National Market on March 3, 2003 was $5.70. We have never declared or paid cash dividends on our common stock and do not anticipate paying a cash dividend on our common stock in the foreseeable future. See "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations—Liquidity, Funding and Capital Resources."

ITEM 6. SELECTED FINANCIAL DATA

        The following tables set forth, for the periods indicated, selected consolidated financial and other data for CompuCredit. You should read the selected consolidated financial and other data below in conjunction with our consolidated financial statements and the related notes and with "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" included elsewhere in this Form 10-K. With the exception of the selected credit card data, we have derived the following selected financial data from our consolidated financial statements for the year ended December 31, 2002, which have been audited by BDO Seidman, LLP, independent certified public accountants, and from our consolidated financial statements for the years ended December 31, 2001, 2000, 1999 and 1998, all of which have been audited by Ernst & Young LLP, independent auditors. In April 2000, we acquired Citadel Group, Inc. of Daytona Beach, Florida. The transaction was accounted for as a pooling of interests. All amounts have been restated to reflect the financial position, results of operations and cash flows of the respective companies as though the companies were combined for all periods presented.

        In August 1997, we began securitizing our credit card receivables. In each securitization, we receive cash, retain an interest in the receivables that are securitized, retain the rights to receive cash in the future and retain the rights and obligations to service the accounts. Securitizations are treated as sales under generally accepted accounting principles in the United States. As such, we remove the securitized receivables from our consolidated balance sheet. The performance of the underlying credit card receivables will affect the future cash flows we actually receive. The information in the following table

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under "Selected Credit Card Data" is presented for the credit card receivables that we have securitized and for the interests that we have acquired in credit card receivables that were securitized by others.

(1)

The combined gross charge off ratio equals the ratio of accrued finance charge, fee, and principal charge offs, net of recoveries, to average managed receivables for the respective reporting periods.

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The net charge off ratio equals the ratio of only principal charge offs, net of recoveries, to average managed receivables for the respective reporting periods.

(2)

During 1998 and 2002, we purchased portfolios of credit card receivables at substantial discounts from the face amount of the credit card receivables outstanding. A portion of the discount related to the credit quality of the receivables. For purposes of reporting our adjusted charge off ratio, we have used this discount related to credit quality to offset a portion of our actual net principal charge offs. See "Selected Credit Card Data" included in "Item 7. Management's Discussion and Analysis of Financial Condition and Results of Operations" for more information about these portfolio purchases and the associated discounts.

        The following tables contain unaudited quarterly results for the years ended December 31, 2002, and 2001.

Selected Quarterly Financial Data

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        During the second quarter of 2002, net income decreased by approximately $38.2 million due primarily to (a) a decrease in our estimate of the fair value of our retained interests in finance charge receivables of approximately $54.7 million based in part on proposed bank regulatory guidelines at the time which were subsequently issued in final form later in 2002, (b) a decrease in our estimate of accrued interest and fees earned but not billed of approximately $12.0 million to better estimate the collectible portion of these fees also based in part on the aforementioned bank regulatory guidelines, partially offset by (c) an approximately $22.8 million increase in the fair value of our retained interest due to a decrease of our residual cash flows discount rate to 22.5%.

        During the fourth quarter of 2001, our net income decreased by approximately $48.1 million due to a decrease in securitization income of approximately $10.0 million and a decrease in income from retained interests in credit card receivables securitized of approximately $63.7 million. The decrease in the securitization income (loss) resulted from selling approximately $36.3 million of our retained interests in credit card receivables securitized for net proceeds of approximately $26.7 million during the fourth quarter of 2001. As a result of these transactions, we recognized a loss of approximately $49.7 million when we revalued our retained interests with the discount rate assumption implicit within these fourth quarter 2001 transactions. The loss associated with the change in fair market value of our retained interests was recorded in income (loss) from retained interests in credit card receivables securitized. Other than these fourth quarter of 2001 transactions, we have not sold at a discount any of our retained interests in credit card receivables securitized.

ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

        The following discussion should be read in conjunction with "Item 6. Selected Financial Data" and our consolidated financial statements and the related notes included herein.

        This Management's Discussion and Analysis of Financial Condition and Results of Operations includes forward-looking statements. We have based these forward-looking statements on our current plans, expectations and beliefs about future events. In light of the risks, uncertainties and assumptions discussed under the caption "Risk Factors" in "Item 1. Business" of this Annual Report on Form 10-K and other factors discussed in this section, there are risks that our actual experience will differ materially from the expectations and beliefs reflected in the forward-looking statements in this section. See "Cautionary Notice Regarding Forward-Looking Statements."

General

        CompuCredit is a credit card company that originates and purchases receivables and markets products and services to its customers for which it earns commissions from the providers of such products and services, and to a limited extent certain fee payments directly from its customers. We market unsecured Visa and MasterCard credit cards through direct mail and telemarketing and to a limited degree television and the internet.

        Our revenues primarily consist of (1) securitization income, (2) income from our retained interests in credit card receivables securitized, (3) servicing income, (4) other credit card fee income, (5) interchange fees, (6) ancillary product revenue and (7) equity in the income of our equity method investee.

        Securitization income is gain or loss we recognize at the time of each sale of our credit card receivables. Income or loss from retained interests in credit card receivables securitized is the income or loss we recognize from credit card receivables that have been securitized. See the "Off Balance Sheet Arrangements" and "Results of Operations" sections for additional information. Servicing income consists of the gross fees we receive for servicing the various portfolios of credit card receivables. Other credit card fee income includes annual fees, over-limit fees, cash advance fees, other

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fees assessed to our cardholders and recovery revenue. Interchange fees are the portions of the merchant fees assessed by Visa and MasterCard that are passed on to us and are a function of the purchase volume of our cardholders. Ancillary product revenue consists of the commissions we earn from our sales on behalf of various providers of products and services of certain fee-based products and to a limited extent certain fees that we receive directly from customers associated with the sale of various fee-based products. These fee-based products include various memberships, insurance, subscription and other products. Equity in the income of our equity method investee is our portion of our equity method investment in CSG discussed below.

        Our primary operating costs include the costs of funding our receivables, credit losses and other operating expenses, such as employee compensation, account solicitation and marketing expenses, data processing, servicing expenses and income taxes.

        We originate the receivables in our originated portfolio through the use of our target marketing system and direct mail, telemarketing, internet and television campaigns to obtain our customers. We also add accounts by purchasing—either by ourselves or with entities formed through our partnership with others—both credit card receivables portfolios and retained interests in credit card receivables portfolios that have been previously securitized by others. With the exception of receivables purchased or originated through accounts added in portfolio acquisitions, the size of our receivables depend in part on the timing, size and success of our marketing campaigns. During periods of reduced marketing, which we experienced in 2002 and expect to continue to experience throughout 2003 and until we see more favorable advance rates for our securitizations in the asset backed securities markets, our originated receivables portfolio may not grow and may decline. We continue to evaluate opportunities to purchase portfolios because we believe they may provide an attractive return on our investment and because we believe that we may be able to obtain liquidity to fund these activities under terms that are favorable toward these acquisitions.

        During the second quarter of 2002, we purchased a 50% interest in CSG. CSG was formed during the second quarter of 2002 by affiliates of Goldman, Sachs & Co. and Salomon Smith Barney and one of our wholly owned subsidiaries. CSG was formed to acquire notes and a certificated interest issued by a trust ("CSG Trust"). Equity in the income of our equity method investee is 50% of CSG's income or loss, before income taxes. See the "Results of Operations" and "Other Operating Income" sections for additional information on these revenues. We agreed to service the entire portfolio of credit card receivables underlying the CSG Trust. In exchange for our servicing, we receive a fee. In our "Selected Credit Card Data" section, we include information relating to the receivables underlying our securitizations. Beginning with the second quarter of 2002, our data reflects the credit card receivables underlying our securitizations, as well as 50% of the managed receivables underlying the CSG Trust (which reflects our 50% interest in CSG).

        In July 2002, we acquired from Federated the retained interests in a trust (the "Fingerhut Trust") that then owned approximately $1.0 billion in face amount of receivables. The receivables included in the Fingerhut Trust are private label revolving credit cards used to purchase items from the Fingerhut catalog. This portfolio will decrease in size over time because payments from cardholders are expected to be significantly greater than purchases being made by cardholders. We also hired approximately 830 employees from Federated to service the receivables in the Fingerhut Trust. We assumed a servicing liability in the Federated transaction because the contractual servicing fee we receive from the Fingerhut Trust is less than adequate compensation for servicing the receivables. Our servicing liabilities, as well as why we accept servicing revenues less than our anticipated servicing costs, are more fully described in our "Off Balance Sheet Arrangements" section below.

        During the third quarter of 2002, we extended our Affinity Card Agreement with CB&T, the subsidiary of Synovus Financial Corporation that provides for the issuance of our originated credit cards. This agreement was extended from December 2003 to March 2006.

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        Our income is dependent upon the size and the quality of the credit card receivables underlying our securitizations. During 2002, we added approximately 545,000 gross new accounts within our originated portfolio. Additionally, with the acquisition of the retained interests from Federated and our investment in CSG, the managed receivables underlying our securitizations and our 50% share of the CSG securitizations increased by approximately $0.9 billion. The receivables within the Fingerhut Trust, in particular, are expected to decline very rapidly. If we do not increase the growth of our portfolio either by originating more accounts or by acquiring additional portfolios, our income from retained interests in future quarters will likely decrease relative to that experienced in 2002.

        Depending on relative competitive, market, and liquidity environments for portfolio acquisition versus origination, we may use either or both of these methods of account growth to varying degrees. We believe that the current competitive, market, and liquidity environments favor growth through acquisition, rather than origination, for our entire underserved customer base, except for those consumers at the lower end of the FICO scoring system. As such, we plan to grow during 2003 through acquisition, rather than origination, for all of those segments of our underserved market except for a segment of consumers at the lower end of the FICO scoring system to which we plan to offer a largely fee-based card product during 2003.

Off Balance Sheet Arrangements

        We contract with banks—primarily CB&T—to originate Visa and MasterCard revolving credit card accounts under agreements with us. On a daily basis, the banks sell us an interest in the receivables created that day in these accounts. Each day, upon our acquisition of that day's receivables, we in turn sell our interest in the receivables to trusts or to multi-seller commercial paper conduits administered by national banking institutions. The trusts or conduits issue notes to investors in order to obtain the cash to pay us for the receivables.

        After an initial purchase of notes by the investors, there is usually a period during which collections from the receivables are used to purchase new receivables. This is referred to as a revolving period. The revolving period typically begins on the issuance date of any particular series of notes and ends at the beginning of an amortization period. At the end of the revolving period, the investment of collections in new receivables ends, and collections are instead used to repay the investors. The period during which investors are being repaid is referred to as an amortization period. The revolving periods have coincided with the maturity dates for each of our 364 day commercial paper conduit series or are no less than two years for our series placed with other investors. The maturity date for each series is included in our "Liquidity, Funding and Capital Resources" section.

        All collections received from the cardholders underlying each securitization are included in the securitization cash flows. This includes collections from the cardholders for interest, fees and other charges on the accounts and collections from the cardholders repaying the principal portion of their account balances. The cash flows are then distributed in accordance with the securitization documents. Cash is distributed to us as servicer for our servicing fee, to the investors as interest on their outstanding notes, to or for the benefit of the investors to repay any portion of their outstanding notes that become due and payable and to us as the seller to fund new purchases. Any collections from cardholders remaining each month after making the payments noted above are paid to us on our retained interests.

        In each securitization transaction, we retain the risk of compliance with federal and state laws and regulations regarding the securitized accounts and any fraudulent activity with regard to the accounts. The fraud for which we are responsible includes the unauthorized use of the credit cards, including identity theft or purchases on lost or stolen cards or account numbers. We expense these fraud losses in other operating expense. To date, we have experienced very little fraud for unauthorized use of the credit cards, and the total expense has annually averaged below 0.20% of average managed receivables.

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        The investors in the securitizations require us to provide credit support for the receivables to reduce the risk of loss to the investors resulting from cardholders not repaying their credit card balances when due. We negotiate with each investor the amount of the credit support, which is based on historical and expected delinquency and loss experience on the receivables. The credit support is usually in the form of over-collateralization, which means that we sell the receivables for cash and a subordinated retained interest. Because the retained interest is subordinate to the investors' investment, the investors get excess collateral for their cash purchase price. As a result, the receivables available to repay the investors exceed the total amount of the investors' interests in the receivables. This excess is the retained interest that we own, which is also referred to as a subordinated interest, or a seller's interest. These retained interests represent the difference in the cash we receive from the investors when we sell our originated receivables in our securitizations and the cash we paid to initially purchase the receivables. Increases in retained interests are a use of our cash. During July 2002, we acquired retained interests in the Fingerhut Trust; these retained interests are carried at the lower of amortized cost or fair market value. Expected cash flows in excess of the cost of the purchased retained interests are being amortized into income from retained interests using the effective interest method. The carrying amount of the retained interests we purchase from third parties is included in our "retained interest in credit card receivables securitized" on our consolidated balance sheet.

        The investors in the securitized receivables have no recourse against us for the cardholders' failure to pay their credit card balances; however, substantially all of our retained interests are subordinated to the investors' interests until the investors have been fully repaid. This means that our retained interests will absorb any losses due to cardholders' failure to repay their balances first before investors in the securitizations have to absorb these losses. In addition, if the receivables within the trusts were to perform poorly, our ability to securitize receivables in the future could be adversely impacted.

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

        Our securitizations are treated as sales under generally accepted accounting principles in the United States ("GAAP"). As such, we remove the securitized receivables from our consolidated balance sheets. As noted above, we own a retained interest in the pool of assets included in each securitization, with the right to receive collections allocated to such retained interest after payments to investors are made. These amounts are recorded as income from retained interests in credit card receivables securitized. Because quoted market prices are generally not available for the retained interests arising from securitizations of our originated portfolio, the fair values of our retained interests in our originated portfolio's receivables are based on the estimated present value of the future cash flows using management's best estimates of key assumptions and the estimated collectible portion of finance charge receivables. We also recognize an "interest-only" ("I/O") strip, which is the present value of the projected excess cash flows the receivables will produce during their life. The excess cash flow is the excess of the finance charges and late fees generated by the securitized receivables over related credit losses, interest paid to investors, servicing costs and other expenses. The I/O strip is included in "retained interests in credit card receivables securitized" on our consolidated balance sheet.

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

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        "Amounts due from securitization" on our consolidated balance sheets include payments recently received by the securitization structure with respect to the securitized receivables that are still held by the structure but are payable to us within the next 30 days.

        Our securitizations are accounted for in accordance with Statement of Financial Accounting Standards No. 140, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("Statement No. 140"), and, prior to April 1, 2001, were accounted for under Statement of Financial Accounting Standards No. 125, "Accounting for Transfers and Servicing of Financial Assets and Extinguishments of Liabilities" ("Statement No. 125"). Under these statements, gains or losses are recognized at the time of each sale and are recorded as securitization income or loss in our consolidated statements of operations. The gains or losses recognized on the sales of credit card receivables depend in part on the previous carrying amount of the financial assets sold as well as the fair value of the financial assets and cash proceeds received.

        We believe our securitizations satisfy the conditions of Statement No. 140 for sale accounting because each trust, as the issuer, is a qualified special purpose entity ("QSPE"). The activities of each trust are limited to (1) acquiring, owning and managing its assets and the proceeds of those assets; (2) issuing and making payments on notes; and (3) engaging in related activities. In addition, each holder of a beneficial interest in the notes has the right to pledge or exchange its beneficial interest. Finally, we, as the transferor, transfer the receivables to each trust or to a third party conduit, and we do not maintain control over the receivables.

        The securitization transactions do not affect the relationship we have with our customers, and we continue to service the credit card receivables. We either perform the servicing or contract with third party service providers. The fees we receive to service credit cards are included in our servicing income and are discussed in our "Results of Operations—Other Operating Income" section. In cases where we do not receive adequate compensation for servicing the credit cards, we have recognized a servicing liability for the projected servicing costs that exceed our projected servicing revenue. See our "Results of Operations—Net Securitization (Loss) Income and (Loss) Income from Retained Interests in Credit Card Receivables Securitized" section for the assumptions used and the servicing liability amounts. The amount of servicing revenue we receive is dictated by the trust agreements in our securitizations. We accept servicing revenue that is less than the anticipated servicing costs because during the revolving period, we receive all of the excess cash flows from the securitizations; these excess cash flows represent collections on the receivables in excess of the interest paid to the investors, the servicing fees paid to us as servicer, and required amortization payments. Because we receive the residual or excess cash flows during the revolving period, the total cash we expect to receive, inclusive of both the servicing revenue as well as the excess cash flows, is expected to more than cover our servicing costs.

        The table below summarizes our securitization activity:

(1)

Excludes CSG receivables of $922 million (or $461 million attributable to our ownership percentage) because such amounts are included in our equity investment and therefore not reflected in the statement of operations or balance sheet items included herein.

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        The gross amount of receivables securitized increased from December 31, 2001, to December 31, 2002, due to the receivables underlying the Fingerhut Trust. Proceeds from collections reinvested in revolving-period securitizations decreased during that same time period due to reduced growth in our originated portfolio. Also during this time period, excess cash flows received on retained interests increased due to the cash flows generated from the retained interests in the Fingerhut Trust. Our pretax securitization income is recognized when the receivables are securitized. Net securitization loss was approximately $18,000 for the year ended December 31, 2002, compared to net securitization loss of $8.4 million for the year ended December 31, 2001. The decrease in securitization loss in 2002 was due primarily to sales of retained interests at a loss during the fourth quarter of 2001. During the fourth quarter of 2001, we sold approximately $36.3 million of our retained interest in credit card receivables securitized for net proceeds of approximately $26.7 million. The $9.6 million difference was a loss and was included in our securitization loss for 2001. Prior to the fourth quarter 2001, and subsequent to the fourth quarter of 2001, we had not and have not sold at a discount to face value any retained interests in credit card receivables securitized.

        The trusts or the conduits in our securitization structures purchase receivables from us by raising proceeds from investors. The proceeds raised are included within the series of notes issued by the trusts or issued by the conduits. The proceeds from the investors are then remitted to us as part of the trusts' or conduits' purchase price of the receivables. We had the following total commitments and outstanding notes in our securitizations for each year presented excluding the structurally subordinate series:

        The maturities of these notes range from April 2003 to July 2004, and are more fully detailed in the "Liquidity, Funding and Capital Resources" section. We try to structure our securitization funding sources by having commitments in excess of our current growth plans so that we have investors who will purchase notes from the trusts, which in turn allows the trusts to purchase receivables from us. We believe we have structured our securitization program to reduce our reliance on any one series of notes by staggering the maturity dates of the notes (assuming, of course, that prior to the maturity of any one series of notes that such series can be replaced with a series structurally subordinate to the series that is nearing maturity).

        The payment terms of each securitization structure are negotiated with investors. Some facilities enter into accumulation periods at pre-determined dates prior to their maturity. During an accumulation period, a portion of cash collected from the cardholders is required to be accumulated in an account for the benefit of the facility and is not available to us to fund new purchases.

        In our securitization structure associated with the portfolios we purchased in 1998, each month a portion of the cash collected from the cardholders is paid to the investors to decrease their remaining invested amount. The amount paid to the investors to decrease their invested amount totaled $47.1 million for the year ended December 31, 2002, and $45.1 million for the year ended December 31, 2001. Under the current terms of the securitization, the amount paid to the investors to reduce their invested amount equals 100% of the cash collected less servicing fees paid to CompuCredit and less interest charges on the invested amount. CompuCredit is responsible for financing any new purchases. For the year ended December 31, 2002, CompuCredit was required to finance $0.3 million in purchases. For the year ended December 31, 2001, CompuCredit was not required to finance any purchases. As of December 31, 2002, the total due to the investors in the securitization structure associated with the portfolios that were purchased in 1998 was approximately $49.1 million and the retained interest was $14.3 million. As of December 31, 2001, the total due to the

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investors in the securitization structure was approximately $96.2 million and the retained interest was $19.1 million.

        The excess cash from the securitization structure associated with the Fingerhut Trust retained interests we purchased in 2002 was $128.9 million during 2002. As of December 31, 2002, the total due to the investors in the securitization structure associated with the purchased Fingerhut Trust retained interest was approximately $360.1 million, and the gross retained interest was carried at $21.1 million and the servicing liability was carried at $66.9 million. The amortization of the servicing liability associated with this securitization structure was $28.9 million for 2002.

        Once the investors in each of our securitization structures are repaid, all cash collected on any remaining receivables is payable to us. We detail the maturity dates and describe our facilities and amounts being used to repay investors in the "Liquidity, Funding and Capital Resources" section.

        We include in our consolidated financial statements all of our wholly owned subsidiaries. However, in accordance with Statement No. 140, we do not consolidate any of the trusts, all of which are QSPEs. We are required to service the receivables that have been sold. We also perform the administrative functions for the trusts, including preparing daily and monthly reports relating to the receivables. We do this pursuant to an administration agreement between the trustees of the trusts and us.

        Our securitization documents require us, as servicer of the receivables, to covenant that we will maintain an acceptable ratio of tangible net worth to total managed receivables or that we will not default in the payment of material indebtedness or reduce the periodic finance charges assessed on the receivables below agreed upon levels. We have also agreed to service the receivables in accordance with our servicing policies and procedures. In addition to the above, there are events described in our agreements that may trigger an early redemption, which would cause substantially all collections on the receivables to go to the investors to pay the principal on the notes. This would largely delay the payment of cash to us with respect to our seller's interests until the investors' notes were paid in full. These events include our failure as servicer to remit the collections that we receive from cardholders to the appropriate securitization accounts within the required time frames, our failure to provide reports regarding the activity in the accounts within required time frames, or a breach of our representations and warranties. These events also include financial performance measures on the underlying receivables. As servicer of the accounts, we do not covenant or make any representation or warranty regarding the collectibility of the receivables in the accounts.

        Our securitization documents require us, as the seller of the receivables, to make representations and warranties relating to the validity and the enforceability of the agreements pursuant to which the receivables were created. We also make other standard representations and warranties including our ability to enter into the agreements and the accuracy of the information provided by us to investors. If we breach any of these representations, we may not be able to sell additional receivables into our securitization structures, and we may cause an early redemption event. As seller of the receivables, we do not make any representation or warranty regarding the collectibility of the receivables in the accounts.

        As of December 31, 2002, we have not breached any representations or warranties or otherwise caused an early redemption event, and the underlying performance of the receivables has not caused an early redemption event in any of our securitizations. However, during the first quarter of 2003, and in line with our expectations at the time of our acquisition and projections upon which we based our purchase price for the Fingerhut Trust retained interests, Fingerhut Trust Series 1998-2 triggered an early amortization as a result of the principal balance of receivables in the trust falling below the minimum balance required by the series.

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Results of Operations

Year Ended December 31, 2002, Compared to Year Ended December 31, 2001

        Net income for the year ended December 31, 2002 was $5.9 million, an increase of $3.0 million from net income of $2.9 million for the year ended December 31, 2001. Net income attributable to common shareholders for the year ended December 31, 2002, was $1.7 million, or $0.04 per diluted share, compared to net income attributable to common shareholders of $2.7 million, or $0.06 per diluted share for the year ended December 31, 2001. The increase in our net income was principally due to our equity method-investee, the Federated acquisition and the change in our residual cash flow discount rate. These effects were partially offset, however, by (a) decreases during the second quarter of 2002 in our estimates of both the fair value of our retained interests in finance charge receivables and accrued interest and fees earned but not billed, and (b) the seasoning during 2002 of the receivables underlying our securitizations, which resulted in a larger percentage of our receivables portfolio aging into the second and third year of their lives. As the receivables age through their peak charge-off period, as described below, they produce less income. The reduction in net income attributable to common shareholders in 2002 versus 2001 reflects the higher 2002 costs of dividends paid on our preferred stock; our preferred stock was outstanding during the entire 2002 year versus less than one month during 2001.

        During 2002, as in prior years, we securitized all of our receivables, but nevertheless experienced income that was dependent upon the performance of the receivables underlying the securitizations. During 2002, our managed receivables grew approximately 47% from $1.9 billion as of December 31, 2001, to $2.8 billion as of December 31, 2002. The $2.8 billion managed receivables balance as of December 31, 2002, includes our 50% share of the managed receivables of CSG.

        In connection with both the CSG investment and the Federated acquisition, we agreed to service 100% of the receivables underlying their respective securitizations. We receive servicing fees, which increased our servicing income to $37.8 million during the 2002, as compared to $6.0 million during 2001. Because we are servicing these assets, our credit card servicing expense increased from $62.4 million in 2001 to $94.0 million in 2002. Additionally, we recorded approximately $45.7 million of pretax income during the year ended December 31, 2002, under the equity method of accounting for our CSG investment. This income primarily consisted of income from retained interests in credit card receivables securitized that CSG acquired in the second quarter of 2002 from the CSG Trust.

        We had a loss from retained interests in credit card receivables securitized during 2002 of $25.0 million, compared to 2001 income from retained interests of $11.3 million. This change resulted principally from an approximate $76.0 million decrease during 2002 of our estimate of the fair value of our retained interests in finance charge receivables and accrued interest and fees. Prior to the second quarter of 2002, we estimated the fair value of our retained interests in finance charge receivables and accrued interest and fees using our estimates of total finance charges billed and earned but not yet billed to cardholders. Our new estimates better reflect our expectation of just the collectible portion of these finance charges. We believe our change in estimate was preferable as it more accurately reflects the cash we expect to receive in the future from cardholders with respect to these fees. We made this change in our estimate during the second quarter based in part on proposed regulatory guidelines, which affect many other companies in the credit card industry and which were issued in final form during the latter half of 2002. Although we are not a bank and are not directly regulated by any financial regulator, we believe other credit card companies either have or will be adopting this change in estimate in response to the new regulatory guidance.

        Our income from retained interests also decreased during 2002 as compared to 2001 due to a reduction in the profitability of the originated credit card receivables underlying our retained interests. This resulted from an increase in the charge offs of the receivables, which is due to a larger percentage of our originated receivables aging through the second and third years of their life, as well as generally

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poor economic conditions and the effects of these conditions on the ability of our customers to make their required payments. When credit card receivables are first originated, we expect them to have low charge off rates in their first twelve months. The charge off levels are then expected to dramatically increase during year two and then moderate in year three and beyond. We have observed this trend in our originated portfolio but have noticed our charge offs have not moderated as quickly as expected, primarily due to the generally poor economic conditions that have existed since the end of 2001. For 2002, we incurred combined gross charge offs on our originated portfolio of $529.8 million, as compared to $388.9 million during 2001; for further detailed discussion of our charge off data and the credit quality of our originated portfolio, see the "Selected Credit Card Data" section.

        The above decreases in our income from retained interests were partially offset by (a) an approximate $22.8 million increase in our retained interests due to the reduction of our residual cash flows discount rate from 34.9% as of December 31, 2001, to 22.5% during the second quarter of 2002 and throughout the remainder of the 2002 year, and (b) income from the retained interests in the Fingerhut Trust we acquired during July 2002.

        The largest component of our income comes from the profit generated from the credit card receivables underlying our securitizations. Growth in managed receivables cannot be predicted with certainty. In general, it is a product of our marketing, portfolio acquisitions and other strategic efforts. In general, our growth is a product of (1) the growth in the number of accounts, and (2) the amount of usage—or balances—on the accounts. Our growth also is dependent upon a number of factors that we are not able to control, such as levels of consumer spending, competition and general economic conditions. Growth in the number of accounts is a product of several factors, primarily the level of our marketing efforts, our competition, the general economy and our portfolio acquisition efforts. Our marketing and solicitation expenses decreased to $11.9 million for 2002 from $29.9 million for 2001, and we expect a decrease in marketing expense in 2003 compared to 2002. We decreased our marketing in 2002 and have decreased our marketing budget for 2003 because we believe that, while we should have access to liquidity for our origination activities, the advance rates and other terms underlying this available liquidity do not allow us to earn our, and our shareholders' desired returns on equity. We have chosen to focus our 2003 growth efforts on portfolio acquisition, rather than marketing and origination activities for our traditional underserved market. We do anticipate some marketing efforts and originations, however, during 2003, pursuant to our efforts to move down to the lower end of the FICO scoring system with more of a fee-based card product in 2003.

Year Ended December 31, 2001, Compared to Year Ended December 31, 2000

        Net income for the year ended December 31, 2001, was $2.9 million, or $0.06 per diluted share, a decrease of $79.5 million from net income of $82.4 million for the year ended December 31, 2000. The decrease was principally due to a $9.6 million loss on the sale of two retained interests during our fourth quarter of 2001 and a reduction in the fair market value of our retained interests in the fourth quarter of $49.7 million. The decrease in our income was also due to the seasoning of the receivables underlying our securitizations, as the average growth rate during 2001 decreased as compared to 2000, resulting in a larger percentage of our receivables portfolio being more than twelve months old during 2001. When receivables age through their peak charge-off period they produce less income. Receivables generated in accounts that are new typically will have much lower charge offs over the next twelve months or so than receivables generated in accounts that are between one and two years old. We generally expect charge off levels to dramatically increase during year two and then moderate in year three and beyond. While we have noticed this general trend within our originated portfolio and believe in this trend line in moderate to good economic environments, our charge offs have not moderated as quickly as expected primarily due to the generally poor economic conditions that have existed since the end of 2001 and the effects of these conditions on the ability of our cardholders to make their required payments.

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        During 2001, as in prior years, we securitized all of our receivables; however, our income for 2001 was dependent upon the performance of the receivables underlying the securitizations. During 2001, our managed receivables grew approximately 24% from $1.5 billion at December 31, 2000, to $1.9 billion at December 31, 2001. This growth rate was substantially less than the growth rate we experienced during 2000 of 67%.

        Our receivables growth rate decreased from 2000 to 2001 because we added fewer accounts. During 2001, our net charge off rate increased and our net interest margin decreased because a larger percentage of the accounts—many of which were added during 1999 and 2000 growth periods—seasoned to an age of greater than twelve months. When credit card receivables are first originated, they tend to have artificially low charge off rates in their first twelve months. Receivables generated in accounts that are new typically will have much lower charge offs over the next twelve months or so than receivables generated in accounts that are between one and two years old. We further describe the receivables portfolio in "Selected Credit Card Data," including further discussion of the asset quality of the receivables. Because our income is dependent upon the performance of the receivables underlying our securitizations, the reduction in our growth rate in receivables during 2001, as compared to 2000, resulted in a reduction in our income for 2001 as compared to 2000.

        During the fourth quarter of 2001, we sold approximately $36.3 million of our retained interests in credit card receivables securitized for net proceeds of approximately $26.7 million. Approximately $27.0 million of our retained interests sold were to a related party, which is more fully described in "Item 13. Relationships and Related Transactions." The $9.6 million difference is a loss on sale under the provisions of Statement No. 140 and is included in our securitization loss for 2001. We sold the retained interests to raise additional liquidity without selling additional common stock at what we believed was a low price. The retained interests were sold at a discount because the stated interest rates on the interests were less than the interest rate required by investors in the marketplace. The first retained interest that we sold at a discount had a stated interest rate of LIBOR +7.5%, while the investor required a total return of 22%. The second retained interest that we sold had a stated interest rate of 15%, while the investor required a total return of 35%. We believe the pricing was a function of the uncertainty in the economy resulting from a general economic slowdown and from events that took place on September 11, 2001. We also believe the pricing was a function of uncertainty in the liquidity markets and issues surrounding other credit card issuers such as NextCard and Providian, both of which were having financial difficulties at the time we accessed the capital markets. The investor that required the 35% return also purchased Series A Preferred Stock from us. Prior to the fourth quarter of 2001, we had not previously sold at a discount to face value any retained interests in credit card receivables securitized.

        Income from retained interests in credit card receivables securitized decreased to $11.3 million in 2001, versus $113.9 million in 2000, due primarily to a decrease in the fair market value of our retained interests in credit card receivables securitized at December 31, 2001. Additionally, the income earned on the retained interest during 2001 was less than the income earned during 2000 due primarily to an increase in the combined gross charge off rates on our securitized receivables. See our discussion under "Net Securitization Income (Loss) and Income from Retained Interests in Credit Card Receivables Securitized."

        The fair market value of our retained interests in credit card receivables securitized decreased at December 31, 2001, due primarily to a substantial increase in the market interest rate (or discount rate) used to discount the associated cash flows and an increase in the net charge off rate used in valuing our retained interests. The discount rate increased to 34.9% at December 31, 2001, from 16.7% at December 31, 2000, and the charge off rate increased to 16.7% at December 31, 2001, from 10.9% at December 31, 2000. The increase in the market interest rate reflects the interest rate implicit in sales of retained interests that occurred during the fourth quarter of 2001. We sold a retained interest in

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November 2001 with a total return to the investor of 22% and a retained interest in December 2001 with a total return to the investor of 35%.

        The largest component of our income is derived from profit generated from the managed receivables underlying our securitizations. The components of our income that the managed receivables impact are securitization income, income from retained interests in credit card receivables securitized, servicing income, other credit card fees and interchange fees. These items are more fully discussed below in this MD&A. Growth in managed receivables cannot be predicted with certainty, but, in general, is a product of (1) the growth in the number of accounts, and (2) the amount of usage—or balances on the accounts. Overall, our managed receivables grew from $0.9 billion in 1999, to $1.5 billion in 2000 (a 67% growth rate), to $1.9 billion in 2001 (a 27% growth rate). At the same time, the number of accounts grew from 1.18 million in 1999, to 2.18 million in 2000 (84.4%), to 2.19 million in 2001 (0.3%). During the third quarter of 2001, we closed 182,000 inactive accounts, which reduced our ending accounts at the end of 2001.

        Growth in the number of accounts is a product of several factors, primarily the level of our marketing efforts, our competition and the general economy. Our marketing and solicitation expenses increased from $33.2 million in 1999 to $59.5 million in 2000, and declined to $29.9 million in 2001. We decreased our marketing in 2001 because we believed that (1) the profitability of the accounts that we could add given the economic circumstances of late 2001 did not justify the marketing expense, and (2) we had limited access to liquidity and we did not want our portfolio to grow beyond what we could fund.

        During 2001, our competition also was active. We faced intense competition, and we believe that the drop in the usage of our credit cards during 2000 and 2001 was due in part to increased competition from other credit card companies during the same period, including Metris, Providian, NextCard and Capital One. Although we cannot measure the impact of competitors to our business specifically, we believe that many of our competitors were offering lower fees during 2000 and 2001 for their credit card products and were possibly offering larger credit lines on their credit card products. We also believe that our competitors may have been offering teaser rates to induce cardholders to accept and use their products.

        During 2001, we believe that the average usage of accounts also declined due to both general economic and, particularly after September 11, broader uncertainty. A decrease in the usage of the accounts directly impacts the amount of outstanding receivables, and therefore, our income.

        Other operating income, excluding securitization income and income from retained interests in credit card receivables securitized, increased to $148.9 million for the year ended December 31, 2001, from $109.2 million for the year ended December 31, 2000. This increase is due primarily to the increase in other credit card fees. Our interchange income and our income from ancillary products did not materially change from 2000.

Net Interest Income and Interest Expense

        Net interest income consists of interest income earned on cash and cash equivalents less interest expense. Net interest expense was $5.1 million for the year ended December 31, 2002, compared to net interest income of $2.0 million for the year ended December 31, 2001, and $7.1 million for the year ended December 31, 2000. The decrease in net interest income of $7.1 million during 2002 is due primarily to interest expense associated with the debt used to purchase our ownership interest in CSG and to acquire the retained interest of the Fingerhut Trust. Both of these loans were paid off during 2002. However, as part of the loan to acquire our interest in CSG, the lender is entitled to receive a portion of excess cash flows received by the Company from CSG. These payments are classified as interest expense. As such, we anticipate interest expense increasing during the first six months of 2003 and then decreasing the last six months of 2003. The $5.1 million decrease in net interest income

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between 2000 and 2001 is attributable to (a) the usage during 2000 and 2001 of the cash proceeds we received from our first quarter 2000 follow-on public offering, and (b)  increased 2001 interest expense associated with amounts outstanding under our revolving credit facility during that year.

        During 2001, we utilized our $25.0 million, one-year, revolving credit facility. As of December 2001, $15.0 million was outstanding under this facility and $10.0 million was reserved for a letter of credit in favor of a third party servicer. The revolving credit facility expired in January 2002 and was paid in full.

Net Securitization (Loss) Income and (Loss) Income from Retained Interests in Credit Card Receivables Securitized

        Retained interests in credit card receivables securitized are valued in accordance with the provisions of Statement No. 140 and EITF 99-20. Retained interests accounted for under Statement No. 140 are subsequently accounted for as trading securities and reported at estimated fair market value in accordance with Financial Accounting Standard No. 115, "Accounting for Certain Investments in Debt and Equity Securities" ("Statement No. 115"). See "Off Balance Sheet Arrangements."

        Net securitization (loss) income is recognized under Statement No. 140 at the time the receivables are securitized. Gains or losses on sales of receivables depend in part on the previous carrying amount of the financial assets sold as well as the fair value of the assets and cash proceeds received. In a sale, we receive cash, retain an interest in the receivables sold (our retained interest) and retain rights to receive cash in the future (the I/O strip). Net securitization loss for the year ended December 31, 2002, was $18,000 compared to net securitization loss of $8.4 million as of December 31, 2001, compared to net securitization income of $11.8 million for the year ended December 31, 2000. The decrease in securitization loss in 2002 was due primarily to sales of retained interests at a loss during the fourth quarter of 2001. During the fourth quarter of 2001, we sold approximately $36.3 million of our retained interest in credit card receivables securitized for net proceeds of approximately $26.7 million. The $9.6 million difference was a loss and was included in our securitization loss for 2001. Other than these fourth quarter of 2001 transactions, we have not sold at a discount any retained interests in credit card receivables securitized. The securitization loss in 2001 as compared to securitization income in 2000 is due primarily to the fourth quarter 2001 sales of the retained interests as described above.

        Loss (income) from retained interests in credit card receivables securitized includes the income earned on the retained interests and any changes in the fair value of the retained interest in credit card receivables securitized in accordance with Statement No. 115. Loss from retained interests in credit card receivables securitized for the year ended December 31, 2002, was $25.0 million, compared to income of $11.3 million for the year ended December 31, 2001, and $113.9 million for the year ended December 31, 2000.

        The significant decrease in our income (loss) from retained interests in credit card receivables securitized from December 31, 2001, to December 31, 2002, was due primarily to (a) a decrease in our estimate of the fair value of our retained interests in finance charge receivables of our originated portfolio of approximately $63.3 million; (b) a decrease in our estimate of accrued interest and fees earned but not billed of approximately $12.7 million to better estimate the collectible portion of these fees; and (c) an increase in the charge offs of the receivables with a commensurate increase in the charge off assumption used to value our retained interests. Substantially all of our cardholders as of December 31, 2002, and December 31, 2001, are considered "sub-prime" according to the guidance provided by the agencies that regulate the banking industry. This reflects the fact that, as a whole, the accounts underlying our securitizations generally experience higher losses than prime accounts. We factor these higher expected losses into our projected loss assumptions which are used to value our retained interests under Statement No. 140. See Note 6 (Off Balance Sheet Arrangements) to our consolidated financial statements. The increase in the charge off assumptions is due primarily to the

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seasoning of the portfolio and the generally poor economic conditions being experienced throughout the country and the effects of these conditions on the ability of our cardholders to make their required payments. The aforementioned decreases in our income from retained interests were partially offset, however, by (a) an approximate $22.8 million increase in our retained interest due to decreasing our residual cash flows discount rate from 34.9% to 22.5% during the second and subsequent quarters of 2002; and (b) the income from the retained interests we acquired in the Federated Trust during July 2002. See below for the other key assumptions used to value our retained interests.

        The significant decrease in our income from retained interests in credit card receivables securitized from December 31, 2000, to December 31, 2001, is due to a decrease in the fair value of the retained interests at December 31, 2001. This decrease attributable to the change in the fair value was approximately $49.7 million and is due primarily to the increase in our discount rate from 16.7% at December 31, 2000, to 34.9% at December 31, 2001. The increase in the discount rate reflects the interest rate implicit in sales of retained interests that occurred during the fourth quarter of 2001. Additionally, the change in fair value was also due to the increase in the estimated expected credit loss rate from 10.9% at December 31, 2000, to 16.7% at December 31, 2001. The remainder of the 2001 decrease in income from retained interests in credit card receivables securitized was due to an increase in charges offs, offset in part by an increase in APR and late fees.

        The fair value of our retained interests in credit card receivables securitized is estimated by discounting the expected future cash flows from the receivables that have been securitized at rates which we believe are consistent with those that would be used by an independent third party. These rates have historically been reflective of (a) average rates disclosed by our peers and (b) average rates we have reviewed from transactions where the total interest rate to the investor has been disclosed. We also sold two retained interests during the fourth quarter of 2001. The sale in November 2001 provided a total return of 22% and the December 2001 sale provided a total return of 35%. The increase in our residual cash flows discount rate used at December 31, 2001, was reflective of the higher rate of return of the transaction that we closed in December 2001. This fourth quarter 2001 increase in the discount rate used to value the interest-only strip did not affect the discount rate used to value the servicing liability because the two fourth quarter 2001 transactions did not affect the servicing discount rate. The discount rate for the servicing liability is what we believe is reflective of what market participants would use for servicing valuation. Had we increased the discount rate of the servicing liability, it would have decreased the servicing liability and thus increased our income.

        Because quoted market prices are generally not available, the fair value is based on the estimated present value of future cash flows using management's best estimates of finance charges and late fees, servicing fees, costs of funds paid to investors, payment rates, credit losses, discount rates and required amortization payments to investors. The weighted average key assumptions used as of the end of each period are presented below. Changes in any of these assumptions could impact the estimates of the fair value of our retained interest as well as the realization of expected future cash flows:

        See below for the assumptions used to value the interest-only strip and servicing liability for the receivables that we have securitized.

        Management estimates the fair value of the retained interests at the end of each period. Fair value is estimated as the amount the retained interests could be bought for, or sold for, in a current

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transaction between willing parties; specifically, other than in a forced liquidation. We believe that quoted market prices in active markets are the best evidence of fair value. Because quoted market prices are not available for our retained interests, the estimated fair value is based on the best information available under the circumstances. As such, we utilize a discounted cash flow approach, under which our estimated future cash flows are discounted at the estimated rate of return that we believe an investor in our retained interests would expect to be associated with such an investment (the "residual cash flows discount rate").

        Estimated default and payment rates are based on historical results, adjusted for expected changes based on our credit risk models. The payment rate decreased from 2001 to 2002, primarily due to the seasoning of the originated portfolio and the effects of the generally poor economic climate on our cardholders. Expected credit loss rates have increased due to the generally poor economic climate, increases in our delinquencies and our expected overall credit quality decline within our portfolios given the trending higher weighted-average age of the portfolios. We compare historical loss rates on each vintage of our portfolio at comparable points in their lives to project our expected credit loss rate. Our servicing liability discount rate is based on management's estimate of the required returns for Company's who service similar assets.

        The residual cash flow discount rate is dependant on the asset backed securities market and the various companies that make up this market (e.g., Providian, Capital One, Metris, NextCard and CompuCredit). The asset backed securities market is influenced by the results of the issuers who participate in the market, as well as (a) the reaction of rating agencies to the results of issuers, (b) general economic conditions and (c) the investment appetite of investors, which include banks, commercial paper conduits administered by banks, money market funds, pension funds, hedge funds and insurance companies. Also, as demonstrated to us in December 2001, they also are impacted by our own perceived liquidity and negotiating positions. However, absent exigent circumstances, the asset backed securities market tends to react to the overall performance of the group as opposed to the individual companies comprising the group (i.e., the advance rates, pricing and terms available are responsive to the peer group that includes us, as opposed to just us).

        Our residual cash flows discount rate has been volatile during the latter part of 2001 and the first half of 2002. That volatility was unprecedented and unforeseen, both by us and other market participants, but reflected the prevailing market conditions in the asset backed securities market as well as our own liquidity. GAAP requires, however, that we estimate the residual cash flows discount rate at the end of each period.

        During the fourth quarter of 2001, we completed transactions at very unfavorable pricing, which yielded a 35% return to the buyers. This pricing reflected the deterioration of the asset backed securities markets and our near-term liquidity needs in December 2001. The December transaction was the most readily available information upon which to base the Company's fourth quarter 2001 discount rate estimate—at this point we increased our discount rate to 34.9%.

        During the first quarter of 2002, due to the continued general weakness of the economy and the continued stress and liquidity challenges that we saw in the asset backed securities markets, we did not believe that there was sufficient evidence to warrant a reduction in our discount rate. In the second quarter of 2002, however, our liquidity position improved with the purchase (through our 50%-owned equity method investee, CSG) of the retained interests from Providian. Additionally, we finalized the terms of a new securitization structure with more favorable advance rates, pricing and other terms. As a result, we concluded, after consultation with and corroboration by an independent third-party valuation firm, that a reduction in our discount rate was warranted. The valuation techniques utilized by the third-party valuation firm included analyzing our recent transactions and our competitors (both direct and indirect) discount rates and cost of equity, with equal weighting given to each.

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        During the third and fourth quarters of 2002, we did not see any evidence indicating an adjustment in our discount rate was necessary, thus, our residual cash flows discount rate remained at 22.5% at the end of those periods.

        The various assumptions in the above table relate only to receivables that we have securitized and do not apply to retained interests that we have purchased. The Federated Trust retained interests purchased by the Company during 2002 are carried at the lower of amortized cost or fair market value, net of a servicing liability. In accordance with EITF 99-20, expected cash flows in excess of the cost of the purchased retained interests are being amortized into income from retained interests using the effective interest method. This same method is used by the Company's 50%-owned equity method investee, CSG, with respect to its purchase of the retained interests in the CSG Trust during 2002.

        We securitize all of our originated receivables each day by selling the receivables to trusts or to multi-seller commercial paper conduits administered by national banking institutions. The receivables that are sold through securitizations are removed from our balance sheet for financial reporting purposes. When we sell the receivables we receive cash proceeds and a retained interest in the receivables. Our retained interests are subordinate to the other investors. We receive all of the excess cash flows from the securitizations, which represent collections on the accounts in excess of the interest paid to the investors, servicing fees, credit losses and required amortization payments.

        The following table summarizes our securitization activity for the periods presented and does not include any of the receivables managed by or the securitization facility of CSG, our 50%-owned equity method investee:

        The gross amounts of receivables securitized at year-end have increased each year as we have grown our business. The principal portion securitized has increased accordingly as have our total receivables securitized. Prior to the end of 2001, we saw a steady decrease in the amount of over-collateralization ratio required by our investors in our securitizations as a percentage of the total principal securitized as a result of the maturation of the securitizations. In addition to the general seasoning of the portfolio, there was more historical data available about the securitizations on which investors could more accurately base their over-collaterization decisions. The percentage of over-collateralization to total principal securitized increase from 2001 to 2002 is due to both adverse asset backed securities liquidity market factors and trends and the retained interests we acquired in

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2002. The proceeds from securitizations are the result of purchases of receivables by third party investors. These proceeds fluctuate based on the growth of the originated receivables. The proceeds from securitization increased from 1999 to 2000 due to the increase in managed receivables and then decreased during 2001 and 2002 as our growth slowed and we did not securitize the volume of receivables that we did while growing the originated portfolio prior to 2001. The excess cash flows received on our retained interests are a function of the size and average age of the managed portfolio. Our pretax securitization (loss) income is loss or gain recognized when the receivables are securitized. This amount remained fairly constant from 1999 to 2000 and decreased from 2000 to 2002 due to the loss associated with the sale of two pieces of our retained interest in the fourth quarter of 2001 (explained in more detail above) and the lower volume of receivables securitized during the period. Our interest-only strip is the present value of the projected excess cash flows we expect to receive on the securitized receivables. These cash flows are dependent upon the size and performance of the gross amount of receivables securitized. Our interest-only strip increased from 1999 to 2002 as the aggregate amount of receivables securitized increased.

        We initially record a servicing liability with respect to a securitization structure when the servicing fees we expect to receive do not provide adequate compensation for servicing the receivables. The initial servicing liability is recorded at estimated fair market value. The servicing liability is then evaluated each quarter and carried at estimated fair market value with changes in fair value included in income. Because quoted market prices are generally not available, the Company estimates fair value based on the estimated present value of future cash flows using management's best estimates of key assumptions as outlined in Note 6 (Off Balance Sheet Arrangements) to our consolidated financial statements. The servicing liability is netted against the value of the I/O strip and included in retained interests in credit card receivables securitized on our consolidated balance sheets. These servicing costs are also a function of the gross amount of receivables securitized and increased from 2000 to 2002 as the receivables we serviced increased. The increase in the servicing liability from December 31, 2001, to December 31, 2002, is due primarily to our servicing for the Fingerhut Trust, for which we do not receive adequate compensation. We typically accept servicing revenue that is not considered adequate compensation because, during the revolving period of a securitization, we receive all of the excess cash flows from the securitization, which represent collections on the receivables in excess of the interest paid to the investors, the servicing fees paid to us as servicer, and required amortization payments. Because we receive the residual or excess cash flows during the revolving period, the total cash we expect to receive inclusive of both the servicing revenue as well as the excess cash flows is expected to more than cover our servicing costs.

        Our retained interests in credit card receivables securitized include the following:

        The I/O strip reflects the estimated fair value of our rights to future income from the portfolios and includes certain credit enhancements. The servicing liability reflects, for those securitizations for which servicing compensation is not adequate, the estimated fair value of the costs to service receivables above and beyond the servicing income we expect to receive from the securitizations. The change in the servicing liability is included in income from retained interests in credit card receivables securitized. The fair value of retained interests includes all of the retained interests we own in the

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securitizations. Our I/O strip increased from December 31, 2001, primarily due to a decrease in our residual cash flows discount rate from 34.9% at December 31, 2001, to 22.5% at December 31, 2002, as discussed previously. Our servicing liability increased due to the servicing liability we assumed when we purchased the Fingerhut Trust retained interests from Federated in July 2002. We have received strong cash flows from the Fingerhut acquisition. The fair value of retained interest decreased between December 31, 2001, and December 31, 2002, due to a decrease in our estimate of the fair value of our retained interests in finance charge receivables as discussed earlier, partially offset by the acquisition of the retained interests we purchased from Federated in July 2002.

Equity Method Investment in CSG

        CSG was formed during the second quarter of 2002 by affiliates of Goldman, Sachs & Co., Salomon Smith Barney and a wholly owned subsidiary of the Company to acquire notes and a certificated interest issued by the CSG Trust, which owns a portfolio of credit card receivables. We own a 50% interest in CSG, and we account for our interest in CSG using the equity method of accounting. We funded our initial $34.9 million investment in CSG with cash of $3.5 million and by borrowing $31.4 million. In exchange for servicing 100% of the receivables owned by the CSG Trust, we receive a servicing fee from the securitization structure. The servicing fee is considered adequate compensation for the services performed.

        Under the equity method of accounting for our CSG investment, we recorded approximately $45.7 million of pretax income during the year ended December 31, 2002. This income primarily consisted of income from retained interests in credit card receivables securitized that CSG acquired in the second quarter of 2002 from the CSG Trust. During the year ended December 31, 2002, we received approximately $43.5 million in cash distributions and $21.5 million in bonds from our investment in CSG. See the CSG consolidated financial statements contained herein.

Other Operating Income

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

        Our total other operating income is primarily a function of the size of our average credit card receivables portfolio. The increase in other operating income to $164.4 million for the year ended December 31, 2002, from $148.9 million for the year ended December 31, 2001, relates to the increase in our managed receivables, which increased to $2.8 billion (including our 50% ownership interest in the CSG retained interest) at December 31, 2002, from $1.9 billion at December 31, 2001. This increase was due to the increase in servicing revenue associated with the purchase of the retained interests in the Fingerhut trust and the investment in CSG, as we service 100% of both of these portfolios. The increase in servicing revenue was offset by a decrease in our ancillary product revenue. This revenue category is very sensitive to our new account growth since historically sales of our fee-based products are higher to our new cardholders than to existing cardholders. During 2002, we originated less accounts than in prior years, and this resulted in the decrease in ancillary product

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revenue. Other credit card fee income increased slightly for the twelve months ended December 31, 2002, compared to December 31, 2001, due primarily to increases in annual and overlimit fees. Interchange fees are the portion of the merchant fee assessed by Visa and MasterCard and passed on to us based on the purchase volume on our credit card receivables. Interchange fees decreased for the twelve months ended December 31, 2002, compared to December 31, 2001, primarily due to a decrease in purchase volume of our cardholders. This was in spite of an overall increase in receivables as the Federated accounts are private label and therefore do not contribute to any additional volume related to our interchange agreements.

        The increase in other operating income to $148.9 million for the year ended December 31, 2001, from $109.2 million for the year ended December 31, 2000, relates to the increase in our managed receivables, which increased to $1.9 billion at December 31, 2001, from $1.5 billion at December 31, 2000. A substantial portion of the servicing income relates to the portfolios purchased in 1998. As the size of these purchased portfolios decreases, there is a corresponding decrease in servicing income. Other credit card fees, which includes annual, over-limit and cash advance fees, increased to $89.6 million from $53.2 million. The increase in these fees was primarily due to the increase in our managed receivables and not due to any significant change in the type or composition of the fees that are charged on the credit card accounts. Interchange fees are the portion of the merchant fee assessed by Visa and MasterCard and passed on to us on the purchase volume on our credit card receivables. Interchange fees grew to $22.8 million from $19.9 million due to an increase in the purchase volume on our managed receivables. Ancillary product revenue increased to $30.6 million from $28.5 million due to more customers purchasing our products. During 2001, we added several fee-based products; we developed and implemented several new fee-based response models; and we continued to enhance our marketing reach by refining our internet promotions, increasing promotions offered to our cardholders on their monthly account statements, and refining our most significant cross selling promotions. These efforts increased our ancillary product income during 2001. Substantially all of our ancillary product income for the past three years consist of commissions paid directly to us from vendors whose products we market.

Other Operating Expense

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

        Other operating expense for the year ended December 31, 2002, increased to $170.9 million, from $149.5 million for the year ended December 31, 2001. This increase is due primarily to servicing expenses associated with servicing 100% of the receivables in the CSG Trust and the Fingerhut acquisition. Credit card servicing costs primarily include collections and customer service expenses. These expenses include in-house collections and customer service expenses as well as costs associated

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with corresponding with our cardholders. Servicing expense also includes outsourced collections and customer service expenses. Based on the growth of the receivables we service, we increased our infrastructure, customer service and collection personnel. Salaries and benefits, professional fees, net occupancy and other expenses increased as our operations expanded to service the increase in managed receivables. Depreciation expense increased for all periods due to growth in our infrastructure to support our increase in managed receivables.

        In 2002, marketing and solicitation costs decreased due to reduced budgeted levels of direct mail, telemarketing, internet and television campaigns. Ancillary product expense decreased due to a decrease in ancillary product marketing and a decrease in ancillary products sold. Data processing decreased due to planned spending decreases during 2002 compared to 2001.

        Other operating expense for year ended December 31, 2001, increased to $149.5 million from $117.9 million for the year ended December 31, 2000. This increase is due primarily to increases in credit card servicing, salaries and benefits, data processing expenses, and other expenses, offset by a decrease in marketing and solicitation expenses. Credit card servicing costs, including collections and customer service, increased due to the increase in our managed receivables. Based on anticipated growth in our managed receivables, we increased our infrastructure, customer service and collection personnel. Salaries and benefits, professional fees, data processing, net occupancy and other expenses increased as our operations expanded to service the increase in managed receivables. We reduced our marketing and solicitation efforts during the second half of 2001 as a result of concerns relating to the availability of financing, general economic conditions and uncertainty regarding credit quality of accounts we historically have targeted. Our growth rate in 2001 and 2002 was negatively impacted by this reduction in marketing. Ancillary product expense increased due to the additional sales of products and services that took place during 2001, including insurance products and memberships.

        Other expenses include fraud, travel and entertainment, insurance, hiring expense, corporate communications, leased equipment expenses, office supplies and other miscellaneous expenses. Expenses in this category other than fraud increased incrementally as we added infrastructure to support the growth in managed receivables. Our fraud expense includes the expense of unauthorized use of the credit cards including identity theft or purchases on lost or stolen cards. To date, we have experienced very little fraud for unauthorized use, and the total expense has approximated 0.2% of our average managed receivables in any given year.

Income Taxes

        Income taxes were $3.2 million for the year ended December 31, 2002, $1.5 million for the year ended December 31, 2001 and $41.8 million for the year ended December 31, 2000. Our effective tax rate was 35.0% for 2002, 35.0% for 2001 and 33.7% for 2000. See Note 11 (Income Taxes) to our consolidated financial statements included elsewhere herein for further explanation of the income tax expense and a reconciliation of reported income taxes to the amount utilizing the federal statutory rate.

Selected Credit Card Data

         Securitizations are treated as sales under GAAP. As such, we remove the securitized receivables from our consolidated balance sheet. The performance of the underlying credit card receivables will nevertheless affect the future cash flows we actually receive. The information in the following table is presented to reflect the credit card receivables that we have securitized, the credit card receivables associated with retained interests that we have acquired (e.g., from Federated in 2002) and 50% of the credit card receivables underlying the CSG Trust (which reflects our ownership percentage in CSG). We have included 50% of the managed receivables underlying the CSG Trust because we have a 50% interest in CSG, which owns the retained interest in the CSG Trust. CSG's cash flows and income are dependent on how the receivables in the CSG Trust perform, and therefore, our cash flows and income are dependent upon 50% of the managed receivables. In addition to owning our 50% interest in CSG,

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we are the servicer for 100% of the receivables in the CSG Trust, and we receive a servicing fee from the CSG Trust which we believe to be adequate compensation for the servicing we perform.

        The numerator of the net interest margin calculation includes all accrued finance charge and late fee income billed on all outstanding receivables, less interest expense as well as accrued finance charge and fee charge offs. The numerator of our other credit card income ratio includes other credit card fees, such as over-limit fees, cash advance fees, maintenance fees, miscellaneous fees, interchange income and ancillary product income. Our operating ratio numerator includes all expenses associated with our business, net of any servicing income we receive as servicer for the CSG Trust, other than marketing and solicitation and ancillary product expenses. Each of the aforementioned ratios is expressed as a percentage of average managed receivables.

        The portfolios we acquired in 1998 were acquired at substantial discounts. The retained interests in the CSG Trust that CSG acquired in 2002 and the retained interests in the Federated Trust that we acquired in 2002 both were acquired at substantial discounts as well. As to the managed receivables underlying the 1998 and 2002 acquisitions, the presented credit card data excludes some of the acquired receivables and the related accounts, which, at the time of purchase, were in a late delinquency status. Our belief is that these receivables were either in the process of being charged off by the seller due to delinquency or were likely to be charged off in the near term. In each purchase, these receivables were purchased as part of the portfolio as the sellers desired to sell the entire portfolio. The same representations and warranties from the sellers were made on these receivables that were made on the entire portfolio; however, the sellers did not provide any representations or warranties as to the ability or willingness of the any of the cardholders to repay their balances. There is no recourse to any seller in the event that cardholders simply do not pay the account balances that have been acquired.

        The following table summarizes the managed receivables and related accounts underlying our acquisitions, as well as those receivables and accounts that have been excluded from our credit card data:

        As noted above, the portfolios acquired during 1998 and 2002 were acquired at substantial discounts. A portion of each discount related to those excluded receivables and accounts noted above. Another portion of each discount related to the credit quality of the remaining acquired receivables and was calculated as the difference between the face amount of the receivables purchased (less the excluded receivables described above) and the expected future cash flows expected to be collected from the receivables. The balance of the discount for each purchase is not needed for credit quality, is

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referred to as accretable yield, and is being amortized into net interest margin, using the interest method over the estimated life of each acquired portfolio for purposes of reporting our selected credit card data. As of the close of each financial reporting period, we evaluate the appropriateness of the credit quality discount component of our acquisition discount and the accretable yield component of our acquisition discount based on actual and projected future results. Although it has not happened to date, should we determine that the amount allocated to credit quality discount exceeds the needed amount, we will re-allocate the unused credit quality discount to our accretable yield. Such an adjustment would not affect our reported GAAP income, but would affect the amounts included within this selected credit card data discussion, in particular net interest margin and adjusted net charge offs. The following table summarizes the discounts components associated with the acquired portfolios as they were computed at the date of acquisition:

        Our net interest margins are influenced by a number of factors, including the level of accrued finance charges and late fees billed, the weighted average cost of funds, amortization of the accretable yield component of our acquisition discounts for portfolio purchases and the level of our accrued finance charge and fee charge offs. Our net interest margin for the three months ended December 31, 2002, was 17.1%, as compared to 21.4% for the three months ended September 30, 2002. For the three months ended September 30, 2002, our net interest margin was favorably affected by the Federated acquisition and the acquisition of our ownership interest in CSG, which occurred during the third and second quarters of 2002, respectively. As previously explained, certain accounts in late delinquency status and those at or near charge-off at the time of acquisition are excluded from our selected credit card data. For the first six to nine months or so following the portfolio acquisition date, the exclusion of these accounts will yield diminished charge offs of accrued finance charges and fees. As we saw during the fourth quarter and will continue to see throughout the first half of 2003, the level of accrued finance charge and fee charge-offs normalize with the seasoning of the acquired portfolios. That is the non-excluded accounts that we have acquired age into later delinquency buckets and charge off. This explains the reduction of our net interest margin during the fourth quarter of 2002 and our expected further decline in the net interest margin during the first half of 2003. Also noteworthy is the drop in our second quarter net interest margin, which was caused by the changes we made during the second quarter in how we estimate finance charge receivables and accrued interest and fees earned but not yet billed. During the second quarter of 2002, we revised our accrued balance to better estimate the collectible portion of these finance charges and fees. The change resulted in a reduction in our second quarter net interest margin of approximately 2.1%.

        Each quarter, we re-underwrite our portfolio to price our products to appropriately reflect the level of each customer's credit risk. As part of this underwriting process, existing customers may be offered increased or decreased pricing depending on their credit risk as well as their supply and demand for credit. Increases in pricing may increase our net interest margin, while decreases in pricing may reduce our net interest margin.

        Our operating ratio includes all expenses associated with our business, net of any servicing income we receive as servicer for the CSG Trust, other than marketing and solicitation and ancillary product expenses, and is expressed as a percentage of average managed receivables. Our operating ratio fluctuates based on our rate of receivables growth and the level of our expenditures on our

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infrastructure, our personnel, our collections and customer service operations, and our database management system. The operating ratio decreased through June 30, 2002, due to the cost cutting measures that were implemented at the beginning of 2002 and increased after June 30, 2002, due to our addition of capacity based on the increased staffing and servicing requirements that resulted from the acquisitions made during 2002.

Asset Quality

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

        Our strategy for managing delinquency and receivables losses consists of active account management throughout the customer relationship. This strategy includes credit line management and pricing based on the risk of the credit card accounts. See "Collection Strategies" below for further discussion.

        Delinquencies.    Delinquencies have the potential to impact net income in the form of net credit losses. Delinquencies are also costly in terms of the personnel and resources dedicated to resolving them. A credit card account is contractually delinquent if the minimum payment is not received by the specified date on the customer's statement. It is our policy to continue to accrue interest and fee income on all credit card accounts, except in limited circumstances, until the account and all related receivables, interest and other fees are charged off. See the "Charge offs" discussion as well.

        We are using our account management strategies on our portfolio, which are intended to reduce the expected increase in delinquency rates, as our portfolio continues to mature. Examples of management strategies include conservative credit line management, purging of inactive accounts and collection strategies (see "Collections Strategies" below) intended to optimize the effective account-to-collector ratio across delinquency buckets. We measure the success of these efforts by measuring delinquency rates.

        The following table presents the delinquency trends of our credit card receivables portfolio on a managed receivables portfolio basis, as of the close of each year. The 2002 data includes delinquency data for our 50% share of the managed receivables that are owned by CSG.

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        Our 60 or more days past due delinquency rates have increased due to the seasoning of the originated portfolios and higher delinquency rates associated with the receivables included in our 2002 acquisitions. We expect the portfolio delinquencies to continue to increase into the first half of 2003 as the receivables acquired in connection with our 2002 acquisitions age into later delinquency status for the first six to nine months or so after the date of their acquisition.

        The following table separately reports our receivables delinquency trends for our originated portfolio as of the close of each year:

        The increase in the 60 or more days past due delinquency rates in our originated portfolio is primarily reflected in the 90 or more days past due category. We anticipate that this increase will cause a rise in our charge off levels for the first quarter of 2003 as these receivables for which we do not receive a payment will charge off when they age past 180 days. We anticipate fairly stable delinquency rates in our originated portfolio going forward compared to our delinquencies as of December 31, 2002, and some of our new 2003 collections initiatives have improved the delinquency rates that we have seen thus far in 2003. Our delinquency rates have increased in general due primarily to the seasoning of receivables that were originated during 2000 and 1999 and the generally poor economic conditions that have prevailed during 2001 and 2002.

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        The following table presents the delinquency trends of our purchased portfolio at the close of each year: