**SECURITIES AND EXCHANGE COMMISSION**

**WASHINGTON,D.C. 20549**

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FORM 10-Q

**Forthe quarterly period ended June 30, 2005**

**of**

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

 

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

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

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CompuCredit’s Common Stock, nopar value per share, is registered pursuant to Section 12(g) of theSecurities Exchange Act of 1934.

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

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

As of July 31, 2005,48,696,905 shares of Common Stock, no par value, of the registrant wereoutstanding.

 

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**COMPUCREDITCORPORATIONFORM 10-QTABLE OF CONTENTSJune 30, 2005**
|               | ** **            | ** **                                                                                       | **Page**   |
|---------------|-----------------------|--------------------------------------------------------------------------------------------------|------------|
| PART I.  | FINANCIAL INFORMATION | ** **                                                                                       | ** ** | ** ** |
|          | Item 1.               | Financial Statements (Unaudited)                                                                 |       |   |   |
|          |                  | Condensed Consolidated Balance Sheets                                                            |       | 3 |   |
|          |                  | Condensed Consolidated Statements of Operations                                                  |       | 4 |   |
|          |                  | Condensed Consolidated Statement of Shareholders’ Equity                                    |       | 5 |   |
|          |                  | Condensed Consolidated Statements of Cash Flows                                                  |       | 6 |   |
|          |                  | Notes to Condensed Consolidated  Financial Statements                                            |       | 7 |   |
|          | Item 2.               | Management’s Discussion and Analysis of  Financial Condition and Results of Operations |       | 23 |   |
|          | Item 3.               | Quantitative and Qualitative  Disclosures About Market Risk                                      |       | 47 |   |
|          | Item 4.               | Controls and Procedures                                                                          |       | 48 |   |
| PART II. | OTHER INFORMATION     |                                                                                             | 49         |   |
|          | Item 1.               | Legal Proceedings                                                                                |       | 49 |   |
|          | Item 2.               | Changes in Securities, Use of  Proceeds and Issuer Purchases of Equity Securities                |       | 49 |   |
|          | Item 3.               | Defaults Upon Senior Securities                                                                  |       | 50 |   |
|          | Item 4.               | Submission of Matters to a  Vote of Security Holders                                             |       | 50 |   |
|          | Item 5.               | Other Information                                                                                |       | 50 |   |
|          | Item 6.               | Exhibits                                                                                         |       | 50 |   |
|          |                  | Signatures                                                                                       |       | 51 |   |

 

2

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**CompuCreditCorporation and SubsidiariesCondensed Consolidated Balance Sheets**
| ** **                                                                                                                                                        | ** ** | **June 30,  2005**              | ** ** | ** December 31,   2004** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|-----------------------------------------|------------|
| ** **                                                                                                                                                        | ** ** | **(Unaudited)**                      | ** ** | ** **                              | ** ** |
| ** **                                                                                                                                                        | ** ** | **(Dollars in thousands)** | ** ** |
| **Assets**                                                                                                                                                        |       |                                 |       |                                    |       |   |   |
| Cash and cash  equivalents (including restricted cash of $11,839 at June 30, 2005 and  $11,615 at December 31, 2004)                                    |       | $                                    | 216,472    |                                    |       | $ | 68,240 |   |   |
| Securitized  earning assets                                                                                                                                       |       | 586,766                              |       |                                    | 536,718    |   |   |
| Non-securitized  earning assets, net                                                                                                                              |       | 306,373                              |       |                                    | 158,430    |   |   |
| Deferred costs,  net                                                                                                                                              |       | 35,130                               |       |                                    | 34,920     |   |   |
| Software,  furniture, fixtures and equipment, net                                                                                                                 |       | 34,462                               |       |                                    | 31,552     |   |   |
| Investments in  equity-method investees                                                                                                                           |       | 74,278                               |       |                                    | 42,059     |   |   |
| Intangibles, net                                                                                                                                                  |       | 15,312                               |       |                                    | 10,643     |   |   |
| Goodwill                                                                                                                                                          |       | 131,143                              |       |                                    | 100,552    |   |   |
| Prepaid expenses  and other assets                                                                                                                                |       | 25,241                               |       |                                    | 20,412     |   |   |
| Total assets                                                                                                                                                      |       | $                                    | 1,425,177  |                                    |       | $ | 1,003,526 |   |   |
| **Liabilities**                                                                                                                                                   |       |                                 |       |                                    |       |   |   |
| Accounts payable  and accrued expenses                                                                                                                            |       | $                                    | 79,210     |                                    |       | $ | 36,088 |   |   |
| Notes payable                                                                                                                                                     |       | 145,609                              |       |                                    | 83,624     |   |   |
| Convertible  senior notes                                                                                                                                         |       | 250,000                              |       |                                    | —     |   |   |
| Deferred revenue                                                                                                                                                  |       | 87,954                               |       |                                    | 29,830     |   |   |
| Current and  deferred income tax liabilities                                                                                                                      |       | 105,532                              |       |                                    | 115,786    |   |   |
| Total liabilities                                                                                                                                                 |       | 668,305                              |       |                                    | 265,328    |   |   |
| Minority interests                                                                                                                                                |       | 53,187                               |       |                                    | 54,308     |   |   |
| **Shareholders’  equity**                                                                                                                                    |       |                                 |       |                                    |       |   |   |
| Common stock, no  par value, 150,000,000 shares authorized: 53,385,718 and 53,159,253  issued at June 30, 2005 and December 31, 2004, respectively |       | —                               |       |                                    | —     |   |   |
| Additional  paid-in capital                                                                                                                                       |       | 312,128                              |       |                                    | 303,356    |   |   |
| Treasury stock,  at cost, 4,745,646 and 1,914,646 shares at June 30, 2005 and  December 31, 2004                                                   |       | (125,927                             | )          |                                    | (26,721    | ) |   |
| Deferred  compensation                                                                                                                                            |       | (6,405                               | )          |                                    | (922       | ) |   |
| Warrant                                                                                                                                                           |       | 25,610                               |       |                                    | 25,610     |   |   |
| Retained earnings                                                                                                                                                 |       | 498,279                              |       |                                    | 382,567    |   |   |
| Total  shareholders’ equity                                                                                                                                  |       | 703,685                              |       |                                    | 683,890    |   |   |
| Total liabilities and  shareholders’ equity                                                                                                                  |       | $                                    | 1,425,177  |                                    |       | $ | 1,003,526 |   |   |

 

See accompanying notes.

3

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**CompuCreditCorporation and SubsidiariesCondensed Consolidated Statements of Operations(Unaudited)**
| ** **                                                                                                                  | ** ** | **For the three months ended  June 30,**                            | ** ** | **For the six months ended  June 30,**                              | ** ** |
|-----------------------------------------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|----------------------------------------------------------------------------------------------|------------|
| ** **                                                                                                                  | ** ** | **       2005       ** | ** ** | **       2004       ** | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                  | ** ** | **(In thousands, except per share data)**                           | ** ** |
| Interest income:                                                                                                            |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Consumer loans, including past due fees                                                                                     |       |                                                                                         | $          | 30,944                                                                                       |       |   |   | $ | 9,548 |   |   | $ | 44,981 |   | $ | 15,580 |   |
| Other                                                                                                                       |       |                                                                                         | 4,320      |                                                                                         |       |   | 1,944 |   |   | 7,232 |   | 3,617 |   |
| Total interest  income                                                                                                      |       |                                                                                         | 35,264     |                                                                                         |       |   | 11,492 |   |   | 52,213 |   | 19,197 |   |
| Interest expense                                                                                                            |       |                                                                                         | (16,373    | )                                                                                            |       |   | (680 | ) |   | (18,795 | ) | (771 | ) |
| Net interest income before fees and other income on non-securitized  earning assets and provision for loan losses |       |                                                                                         | 18,891     |                                                                                         |       |   | 10,812 |   |   | 33,418 |   | 18,426 |   |
| Fees and other income on non-securitized earning  assets                                                               |       |                                                                                         | 171,718    |                                                                                         |       |   | 37,563 |   |   | 272,484 |   | 68,338 |   |
| Provision for loan losses                                                                                                   |       |                                                                                         | (39,590    | )                                                                                            |       |   | (14,885 | ) |   | (58,814 | ) | (24,000 | ) |
| Net interest  income, fees and other income on non-securitized earning assets                                               |       |                                                                                         | 151,019    |                                                                                         |       |   | 33,490 |   |   | 247,088 |   | 62,764 |   |
| Other  operating income:                                                                                                    |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Fees and other income on securitized earning assets                                                                         |       |                                                                                         | 22,489     |                                                                                         |       |   | 35,312 |   |   | 59,981 |   | 75,955 |   |
| Servicing income                                                                                                            |       |                                                                                         | 37,693     |                                                                                         |       |   | 21,926 |   |   | 74,152 |   | 47,224 |   |
| Ancillary and interchange revenues                                                                                          |       |                                                                                         | 6,469      |                                                                                         |       |   | 5,888 |   |   | 12,002 |   | 10,126 |   |
| Equity in income (loss) of equity-method investees                                                                          |       |                                                                                         | 7,362      |                                                                                         |       |   | (223 | ) |   | 26,181 |   | (437 | ) |
| Total other  operating income                                                                                               |       |                                                                                         | 74,013     |                                                                                         |       |   | 62,903 |   |   | 172,316 |   | 132,868 |   |
| Other operating expense:                                                                                                    |       |                                                                                         |       |                                                                                         |       |   |   |   |   |   |   |   |   |
| Salaries and benefits                                                                                                       |       |                                                                                         | 7,882      |                                                                                         |       |   | 5,127 |   |   | 14,989 |   | 11,372 |   |
| Card and loan servicing                                                                                                     |       |                                                                                         | 63,173     |                                                                                         |       |   | 36,874 |   |   | 122,508 |   | 73,892 |   |
| Marketing and solicitation                                                                                                  |       |                                                                                         | 20,156     |                                                                                         |       |   | 9,030 |   |   | 38,206 |   | 14,729 |   |
| Depreciation                                                                                                                |       |                                                                                         | 4,346      |                                                                                         |       |   | 3,959 |   |   | 8,559 |   | 7,952 |   |
| Other                                                                                                                       |       |                                                                                         | 21,858     |                                                                                         |       |   | 10,857 |   |   | 40,916 |   | 20,772 |   |
| Total other  operating expense                                                                                              |       |                                                                                         | 117,415    |                                                                                         |       |   | 65,847 |   |   | 225,178 |   | 128,717 |   |
| Income before  minority interests and income taxes                                                                          |       |                                                                                         | 107,617    |                                                                                         |       |   | 30,546 |   |   | 194,226 |   | 66,915 |   |
| Minority  interests                                                                                                         |       |                                                                                         | (2,842     | )                                                                                            |       |   | (6,754 | ) |   | (12,003 | ) | (13,047 | ) |
| Income before  income taxes                                                                                                 |       |                                                                                         | 104,775    |                                                                                         |       |   | 23,792 |   |   | 182,223 |   | 53,868 |   |
| Income taxes                                                                                                                |       |                                                                                         | (38,243    | )                                                                                            |       |   | (8,941 | ) |   | (66,511 | ) | (20,229 | ) |
| Net income                                                                                                                  |       |                                                                                         | $          | 66,532                                                                                       |       |   |   | $ | 14,851 |   |   | $ | 115,712 |   | $ | 33,639 |   |
| Net income  attributable to common shareholders                                                                             |       |                                                                                         | $          | 66,532                                                                                       |       |   |   | $ | 13,754 |   |   | $ | 115,712 |   | $ | 31,472 |   |
| Net income per  common share-basic                                                                                          |       |                                                                                         | $          | 1.33                                                                                         |       |   |   | $ | 0.29 |   |   | $ | 2.28 |   | $ | 0.65 |   |
| Net income per common  share-diluted                                                                                        |       |                                                                                         | $          | 1.29                                                                                         |       |   |   | $ | 0.28 |   |   | $ | 2.23 |   | $ | 0.64 |   |

 

See accompanying notes.

4

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**CompuCreditCorporation and SubsidiariesCondensed Consolidated Statement of Shareholders’ Equity(Unaudited)For the Six Months Ended June 30, 2005**
| ** **                                               | ** ** | ** **                           | ** ** | ** **  | ** ** | **Additional** | ** ** | ** **   | ** ** | ** **       | ** ** | ** **   | ** ** | ** **             | ** ** | **Total**  | ** ** |
|----------------------------------------------------------|------------|--------------------------------------|------------|-------------|------------|----------------|------------|--------------|------------|------------------|------------|--------------|------------|------------------------|------------|------------|------------|
| ** **                                               | ** ** | **Common Stock**                | ** ** | **Paid-In** | ** ** | **Treasury**   | ** ** | **Deferred** | ** ** | ** **       | ** ** | **Retained** | ** ** | **Shareholders’** | ** ** |
| ** **                                               | ** ** | **Shares**                           | ** ** | **Amount**  | ** ** | **Capital**    | ** ** | **Stock**    | ** ** | **Compensation** | ** ** | **Warrant**  | ** ** | **Earnings**           | ** ** | **Equity** | ** ** |
| ** **                                               | ** ** | **(Dollars in thousands)** | ** ** |
| Balance at  December 31, 2004                       |       | 53,159,253                           |       |        | $          | —         |       |         | $          | 303,356          |       | $            | (26,721    | )                      |       | $          | (922       | ) |   | $ | 25,610 |   | $ | 382,567 |   |   | $ | 683,890 |   |   |
| Exercise of  stock options, including  tax benefit       |       | 163,000                              |       |        | —     |           |       | 2,872        |       | —           |       |         | —     |                   |       | —     |       | — |   |   | 2,872 |   |   |
| Use of treasury stock to  satisfy stock option  exercise |       | (163,000                             | )          |        | —     |           |       | (928         | )          | 928              |       |         | —     |                   |       | —     |       | — |   |   | — |   |   |
| Issuance of restricted stock, net                        |       | 226,465                              |       |        | —     |           |       | 6,828        |       | —           |       |         | (6,828     | )                      |       | —     |       | — |   |   | — |   |   |
| Amortization of deferred compensation                    |       | —                               |       |        | —     |           |       | —       |       | —           |       |         | 1,345      |                   |       | —     |       | — |   |   | 1,345 |   |   |
| Purchase of treasury  stock                              |       | —                               |       |        | —     |           |       | —       |       | (100,134         | )          |         | —     |                   |       | —     |       | — |   |   | (100,134 | ) |   |
| Net income                                               |       | —                               |       |        | —     |           |       | —       |       | —           |       |         | —     |                   |       | —     |       | 115,712 |   |   | 115,712 |   |   |
| Balance at June 30,  2005                           |       | 53,385,718                           |       |        | $          | —         |       |         | $          | 312,128          |       | $            | (125,927   | )                      |       | $          | (6,405     | ) |   | $ | 25,610 |   | $ | 498,279 |   |   | $ | 703,685 |   |   |

 

See accompanying notes.

5

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**CompuCreditCorporation and SubsidiariesCondensed Consolidated Statements of Cash Flows (Unaudited)**
| ** **                                                                                   | ** ** | **For the six months  ended June 30,** | ** ** |
|----------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                   | ** ** | **2005**                                                        | ** ** | **2004** | ** ** |
| ** **                                                                                   | ** ** | **(In thousands)**                                         | ** ** |
| **Operating activities**                                                                     |       |                                                            |       |   |   |
| Net income                                                                                   |       | $                                                               | 115,712    |   | $ | 33,639 |   |
| Adjustments to reconcile net income to net cash  provided by (used in) operating activities: |       |                                                            |       |   |   |
| Depreciation  expense                                                                        |       | 8,559                                                           |       | 7,952 |   |
| Provision for loan  losses                                                                   |       | 58,814                                                          |       | 24,000 |   |
| Amortization  expense                                                                        |       | 1,366                                                           |       | 1,243 |   |
| Amortization of  deferred revenue/acquired servicing liability                               |       | (15,878                                                         | )          | (15,602 | ) |
| Amortization of  deferred compensation                                                       |       | 1,345                                                           |       | 216 |   |
| Minority interests                                                                           |       | 12,003                                                          |       | 13,047 |   |
| Securitization  income adjustment                                                            |       | (2,779                                                          | )          | — |   |
| Retained interests  income adjustment, net                                                   |       | 2,189                                                           |       | (75,745 | ) |
| Gain on bulk sale  of receivables                                                            |       | (69,559                                                         | )          | — |   |
| (Income in excess  of distributions from) loss on equity-method investments                  |       | (15,608                                                         | )          | 437 |   |
| Changes in assets and  liabilities, exclusive of business acquisitions:                      |       |                                                            |       |   |   |
| Increase in  deferred costs                                                                  |       | (2,932                                                          | )          | (20,157 | ) |
| Decrease in income  tax liability                                                            |       | (10,254                                                         | )          | (16,553 | ) |
| Increase in  uncollected fees on non-securitized earning assets                              |       | (34,127                                                         | )          | (12,473 | ) |
| Increase in  deferred revenue before amortization thereof                                    |       | 74,003                                                          |       | 13,380 |   |
| Other                                                                                        |       | 8,604                                                           |       | (1,270 | ) |
| Net cash provided  by (used in) operating activities                                         |       | 131,458                                                         |       | (47,886 | ) |
| **Investing activities**                                                                     |       |                                                            |       |   |   |
| Investments in  equity-method investees                                                      |       | (25,285                                                         | )          | — |   |
| Proceeds from  equity-method investments                                                     |       | 8,674                                                           |       | — |   |
| Investments in  securitized earning assets                                                   |       | (562,505                                                        | )          | (432,663 | ) |
| Proceeds from  securitized earning assets                                                    |       | 525,002                                                         |       | 552,021 |   |
| Investments in  non-securitized earning assets                                               |       | (533,023                                                        | )          | (81,006 | ) |
| Proceeds from  non-securitized earning assets                                                |       | 556,324                                                         |       | 31,787 |   |
| Acquisition of  sub-prime lenders’ assets                                               |       | (133,957                                                        | )          | (107,179 | ) |
| Purchases and  development of software, furniture, fixtures and equipment                    |       | (9,493                                                          | )          | (3,912 | ) |
| Net cash used in  investing activities                                                       |       | (174,263                                                        | )          | (40,952 | ) |
| **Financing activities**                                                                     |       |                                                            |       |   |   |
| Minority interests  distributions, net of contributions                                      |       | (13,124                                                         | )          | (7,500 | ) |
| Proceeds from  exercise of stock options                                                     |       | 1,752                                                           |       | 738 |   |
| Purchase of  treasury stock                                                                  |       | (100,134                                                        | )          | (18,174 | ) |
| Proceeds from  issuance of convertible senior notes                                          |       | 250,000                                                         |       | — |   |
| Debt issuance costs                                                                          |       | (10,645                                                         | )          | (1,484 | ) |
| Proceeds from borrowings                                                                     |       | 111,340                                                         |       | 55,818 |   |
| Repayment of  borrowings                                                                     |       | (48,152                                                         | )          | (3,376 | ) |
| Net cash provided  by financing activities                                                   |       | 191,037                                                         |       | 26,022 |   |
| **Net  increase (decrease) in cash**                                                         |       | 148,232                                                         |       | (62,816 | ) |
| Cash and cash  equivalents at beginning of period                                            |       | 68,240                                                          |       | 122,526 |   |
| Cash and cash  equivalents at end of period                                                  |       | $                                                               | 216,472    |   | $ | 59,710 |   |
| **Supplemental cash flow information**                                                       |       |                                                            |       |   |   |
| Cash paid for  interest                                                                      |       | $                                                               | 16,814     |   | $ | 687 |   |
| Cash paid for  income taxes                                                                  |       | $                                                               | 74,985     |   | $ | 36,783 |   |
| **Supplemental non-cash information**                                                        |       |                                                            |       |   |   |
| Issuance of  warrant                                                                         |       | $                                                               | —     |   | $ | 25,610 |   |
| Notes payable  associated with capital leases                                                |       | $                                                               | 3,357      |   | $ | 2,444 |   |
| Notes payable  associated with investments in securities                                     |       | $                                                               | 4,422      |   | $ | 2,800 |   |
| Accretion of  preferred stock dividends                                                      |       | $                                                               | —     |   | $ | 2,158 |   |
| Issuance of restricted  stock                                                                |       | $                                                               | 6,828      |   | $ | 91 |   |

 

See accompanying notes.

6

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**CompuCreditCorporation and SubsidiariesNotes to Condensed Consolidated Financial Statements(Unaudited)June 30, 2005**

**1.**   Basis of Presentation

The Company’s condensed consolidated financialstatements have been prepared in accordance with accounting principlesgenerally accepted in the United States of America (“GAAP”) for interimfinancial information and with the instructions to Form 10-Q and Article 10of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly,they do not include all of the information and notes required by GAAP forcomplete consolidated financial statements. In the opinion of management, allnormal recurring adjustments considered necessary to fairly state the resultsfor the interim periods presented have been included. The preparation ofinterim condensed consolidated financial statements in conformity with GAAPrequires management to make estimates and assumptions that affect the reportedamounts of assets and liabilities and the disclosure of contingent assets andliabilities at the date of the financial statements, as well as the reportedamounts of revenues and expenses during the reporting period. Actual resultscould differ from these estimates. Certain estimates, such as credit losses,payment rates, discount rates and the yield earned on securitized receivables,significantly affect the Company’s reported gains and losses on securitizationsand income from retained interests in credit card receivables securitized (bothof which are components of fees and other income on securitized earning assetson the Company’s condensed consolidated statements of operations) and theCompany’s reported value of securitized earning assets on its condensedconsolidated balance sheets. Additionally, estimates of future credit losses onthe Company’s non-securitized loans and fees receivable have a significantimpact on the provision for loan losses within the Company’s condensedconsolidated statements of operations and loans and fees receivable, net, whichis a component of non-securitized earning assets, net on the Company’scondensed consolidated balance sheets. Operating results for the three and sixmonths ended June 30, 2005 are not necessarily predictive of results forthe year ending December 31, 2005. These unaudited condensed consolidatedfinancial statements should be read in conjunctionwith the notes to the consolidated financial statements for the year ended December 31,2004 contained in the Company’s Annual Report on Form 10-K filed with theSEC.

Certain amounts in priorperiod financial statements have been reclassified to conform to the currentperiod presentation. The primary reclassification relates to combiningsecuritized and non-securitized earning assets and results and cash flowsthereon on the Company’s condensed consolidated balance sheets, statements ofoperations and statements of cash flows. All significant intercompany balancesand transactions have been eliminated for financial reporting purposes.

**2.**   Significant Accounting Policies andCondensed Consolidated Financial Statement Components

The following is a summaryof significant accounting policies followed in preparation of the condensedconsolidated financial statements, along with a discussion of significantcondensed consolidated balance sheet components.

7

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***Non-Securitized Earning Assets, Net***

Non-securitizedearning assets, net on the Company’s condensed consolidated balance sheetsinclude loans and fees receivable, net, investments in previously charged-offreceivables and investments in securities, each of which is discussedseparately below. Details of non-securitized earning assets, net balances areas follows (in thousands of dollars):
| ** **                                         | ** ** | **Balance at  June 30, 2005** | ** ** | **Balance at  December 31, 2004** | ** ** |
|----------------------------------------------------|------------|----------------------------------------------|------------|--------------------------------------------------|------------|
| Loans and fees  receivable, net                    |       |                                         | $          | 256,206                                          |       |   |   | $ | 94,055 |   |   |
| Investments in  previously charged-off receivables |       |                                         | 14,550     |                                             |       |   | 15,094 |   |   |
| Investments in  securities                         |       |                                         | 35,617     |                                             |       |   | 49,281 |   |   |
| Non-securitized earning  assets, net               |       |                                         | $          | 306,373                                          |       |   |   | $ | 158,430 |   |   |

 

***Loans and FeesReceivable, Net****.  *Loansand fees receivable, net include receivables associated with: the Company’slargely fee-based credit card offering to consumers at the lower end of theFICO scoring range; the Company’s micro-loan activities; and the Company’s autofinance segment, none of which have been securitized in off balance sheetsecuritizations. These receivables are shown net of an allowance foruncollectible loans and fees. Loans and fees receivable are also presented netof unearned fees (or “deferred revenue”) in accordance with Statement ofFinancial Accounting Standards No. 91, “Accounting for Nonrefundable Feesand Costs Associated with Originating or Acquiring Receivables and InitialDirect Costs of Leases.”

The loans and fees receivable associated with theCompany’s largely fee-based credit card offering to consumers at the lower endof the FICO scoring range consist of finance charges and fees, as well asprincipal balances receivable from this class of customer. In addition tofinance charges on principal balances, the fees associated with this particularproduct offering consist principally of activation, annual, monthlymaintenance, over-limit, cash advance and returned check fees. The activationfees are recognized over the estimated life of a customer (approximately oneyear), and the annual fees are recognized over the year to which they apply.The loans and fees receivable associated with the Company’s micro-loanactivities include principal balances and associated fees due from consumers,as well as marketing and servicing fees receivable from a third-party financialinstitution; these fees are recognized as earned—generally over a two-weekperiod. Loans and fees receivable associated with the Company’s auto financebusiness include principal balances and associated fees and interest, net ofthe unearned portion of loan discounts due from customers which is recognizedover the life of each loan.

Theallowance for uncollectible loans and fees is provided for that portion of theloans and fees receivable that management believes will not ultimately becollected. The components of loans and fees receivable, net are as follows (inmillions of dollars):
| ** **                                  | ** ** | **Balance at  December 31, 2004** | ** ** | **Additions** | ** ** | **Subtractions** | ** ** | **Receivables  Added Through  Acquisitions** | ** ** | **Balance at  June 30, 2005** | ** ** |
|---------------------------------------------|------------|--------------------------------------------------|------------|---------------|------------|------------------|------------|---------------------------------------------------|------------|----------------------------------------------|------------|
| Loans and fees  receivable, gross           |       |                                             | $          | 145.2         |       |             |       | $                                                 | 526.3      |                                         |       |   | $ | (466.1 | ) |   |   | $ | 151.6 |   |   |   | $ | 357.0 |   |   |
| Deferred revenue                            |       |                                             | (22.0      | )             |       |             | (66.5      | )                                                 |       |                                         | 51.4       |   |   |   | (24.9 | ) |   |   | (62.0 | ) |   |
| Allowance for  uncollectible loans and fees |       |                                             | (29.1      | )             |       |             | (58.8      | )                                                 |       |                                         | 49.1       |   |   |   | — |   |   |   | (38.8 | ) |   |
| Loans and fees  receivable, net             |       |                                             | $          | 94.1          |       |             |       | $                                                 | 401.0      |                                         |       |   | $ | (365.6 | ) |   |   | $ | 126.7 |   |   |   | $ | 256.2 |   |   |

 

Interest income associated with these loans and feesreceivable for the three and six months ended June 30, 2005 and 2004 isincluded in interest income under the consumer loans, including past due feescategory on the accompanying condensed consolidated statements of operations.Additionally, 

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$57.9 million, $106.6million, $24.5 million and $41.2 million of fee income associatedwith these loans and fees receivable for the three and six months ended June 30,2005 and 2004, respectively, is reflected in fees and other income fromnon-securitized earning assets on the condensed consolidated statement ofoperations. As of June 30, 2005, the weighted-average remaining amortizationperiod for the $62.0 million of deferred revenue reflected in the abovetable was 10.8 months.

***Investments in Previously Charged-Off Receivables.  ***Forthe three and six months ended June 30, 2005, the following table shows aroll-forward of the Company’s investments in previously charged-off receivablesactivities (in thousands of dollars):
| ** **                                                                                                                                                                                                                           | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|--------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Unrecovered  balance at beginning of period                                                                                                                                                                                          |       |                                                  | $          | 18,134                                              |       |   |   | $ | 15,094 |   |   |
| Acquisitions of  defaulted accounts                                                                                                                                                                                                  |       |                                                  | 9,651      |                                                |       |   | 19,974 |   |   |
| Cost-recovery  method income recognized on defaulted accounts (included as a  component of fees and other income on non-securitized earning assets on the  Company’s condensed consolidated statements of operations) |       |                                                  | 17,484     |                                                |       |   | 34,992 |   |   |
| Cost-recovery  method income recognized on bulk sale of receivables (See Note 5, “Sale  of Investments in Previously Charged-Off Receivables and Forward Flow  Contract.”)                                       |       |                                                  | 69,559     |                                                |       |   | 69,559 |   |   |
| Cash collections                                                                                                                                                                                                                     |       |                                                  | (24,278    | )                                                   |       |   | (49,069 | ) |   |
| Cash collections  on bulk sale of receivables (See Note 5, “Sale of Investments in  Previously Charged-Off Receivables and Forward Flow Contract.”)                                                         |       |                                                  | (76,000    | )                                                   |       |   | (76,000 | ) |   |
| Unrecovered  balance at June 30, 2005                                                                                                                                                                                           |       |                                                  | $          | 14,550                                              |       |   |   | $ | 14,550 |   |   |
| Estimated remaining  collections (“ERC”)                                                                                                                                                                                   |       |                                                  | $          | 36,204                                              |       |   |   | $ | 36,204 |   |   |

 

In June of 2005, a subsidiary of the Company solda significant pool of its previously charged-off receivables; See Note 5, “Saleof Investments in Previously Charged-Off Receivables and Forward Flow Contract.”Remaining after this sale are the Company’s pools of previously charged-offreceivables primarily associated with accounts for which the debtors have filedfor bankruptcy protection under Chapter 13 of the United States Bankruptcy Code(“Chapter 13 Bankruptcies”) or accounts participating in or acquired inconnection with the subsidiary’s balance transfer program. Additionally, thesubsidiary of the Company is expected to continue to acquire for resale underthe Forward Flow Contract discussed in Note 5, certain previously charged-offreceivables from trusts, the receivables of which are serviced by the Company,as well as certain previously charged-off receivables associated with theCompany’s largely fee-based credit card offering to consumers at the lower endof the FICO scoring range.

The life of each pool of charged-off receivablestypically acquired by the Company is generally estimated to be between 24 and36 months for normal delinquency charged-off accounts and approximately 60months for Chapter 13 Bankruptcies. The Company anticipates collectingapproximately 35.7% of the ERC of the existing accounts over the next twelvemonths, with the balance to be collected thereafter.

***Investments in Securities.  ***TheCompany periodically invests through the open market in debt and equitysecurities that the Company feels will provide it with an adequate return.Generally, these debt and equity securities will be purchased outright orpartially funded using existing margin accounts; see Note 11, “NotesPayable,” below. The Company’s purchased debt and equity securities generallyare classified as trading securities. Additionally, the Company hasoccasionally received distributions of debt securities 

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from its equity-methodinvestees; the Company has classified such distributed debt securities as heldto maturity.

***Fees and Other Income on Non-Securitized EarningAssets***

Fees and other income on non-securitized earningassets include (1) lending fees associated with the Company’s micro-lendingactivities; (2) fees associated with the Company’s largely fee-based cardoffering to consumers at the lower end of the FICO scoring system; (3) incomeassociated with the Company’s de-securitized Fingerhut receivables; (4) incomeassociated with the Company’s investments in previously charged-offreceivables; (5) gain associated with the Company’s bulk sale ofpreviously charged-off receivables (See Note 5, “Sale of Investments inPreviously Charged-Off Receivables and Forward Flow Contract.”); (6) transactionand other fees associated with the Company’s stored-value card offering;and (7) gains or losses associated with the Company’s investments in debtsecurities.

Detailsof the components of fees and other income on non-securitized earning assetsfor the three and six months ended June 30, 2005 and 2004 are as follows:
| ** **                                                                                                                                                                          | ** ** | **For the three months  ended June 30,** | ** ** | **For the six months  ended June 30,** | ** ** |
|-------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                                                                                                                          | ** ** | **2005**                                                          | ** ** | **2004**                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                                                                                                                          | ** ** | **(In thousands)**                                           | ** ** |
| Fees and other income on  non-securitized earning assets:                                                                                                                           |       |                                                              |       |                                                            |       |   |   |   |   |
| Retail micro-loan fees                                                                                                                                                              |       | $                                                                 | 18,327     |                                                            | $          | 3,041 |   | $ | 36,204 |   | $ | 3,041 |   |
| Fees on non-securitized credit card receivables                                                                                                                                     |       | 38,227                                                            |       | 21,462                                                          |       | 67,955 |   | 38,205 |   |
| De-securitized Fingerhut receivables                                                                                                                                                |       | 23,412                                                            |       | —                                                          |       | 56,144 |   | — |   |
| Investments in previously charged-off receivables                                                                                                                                   |       | 17,484                                                            |       | 12,982                                                          |       | 34,992 |   | 27,001 |   |
| Gain on bulk sale of previously charged-off  receivables (See Note 5, “Sale  of Investments in Previously Charged-Off Receivables and Forward Flow  Contract.”) |       | 69,559                                                            |       | —                                                          |       | 69,559 |   | — |   |
| Other                                                                                                                                                                               |       | 4,709                                                             |       | 78                                                              |       | 7,630 |   | 91 |   |
| Total                                                                                                                                                                               |       | $                                                                 | 171,718    |                                                            | $          | 37,563 |   | $ | 272,484 |   | $ | 68,338 |   |

 

***Fees and Other Income on Securitized Earning Assets***

Feesand other income on securitized earning assets include (1) annualmembership, over-limit, cash advance, returned check and other fees associatedwith our credit card products, (2) securitization gains and losses and (3) incomefrom retained interests in credit card receivables securitized, each of whichis detailed in the following table for the three and six months ended June 30,2005 and 2004.
| ** **                                                             | ** ** | **For the three months  ended June 30,** | ** ** | **For the six months  ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                                          | ** ** | **2004**                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **(In thousands)**                                           | ** ** |
| Securitization  income                                                 |       | $                                                                 | 1,192      |                                                            | $          | — |   | $ | 2,779 |   | $ | — |   |
| Income from  retained interests in credit card receivables securitized |       | 6,276                                                             |       | 16,601                                                          |       | 26,145 |   | 35,993 |   |
| Fees on  securitized receivables                                       |       | 15,021                                                            |       | 18,711                                                          |       | 31,057 |   | 39,962 |   |
| Total fees and other  income on securitized earning assets             |       | $                                                                 | 22,489     |                                                            | $          | 35,312 |   | $ | 59,981 |   | $ | 75,955 |   |

 

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***Stock Options***

The Company has five stock-based employee compensationplans (an employee stock purchase plan, three stock option plans and arestricted stock plan). As permitted by Statement of Financial AccountingStandards No. 123, “Accounting for Stock-Based Compensation” (“Statement No. 123”),the Company accounts for its stock option plans under the recognition andmeasurement principles of Accounting Principles Board Opinion No. 25, “Accountingfor Stock Issued to Employees” (“APB 25”), and its related interpretations.Because all options granted under the Company’s stock option plans had anexercise price equal to the market value of the underlying common stock on thedate of grant, no stock-based compensation cost is reflected in net incomeunder the Company’s application of APB 25. The Company issued no stock optionsduring the six months ended June 30, 2005.

Thefollowing table presents the effects on net income and net income per share ifthe Company had recognized compensation expense under the fair valuerecognition provisions of Statement No. 123:
| ** **                                                                               | ** ** | **For the three months  ended June 30,**  | ** ** | **For the six months  ended June 30,** | ** ** |
|------------------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                               | ** ** | **2005**                                                           | ** ** | **2004**                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                               | ** ** | **(In thousands, except per share data)** | ** ** |
| Net income  attributable to common shareholders, as reported                             |       | $                                                                  | 66,532     |                                                            | $          | 13,754 |   | $ | 115,712 |   | $ | 31,472 |   |
| Stock-based  employee compensation expense determined under fair value basis, net of tax |       | (189                                                               | )          | (149                                                            | )          | (378 | ) | (292 | ) |
| Pro-forma net  income                                                                    |       | $                                                                  | 66,343     |                                                            | $          | 13,605 |   | $ | 115,334 |   | $ | 31,180 |   |
| Earnings per share:                                                                      |       |                                                               |       |                                                            |       |   |   |   |   |
| Basic—as reported                                                                   |       | $                                                                  | 1.33       |                                                            | $          | 0.29 |   | $ | 2.28 |   | $ | 0.65 |   |
| Basic—pro-forma                                                                     |       | $                                                                  | 1.32       |                                                            | $          | 0.29 |   | $ | 2.28 |   | $ | 0.65 |   |
| Diluted—as  reported                                                                |       | $                                                                  | 1.29       |                                                            | $          | 0.28 |   | $ | 2.23 |   | $ | 0.64 |   |
| Diluted—pro-forma                                                                   |       | $                                                                  | 1.29       |                                                            | $          | 0.28 |   | $ | 2.22 |   | $ | 0.63 |   |

 

Due to a variety of factors, including the timing andnumber of awards, the above pro-forma results may not be indicative of thefuture effect of stock option expensing on the Company’s results of operations.

In December 2004, theFASB issued a revised Statement of Financial Accounting Standards 123, “ShareBased Payment” (“Statement No. 123R”), to address the accounting forstock-based employee plans. The statement eliminates the ability to account forshare-based compensation transactions using APB 25 and instead requires thatsuch transactions be accounted for using a fair-value-based method ofaccounting. The adoption of this statement will result in income statementeffects similar to those reflected in the above pro-forma computations. TheCompany is required to adopt Statement No. 123R for interim and annualreporting beginning after December 15, 2005, and the adoption of thisstatement is not expected to have a material effect on the Company’s financialstatements.

**3.**   Segment Reporting

The Company operates primarily within one industryconsisting of five reportable segments by which it manages its business. TheCompany’s five reportable segments are: Credit Cards; Investments in PreviouslyCharged-Off Receivables; Retail Micro-Loans; Auto Finance; and Other.

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TheCompany measures the profitability of its reportable segments based on theirincome after allocation of specific costs and corporate overhead. Overheadcosts are allocated based on headcounts and other applicable measures in orderto better align costs with the associated revenues. Summary operating segmentinformation is as follows (in thousands of dollars):
| **Three Months Ended June 30, 2005**                     | ** ** | ** ** | ** ** | **Credit Cards** | ** ** | **Investments in  Previously  Charged-Off  Receivables(1)** | ** ** | **Retail Micro-  Loans** | ** ** | **Auto Finance** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------|------------|-----------|------------|-----------|------------|
| **Net  interest income, fees and other income on non-securitized earning assets** |       |       | $          | 38,757                |       |                                                             |       | $                             | 87,043     |                  |       |      | $          | 14,697    |       |   |   | $ | 9,553 |   |   | $ | 969 |   | $ | 151,019 |   |
| **Total  Other Operating Income**                                                 |       |       | $          | 65,049                |       |                                                             |       | $                             | 2,036      |                  |       |      | $          | 6,928     |       |   |   | $ | — |   |   | $ | — |   | $ | 74,013 |   |
| **Income  before Income Taxes**                                                   |       |       | $          | 29,030                |       |                                                             |       | $                             | 77,587     |                  |       |      | $          | 2,717     |       |   |   | $ | 2,973 |   |   | $ | (7,532 | ) | $ | 104,775 |   |
| **Loans  and fees receivable,  gross**                                            |       |       | $          | 170,729               |       |                                                             |       | $                             | —     |                  |       |      | $          | 31,880    |       |   |   | $ | 151,937 |   |   | $ | 2,472 |   | $ | 357,018 |   |
| **Loans  and fees receivable, net**                                               |       |       | $          | 100,641               |       |                                                             |       | $                             | —     |                  |       |      | $          | 26,596    |       |   |   | $ | 127,304 |   |   | $ | 1,665 |   | $ | 256,206 |   |
| **Total Assets**                                                                  |       |       | $          | 917,569               |       |                                                             |       | $                             | 157,699    |                  |       |      | $          | 165,780   |       |   |   | $ | 172,319 |   |   | $ | 11,810 |   | $ | 1,425,177 |   |

 
| **Six Months Ended June 30, 2005**                       | ** ** | ** ** | ** ** | **Credit Cards** | ** ** | **Investments in  Previously  Charged-Off  Receivables(1)** | ** ** | **Retail Micro-  Loans** | ** ** | **Auto Finance** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|------------------------------------------------------------------|------------|-------------------------------|------------|-----------------------|------------|-----------|------------|-----------|------------|
| **Net  interest income, fees and other income on non-securitized earning assets** |       |       | $          | 102,767               |       |                                                             |       | $                             | 104,551    |                  |       |      | $          | 29,012    |       |   |   | $ | 9,553 |   |   | $ | 1,205 |   | $ | 247,088 |   |
| **Total  Other Operating Income**                                                 |       |       | $          | 157,917               |       |                                                             |       | $                             | 2,036      |                  |       |      | $          | 12,363    |       |   |   | $ | — |   |   | $ | — |   | $ | 172,316 |   |
| **Income  before Income Taxes**                                                   |       |       | $          | 104,293               |       |                                                             |       | $                             | 84,658     |                  |       |      | $          | 3,607     |       |   |   | $ | 2,973 |   |   | $ | (13,308 | ) | $ | 182,223 |   |
| **Loans  and fees receivable,  gross**                                            |       |       | $          | 170,729               |       |                                                             |       | $                             | —     |                  |       |      | $          | 31,880    |       |   |   | $ | 151,937 |   |   | $ | 2,472 |   | $ | 357,018 |   |
| **Loans  and fees receivable, net**                                               |       |       | $          | 100,641               |       |                                                             |       | $                             | —     |                  |       |      | $          | 26,596    |       |   |   | $ | 127,304 |   |   | $ | 1,665 |   | $ | 256,206 |   |
| **Total Assets**                                                                  |       |       | $          | 917,569               |       |                                                             |       | $                             | 157,699    |                  |       |      | $          | 165,780   |       |   |   | $ | 172,319 |   |   | $ | 11,810 |   | $ | 1,425,177 |   |

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(1)          Netinterest income, fees and other income on non-securitized earnings assetsincludes $69.6 million of gain on the bulk sale of previously charged-offreceivables (See Note 5, “Sale ofInvestments in Previously Charged-Off Receivables and Forward Flow Contract.”).
| **Three Months Ended June 30, 2004**                     | ** ** | ** ** | ** ** | **Credit Cards** | ** ** | **Investments in  Previously  Charged-Off  Receivables** | ** ** | **Retail Micro-  Loans** | ** ** | **Auto Finance** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|---------------------------------------------------------------|------------|-------------------------------|------------|-----------------------|------------|-----------|------------|-----------|------------|
| **Net  interest income, fees and other income on non-securitized earning assets** |       |       | $          | 18,329                |       |                                                          |       | $                             | 12,982     |                  |       |      | $          | 2,105     |       |   |   | $ | — |   |   | $ | 74 |   | $ | 33,490 |   |
| **Total  Other Operating Income**                                                 |       |       | $          | 60,492                |       |                                                          |       | $                             | —     |                  |       |      | $          | 2,411     |       |   |   | $ | — |   |   | $ | — |   | $ | 62,903 |   |
| **Income  before Income Taxes**                                                   |       |       | $          | 26,412                |       |                                                          |       | $                             | 2,253      |                  |       |      | $          | 807       |       |   |   | $ | — |   |   | $ | (5,680 | ) | $ | 23,792 |   |
| **Loans  and fees receivable, gross**                                             |       |       | $          | 78,772                |       |                                                          |       | $                             | —     |                  |       |      | $          | 19,503    |       |   |   | $ | — |   |   | $ | 380 |   | $ | 98,655 |   |
| **Loans  and fees receivable, net**                                               |       |       | $          | 45,025                |       |                                                          |       | $                             | —     |                  |       |      | $          | 16,068    |       |   |   | $ | — |   |   | $ | 247 |   | $ | 61,340 |   |
| **Total Assets**                                                                  |       |       | $          | 699,975               |       |                                                          |       | $                             | 22,384     |                  |       |      | $          | 115,470   |       |   |   | $ | — |   |   | $ | 4,040 |   | $ | 841,869 |   |

 

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| **Six Months Ended June 30, 2004**                       | ** ** | ** ** | ** ** | **Credit Cards** | ** ** | **Investments in  Previously  Charged-Off  Receivables** | ** ** | **Retail Micro-  Loans** | ** ** | **Auto Finance** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------------------------------------------------|------------|------------|------------|-----------------------|------------|---------------------------------------------------------------|------------|-------------------------------|------------|-----------------------|------------|-----------|------------|-----------|------------|
| **Net  interest income, fees and other income on non-securitized earning assets** |       |       | $          | 33,567                |       |                                                          |       | $                             | 27,001     |                  |       |      | $          | 2,105     |       |   |   | $ | — |   |   | $ | 91 |   | $ | 62,764 |   |
| **Total  Other Operating Income**                                                 |       |       | $          | 130,457               |       |                                                          |       | $                             | —     |                  |       |      | $          | 2,411     |       |   |   | $ | — |   |   | $ | — |   | $ | 132,868 |   |
| **Income  before Income Taxes**                                                   |       |       | $          | 54,108                |       |                                                          |       | $                             | 7,512      |                  |       |      | $          | 807       |       |   |   | $ | — |   |   | $ | (8,559 | ) | $ | 53,868 |   |
| **Loans  and fees receivable, gross**                                             |       |       | $          | 78,772                |       |                                                          |       | $                             | —     |                  |       |      | $          | 19,503    |       |   |   | $ | — |   |   | $ | 380 |   | $ | 98,655 |   |
| **Loans  and fees receivable, net**                                               |       |       | $          | 45,025                |       |                                                          |       | $                             | —     |                  |       |      | $          | 16,068    |       |   |   | $ | — |   |   | $ | 247 |   | $ | 61,340 |   |
| **Total Assets**                                                                  |       |       | $          | 699,975               |       |                                                          |       | $                             | 22,384     |                  |       |      | $          | 115,470   |       |   |   | $ | — |   |   | $ | 4,040 |   | $ | 841,869 |   |

 

**4.**   Shareholders’Equity

***Treasury Stock***

The Company’s Board ofDirectors has authorized a program to repurchase up to 10 million shares(or approximately 18.7%) of the Company’s outstanding common stock. Under theplan, the Company repurchases shares of its common stock from time to timeeither on the open market or through privately negotiated transactions incompliance with SEC guidelines. Concurrent with the Company’s second quarter of2005 issuance of $250.0 million of Convertible Senior notes due 2025 (see Note11, “Notes Payable”), the Company repurchased 2,994,000 shares of the Company’scommon stock for $100.0 million.

At its discretion, theCompany will use treasury shares to satisfy option exercises and restrictedstock awards. The Company uses the cost approach when accounting for therepurchase and reissuance of its treasury stock. During the three and six monthsended June 30, 2005, the Company reissued 94,135 and 163,000 treasuryshares in satisfaction of option exercises at a cost of $0.4 million and$0.8 million, respectively.

***Restricted ShareAwards***

The Company granted 32,780and 226,465 shares of restricted stock under its 2004 Restricted Stock Plan forthe three and six months ended June 30, 2005, respectively. The fairmarket value of granted restricted shares as of respective grant dates is shownnet of amortization as deferred compensation within consolidated shareholders’equity as of the close of each accounting period. The Company’s restrictedshare grants generally vest over a range of 24 to 36 months and are beingamortized to compensation expense ratably over the vesting period.

**5.**   Saleof Investments in Previously Charged-Off Receivables and Forward Flow Contract

In June of 2005, asubsidiary of the Company sold a portfolio of charged-off credit cardreceivables having a face amount of approximately $2.9 billion to EncoreCapital Group, Inc. (“Encore”) and agreed to sell Encore up to $3.25billion in face amount of the future charged-off credit card receivables atestablished pricing over the next five years (the “Forward Flow Contract”). Asconsideration for these transactions, the subsidiary received $143.0 million incash. The purchase price included $76.0 million related to the portfolio ofcharged-off credit card receivables and $67.0 million of deferred revenuerelated to the Forward Flow Contract. The sale of the portfolio of charged-offcredit card receivables resulted in a gain of $69.6 million which has beenrecorded in fees and other income on non-securitized earning assets on theCompany’s condensed consolidated statements of operations for the three and sixmonths ended June 30, 2005. Ten million dollars of the $67.0 million indeferred revenue related to the Forward Flow Contract is required to be held inescrow until the performance of certain conditions under the contract and isincluded in restricted cash on the Company’s condensed consolidated balancesheet; as such, this $10 million will be excluded from income recognitioncomputations until the conditions are satisfied. The 

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remaining$57.0 million of deferred revenue will be recognized into income over the lifeof the contract as the Company’s subsidiary delivers its associated volumes ofcharged-off credit card receivables to Encore in the future. Based on theForward Flow Contract, the Company’s subsidiary is expected to purchase fordelivery to Encore over the life of the contract, certain previouslycharged-off receivables from trusts, the receivables of which are serviced bythe Company, as well as certain previously charged-off receivables associatedwith the Company’s largely fee-based credit card offering to consumers at thelower end of the FICO scoring range. Any shortfalls in delivery of minimumperiodic dollar amounts of previously charged-off receivables to Encore couldresult in the subsidiary being required to return a portion of the purchaseprice related to the Forward Flow Contract.

**6.**   Investments in Equity-Method Investees

In January 2005, the Company purchased a 47.5%interest in a joint venture for $10.9 million, including transactioncosts. A wholly owned subsidiary of the Company and two unaffiliated investorsformed this entity in connection with the acquisition of $376.3 million(face amount) in credit card receivables. These receivables were thentransferred to a subsidiary of the joint venture, and then on to a trustpursuant to a Statement of Financial Accounting Standards No. 140, “Accountingfor Transfers and Servicing of Financial Assets and Extinguishments ofLiabilities” (“Statement No. 140”), transfer in exchange for notes and asubordinated, certificated interest issued by the trust. The Company accountsfor its investment in this joint venture and other similar investments inexistence as of June 30, 2005 under the equity method of accounting, andthese investments are included in investment in equity-method investees on theCompany’s condensed consolidated balance sheets.

During the second quarterof 2005, the Company made an $11.0 million payment in final settlement of itsobligations to a lender that financed the Company’s original equity investmentin CSG, LLC (“CSG’’), an equity-method investee. Under the terms of theoriginal loan agreement, in addition to principal payments to be made, whichwere repaid during the fourth quarter of 2002, the lender was entitled toreceive 15% of all future excess cash flows received by the Company from itsinvestment in CSG. The $11.0 settlement payment to the lender is includedwithin interest expense in the condensed consolidated statements of operationsfor the three and six month periods ended June 30, 2005; because of thispayment, the Company is now entitled to receive 100% of all future excess cashflows attributable to the Company’s investment in CSG. The Company anticipatesthat CSG will resume distributions of excess cash flows to its members(including the Company) during the fourth quarter of 2005.

**7.**   De-Securitized Fingerhut Receivables

Total income recognized relating to cash received onde-securitized Fingerhut receivables was $19.3 million and $46.2 millionfor the three and six months ended June 30, 2005, respectively, with nocorresponding amounts in the previous year, such amounts being included as acomponent of fees and other income on non-securitized earning assets on theCompany’s condensed consolidated statements of operations. The remaining excesscash flows that the Company expects to receive from the de-securitizedFingerhut receivables through December of 2008 are currently estimated tobe $64.1 million, with the Company expecting to receive 62.8% of thesecollections within the next 12 months.

Deferred gain associatedwith the Fingerhut receivables is being amortized into fees and other income onnon-securitized earning assets in the Company’s condensed consolidatedstatements of operations in a manner that corresponds with actual andanticipated future cash collections on the de-securitized Fingerhutreceivables; the income associated with amortization of this deferred gaintotaled $4.1 million and $9.9 million for the three and six months ended June 30,2005, respectively, with no corresponding amounts for the previous year. Approximately,$13.5 million of Fingerhut deferred gain is reflected within the deferredrevenue category on the Company’s condensed consolidated balance sheet as of June 30,2005.

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**8.**   Credit Card Receivables Acquisition

In January 2005, one of the Company’smajority-owned subsidiaries purchased $72.1 million (face amount) incredit card receivables for $42.0 million, including transaction costs.These receivables were then transferred to a trust pursuant to a Statement No. 140transfer in exchange for notes and a subordinated, certificated interest issuedby the trust, thereby resulting in securitization income of $1.6 million.To fund this purchase, the Company contributed $2.0 million into itsmajority-owned subsidiary. The assets and liabilities of the majority-ownedsubsidiary, and its associated earnings from operations, are presented as partof the Company’s condensed consolidated financial statements with a minorityinterest being shown to reflect the unaffiliated investor’s portion of theoperations. The minority interest associated with this subsidiary is not shownnet of tax because the subsidiary is a pass-through entity for income taxpurposes. For a fee that represents adequate compensation for servicing, theCompany has agreed to service the entire portfolio of credit card receivablesunderlying the trust.

See separately thediscussion of credit card receivables acquired during 2005 by the Company’sequity-method investee in Note 6, “Investments in Equity-Method Investees,”above.

**9.**   Auto Finance Acquisition

On April 1, 2005, theCompany completed the acquisition of Wells Fargo Financial’s “Consumer AutoReceivables” business unit. This acquisition included all of Consumer AutoReceivables’ assets, business operations and employees for approximately $121.5million including transaction costs. The acquisition was financed using $88.2million in debt (see Note 11 “Notes Payable”) with the remainder in cash. Uponacquisition, Consumer Auto Receivables had $128.9 millionauto-finance-related receivables (at face, net of unearned discounts) andoperated in thirty-eight states through its twelve branches, three regionalprocessing centers and national collection center at its Lake Mary, FLheadquarters. The business has approximately 300 employees. The results ofoperations of the auto finance business are included in the Company’s condensedconsolidated financial statements subsequent to the acquisition date and aretreated as a separate segment as shown in Note 3, “Segment Reporting,” above.Goodwill of approximately $22.5 million resulted from this transaction.

**10.**   Off Balance Sheet Arrangements

The Company securitizes through a master trust all ofits credit card receivables originated on a daily basis under its primarythird-party financial institution relationship (the “originated portfolio”),except for those credit card receivables underlying the Company’s largelyfee-based card offering to consumers at the lower end of the FICO scoringrange. The securitized credit card receivables are transferred to a mastertrust, which issues notes representing undivided ownership interests in theassets of the master trust. Additionally, during the first quarter of 2005, theCompany acquired receivables from a third party and subsequently securitizedthem. (See Note 8, “Credit Card Receivables Acquisition,” for a discussionof the first quarter of 2005 acquisition.)

All of the Company’soriginated and purchased credit card receivables, with the exception of the de-securitizedFingerhut receivables (see Note 7, “De-Securitized Fingerhut Receivables”)and as noted above those receivables associated with its largely fee-based cardoffering to consumers at the lower end of the FICO scoring range, are held bysecuritization trusts. The exclusive interest of the Company in thesesecuritized receivables is in the form of retained interests. GAAP requires theCompany to treat its transfers to the securitization trusts as sales, and thereceivables are removed from the Company’s condensed consolidated balancesheets. Under Statement No. 140, an entity recognizes the assets itcontrols and liabilities it has incurred, and derecognizes the financial assetsfor which control has been surrendered and all liabilities that have beenextinguished. An entity is considered to have surrendered 

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controlover the transferred assets and, therefore, to have sold the assets if thefollowing conditions are met:

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

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

3.                The transferordoes not maintain effective control over the transferred assets through either (i) anagreement that both entitles and obligates the transferor to repurchase orredeem them before their maturity, or (ii) the ability to unilaterallycause the holder to return specific assets, other than through a clean-up call.

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

Thetable below summarizes the Company’s securitization activity for the periodspresented. As with other tables included herein, it does not include thesecuritization activity of the Company’s equity-method investees:
| ** **                                                                | ** ** | **For the three months  ended June 30,** | ** ** | **For the six months  ended June 30,** | ** ** |
|---------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                | ** ** | **2005**                                                          | ** ** | **2004**                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                | ** ** | **(In thousands)**                                           | ** ** |
| Gross amount of  receivables securitized at period end                    |       | $                                                                 | 1,583,807  |                                                            | $          | 1,854,918 |   | $ | 1,583,807 |   | $ | 1,854,918 |   |
| Proceeds from  collections reinvested in revolving-period securitizations |       | $                                                                 | 256,346    |                                                            | $          | 225,222 |   | $ | 504,644 |   | $ | 423,183 |   |
| Excess cash flows  generated on securitized  receivables                  |       | $                                                                 | 55,840     |                                                            | $          | 54,251 |   | $ | 121,706 |   | $ | 127,508 |   |
| Pretax securitization income                                              |       | $                                                                 | 1,192      |                                                            | $          | — |   | $ | 2,779 |   | $ | — |   |
| Income from  retained interests in credit card receivables securitized    |       | 6,276                                                             |       | 16,601                                                          |       | 26,145 |   | 35,993 |   |
| Fees on  securitized receivables                                          |       | 15,021                                                            |       | 18,711                                                          |       | 31,057 |   | 39,962 |   |
| Total fees and other  income on securitized earning assets                |       | $                                                                 | 22,489     |                                                            | $          | 35,312 |   | $ | 59,981 |   | $ | 75,955 |   |

 

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

Generally, all collections received from the cardholdersunderlying each securitization are included in the securitization cash flows.This includes collections from the cardholders for interest, fees and othercharges on the accounts and collections from the cardholders repaying theprincipal portion of their account balances. In general, the cash flows arethen distributed to the Company as servicer for its servicing fee, to theinvestors as interest on their outstanding notes, to the investors to repay anyportion of their outstanding notes that becomes due and payable and to theCompany as the seller to fund new purchases. Any collections from cardholdersremaining each month after making the various payments noted above generallyare paid to the Company on its retained interests.

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The retained interests associated with the credit cardreceivables that the Company has securitized are carried at estimated fairmarket value within the securitized earning assets category on the Company’scondensed consolidated balance sheets, and because they are classified astrading securities, any changes in fair value are included in income. Becausequoted market prices for the Company’s retained interests are generally notavailable, the Company estimates fair value based on the estimated presentvalue of future cash flows using management’s best estimates of keyassumptions.

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

TheCompany’s retained interests in credit card receivables securitized (labeled assecuritized earning assets on the condensed consolidated balance sheets)include the following:
| ** **                        | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** |
|-----------------------------------|------------|-------------------------|------------|-----------------------------|------------|
| ** **                        | ** ** | **(In thousands)** | ** ** |
| I/O strip                         |       | $                       | 95,276     |                        |       | $ | 106,131 |   |   |
| Accrued interest  and fees        |       | 12,239                  |       |                        | 12,603     |   |   |
| Servicing  liability              |       | (19,079                 | )          |                        | (20,813    | ) |   |
| Amounts due from  securitization  |       | 7,041                   |       |                        | 6,511      |   |   |
| Fair value of  retained interests |       | 491,289                 |       |                        | 432,286    |   |   |
| Securitized  earning assets       |       | $                       | 586,766    |                        |       | $ | 536,718 |   |   |

 

The I/O strip reflects the fair value of the Company’srights to future income from Company-arranged securitizations and includescertain credit enhancements. The I/O strip decreased during the six monthsended June 30, 2005 principally due to reduced receivables levels withinthe trust underlying the Company’s 2003 Providian portfolio acquisition (the “EmbarcaderoTrust”) and an increased payment rate experienced within the Company’soriginated portfolio master trust. Offsetting this was an increase in yield, areduction in the expected credit loss rate, and a reduction in the residualcash flows discount rate used to value the I/O strip as of June 30, 2005(all of which are illustrated on the table below). The slight decrease inaccrued interest and fees also corresponds with the net reductions inreceivables levels within the Embarcadero Trust offset by increases inreceivables levels within the originated portfolio master trust. The servicingliability reflects, for those securitization structures for which servicingcompensation is not adequate, the fair value of the costs to service thereceivables above and beyond the servicing income the Company expects toreceive from the securitizations. The slight decrease in the servicingliability is consistent with reductions in receivables levels to which theservicing liability relates. The fair value of retained interests includes theCompany’s interests in its securitizations. The fair value of retainedinterests increased between December 31, 2004 and June 30, 2005,principally due to the effects of decreased draws of cash against the Company’soriginated portfolio master trust securitization facilities. Given theabundance of liquidity available to the Company in the second quarter of 2005based on the Encore transaction (see Note 5, “Sale of Investments in PreviouslyCharged-Off Receivables and Forward Flow 

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Contract”) and the Company’s$250.0 million Convertible Senior debt issuance (see Note 10, “Notes Payable”),****the Company funded the majority ofcardholder purchases underlying its originated portfolio master trust duringthe second quarter, rather than drawing against originated portfolio mastertrust securitization facilities to fund these purchases.

Changesin any of the assumptions used to value the Company’s retained interests in itssecuritizations could impact the Company’s fair value estimates. Theweighted-average key assumptions used to estimate the fair value of the Company’sretained interests in the receivables it has securitized are presented below:
| ** **                              | ** ** | **June 30,  2005** | ** ** | **December 31,  2004** | ** ** | **June 30,  2004** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|-----------------------------|------------|-------------------------|------------|
| Yield  (annualized)                     |       |                    | 29.7       | %                           |       |                    | 29.4       | % |   |   | 29.1 | % |   |
| Payment rate  (monthly)                 |       |                    | 6.4        |                        |       |                    | 6.3        |   |   |   | 6.0 |   |   |
| Expected credit  loss rate (annualized) |       |                    | 13.1       |                        |       |                    | 13.7       |   |   |   | 13.2 |   |   |
| Residual cash  flows discount rate      |       |                    | 15.7       |                        |       |                    | 17.4       |   |   |   | 22.5 |   |   |
| Servicing liability  discount rate      |       |                    | 14.0       |                        |       |                    | 14.0       |   |   |   | 14.0 |   |   |

 

The decrease in the residual cash flows discount ratecorresponds with new market evidence of tightened spreads on BB notes based uponthe sale to third parties of subordinated bonds in a securitization in thesecond quarter of 2005, coupled with significantly increased overall collateralenhancement levels within the originated portfolio master trust during thesecond quarter of 2005 given the Company’s funding of cardholder purchases asdiscussed above. The Company’s Statement No. 140 models recognize incomputing the residual cash flows discount rate that variations in collateralenhancement levels affect the returns that investors require withinsecuritization structures.

At June 30,2005, the following illustrates the hypothetical effect of an adverse 5 and10 percent change in key economic assumptions on the retained interests incredit card receivables securitized (dollars in thousands):
| ** **                                    | ** ** | **Credit Card  Receivables** | ** ** |
|-----------------------------------------------|------------|-----------------------------------|------------|
| **Yield  (annualized)**                       |       |                              | 29.7       | % |   |
| *Impact  on fair value of 5% adverse change*  |       |                              | $          | (13,318 | ) |   |
| *Impact  on fair value of 10% adverse change* |       |                              | $          | (26,635 | ) |   |
| **Payment rate (monthly)**                    |       |                              | 6.4        | % |   |
| *Impact  on fair value of 5% adverse change*  |       |                              | $          | (1,769 | ) |   |
| *Impact  on fair value of 10% adverse change* |       |                              | $          | (4,021 | ) |   |
| **Expected credit loss rate (annualized)**    |       |                              | 13.1       | % |   |
| *Impact  on fair value of 5% adverse change*  |       |                              | $          | (5,874 | ) |   |
| *Impact  on fair value of 10% adverse change* |       |                              | $          | (11,748 | ) |   |
| **Residual cash flows discount rate**         |       |                              | 15.7       | % |   |
| *Impact  on fair value of 5% adverse change*  |       |                              | $          | (2,058 | ) |   |
| *Impact  on fair value of 10% adverse change* |       |                              | $          | (4,098 | ) |   |
| **Servicing discount rate**                   |       |                              | 14.0       | % |   |
| *Impact  on fair value of 5% adverse change*  |       |                              | $          | (87 | ) |   |
| *Impact on fair value of 10%  adverse change* |       |                              | $          | (174 | ) |   |

 

These sensitivities are hypothetical and should beused with caution. As the figures indicate, changes in fair value based on a 5%and a 10% variation in assumptions generally cannot be extrapolated because therelationship of the change in assumption to the change in fair value of theretained interests in credit card receivables securitized may not be linear.Also, in this table, the effect of a variation in a particular 

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assumption on the fairvalue of the retained interest is calculated without changing any otherassumptions; in reality, changes in one assumption may result in changes inanother. For example, increases in market interest rates may result in lowerprepayments and increased credit losses, which could magnify or counteract thesensitivities.

TheCompany’s managed receivables portfolio underlying its securitizations(including only those of its consolidated subsidiaries) is comprised of theCompany’s retained interests in the credit card receivables securitized andother investors’ shares of these securitized receivables. The table belowsummarizes the balances included within, and certain operating statisticsassociated with, all of the managed receivables underlying the securitizationsof the Company’s consolidated subsidiaries. The investors’ shares of thesemanaged securitized credit card receivables are not assets of the Company.
| ** **                                   | ** ** | **June 30,  2005** | ** ** | ** December 31,   2004** | ** ** |
|----------------------------------------------|------------|-------------------------|------------|-----------------------------------------|------------|
| ** **                                   | ** ** | **(In thousands)** | ** ** |
| Total managed  principal balance             |       | $                       | 1,435,790  |                                    |       | $ | 1,493,903 |   |   |
| Total managed  finance charge balance        |       | 148,017                 |       |                                    | 160,382    |   |   |
| Total managed  receivables                   |       | $                       | 1,583,807  |                                    |       | $ | 1,654,285 |   |   |
| Receivables  delinquent—60 or more days |       | $                       | 118,157    |                                    |       | $ | 144,715 |   |   |
| Net charge offs for the  three months ended  |       | $                       | 42,737     |                                    |       | $ | 44,770 |   |   |

 

**11.**   Notes Payable and Issuance ofConvertible Senior Notes

In May 2005, the Company issued $250.0 millionaggregate principal amount of 3.625% Convertible Senior notes due 2025 toqualified institutional buyers in a private placement. These notes arereflected within the Company’s June 30, 2005 notes payable balance on itscondensed consolidated balance sheet.

During certain periods and subject to certainconditions, the $250.0 million of notes will be convertible by holders intocash and, if applicable, shares of the Company’s common stock at an initialconversion rate of 23.0309 shares of common stock per $1,000 principal amountof notes, subject to adjustment; the conversion rate is based on an initialconversion price of $43.42 per share of common stock. Upon conversion of thenotes, the Company will deliver to holders of the notes cash of up to $1,000per $1,000 aggregate principal amount of notes and, at its option, either cashor shares in respect of the remainder of the conversion obligation, if any.Beginning with the six-month period commencing on May 30, 2012, theCompany will pay contingent interest on the notes during a six-month period ifthe average trading price of the notes is above a specified level. The Companycan redeem the notes at its election commencing May 30, 2009 if certainconditions are met. In addition, holders of the notes may require the Companyto repurchase the notes on each of May 30, 2012, 2015, and 2020 and uponcertain specified events.

Includedin notes payable as of June 30, 2005 are the following debt instrumentsassociated with the acquisition of and ongoing working capital needs of theCompany’s Retail Micro-Loans segment (in thousands of dollars):
| ** **  | ** ** | **Balance at  June 30, 2005** | ** ** | **Applicable Interest  Rate as of  June 30, 2005** | ** ** |
|-------------|------------|----------------------------------------------|------------|-----------------------------------------------------------------------------|------------|
| Term Loan A |       |                                         | $          | 20,000                                                                      |       |   |   | 7.5 | % |   |
| Term Loan B |       |                                         | 20,000     |                                                                        |       |   | 13.0 | % |   |
| Seller Note |       |                                         | 5,000      |                                                                        |       |   | 10.0 | % |   |
| Total Debt  |       |                                         | $          | 45,000                                                                      |       |   |   |   |   |   |

 

The interest rates associated with the term loanfacilities are adjusted periodically based on an index over LIBOR or Prime.

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Effective June 30, 2005, the Company reduced theamount of notes payable associated with the acquisition of and ongoing workingcapital needs of the Retail Micro-Loan segment. The current amounts outstandingand their associated interest rates are reflected in the table above. Inconnection with the amended financing document, the maturity date of the termloans was extended to June 30, 2007 and financial covenants that governthese term loans were modified to focus on leverage tests in relation toearnings before interest, taxes, depreciation and amortization. The Company hasagreed to provide up to $8.0 million of further capital to reduce term loanoutstanding balances on June 30, 2006 if certain contingencies arise priorto that date. In addition, while all of the Retain Micro-Loan segment’s notespayable are recourse only to the assets of the Retail Micro-loan segment, theCompany has agreed to guarantee a $10.0 million Revolving Credit Facility thatprovides working capital for this segment. There was no outstanding balance onthe Revolving Credit Facility as of June 30, 2005.

Similarly, notes payable as of June 30, 2005include $92.8 million of notes payable associated with the acquisition of andongoing working capital needs of the Company’s Auto Finance segment. Thesenotes payable are held by a conduit underlying a structured financing of theAuto Finance segments receivables; they have a 364-day maturity from the dateof issuance, and they bore an interest rate of 7.5% as of June 30, 2005. Thedebt incurred under this facility is recourse only to the assets that arepledged to the lender. The Company intends to finance any receivables growth inthe business through this same process.

Finally, the Company’s June 30,2005 notes payable balances also include $4.4 million related to marginborrowings underlying the Company’s investments in securities (for whichinterest was charged at a 5.25% rate as of June 30, 2005), as well as$3.4 million of borrowings associated with certain vendor-financedacquisitions of software and equipment (for which interest rates ranged from 3%to 7% as of June 30, 2005).

**12.**   Commitments and Contingencies

In the normal course of business through theorigination of unsecured credit card receivables, the Company incurs offbalance sheet risks. The Company’s off balance sheet risks with respect to thereceivables the Company manages include commitments to extend further credit tocardholders totaling $1.8 billion at June 30, 2005. These instrumentsinvolve, to varying degrees, elements of credit risk in excess of the amountssecuritized. The principal amount of these instruments reflects the maximumexposure the Company has in the instruments. The Company has not experiencedand does not anticipate that all of its customers will exercise their entireavailable line of credit at any given point in time. The Company has the rightto reduce or cancel these available lines of credit at any time.

The Company is an equity member of CSG. During thesecond quarter of 2002, CSG entered into a note purchase agreement whereby itagreed to buy additional interests in a portfolio of credit card receivablesowned by CSG Trust should there be net new growth in the receivables or shouldcollections not be available to fund new cardholder purchases. As of June 30,2005, CSG would be obligated to purchase up to $51.0 million of new notesfrom the CSG Trust should this contingency arise. In general, this contingencyamount will decline as the amount of credit available to cardholders for futurepurchases declines. The portfolio has declined and is expected to continue todecline during the life of the CSG Trust as payments are expected to exceed newpurchases each month. As a member of CSG, the Company has agreed to guaranteethe payment of the purchase price of the aforementioned new notes if the eventsgiving rise to this contingency arise, but only if CSG itself should fail topurchase the new notes under the note purchase agreement. As of June 30,2005, CSG had not purchased and was not required to purchase any additionalnotes under the note purchase agreement. The Company’s guarantee is limited toits ownership percentage in CSG (which at June 30, 2005 was 50%)multiplied by the total amount of the notes that CSG would be required topurchase. Therefore, as of June 30, 2005, the maximum amount of theCompany’s guarantee was $25.5 million. The Company currently does not haveany liability recorded 

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with respect to thisguarantee, but it will record one if events occur that make payment probableunder the guarantee. The fair value of this guarantee is not material.

For various other receivables portfolio investmentsthe Company has made through majority-owned subsidiaries and equity-methodinvestees, the Company has entered into similar note purchase agreements (andrelated guarantees) to that described with respect to CSG above. As of June 30,2005, none of these majority-owned subsidiaries or equity-method investees hadpurchased nor were they required to purchase any additional notes under thenote purchase agreements. The Company’s guarantee is limited to its respectiveownership percentages in the various majority-owned subsidiaries andequity-method investees multiplied times the total amount of the notes thateach of the majority-owned subsidiaries and equity-method investees couldbe required to purchase. As of June 30, 2005, the maximum amount of theCompany’s collective guarantees related to all of these other majority-ownedsubsidiaries and equity-method investees was $440.8 million. TheCompany currently does not have any liability recorded with respect to theseguarantees, but it will record one if events occur that make payment probableunder the guarantees. The fair value of these guarantees is not material.

The Company’s agreement with its principal third-partyoriginating financial institution requires the Company to purchase on a dailybasis the credit card receivables that are originated in the accountsmaintained for the Company’s benefit. To secure this obligation, the Company hasprovided the financial institution a $10.0 million standby letter ofcredit (with respect to which cash collateralization requirements were removedin the second quarter of 2005) and has pledged retained interests carried at$69.6 million. The Company’s arrangements with the financial institutionexpire in March 2006. If the Company were to terminate a sub-serviceagreement under which this institution also provides certain services for theCompany, there would be penalties of $1.2 million as of June 30,2005. The Company currently does not have any liability recorded with respectto the guarantees discussed in this paragraph, but it will record one if eventsoccur that make payment probable under the guarantees. The fair value of theseguarantees is not material.

A subsidiary of the Company has an agreement withanother third-party financial institution pursuant to which the subsidiaryservices loans on behalf of the financial institution in exchange for servicingfees. Either party can cancel this contract with 180 days notice. TheCompany believes that the entities that conduct this business are adequately capitalized.Nevertheless, to further growth plans for the operations underlying the Company’sRetail Micro-Loans segment, the Company has guaranteed up to $15.0 millionof potential indebtedness to the financial institution under its servicingprogram with subsidiaries of the Company. The Company currently does not haveany liability recorded with respect to the guarantee discussed in thisparagraph, but it will record one if events occur that make payment probableunder the guarantee. The fair value of this guarantee is not material.

The Company’s most significant source of liquidity isthe securitization of credit card receivables. The maturity terms of theCompany’s securitizations vary. As of June 30, 2005, securitizationfacilities underlying the Company’s securitization trusts included: a six-yearterm securitization facility, a five-year term securitization facility, atwo-year variable funding securitization facility with renewal options and twoone-year conduit securitization facilities with renewal options issued out ofits originated portfolio master trust; a ten-year amortizing termsecuritization facility issued out of the Embarcadero Trust; and a one-yearvariable funding securitization facility issued out of the a trust associatedwith the Company’s securitization of $92.0 million and $72.1 million (faceamount) in credit card receivables acquired during 2004 and in the firstquarter of 2005, respectively. While the Company has never triggered an earlyamortization within any of the series underlying Company-arrangedsecuritization facilities, and while the Company does not believe that it will,the Company may trigger an early amortization of one or more of the outstandingseries within its securitization trusts. As each securitization facility expiresor comes up for renewal, there can be no assurance that the facility will berenewed, or if renewed, there can be no 

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assurance that the termswill be as favorable as the terms that currently exist. Either of these eventscould significantly increase the Company’s need for additional liquidity.

The Company is subject to various legal proceedingsand claims that arise in the ordinary course of business. In one of these legalproceedings, CompuCredit Corporation and five of the Company’s subsidiaries aredefendants in a purported class action lawsuit entitled Knox, et al. vs. FirstSouthern Cash Advance, et al, No 5 CV 0445, filed in theSuperior Court of New Hanover county, North Carolina, on February 8, 2005.The plaintiffs allege that in conducting a so-called “payday lending” business,certain of our Retail Micro-Loan segment subsidiaries violated various lawsgoverning consumer finance, lending, check cashing, trade practices and loanbrokering. The plaintiffs further allege that CompuCredit is the alter ego ofits subsidiaries and is liable for their actions. The plaintiffs are seekingdamages of up to $75,000 per class member. The Company intends to vigorouslydefend this lawsuit. These claims are similar to those that have been assertedagainst several other market participants in transactions involving smallbalance, short-term loans made to consumers in North Carolina.

There are no othermaterial pending legal proceedings to which the Company is a party.

**13.**   Earnings Per Share

Thefollowing table sets forth the computation of earnings per share:
| ** **                                                                      | ** ** | **For the three months  ended June 30,**  | ** ** | **For the six months  ended June 30,** | ** ** |
|---------------------------------------------------------------------------------|------------|--------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                                      | ** ** | **2005**                                                           | ** ** | **2004**                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                                      | ** ** | **(In thousands, except per share data)** | ** ** |
| Numerator:                                                                      |       |                                                               |       |                                                            |       |   |   |   |   |
| Net income                                                                      |       | $                                                                  | 66,532     |                                                            | $          | 14,851 |   | $ | 115,712 |   | $ | 33,639 |   |
| Preferred stock dividends                                                       |       | 0                                                                  |       | (1,097                                                          | )          | 0 |   | (2,167 | ) |
| Income attributable to common shareholders                                      |       | $                                                                  | 66,532     |                                                            | $          | 13,754 |   | $ | 115,712 |   | $ | 31,472 |   |
| Denominator:                                                                    |       |                                                               |       |                                                            |       |   |   |   |   |
| Denominator for basic earnings per share (weighted-average  shares outstanding) |       | 50,125                                                             |       | 51,548                                                          |       | 50,685 |   | 51,648 |   |
| Effect of dilutive stock options, warrants and  restricted stock                |       | 1,416                                                              |       | 841                                                             |       | 1,313 |   | 893 |   |
| Denominator for diluted earnings per share (adjusted  weighted-average shares)  |       | 51,541                                                             |       | 52,389                                                          |       | 51,998 |   | 52,541 |   |
| Basic earnings per share                                                        |       | $                                                                  | 1.33       |                                                            | $          | 0.29 |   | $ | 2.28 |   | $ | 0.65 |   |
| Diluted earnings  per share                                                     |       | $                                                                  | 1.29       |                                                            | $          | 0.28 |   | $ | 2.23 |   | $ | 0.64 |   |

 

Excluded from the threeand six months ended June 30, 2005 earnings per share calculations wereoptions to purchase 32,500 shares of common stock as their effects wereanti-dilutive. Excluded from the three and six months ended June 30, 2004earnings per share calculations are warrants to purchase 2.4 millionshares of common stock and options to purchase 0.3 million shares of commonstock as their effects are anti-dilutive.

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

*The followingdiscussion should be read in conjunction with our condensed consolidatedfinancial statements and the related notes included therein and our Annual Reporton Form 10-K for the year ended December 31, 2004 where certain terms(including trust, subsidiary and other entity names and financial, statisticaland operating measures) have been defined.*

This Management’sDiscussion and Analysis of Financial Condition and Results of Operationsincludes forward-looking statements. We have based these forward-lookingstatements on our current plans, expectations and beliefs about future events.Actual results could differ materially because of factors discussed in “Forward-LookingInformation” in this item and elsewhere in this report.

**OVERVIEW**

We are a provider of various credit and relatedfinancial services and products to or associated with the underserved, orsub-prime, consumer credit market, as well as to “un-banked” consumers.Historically, we have served this market through our marketing and solicitationof credit card accounts and our servicing of various credit card receivablesunderlying both our originated accounts and our portfolio acquisitions. We generallyhave financed our credit card activities through the securitization of thereceivables underlying the accounts we originate and the portfolios that wepurchase. The leverage (i.e., the percentage on a dollar that lenders willlend us, or the “advance rate”) that our securitization facilities provideagainst our credit card receivables is a critical factor in our ability toobtain the desired returns on equity for our shareholders.

More recently, we have diversified our businessoperations to include the purchase and recovery of previously charged-offreceivables, the issuance of a stored-value card through mass marketing effortsand the marketing and servicing of micro-loans through various channels,including retail branch locations, grocery and convenience stores, directmarketing, telemarketing and the Internet. .

Additionally, during the six months ended June 30,2005, we partnered with others to complete two credit card portfolioacquisitions, and we completed our acquisition of Wells Fargo Financial’s “ConsumerAuto Receivables” business unit. Both occurring during the first quarter of2005, the first credit card portfolio acquisition of $72.1 million (faceamount) in credit card receivables was through a majority-ownedsubsidiary, while the second involved the purchase of $376.3 million (faceamount) of credit card receivables through a 47.5% equity-method interest in ajoint venture with other unaffiliated investors. The acquisition of theConsumer Auto Receivables business unit included all of Consumer AutoReceivables’ assets, business operations and employees for approximately $121.5million including transaction costs.

During the second quarter of 2005, we issued $250.0million aggregate principal amount of our 3.625% Convertible Senior notes due2025 to qualified institutional buyers in a private placement, providing asignificant source of new liquidity for our Company.

Throughout 2005 and beyond, our shareholders shouldexpect us to continue to evaluate and pursue additional credit card receivablesportfolios and other business activities and asset classes that arecomplementary to our historic sub-prime credit card business, including furtheracquisitions of sub-prime lenders.

We remain focused onmaking good economic decisions that will result in high returns on equity toour shareholders over a long-term horizon. While our decisions may makeeconomic sense, they may also result in volatile earnings under GAAP as aresult of the accounting requirements for securitizations under Statement ofFinancial Accounting Standards No. 140, “Accounting for Transfers andServicing of Financial Assets and Extinguishments of Liabilities” (“Statement No. 140”).To the extent that we grow 

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ouroverall portfolio of credit card receivables (through origination, acquisitionor other new channels) and then securitize these assets, we will havesecuritization income or loss, which may be material. For further discussion ofour historic results and the impact of securitization accounting on ourresults, see the “Results of Operations” and “Liquidity, Funding and CapitalResources” sections below, as well as our condensed consolidated financialstatements and the notes thereto.

**RESULTS OF OPERATIONS**

**Threeand Six Months Ended June 30, 2005, Compared to Three and Six Months EndedJune 30, 2004**

***Total interestincome.  ***Total interest income consists primarily offinance charges and late fees earned on our largely fee-based card offering toconsumers at the lower end of the FICO scoring range and interest and feeincome associated with our new auto finance segment. The $23.8 million and$33.0 million increase when comparing the three and six months ended June 30,2005 to 2004, respectively, is primarily due to growth in our credit cardreceivables associated with our largely fee based card offering to consumers atthe lower end of the FICO scoring range as well as the addition of our autofinance segment, none of which we have securitized. Also included within totalinterest income (under the other category) is the interest income that we haveearned on our interest-bearing cash accounts and various investments in debtsecurities, including interest earned on bonds distributed to us from ourequity-method investees, and on our subordinated, certificated interest in theEmbarcadero Trust. Principal amortization has caused reductions in interestincome levels associated with some of our bonds and the Embarcadero Trustsubordinated, certificate interest. Nevertheless, our other interest incomelevels have increased between 2004 and 2005 due to other bond investments thatwe made (typically in bonds issued by other third-party asset backedsecuritizations) throughout 2004 and the first six months of 2005 and given thecash deposits that we have accumulated in interest-bearing accounts during oursecond quarter of 2005 associated with our $250.0 million convertible note offeringand our receipt of $143.0 in cash from the sale of assets within ourInvestments in Previously Charged-Off Receivables segment.

As we continue to grow our largely fee-based creditcard offering to consumers at the lower end of the FICO scoring range as wellas the receivables within our new auto finance segment, and assuming that we donot securitize the loans receivable underlying these product offerings in offbalance sheet arrangements, we expect to see continued growth in our totalinterest income throughout 2005.

***Interest Expense.  ***Interestexpense increased $15.7 million and $18.0 million for the three and sixmonths ended June 30, 2005, respectively, when compared to the sameperiods of the prior year, principally due to an $11.0 million final settlementof our obligations to a lender that financed our original equity investment in CSG,an equity-method investee. Under the terms of the original loan agreement, inaddition to principal payments to be made, which were repaid during the fourthquarter of 2002, the lender was entitled to receive 15% of all future excesscash flows we receive from our investment in CSG. Because of our $11.0 millionsettlement payment to the lender, the Company is now entitled to receive 100%of all future excess cash flows attributable to the Company’s investment in CSG;we expect to resume receipt of these excess cash flows (and hence beginrealization of the benefits of our settlement payment to the lender) during thefourth quarter of 2005. Additional 2005 interest costs are associated with:

(1)         our Retail Micro-Loanssegment acquisition and working capital-related debt, which added $1.2 millionand $3.3 million in interest costs for the three and six months ended June 30,2005, respectively;

(2)         debt funding theacquisition and operations of our new auto finance segment, which added$2.4 million in interest costs for both the three and six months ended June 30,2005; and

(3)         our second quarter of2005 convertible note issuance, which added $1.0 million in interest costs forboth the three and six months ended June 30, 2005.

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***Fees and other income on non-securitized earning assets.  ***Thefollowing table details the components of fees and other income onnon-securitized earning assets for the three and six months ended June 30,2005 and 2004:
| ** **                                                | ** ** | **For the three months  ended June 30,** | ** ** | **For the six months  ended June 30,** | ** ** |
|-----------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                | ** ** | **2005**                                                          | ** ** | **2004**                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                | ** ** | **(In thousands)**                                           | ** ** |
| Fees and other income on  non-securitized earning assets: |       |                                                              |       |                                                            |       |   |   |   |   |
| Retail micro-loan fees                                    |       | $                                                                 | 18,327     |                                                            | $          | 3,041 |   | $ | 36,204 |   | $ | 3,041 |   |
| Fees on non-securitized credit card receivables           |       | 38,227                                                            |       | 21,462                                                          |       | 67,955 |   | 38,205 |   |
| De-securitized Fingerhut receivables                      |       | 23,412                                                            |       | —                                                          |       | 56,144 |   | — |   |
| Investments in previously charged-off  receivables        |       | 17,484                                                            |       | 12,982                                                          |       | 34,992 |   | 27,001 |   |
| Gain on bulk sale of previously charged-off  receivables  |       | 69,559                                                            |       | —                                                          |       | 69,559 |   | — |   |
| Other                                                     |       | 4,709                                                             |       | 78                                                              |       | 7,630 |   | 91 |   |
| Total                                                     |       | $                                                                 | 171,718    |                                                            | $          | 37,563 |   | $ | 272,484 |   | $ | 68,338 |   |

 

The increase infees and other income on non-securitized earning assets of $134.2 millionand $204.1 million for the three and six months ended June 30, 2005,respectively, when compared to the same periods of the prior year, was largelyattributable to:

(1)         growth in fees on ourlargely fee-based credit card offering to consumers at the lower end of theFICO scoring range, which fees increased $16.8 million and $29.8 million forthe three and six months ended June 30, 2005, respectively, when comparedto the same periods of the prior year;

(2)         the addition of ourRetail Micro-Loan segment (during the second quarter of 2004) in which feesincreased $15.3 million and $33.2 million for the three and six months endedJune 30, 2005, respectively, when compared to the same periods of theprior year;

(3)         income associated withthe de-securitized Fingerhut receivables (including amortization of theirassociated deferred gain) of $23.4 million and $56.1 million for the three andsix months ended June 30, 2005, respectively;

(4)         growth in income withinour Investments In Previously Charged-Off Receivables segment of$4.5 million and $8.0 million for the three and six months ended June 30,2005, respectively, when compared to the same periods of the prior year; and

(5)         our bulk sale ofpreviously charged-off receivables during the quarter.

The bulk sale of previously charged-off receivablestransaction is discussed further in the specific segment discussion for ourInvestments in Previously Charged-Off Receivables segment. Because of thattransaction, we do not anticipate investments in previously charged-offreceivables income to grow throughout the rest of 2005. It is even conceivablethat this income during the remaining quarters of this year may be flat to downrelative to third and fourth quarter 2004 results for the Investments inPreviously Charged-Off Receivables segment.

The $23.4 million and $56.1 million for the threeand six months ended June 30, 2004, respectively, of income fromde-securitized Fingerhut receivables relates to the repayment of a Fingerhutsecuritization facility in its entirety in August 2004, thereby resultingin a de-securitization of the Fingerhut receivables. Accordingly, during thethird quarter of 2004, we resumed on balance sheet ownership of thesereceivables at a $0.0 carryover basis corresponding to our then-existing basisin the Fingerhut retained interests. We 

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have no plans tore-securitize the receivables underlying the Fingerhut Trust, and the remainingexcess cash flows that we expect to receive from the Fingerhut receivablesthrough December 2008 are currently estimated to be $64.1 million.Because of our $0.0 basis in the de-securitized Fingerhut receivables, as wereceive our expected $64.1 million in cash flows from the Fingerhutreceivables, we essentially will be reporting into GAAP income (as fees andother income on non-securitized earning assets) all of the cash flows that wereceive in any particular accounting period. Total cash income recognizedrelating to the de-securitized Fingerhut receivables for the three monthsand six months ended June 30, 2005 was $19.3 million and $46.2million, respectively; this amount should decline in successive quartersthroughout 2005 as we continue our liquidation of the Fingerhut receivablesportfolio.

Also reflected in the $23.4 million and $56.1million of income from de-securitized Fingerhut receivables for the three andsix months ended June 30, 2005, respectively, is $4.1 million and $9.9million of post-de-securitization-related deferred gain amortization for thethree and six months ended June 30, 2005. Our original servicing liabilityassociated with an original Fingerhut Trust was converted into a deferred gainupon a third quarter of 2003 Fingerhut retained interests exchange. Thisdeferred gain is now being amortized into fees and other income onnon-securitized earning assets on our condensed consolidated statements ofoperations in a manner that corresponds with actual and anticipated future cashcollections on the de-securitized Fingerhut receivables. As of June 30,2005, deferred revenue on our condensed consolidated balance sheet includes anadditional $13.5 million of this deferred gain on Fingerhut receivables thatremains to be amortized into fees and other income in future periods. Insuccessive quarters throughout 2005, the level of this deferred gain’samortization into income should decline relative to that experienced through June 30,2005 as we continue with our liquidation of the Fingerhut receivablesportfolio.

The other category above includes gains on put optionsthat we wrote on our stock and fees associated with our stored-value card,merchant credit and on-line micro-lending operations, none of which currentlyrepresent significant activities for us. We expect to see continued incomegrowth within the other category as well as within our retail micro-loans andnon-securitized credit card categories throughout 2005.

***Provision for loanlosses.  ***Our provision for loan losses increased$24.7 million and $34.8 million for the three and six months ended June 30,2005, respectively, when compared to the same periods of 2004, principally dueto significant year-over-year growth in our on balance sheet loans and feesreceivable related to: (1) our largely fee-based credit card offering toconsumers at the lower end of the FICO scoring range; (2) our micro-loanacquisitions, the first of which occurred late in the second quarter of 2004;and (3) our second quarter 2005 auto finance segment acquisition.

The provision for loan losses is provided to coveraggregate loss exposures on (1) principal receivable balances, (2) financecharges and late fees receivable underlying income amounts included within ourtotal interest income category, and (3) fees receivable underlying feeincome included within our fees and other income on non-securitized assetscategory. Although we do not expect to see any degradation in credit quality in2005 and while current delinquency and credit loss trends look favorable, we doexpect that our provision for loan losses will increase throughout 2005 basedon the loans and fees receivable growth that we are planning throughout 2005. Ourprovision for loan losses as a percentage of average loans and fees receivablefor the second quarter of 2005 is significantly lower than for the secondquarter of 2004, principally due to our acquisition within the auto financesegment during the second quarter of 2005; we acquire loans and fees receivablefrom auto dealers with recourse back to the dealers to the extent of negotiatedreserves that we carry as a liability within accounts payable and accruedexpenses on our balance sheet. Because of the level of recourse that we haveback to the dealers, our credit losses for the auto finance segment are (andare expected in the future to be) lower than average loss rates experienced(and expected to be experienced) for our credit card and micro-loan activities.The effects of the auto finance acquisition also account for the reduction inthe ratio of our allowance for uncollectible loans and fees receivable as apercentage of period-end loans and fees receivable at June 30, 2005,versus recent prior 

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quarters. The dealerreserve liability that we have included within accounts payable and accruedexpenses at June 30, 2005 is $30.9 million. Beyond the effects of our autofinance acquisition, the aforementioned percentages and ratios are alsofavorably influenced thus far in 2005 by the improved overall creditenvironment that we have experienced across the board within our portfolio ofloans and fees receivable.

***Fees and other income on securitized earning assets.  ***Feesand other income on securitized earning assets include (1) annualmembership, over-limit, cash advance, returned check and other fees associatedwith our credit card products, (2) securitization gains and losses and (3) incomefrom retained interests in credit card receivables securitized, each of whichis detailed in the following table for the three and six months ended June 30,2005 and 2004.
| ** **                                                             | ** ** | **For the three months  ended June 30,** | ** ** | **For the six months  ended June 30,** | ** ** |
|------------------------------------------------------------------------|------------|-------------------------------------------------------------------|------------|-----------------------------------------------------------------|------------|
| ** **                                                             | ** ** | **2005**                                                          | ** ** | **2004**                                                        | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                             | ** ** | **(In thousands)**                                           | ** ** |
| Securitization  income                                                 |       | $                                                                 | 1,192      |                                                            | $          | — |   | $ | 2,779 |   | $ | — |   |
| Income from  retained interests in credit card receivables securitized |       | 6,276                                                             |       | 16,601                                                          |       | 26,145 |   | 35,993 |   |
| Fees on  securitized receivables                                       |       | 15,021                                                            |       | 18,711                                                          |       | 31,057 |   | 39,962 |   |
| Total fees and other  income on securitized earning assets             |       | $                                                                 | 22,489     |                                                            | $          | 35,312 |   | $ | 59,981 |   | $ | 75,955 |   |

 

Detailsof our income from retained interests in credit card receivables securitizedfor the three and six months ended June 30, 2005 and 2004 are as follows:
| ** **                                                              | ** ** | **Three Months ended  June 30,** | ** ** | **Six Months ended  June 30,** | ** ** |
|-------------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                              | ** ** | **2005**                                        | ** ** | **2004**                                      | ** ** | **2005** | ** ** | **2004** | ** ** |
| ** **                                                              | ** ** | **(In millions)**                          | ** ** |
| Income from retained  interests in credit card receivables securitized: |       |                                            |       |                                          |       |   |   |   |   |
| Originated portfolio                                                    |       | $                                               | 5,898      |                                          | $          | 3,156 |   | $ | 7,307 |   | $ | 9,255 |   |
| Purchased portfolios(*)                                                 |       | 378                                             |       | 13,445                                        |       | 18,838 |   | 26,738 |   |
| Total                                                                   |       | $                                               | 6,276      |                                          | $          | 16,601 |   | $ | 26,145 |   | $ | 35,993 |   |

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(*)          This amount includes$1.0 million and $2.8 million for the three and six months ended June 30,2004, respectively, related to the Fingerhut Trust. It also includes $1.0million, $12.4 million, $12.8 million and $23.9 million for the three and sixmonths ended June 30, 2005 and 2004, respectively, related to theEmbarcadero Trust. Also included are ($0.6) million and $6.4 million for the threeand six months ended June 30, 2005 associated with portfolios ofreceivables acquired in the third quarter of 2004 and early in the firstquarter of 2005 and securitized into a single trust in separate transactions.

The followingtrends are noted with respect to the above tables of fees and other income onsecuritized earning assets:

(1)         The $1.2 million ofsecuritization income for the three months ended June 30, 2005 relates toa net increase in the managed receivables underlying securitizations throughour originated portfolio master trust during the second quarter of 2005; inrecent prior quarters, we experienced net liquidations of managed receivableswithin the originated portfolio master trust. We expect to see securitizationincome associated with receivables underlying securitizations through ouroriginated portfolio master trust throughout the balance of 2005.

(2)         The $2.8 million ofsecuritization income for the six months ended June 30, 2005 includes boththe $1.2 million referenced above, plus securitization income associated withour first quarter 

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2005 acquisition of $72.1million (face amount) in credit card receivables through one of ourmajority-owned subsidiaries.

(3)         Income from retainedinterests in credit card receivables securitized is down $10.3 million betweenthe second quarter of 2004 and the second quarter of 2005, principallyassociated with: (a) the third quarter 2004 de-sccuritization of theFingerhut receivables, which contributed $1.0 million to income fromretained interests in credit card receivables securitized in the second quarterof 2004; (b) reductions in managed receivables levels within theoriginated portfolio master trust and the Embarcadero Trust between the secondquarter of 2004 and the second quarter of 2005, which were not offset by theonly other securitization trust (related to our third quarter 2004 acquisitionof $92.0 million in face amount and our first quarter 2005 acquisition of $72.1million in face amount of receivables) the income from which is reported withinincome from retained interests in credit card receivables securitized; and (c) theeffects of purchase discounts underlying our retained interests in theEmbarcadero Trust. The benefits of purchase discounts associated with themanaged receivables underlying our retained interests in the Embarcadero Trusthave abated significantly between the second quarter of 2004 and the secondquarter of 2005; this was expected as the mix of managed receivables within theEmbarcadero Trust has continued to shift over time (i.e., from receivables towhich purchase discounts applied at the date of acquisition to new receivablesgenerated from post-acquisition cardholder purchases for which there are nopurchase discounts). Related to these mix changes are higher finance charge andlate fee charge offs and higher principal charge offs being netted against ourincome from retained interests in credit card receivables securitized, as wellas lower inclusions of accretable yield as a component of our income from retainedinterest in credit card receivables securitized.

(4)         Income from retainedinterests in credit card receivables securitized decreased $13.6 millionbetween the first and second quarters of 2005. The $13.6 million decline is thenet of a $4.5 million increase for the originated portfolio master trustand a $18.1 million decrease for the effects of declining managed receivableslevels and purchase discounts associated with the managed receivablesunderlying our retained interests in the (1) Embarcadero Trust (accountingfor $10.4 million of the $18.1 million decline) and (2) a trust into whichwe securitized our third quarter 2004 portfolio acquisition of $92.0 million(face amount) and our first quarter 2005 portfolio acquisition of $72.1 million(accounting for $7.7 million of the $18.1 million decline). As we liquidate themanaged receivables underlying our purchased portfolio securitizations, the mixof managed receivables within the securitization trusts shifts over time fromreceivables to which purchase discounts applied at the date of acquisition tonew receivables generated from post-acquisition cardholder purchases forwhich there are no purchase discounts. Moreover, related to these mix changesare higher finance charge and late fee charge offs and higher principal chargeoffs being netted against our income from retained interests in credit cardreceivables securitized, as well as lower inclusions of accretable yield as acomponent of our income from retained interest in credit card receivablessecuritized. The $4.5 million increase for the originated portfolio mastertrust corresponds with a reduced residual cash flows discount rate appliedwithin our Statement No. 140 models as of June 30, 2005 given newmarket evidence of tightened spreads on BB notes upon the sale to third partiesof subordinated bonds in a securitization in the second quarter of 2005,coupled with significantly increased overall collateral enhancement levelswithin the originated portfolio master trust during the second quarter of 2005given our funding of cardholder purchases with proceeds from our convertiblenote issuance in lieu of draws against variable funding and conduit securitizationfacilities. Our Statement No. 140 models recognize in computing theresidual cash flows discount rate that variations in collateral enhancementlevels affect the returns that investors require within securitizationstructures.

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(5)         The increase in ourservicing rates to 4% on the two term securitization facilities issued out ofthe originated portfolio master trust in October 2004 accounts for a $6.0million and $12.0 million offset against income from retained interests incredit card receivables securitized for the originated portfolio for the threeand six months ended June 30, 2005, respectively, versus the three and sixmonths ended June 30, 2004. Offsetting this amount dollar-for-dollar are a$6.0 million and $12.0 million increase in servicing income for the threeand six months ended June 30, 2005, respectively, versus the three and sixmonths ended June 30, 2004. Even with the adverse effects of thisservicing rate increase on our income from retained interest in credit cardreceivables securitized, we did not see a large movement in our income fromretained interests in credit card receivable securitized associated with ouroriginated portfolio based on the improved credit quality that we have seenwithin this portfolio, coupled with the favorable second quarter 2005 residualcash flows discount rate effects discussed above.

(6)         Given the volatility ofchanging credit enhancement levels and assumptions within our Statement No. 140models, it is difficult for us to predict any particular ongoing trend for ourfuture income from retained interests in credit card receivables securitized. Wedo note, however, that seasonally adjusted credit loss and delinquency trendscontinue to be favorable, and we do expect to see some benefit of seasonallylower third quarter charge offs in our third quarter 2005 results.

(7)         Fees on securitizedreceivables have declined primarily due to lower 2005 over-limit fees,reflecting the fact that many of our originated portfolio master trustreceivables relate to newer account additions, as well as general economicenvironment and credit quality improvements for our securitized receivableswhich are consistent with the general improvements seen in our delinquencyrates.

Further details concerning delinquency and creditquality trends, which affect the level of our income from retained interests incredit card receivables securitized, are provided in the discussion of ourCredit Cards segment below.

***Servicing income.  ***Servicingincome increased $15.8 million and $27.0 million for the three and sixmonths ended June 30, 2005, respectively, when compared to the sameperiods of the prior year, due to in part to the $6.0 million and $12.0 millionhigher servicing fees realized for the three and six months ended June 30,2005, respectively, for the two term securitization facilities issued out ofthe originated portfolio master trust in October 2004. These two termsecuritization facilities permitted an increase in our servicing rates to 4%(i.e., from the .10% level that we have historically experienced for facilitiesissued out of our originated portfolio master trust). Also contributing to theservicing income increases were (1) $4.5 million and $10.0 million ofhigher retail micro-loan processing and servicing fees for the three and sixmonths ended June 30, 2005, respectively, when compared to the sameperiods of the prior year and (2) the addition of servicing income relatedto the $92.0 million (face amount) in receivables that we acquired andsecuritized during the third quarter of 2004, the $996.5 million (face amount)in receivables that our equity-method investee, Transistor, acquired during thefourth quarter of 2004, the $376.3 million (face amount) in receivablesthat our newest equity-method investee acquired during the first quarter of2005 and the $72.1 million (face amount) in receivables that we acquiredduring the first quarter of 2005.

The above-noted servicing income increases were offsetpartially by declines in the Embarcadero Trust and CSG Trust managedreceivables and the de-securitization of the Fingerhut receivables. The de-securitizationof the Fingerhut receivables in the third quarter of 2004 resulted in a yearover year reduction of $6.3 million and $14.2 million in servicing revenues forthe three and six months ended June 30, 2005.

We expect servicing income levels during the remainderof 2005 that will be higher than 2004 levels based on the new, higher termsecuritization facility servicing rates, coupled with anticipated originatedportfolio master trust receivables growth in 2005 and the new servicingopportunities that have arisen for 

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us associated with thecredit card receivables portfolio acquisitions mentioned above. To the extentthat our servicing income rises associated with increased servicing rates onthe two recent term securitization facilities issued out of the originatedportfolio master trust, we will experience an offsetting reduction in incomefrom retained interests in credit card receivables securitized (a component offees and other income on securitized earning assets).

***Ancillary andinterchange revenues.  ***Ancillary and interchangerevenues increased $0.6 million and $1.9 million for the three and six monthsended June 30, 2005, respectively, when compared to the same periods ofthe prior year, primarily due to growth in both categories as a result of theaddition of new accounts in our core portfolio, growth in our largely fee-basedcredit card offering to consumers at the lower end of the FICO scoring range,as well as the addition of new purchased portfolios. We typically experiencehigher purchasing volumes and higher associated interchange fees for newercardholders than for more mature cardholders within our managed receivablesportfolios. As such, our recent emphasis on new account additions to replaceolder more stagnant accounts has produced higher interchange revenues.

***Equity in income ofequity-method investees.  ***Equity in income ofequity-method investees increased $7.6 million and $26.6 million for the threeand six months ended June 30, 2005, respectively, compared to the sameperiods in 2004 primarily due to income associated with our investments in ourTransistor and Capacitor (33.3% each) equity-method investees made during thefourth quarter of 2004 and our first quarter 2005 investment in another47.5%-owned equity-method investee that acquired a credit card receivablesportfolio in that same quarter. We expect these new investees to continue tocontribute significantly to our 2005 equity in income of equity-methodinvestees.

***Total other operating expense.  ***Totalother operating expense increased by $51.6 million and $96.5 million forthe three and six months ended June 30, 2005, respectively, compared tothe same periods in 2004 due to the following specific increases relative to2004 expense levels:

(1)         a $2.8 million and $3.6million increase for the three and six months ended June 30, 2005,respectively, in salaries and benefits primarily due to the addition of theRetail Micro-Loans segment in June of 2004 as well as the addition of theAuto Finance segment in April of 2005;

(2)         a $26.3 million and $48.6million increase for the three and six months ended June 30, 2005,respectively, related to card and loan servicing primarily due to (a) theaddition of the Company’s micro-loan activities (increases of $7.8 million and$17.9 million for the three and six months ended June 30, 2005,respectively), (b) servicing costs related to growth in receivablesassociated with our largely fee-based credit card offering to consumers at thelower end of the FICO scoring range, (c) the addition of several newmanaged receivables portfolios noted in the servicing income discussion above(increases of $12.9 million and $24.9 million for the three and six monthsended June 30, 2005, respectively, which were partly offset by someliquidations of receivables in earlier-acquired portfolios), and (d) the April 1,2005 addition of the Auto Finance segment;

(3)         an $11.1 million and$23.5 million increase for the three and six months ended June 30, 2005,respectively, in marketing and solicitation costs principally associated with (a) increasedmarketing efforts aimed at growing account originations within our originatedportfolio master trust and with respect to our largely fee-based credit cardoffering to consumers at the lower end of the FICO scoring range, and (b) theaddition of our Retail Micro-Loan segment; and

(4)         an overall increase of$11.0 million and $20.1 million for the three and six months ended June 30,2005, respectively, in other expenses, including occupancy, consulting andrelated expenses, due primarily to the addition of our Retail Micro-Loan andAuto Finance segments.

While we incur certain base levels of fixed costsassociated with the infrastructure that we have built to support our growth anddiversification into new products and services for our under-served andun-banked 

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customers, the vastmajority of our operating costs are highly variable based on the levels ofreceivables that we service (both for our own account and for others) and thepace and breadth of our search for, acquisition of and introduction of newbusiness lines, products and services. We expect to continue growing anddiversifying our business in 2005, and while certain unique expenses undertakenin 2004 may not be repeated in 2005 and while we continue to derive costreductions through our outsourcing and other cost-control efforts, we doexpect to see continued growth in our total other operating expense levels (ona year-over-year comparative basis relative to 2004) based on growth that weplan to undertake in 2005. During the second quarter of 2005, we decided toaccelerate our growth plans for the receivables underlying our originatedportfolio master trust and with respect to our largely fee-based credit cardoffering to consumers at the lower end of the FICO scoring range; as such, weexpect significant growth in marketing expenses throughout the remainder of2005.

***Minority Interest.  ***Theownership interests of minority holders of equity in our majority-ownedsubsidiaries are reflected as minority interests in our condensed consolidatedstatements of operations. The minority interests expense associated with thesesubsidiaries totaled $2.8 million and $12.0 million for the three and six monthsended June 30, 2005, respectively, versus $6.8 million and $13.0 millionfor the same periods of 2004. These trends are consistent with the relativecontributions of two of our majority-owned subsidiaries to income fromretained interest in credit card receivables securitized as discussed above. Oneof our majority-owned subsidiaries owns the retained interests in theEmbarcadero Trust and the other owns the retained interests in the trust thatwe formed in 2004 to facilitate the securitization of $92.0 million (faceamount) of credit card receivables acquired in the third quarter of 2004 and$72.1 million (face amount) of credit card receivables acquired in the firstquarter of 2005. For more details, see the above discussion of purchasediscount effects and receivables mix changes in the analysis of income fromretained interest in credit card receivables securitized trends.

***Income Taxes.  ***Our effective taxrate was 36.5% for the three and six months ended June 30, 2005,respectively, compared to 37.5% for the three and six months ended June 30,2004, respectively. The decrease of 1.0% in our effective tax rate between 2005and 2004 is principally due to the favorable state income tax effects ofacquisitions completed throughout 2004 and during the first quarter of 2005.

**Credit Cards Segment**

Our Credit Cards segmentconsists of our credit card investment and servicing activities, as conductedwith respect to receivables underlying accounts originated and portfoliospurchased by us. This segment represents aggregate activities associated withall of our credit card products, including our largely fee-based cardoffering to consumers at the lower end of the FICO scoring range. Revenuesassociated with our largely fee-based offering to consumers at the lower end ofthe FICO scoring range include interest income (along with late fees), fees andother income, as we have not securitized the receivables associated with thisoffering. With respect to our securitized credit card receivables (whichrepresent a substantial majority of our receivables), our fees and other incomeon securitized earnings assets within the Credit Cards segment include (1) securitizationincome, (2) income from retained interests in credit card receivablessecuritized, and (3) fees and other income. Also within our Credit Cardssegment are equity in the income of equity-method investees and servicingincome revenue sources. We earn servicing income from the trusts underlying oursecuritizations and the securitizations of our equity-method investees. Ourrevenue categories most affected by delinquency and credit loss trends are thenet interest income, the fees and other income on non-securitized earningsassets (which are net of a provision for loan losses) and the income fromretained interests in credit card receivables securitized categories.

***Background***

All of our credit card securitizations are treated assales under GAAP. As such, we remove the securitized receivables from ourcondensed consolidated balance sheet. The performance of the underlying 

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credit card receivableswill nevertheless affect the future cash flows we actually receive. Variousreferences within this section are to our managed receivables, whichinclude our non-securitized credit card receivables, as well as the credit cardreceivables underlying our off balance sheet securitization facilities. Managedreceivables data also include our equity interest in the receivables that wemanage for our equity-method investees and exclude minority interestholders’ shares of the receivables that we manage for our majority-ownedsubsidiaries.

Financial, operating and statistical data based onthese aggregate managed receivables are key to any evaluation of ourperformance in managing (including underwriting, valuing purchased receivables,servicing and collecting) the aggregate of the portfolios of credit cardreceivables reflected on our balance sheet and underlying our securitizationfacilities. In allocating our resources and managing our business, managementrelies heavily upon financial data and results prepared on a so-called “managedbasis.” It is also important to analysts, investors and others that we provideselected financial, operating and statistical data on a managed basis becausethis allows a comparison of us to others within the specialty finance industry.Moreover, our management, analysts, investors and others believe it is criticalthat they understand the credit performance of the entire portfolio of ourmanaged receivables because it reveals information concerning the quality ofloan originations and the related credit risks inherent within the securitizedportfolios and our retained interests in our securitization facilities. It alsofacilitates comparison of us to others within the specialty finance industry.

Managed receivables data assume that none of thecredit card receivables underlying our off balance sheet securitizationfacilities were ever transferred to securitization facilities and present thenet credit losses and delinquent balances on the receivables as if we stillowned the receivables. Reconciliation of the managed receivables data to ourGAAP financial statements requires: (1) recognition that a significantmajority of our loan and fee receivables (i.e., all but $170.7 million ofGAAP credit card loan and fee receivables at gross face value) had been sold insecuritization transactions as of June 30, 2005; (2) a look-throughto our economic share of (or equity interest in) the receivables that we managefor our three equity-method investees; (3) removal of our minorityinterest holders’ interests in the managed receivables underlying our GAAPconsolidated results; and (4) recognition that the de-securitizedFingerhut managed receivables are recorded at a $0.0 basis in our GAAPfinancial statements.

The period-endand average managed receivables data (as well as delinquency and charge-offstatistics) that follow within this section exclude the receivablesassociated with all accounts in late delinquency status in sellers’ hands as ofthe dates of our acquisitions of the receivables or interests therein. Pursuantto this treatment, the only activity within the following statistical dataassociated with these excluded accounts are recoveries, which we include withinthe numerator of the other income ratio computation, as well as the costs ofpursuing these recoveries, which we include within the numerator of theoperating ratio computation. Summarized below are the managed accountsunderlying our 2005 acquisitions, as well as those acquired accounts that havebeen excluded from our credit card data because at the time of purchase, theywere in a late delinquency status (in thousands):
| Acquired accounts |   | 243 |   |
|-------------------|--------|-----|--------|
| Excluded accounts |   | 9   |   |

 

Thecredit card receivables portfolios that we acquire are typically acquired atsubstantial discounts. A portion of each acquisition discount is related to theexcluded receivables and accounts noted above. Another portion of each discountrelates to the credit quality of the remaining acquired receivables and iscalculated as the difference between the face amount of the receivablespurchased (less the excluded receivables described above) and the future cashflows expected to be collected from the receivables. We refer to the balance ofthe discount for each purchase not needed for credit quality as accretableyield, which we amortize into net interest margin using the interest methodover the estimated life of each 

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acquired portfolio. As of the close of each financialreporting period, we evaluate the appropriateness of the credit qualitydiscount component of our acquisition discount and the accretable yieldcomponent of our acquisition discount based on actual and projected futureresults. The following table summarizes the discount components associated withour economic interests in 2004 and 2005 acquired portfolios as they werecomputed at the date of acquisition:
| ** **                             | ** ** | **Purchases occurring:**                           | ** ** |
|----------------------------------------|------------|---------------------------------------------------------|------------|
| ** **                             | ** ** | **Six months ended  June 30, 2005** | ** ** | **Year ended  December 31, 2004** | ** ** |
| ** **                             | ** ** | **(In millions)**                                  | ** ** |
| Total face value  acquired             |       |                                                    | $          | 228.1 |   |   |   | $ | 401.6 |   |   |
| Total discount                         |       |                                                    | 46.8       |   |   |   | 77.2 |   |   |
| Portion used for  excluded receivables |       |                                                    | 13.1       |   |   |   | 26.9 |   |   |
| Portion needed  for credit quality     |       |                                                    | 21.5       |   |   |   | 35.1 |   |   |
| Portion reflecting  accretable yield   |       |                                                    | 12.1       |   |   |   | 15.2 |   |   |

 

***Asset Quality***

Our delinquency and charge off data at any point intime reflect the credit performance of our managed receivables. The average ageof our credit card accounts, the timing of portfolio purchases, the success ofour collection and recovery efforts and general economic conditions all affectour delinquency and charge-off rates. The average age of our credit cardreceivables portfolio also affects the stability of our delinquency and lossrates. The delinquency and charge-off data reflected herein are considered bymanagement in determining our allowance for uncollectible loans and fees withrespect to our non-securitized earning assets, net on our condensedconsolidated balance sheets, as well as the valuation of our retained interestsin credit card receivables securitized, which is a component of securitizedearning assets on our condensed consolidated balance sheets. As receivables arecharged off, the charge offs of non-securitized receivables are reflectedwithin our provision for loan losses, and the charge offs of securitizedreceivables are reflected as an offset in determining income from retainedinterest in credit card receivables securitized (within our fees and otherincome on securitized earning assets) on our condensed consolidated statementsof operations.

Our strategy for managing delinquency and receivableslosses consists of account management throughout the customer relationship.This strategy includes credit line management and pricing based on the risk ofthe credit card accounts.

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

The account management strategies that we use on ourportfolio are intended to manage and to the extent possible reduce the higherdelinquency rates that can be expected in a more mature managed portfolio suchas ours. These account management strategies include conservative credit linemanagement, purging of inactive accounts and collection strategies (asdescribed under the heading “How Do We Collect from Our Customers?” in “Item 1.Business” of our Annual Report on Form 10-K for the year ended December 31,2004) intended to optimize the effective account-to-collector ratio acrossdelinquency buckets. We measure the success of these efforts by measuringdelinquency rates. These rates exclude accounts that have been charged off.

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Thefollowing table presents the delinquency trends of the credit card receivablesthat we manage:
| ** **                                       | ** ** | **As of**                                             | ** ** |
|--------------------------------------------------|------------|------------------------------------------------------------|------------|
| ** **                                       | ** ** | **2005**                                                   | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                                       | ** ** | **Jun. 30**                                           | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sep. 30** | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sep. 30** | ** ** |
| ** **                                       | ** ** | **(Dollars in thousands; % of total)** | ** ** |
| Period-end managed  receivables                  |       | $                                                          | 2,198,703  |   | $ | 2,246,256 |   | $ | 2,166,489 |   | $ | 1,931,514 |   | $ | 1,942,059 |   | $ | 2,090,644 |   | $ | 2,340,898 |   | $ | 2,518,822 |   |
| Period-end managed  accounts                     |       | 2,973                                                      |       | 2,943 |   | 2,888 |   | 2,317 |   | 2,222 |   | 2,276 |   | 2,416 |   | 2,637 |   |
| Receivables  delinquent:                         |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 30 to 59 days past  due                     |       | $                                                          | 83,175     |   | $ | 70,558 |   | $ | 80,419 |   | $ | 76,028 |   | $ | 84,474 |   | $ | 71,108 |   | $ | 104,380 |   | $ | 118,300 |   |
| 60 to 89 days past  due                     |       | 61,882                                                     |       | 54,505 |   | 61,408 |   | 61,144 |   | 60,780 |   | 58,188 |   | 79,347 |   | 87,205 |   |
| 90 or more days  past due                        |       | 128,351                                                    |       | 143,416 |   | 167,863 |   | 148,132 |   | 126,505 |   | 160,055 |   | 200,965 |   | 187,526 |   |
| Total 30 or more  days past due                  |       | $                                                          | 273,408    |   | $ | 268,479 |   | $ | 309,690 |   | $ | 285,304 |   | $ | 271,759 |   | $ | 289,351 |   | $ | 384,692 |   | $ | 393,031 |   |
| Total 60 or more  days past due                  |       | $                                                          | 190,233    |   | $ | 197,921 |   | $ | 229,271 |   | $ | 209,276 |   | $ | 187,285 |   | $ | 218,243 |   | $ | 280,312 |   | $ | 274,731 |   |
| Receivables delinquent as % of period-end loans: |       |                                                       |       |   |   |   |   |   |   |   |   |   |   |   |   |   |   |
| 30 to 59 days past  due                     |       | 3.8                                                        | %          | 3.1 | % | 3.7 | % | 3.9 | % | 4.3 | % | 3.4 | % | 4.5 | % | 4.7 | % |
| 60 to 89 days past  due                     |       | 2.8                                                        | %          | 2.4 | % | 2.8 | % | 3.2 | % | 3.1 | % | 2.8 | % | 3.4 | % | 3.5 | % |
| 90 or more days  past due                        |       | 5.8                                                        | %          | 6.4 | % | 7.7 | % | 7.7 | % | 6.5 | % | 7.7 | % | 8.6 | % | 7.4 | % |
| Total 30 or more  days past due                  |       | 12.4                                                       | %          | 11.9 | % | 14.2 | % | 14.8 | % | 13.9 | % | 13.9 | % | 16.5 | % | 15.6 | % |
| Total 60 or more  days past due                  |       | 8.7                                                        | %          | 8.8 | % | 10.5 | % | 10.9 | % | 9.6 | % | 10.5 | % | 12.0 | % | 10.9 | % |

 

A comparison of our lower delinquency rates in allcategories as of June 30, 2005 to those as of June 30, 2004 supportsour belief that we are seeing credit quality improvements within ourportfolios. We believe this to be the case despite our marketing and additionof new accounts underlying our originated portfolio master trust during 2004,which tend to have lower delinquency rates than more mature accounts. Thefavorable effects of this phenomenon are offset by the growth in our largelyfee-based credit card offering to consumers at the lower end of the FICOscoring range, the receivables of which experience greater delinquency andcharge-off levels.

The increases in our 30 to 59 and 60 to 89 days pastdue delinquency rates since March 31, 2005 are consistent with theseasonal trends that we have experienced in prior years. We typicallyexperience higher payments, and hence lower delinquencies, during the firstquarter of each year. We expect to see some of the 30 to 59 and 60 to 89 dayspast due delinquencies roll into the 90 or more day past due delinquencycategory during the third quarter and then into charge-off status in the fourthquarter. Absent the effects of portfolio acquisitions, these seasonal paymentpatterns typically produce the lowest charge-off rates in the third quarter,with an increase in charge-off rates in the fourth quarter of each year. Weexpect this generally seasonal theme to be present for us throughout theremainder of this year.

*Charge offs.  *Wegenerally charge off credit card receivables when they become contractually180 days past due or within 30 days of notification and confirmationof a customer’s bankruptcy or death. In some cases of death, however,receivables are not charged off if, with respect to the deceased customer’s 

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account, there is asurviving, contractually liable individual or an estate large enough to pay thedebt in full. Other loans and fees receivable generally are charged off whenthey become contractually 90 days past due.

Thefollowing table presents the charge off data for: (1) all of the creditcard receivables underlying the securitizations of our consolidatedsubsidiaries (adjusted to exclude the receivables associated with minorityinterest holders’ equity in our consolidated subsidiaries); (2) ourrespective 50.0%, 33.3% and 47.5% shares of the receivables that we manage onbehalf of our equity-method investees; (3) the de-securitized Fingerhutreceivables; and (4) the $170.7 million face amount of receivables associatedwith our largely fee-based credit card offering to consumers at the lower endof the FICO scoring range, which have not been securitized.
| ** **                      | ** ** | **For the Three Months Ended**                     | ** ** |
|---------------------------------|------------|------------------------------------------------------------------------|------------|
| ** **                      | ** ** | **2005**                                                               | ** ** | **2004** | ** ** | **2003** | ** ** |
| ** **                      | ** ** | **Jun. 30**                                                       | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sep. 30** | ** ** | **Jun. 30** | ** ** | **Mar. 31** | ** ** | **Dec. 31** | ** ** | **Sep. 30** | ** ** |
| ** **                      | ** ** | **(Dollars in thousands; percentages annualized)** | ** ** |
| Average managed receivables     |       | $                                                                      | 2,212,378  |   | $ | 2,307,471 |   | $ | 2,039,235 |   | $ | 1,924,520 |   | $ | 2,001,489 |   | $ | 2,219,537 |   | $ | 2,419,674 |   | $ | 2,469,194 |   |
| Gross yield ratio               |       | 29.1                                                                   | %          | 28.2 | % | 29.3 | % | 29.8 | % | 29.6 | % | 30.3 | % | 31.3 | % | 32.1 | % |
| Combined gross charge offs      |       | $                                                                      | 129,921    |   | $ | 117,924 |   | $ | 131,061 |   | $ | 121,498 |   | $ | 140,573 |   | $ | 165,815 |   | $ | 169,482 |   | $ | 161,746 |   |
| Net charge  offs                |       | $                                                                      | 67,602     |   | $ | 52,432 |   | $ | 58,270 |   | $ | 61,255 |   | $ | 74,087 |   | $ | 87,331 |   | $ | 90,446 |   | $ | 95,629 |   |
| Adjusted charge offs            |       | $                                                                      | 44,900     |   | $ | 39,053 |   | $ | 39,899 |   | $ | 38,343 |   | $ | 43,934 |   | $ | 45,294 |   | $ | 47,304 |   | $ | 54,798 |   |
| Combined gross charge off ratio |       | 23.5                                                                   | %          | 20.4 | % | 25.7 | % | 25.3 | % | 28.1 | % | 29.9 | % | 28.0 | % | 26.2 | % |
| Net charge off ratio            |       | 12.2                                                                   | %          | 9.1 | % | 11.4 | % | 12.7 | % | 14.8 | % | 15.7 | % | 15.0 | % | 15.5 | % |
| Adjusted charge off ratio       |       | 8.1                                                                    | %          | 6.8 | % | 7.8 | % | 8.0 | % | 8.8 | % | 8.2 | % | 7.8 | % | 8.9 | % |
| Net interest margin             |       | 22.5                                                                   | %          | 21.1 | % | 20.4 | % | 22.4 | % | 20.8 | % | 20.1 | % | 22.1 | % | 22.4 | % |
| Other income ratio              |       | 8.6                                                                    | %          | 6.8 | % | 5.4 | % | 7.4 | % | 6.9 | % | 6.2 | % | 5.9 | % | 5.1 | % |
| Operating  ratio                |       | 8.9                                                                    | %          | 8.6 | % | 10.3 | % | 8.2 | % | 7.6 | % | 7.1 | % | 8.6 | % | 7.3 | % |

 

The principal factor contributing to the lower grossyield ratio experienced during the second quarter of 2005 compared to the sameperiod in 2004 is our improved across-the-board delinquency rates within eachof our managed receivables portfolios. Lower delinquencies have translateddirectly into lower late fee billings. Observations with respect to theremaining categories in the above table are as follows:

·       Whileall of our charge-off levels and ratios benefit from our marketing of newaccounts underlying our originated portfolio master trust, which was renewedduring mid to late 2004 and continued into 2005, the favorable effects of thenew accounts are offset by the growth in our largely fee-based credit cardoffering to consumers at the lower end of the FICO scoring range, thereceivables of which experience greater charge-off levels than we experiencewithin our originated portfolio master trust and with respect to purchasedreceivables.

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·       Whileour net interest margin benefits from lower finance charge and late fee chargeoff levels within newly added accounts underlying our originated portfoliomaster trust, the favorable effects of the new accounts are offset partially bythe growth in our largely fee-based credit card offering to consumers at thelower end of the FICO scoring range, the receivables of which experience lowerAPRs and have greater charge-off levels than we experience within ouroriginated portfolio master trust and with respect to purchased receivables.

·       Thesignificant trending, seasonally adjusted decline in combined gross charge offsand combined gross charge off ratios during 2005 as compared to 2004principally reflects credit quality improvements within our portfolios.

·       Bothcredit quality improvements within our portfolios and lower delinquencies contributedto trending lower net charge off ratios and adjusted charge off ratios, whencomparing each quarter of 2005 with its comparable 2004 quarter.

·       Ourfirst quarter of 2005 combined gross charge off, net charge off and adjustedcharge off ratios all benefit from the effects of three acquisitions thatoccurred late in the fourth quarter of 2004 and early in the first quarter of2005. That is to say that our March 31, 2005 managed receivables dataexclude all receivables associated with accounts that were at or near chargeoff at the time the receivables portfolios were acquired. The exclusion ofthese late stage or severely delinquent accounts at the time of acquisitionmeans that there are fewer charge offs on the acquired portfolios’ receivablesuntil the acquired portfolios season through their delinquency buckets in themonths following the acquisitions. Magnifying this beneficial effect is thefact that while there are no charge offs of these receivables until theportfolios season through their delinquency buckets, the denominator of thevarious charge off ratio computations is increased to include all of theacquired portfolios’ receivables that were not at or near charge off at thetimes of acquisition. In prior filings we have sometimes referred to thiseffect as the “denominator effect.” These beneficial effects have diminishedsignificantly during the second quarter of 2005 with the seasoning of theacquired portfolio’s receivables through their delinquency buckets, and weexpect very little continuing beneficial effects beyond the second quarter of2005. This accounts for the increases in the second quarter 2005 combinedcharge off ratio, net charge off ratio and adjusted charge off ratio relativeto comparable first quarter 2005 ratios.

·       Thegap between our net charge offs and adjusted charge offs, as well as theirassociated ratios, has narrowed in recent quarters leading up to the firstquarter of 2005. Given our efforts to grow our account originations andreceivables levels for both our traditional credit card product and our largelyfee-based credit card offering to consumers at the lower end of the FICO scoringrange and given cardholder purchase activities and the commensurate generationof new receivables by customers underlying our portfolio acquisitions, thepre-acquisition receivables balances within our acquired portfolios (to whichour credit quality discount at acquisition applies) have fallen as a relativepercentage of our total portfolio of managed receivables. Our first quarter2005 receivables acquisitions should serve to diminish somewhat the pace ofthis trend over the next few quarters; in fact, these acquisitions contributedto a temporary reversal of this trend in the second quarter of 2005. As firstquarter 2005 acquisitions began to age through their delinquency buckets in thesecond quarter of 2005, we began to experience charge offs for theseacquisitions for the first time, and the net charge offs associated with theseacquisitions were offset by credit quality discounts in arriving at ouradjusted charge offs. This caused the proportion of net charges to which creditquality discounts relate to actually increase (thus widening the spread betweenthe net charge off ratio and the adjusted charge off ratio) in the secondquarter of 2005.

·       Comparingour first and second quarter 2005 net interest margins to their corresponding2004 quarters demonstrates the favorable effects of lower finance charge andlate fee charge offs, which 

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are consistent with theabsolute improvements that we are seeing year over year in the credit qualityof our portfolios. We saw improvement in our net interest margin between thefirst and second quarter of 2005, which corresponds with the improved grossyield ratio in the second quarter, as well as higher accretable yieldinclusions within the net interest margin based on the continued strength ofthe Fingerhut portfolio. During the second quarter of 2005, we determined that$28.0 million of excess credit quality discount on the Fingerhut portfolioshould be reclassified to accretable yield and amortized into net interestmargin over the remaining life of the Fingerhut portfolio. We expect to seesome further improvements in our net interest margin throughout the balance of2005.

·       Thegeneral trend of year over year improvements in the other income ratio resultsprincipally from increased fee income (net of fee charge offs) associated withour largely fee-based credit card product offering to consumers at the lowerend of the FICO scoring range. Also contributing is improved credit qualityoverall, which has had the effect of reducing the level of fee charge offsnetted against fee income associated with our originated portfolio master trustand purchased portfolio managed receivables.

·       The operating ratioincreased slightly over that experienced in the first quarter primarily due tothe fourth quarter 2004 and first quarter 2005 portfolio acquisitions, forwhich servicing revenues (which are an offset to the numerator in our operatingratio computation) have not exceeded servicing costs by as wide of a margin aswe have experienced for other recent acquisitions.

***Definitions of Financial, Operating and StatisticalMeasures***

We refer readers to ourAnnual Report on Form 10-K for the year ended December 31, 2004for the definitions of adjusted charge offs, combined gross charge offs, thegross yield ratio, net charge offs, the net interest margin, and the otherincome ratio, none of which have changed from the definitions provided in thatAnnual Report on Form 10-K. Our operating ratio represents anannualized fraction, the numerator of which includes the expenses associatedwith our Credit Cards segment (net of any servicing income we receive in ourcapacity as servicer for other parties with separate economic interests in thetrusts that we service), other than marketing and solicitation and ancillaryproduct expenses, and the denominator of which is average managed receivables.

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**Investmentsin Previously Charged-Off Receivables Segment**

Forthe three and six months ended June 30, 2005, the following table shows aroll-forward of our investments in previously charged-off receivablesactivities (in thousands of dollars):
| ** **                                                                                                                                                                                                                                                                                        | ** ** | **Three Months  Ended  June 30, 2005** | ** ** | **Six Months  Ended  June 30, 2005** | ** ** |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------|------------|-----------------------------------------------------|------------|
| Unrecovered balance at  beginning of period                                                                                                                                                                                                                                                       |       |                                                  | $          | 18,134                                              |       |   |   | $ | 15,094 |   |   |
| Acquisitions of  defaulted accounts                                                                                                                                                                                                                                                               |       |                                                  | 9,588      |                                                |       |   | 19,911 |   |   |
| Cost-recovery method  income recognized on defaulted accounts (included as a component of fees and  other income on non-securitized earning assets on the Company’s  condensed consolidated statements of operations)                                                                        |       |                                                  | 17,547     |                                                |       |   | 35,055 |   |   |
| Cost-recovery method  income recognized on bulk sale of receivables (See Note 5, “Sale of  Investments in Previously Charged-Off Receivables and Forward Flow Contract,”  in the accompanying condensed consolidated financial statements and the  related notes included therein) |       |                                                  | 69,559     |                                                |       |   | 69,559 |   |   |
| Cash collections                                                                                                                                                                                                                                                                                  |       |                                                  | (24,278    | )                                                   |       |   | (49,069 | ) |   |
| Cash collections on bulk  sale of receivables (See Note 5, “Sale of Investments in Previously  Charged-Off Receivables and Forward Flow Contract,” in the accompanying  condensed consolidated financial statements and the related notes included  therein))                           |       |                                                  | (76,000    | )                                                   |       |   | (76,000 | ) |   |
| Unrecovered balance at  June 30, 2005                                                                                                                                                                                                                                                        |       |                                                  | $          | 14,550                                              |       |   |   | $ | 14,550 |   |   |
| Estimated remaining collections (“ERC”)                                                                                                                                                                                                                                                 |       |                                                  | $          | 36,204                                              |       |   |   | $ | 36,204 |   |   |

 

The above table reflects our use of the cost recoverymethod of accounting for our investments in previously charged-off receivables.Under this method, static pools consisting of homogenous accounts andreceivables are established for each portfolio acquisition. Once a static poolis established, the receivables within the pool are not changed. Each staticpool is recorded at cost and is accounted for as a single unit for paymentapplication and income recognition purposes. Under the cost recovery method,income associated with a particular portfolio is not recognized until cashcollections have exceeded the investment. Additionally, until such time as cashcollected for a particular portfolio exceeds our investment in the portfolio,we will incur commission costs and other internal and external servicing costsassociated with the cash collections on the portfolio investment that will becharged as an operating expense without any offsetting income amounts. The lifeof each pool of charged-off receivables that we typically acquire is generallyestimated to be between 24 and 36 months for normal delinquencycharged-off accounts and approximately 60 months for Chapter 13 Bankruptcies.The Company anticipates collecting approximately 35.7% of the ERC of theexisting accounts over the next twelve months, with the balance to be collectedthereafter.

In June of 2005, the subsidiary that comprisesour Investments in Previously Charged-Off Receivables segment sold a portfolioof charged-off credit card receivables having a face amount of approximately$2.9 billion to Encore Capital Group, Inc. (“Encore”) and agreed to sellEncore up to $3.25 billion in face amount of the subsidiary’s futurecharged-off credit card receivable acquisitions at established pricing over thenext five years. As consideration for these transactions, the subsidiaryreceived $143.0 million in cash. The purchase price included $76.0 millionrelated to the portfolio of charged-off credit card receivables and $67.0million related to the Forward Flow Contract. The sale of the portfolio ofcharged-off credit card receivables resulted in a gain of $69.6 million whichhas been recorded in fees and other income on non-securitized earning assets onour condensed consolidated statements of operations for the three and sixmonths ended June 30, 2005. Ten million dollars of the $67.0 million indeferred revenue related to the 

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Forward Flow Contract isrequired to be held in escrow until the performance of certain conditions underthe contract and is included in restricted cash on our condensed consolidatedbalance sheet; as such, this $10 million will be excluded from incomerecognition computations until the conditions are satisfied. The remaining$57.0 million of deferred revenue will be recognized into income over the lifeof the contract as our subsidiary delivers its associated volumes ofcharged-off credit card receivables to Encore in the future. Based on theForward Flow Contract, our subsidiary is expected to purchase for delivery toEncore over the life of the contract certain previously charged-off receivablesfrom trusts, the receivables of which are serviced by the Company, as well ascertain previously charged-off receivables associated with the Company’slargely fee-based credit card offering to consumers at the lower end of theFICO scoring range. Any shortfalls in delivery of minimum periodic dollaramounts of previously charged-off receivables to Encore could result in thesubsidiary being required to return a portion of the purchase price related tothe Forward Flow Contract.

Remaining after the Encoretransaction are our pools of previously charged-off receivables associated withChapter 13 Bankruptcies and our balance transfer program, which we expect tocontinue to service and grow through future acquisitions. We expect ourInvestments in Previously Charged-Off Receivables segment to continue itsChapter 13 Bankruptcies and other previously charged-off receivables activitiesthroughout 2005 as we acquire previously charged-off receivables and sell themto Encore for fixed sales prices under the Forward Flow Contract (recognizingas we will the associated deferred revenue under the contract). We note here,however, that we do not anticipate income at the second quarter of 2005 levelto be recurring throughout the remainder of 2005. It is even conceivable thatincome during the remaining quarters of this year may be flat to down relativeto third and fourth quarter 2004 results for Investments in PreviouslyCharged-Off Receivables segment.

**Retail Micro-Loan Segment**

The Retail Micro-Loan segment consists of a network ofstorefront locations that provide, either directly or on behalf of a lendingbank, small-denomination, short-term, unsecured cash advances that aretypically due on the customer’s next payday. The assets associated with ourRetail Micro-Loan operations were principally acquired in two separatetransactions completed during 2004. During the second quarter of 2004, certainof our subsidiaries acquired substantially all of the assets of First American,including over 300 retail locations in 11 states, for $108.9 million.Representing an initial market entry into micro-loan activities, the FirstAmerican acquisition provided a platform for future growth in this market.Subsequently, during the third quarter of 2004, our subsidiaries acquired substantiallyall of the assets of another micro-lender, Venture Services, including 166retail locations in 7 states, for $33.9 million. The Venture Servicesacquisition provided complementary locations in 4 existing states and added 3new states. Also in January 2005, one of our subsidiaries acquiredsubstantially all of the assets of another micro-lender for $11.9 million,including transaction costs; with this acquisition, we added an additional 39stores in the State of Ohio. As of June 30, 2005, our subsidiariesoperated a total of 513 micro-loan locations in 14 states.

The micro-lending market emerged in the early 1990s inresponse to a shortage of available short-term consumer credit alternativesfrom traditional banking institutions. We believe customers seek micro-loans asa simple, quick and confidential way to meet short-term cash needs betweenpaydays while avoiding the potentially higher costs and negative creditconsequences of other financing alternatives, which include overdraftprivileges or bounced check protection, late bill payments, checks returned forinsufficient funds and short-term collateralized loans.

In most of the states in which our subsidiariesoperate our micro-lending business, loans are made directly to customers.However, in certain other states, they act only as a processing and servicingagent for a state-chartered, FDIC insured bank that issues loans to customerspursuant to the authority of the laws of the state in which the bank is locatedand federal interstate banking laws, regulations and guidelines. 

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Unlike many competitors,our subsidiaries have structured their processing and servicing agreements withthe lending bank so that the bank bears the entire credit risk associated withthe loans. Additionally, unlike many competitors, our subsidiaries do notpurchase overdue loans from the lending bank. As of June 30, 2005, oursubsidiaries were making micro-loans directly to customers in 386 of the 513locations in 10 states, and they were acting as a processing and servicingagent for the lending bank in the remaining 127 locations in 4 states. For thethree and six months ended June 30, 2005, direct storefront micro-lendinggenerated revenues of $18.3 million, $36.2 million, $3.0 million and $3.0million for the three and six months ended June 30, 2005 and 2004,respectively, and revenues through processing and servicing activities for thelending bank were $6.9 million, $12.4 million, $2.4 million and $2.4million for the three and six months ended June 30, 2005 and 2004,respectively.

Inaddition to the 39 locations acquired during the three months ended March 31,2005, three new locations were opened during the quarter ended June 30,2005. The capital cost of opening a new branch location varies depending on thesize and location of the branch, but typically averages approximately $30,000.This capital cost includes leasehold improvements, signage, fixtures,furniture, computer equipment and security. Historically, it typically takesapproximately nine months for a micro-loan location to generate sufficientrevenues to cover its branch expenses, excluding management fees paid to itsparent. During the quarter ended June 30, 2005, six of the branchlocations were closed in order to better allocate our resources.
| ** **                     | ** ** | **For the Three  Months Ended  June 30, 2005** | ** ** | **For the Six  Months Ended  June 30, 2005** | ** ** | **Year Ended  December 31, 2004** | ** ** |
|--------------------------------|------------|-------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------------------|------------|
| Beginning number  of locations |       |                                                                    | 516        |                                                                  |       |                                             | 482        |   |   |   | — |   |   |
| Acquired  locations            |       |                                                                    | —     |                                                                  |       |                                             | 39         |   |   |   | 468 |   |   |
| Opened locations               |       |                                                                    | 3          |                                                                  |       |                                             | 6          |   |   |   | 16 |   |   |
| Closed locations               |       |                                                                    | (6         | )                                                                     |       |                                             | (14        | ) |   |   | (2 | ) |   |
| Ending locations               |       |                                                                    | 513        |                                                                  |       |                                             | 513        |   |   |   | 482 |   |   |

 

Pre-tax net income withinour Retail Micro-Loan segment was $2.7 million, $3.6 million, $0.8 million and$0.8 million for the three and six months ended June 30, 2005 and 2004,respectively. Historically, the first quarter of each calendar year includesthe slowest lending months of the year for the micro-lending sector as manyconsumers have the benefit of income tax refunds during this period, whichallows them to repay their outstanding micro-lending obligations and to meettheir day-to-day cash flow needs without the necessity of micro-lendingproducts. Also relevant to our year-to-date 2005 results is the fact that wecompleted our 39-store acquisition in January 2005, which resultedin higher operating costs for us during a period of relatively low seasonalrevenues. Notwithstanding the above factors, we expect pre-tax net incomelevels for our Retail Micro-Loan segment to be consistent with thecorresponding periods of the prior year through the third and fourth quartersof 2005. We have these expectations notwithstanding guidance published by theFDIC, which limits the frequency of borrower usage of micro-loans offered byFDIC-supervised institutions and the period a customer may have micro-loansoutstanding from any lender to three months during the previous twelve-monthperiod. We are currently rolling out new alternative lending products withinour storefronts in response to the new FDIC guidelines, and while we arecontinually assessing the potential effects of the FDIC guidelines on ourbusiness, we do not expect the FDIC guidelines to have any materially adverseconsequences to our Retail Micro-Loan segment.

**Auto Finance Segment**

On April 1, 2005, we completed the acquisition ofthe Wells Fargo Financial’s Consumer Auto Receivables business unit, whichcomprises our new Auto Finance segment. This acquisition included all ofConsumer Auto Receivables’ assets, business operations and employees forapproximately $121.5 million including transaction costs. The acquisition wasfinanced using $88.2 million in debt with the remainder in 

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cash. Upon acquisition,Consumer Auto Receivables had $128.9 million auto-finance-relatedreceivables (at face, net of unearned discounts) and operated in thirty-eightstates through its twelve branches, three regional processing centers andnational collection center at its Lake Mary, FL headquarters. The business hasapproximately 300 employees.

The Auto Finance segment consists of a nationwidenetwork of pre-qualified dealers in the “Buy Here/Pay Here” used car businessfrom whom auto loans are purchased at a discount or serviced for a fee. Revenuesare generated on purchased loans through interest earned on the face value ofthe purchased installment agreements combined with discounts on these purchasedloans. Interest income from discounts is generally earned over the life of theapplicable loan. Additionally, our Auto Finance segment generates revenues fromservicing loans on behalf of dealers for a portion of actual collections, andby providing back-up servicing for similar quality securitized assets.

The number of active dealers is a function of newdealer enrollments offset by dealer attrition within the states in which theAuto Finance segment is presently licensed. Dealers are certified upon beingrecruited by a sales force of approximately 60 resources located throughoutstrategically selected territories. Our Auto Finance segment recently receivedauthorization to expand business operations into three new states (Mississippi,Alabama and Arkansas), bringing the total number of states in which thebusiness unit operates to 41, and we presently have approximately 1,300 activedealers and approximately 42,000 active accounts.

The Auto Finance segmentis also in the process of developing and releasing new financing productsdesigned to complete its complement of products being offered to this marketsegment. In addition to these initiatives, the business unit is in the processof forming strategic alliances with aftermarket product and service providersin an effort to cross-sell to their existing customer base. We expect thisbusiness to continue to grow throughout 2005 with the addition of new dealerenrollments, loan origination increases with existing dealers and the additionof complementary product rollouts.

**Liquidity,Funding and Capital Resources**

At June 30,2005, we had $204.6 million in unrestricted cash. Because thecharacteristics of our assets and liabilities change, liquidity management is adynamic process affected by the pricing and maturity of our assets andliabilities. We finance our business through cash flows from operations, assetbacked securitizations and the issuance of debt and equity:

·       Duringthe six months ended June 30, 2005, we generated $131.5 million incash flow from operations, compared to using $47.9 million in cash flowfrom operations during the six months ended June 30, 2004. The $179.4 millionincrease is due primarily to (1) the $56.1 million 2005 cash flowsassociated with our zero-basis de-securitized Fingerhut receivables, all ofwhich are reflected in our net income; (2) higher 2005 income associatedwith our Investment in Previously Charged-Off Receivables segments collections;and (3) the Forward Flow Contract associated with the Encore transaction,which resulted in the receipt of $67.0 million in cash which is shown asdeferred revenue on our condensed consolidated balance sheet at June 30,2005.

·       Duringthe six months ended June 30, 2005, we used $174.3 million of cash ininvesting activities, compared to using $41.0 million of cash for the sixmonths ended June 30, 2004. The $133.3 million increase is due primarilyto: (1) net investments in securitized earning assets of $37.5 million forthe six months ended June 30, 2005 compared to net proceeds fromsecuritized earning assets of $119.4 million for the six months ended June 30,2004, due to our use of proceeds from our convertible note offering and theEncore transaction to fund receivables purchases that are securitized withinour originated portfolio master trust; (2) our first quarter investment ina 47.5%-owned equity-method investee in connection with the acquisition of$376.3 million (face amount) in credit card receivables; (3) theacquisition of our auto finance business during the second quarter of 2005; and

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(4) increasedpurchases of software, furniture, fixtures and equipment related to ourcontinued growth and expansion. These increase were partially offset by ourbulk sale of previously charged-off receivables to Encore which resulted incash receipts of $76.0 million and is included as proceeds from non-securitizedearning assets.

·       Duringthe six months ended June 30, 2005, we generated $191.0 million incash from financing activities, compared to generating $26.0 million incash from financing activities during the same period in 2004. The $165.0million increase in cash flow generated is primarily due to: (1) our secondquarter 2005 issuance of $250.0 million aggregate principal amount of 3.625%Convertible Senior notes due 2025; and (2) debt incurred during theacquisition of our Auto Finance segment and subsequent funding of receivablestherein. This increase was offset by: (1) repurchases of $100.0 milliontreasury stock in connection with the $250.0 million debt offering; (2) increasednet distributions to minority interest-holders in our consolidatedsubsidiaries; and (3) higher net debt repayments in the first six months2005 than in the corresponding period in 2004 related to our Retail Micro-Loansegment.

In recent prior quarters, we focused on reducing ourunrestricted cash balances to the minimal levels necessary to meet our dailyoperations and investment needs so as to avoid incurring costs on funds notcurrently needed to fund investments or operations. Historically, we have beenable to manage our cash balances in this way by managing draws under oursecuritization facilities so as to meet our cash needs on an “as needed” basis.During the second quarter of 2005, however, we received substantial net cashflows of $141.7 million net from our convertible note offering (the $250.0million convertible note proceeds, net of $8.3 million issuance costs and the$100.0 million used contemporaneous with issuance to repurchase our commonshares) and $133.0 million ($143.0 million, net of $10.0 million of escrowedcash) from the Encore transaction. With these cash flows, we accumulated $204.6million in unrestricted cash as of June 30, 2005, notwithstanding ourcontinuing efforts to fund receivable purchases securitized within ouroriginated portfolio master trust so as to minimize draws on outstandingsecuritization facilities. We expect to continue funding receivable purchasessecuritized within our originated portfolio master trust to further reduce ourunrestricted cash balances given that the yields that we can earn on our cashdeposits are less than the costs of funds under our securitization facilities. Weare comfortable with this strategy because we are confident in our ability todraw additional cash from our $1.5 billion 2-year variable fundingfacility (as well as our conduit facilities) to meet our future acquisition andoperating needs as they arise in the future. As of June 30, 2005, ourcollateral base within our originated portfolio master trust was sufficient toallow for additional cash draws of $237.5 million against our existingsecuritization facilities. Coupled with our unrestricted cash balances, thisgives us some $442.1 million of ready liquidity for use in our growth,acquisition and diversification efforts. We expect to explore several newacquisition opportunities throughout 2005 and beyond through our efforts to acquireother credit card receivables portfolios and our expansion into product andservice offerings complementary to our sub-prime consumer market.

On April 1, 2005, we completed the acquisition ofWells Fargo Financial’s Consumer Auto Receivables business unit. Thisacquisition included all of Consumer Auto Receivables’ assets, businessoperations and approximately 300 employees for approximately $121.5 millionincluding transaction costs. The acquisition was financed using $88.2 millionin debt with the remainder paid in cash. The $88.2 million in debt was financedthrough a structured finance transaction. In that transaction, a newly-formedspecial purpose subsidiary purchased the receivables and supporting collateralfrom the business and financed that acquisition through a secured lendingfacility with a bank. The debt incurred under that facility is recourse only tothe assets that are pledged to the lender. We intend to finance any receivablesgrowth in the business through this same process. The sale of receivables andsupporting collateral to this particular special purpose subsidiary does notqualify for gain on sale treatment under Statement No. 140.

In January 2005, we purchased a 47.5% interest ina joint venture for $10.9 million, including transaction costs. One of ourwholly owned subsidiaries and two unaffiliated investors formed this entity in 

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connection with theacquisition of $376.3 million (face amount) in credit card receivables.These receivables were then transferred to a subsidiary of the joint venture,and then on to a trust pursuant to a Statement No. 140 transfer inexchange for notes and a subordinated, certificated interest issued by thetrust. We account for our investment in this joint venture under the equitymethod of accounting, and it is included in investment in equity-methodinvestees on our condensed consolidated balance sheet as of June 30, 2005.For a fee that represents adequate compensation for servicing, we agreed toservice this entire portfolio of securitized credit card receivables.

Our Board of Directors hasauthorized a program to repurchase up to 10 million shares (approximately 18.7percent of the outstanding total) of our outstanding common stock. Under theplan, we repurchase shares of our common stock from time to time either on theopen market or through privately negotiated transactions in compliance with SECguidelines. At our discretion, we may use the treasury shares to satisfy optionexercises and restricted stock grants. We will continue to evaluate our stockprice relative to other investment opportunities and, to the extent we believethat the repurchase of our stock represents an appropriate return of capital,we will repurchase additional shares of our stock. To date, we have repurchased5,252,500 shares including the 2,994,000 shares we repurchased inconjunction with the issuance of the convertible notes. We have subsequently reissued506,854 of these shares in satisfaction of stock option exercises.

***Securitization Facilities***

One of our most significant sources of liquidity isthe securitization of credit card receivables. As of June 30, 2005, we hadtotal securitization facilities of approximately $3.0 billion and had used approximately$1.0 billion of these facilities. The weighted-average borrowing rate on thesefacilities at June 30, 2005 was approximately 4.4%. The maturity terms ofour securitizations vary.

In thetable below, we have noted the securitization facilities (along with theirmaturity dates) with respect to which a substantial majority of our managedcredit card receivables served as collateral as of June 30, 2005 (i.e.,all credit card receivables other than the de-securitized Fingerhut receivablesand the receivables associated with our largely fee-based credit card offeringto consumers at the lower end of the FICO scoring range). Following the tableare further details concerning each of the facilities.
| **Maturity date** | ** ** | ** **                          | ** ** | **Facility Limit(1)** | ** ** |
|------------------------|------------|-------------------------------------|------------|----------------------------|------------|
| ** **             | ** ** | **(Dollars in millions)** | ** ** |
| September 2005(2) |       |                                | $          | 306.0                      |       |   |
| October 2005(3)   |       |                                | 200.0      |                       |       |
| January 2006(4)   |       |                                | 75.4       |                       |       |
| January 2006(5)   |       |                                | 1,500.0    |                       |       |
| October 2009(6)   |       |                                | 299.5      |                       |       |
| October 2010(6)   |       |                                | 299.5      |                       |       |
| January 2014(7)   |       |                                | 278.1      |                       |       |
| Total                  |       |                                | $          | 2,958.5                    |       |   |

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(1)          Excludes securitizationfacilities related to receivables managed by CSG because such receivables andtheir related securitization facilities relate to CSG, our 50%-ownedequity-method investee, and therefore are appropriately excluded from directpresentation in the condensed consolidated statement of operations or condensedconsolidated balance sheet items included herein. For similar reasons, excludesthe securitization facilities underlying Transistor’s on-balance-sheetstructured financing of its credit card receivables acquisition and thesecuritization facility of our 47.5%-owned equity-method investee, theinvestment in which we completed in January of 2005.

(2)          Representsthe end of the revolving period for a $306.0 million conduit facility.

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(3)          Representsthe end of the revolving period for a $200.0 million conduit facility.

(4)          Representsthe conduit notes associated with our 75.1% membership interest in ourmajority-owned subsidiary that securitized the $92.0 million (face amount) ofreceivables acquired in the third quarter of 2004 and the $72.1 million (faceamount) of receivables acquired in the first quarter of 2005.

(5)          Thisfacility also contains one-year renewal periods (subject to certain conditionsprecedent) at the expiration of the initial two-year term and an orderlyamortization of the facility at expiration.

(6)          OnOctober 8, 2004, we completed two new, term securitization facilities thatwere issued out of our originated portfolio master trust: a 5-yearfacility represented by $299.5 million aggregate principal notes and a 6-yearfacility also represented by $299.5 million aggregate principal notes. To date,we have elected to sell only $287.0 million of the principal notes underlyingthe 5-year facility and $264.0 of the principal notes underlying the 6-yearfacility. However, assuming the continuation of current market conditions andperformance within our original portfolio master trust, we believe we can sellthe remaining principal notes under terms advantageous to us should we needadditional liquidity from the sale of the notes during the life of thefacilities.

(7)          Representsa ten-year amortizing term series issued out of the Embarcadero Trust.

For each portfolio of credit card receivables that wehave securitized, there has never been an early amortization period. We haveexperienced, however, early amortization events associated with each of thesecuritization structures represented by the Fingerhut retained interests thatwe acquired in 2002 and the retained interests that CSG acquired in 2002—bothof which were contemplated and planned for in connection with our establishmentof purchase prices for the respective acquisitions. While the Fingerhut earlyamortization event was made inconsequential to us first by a Fingerhut retainedinterests exchange during the third quarter of 2003 and then again by our thirdquarter 2004 de-securitization of the Fingerhut receivables, the CSG earlyamortization event has ongoing consequences for us. Due to a reduction in the principalbalance of the receivables within the CSG Trust (the retained interests inwhich are owned by our equity-method investee, CSG), a principal balancetrigger occurred, and hence early amortization began, during the second quarterof 2003. The occurrence of this event caused CSG to cease its cashdistributions to us in June 2003, although we expect that the CSG Trustwill continue to provide adequate compensation to us in cash for servicing theportfolio of receivables underlying the CSG Trust and will continue to makepayments to us in respect of our investment in CSG Trust bonds held. We expectCSG to resume cash distributions to its equity-holders (including us) late inthe fourth quarter of 2005.

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

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

See Item 7, “Management’sDiscussion and Analysis of Financial Condition and Results of Operations” inour Annual Report on Form 10-K for the year ended December 31,2004. There have been no new material commitments entered into since December 31,2004 other than:

·       OnApril 1, 2005, we completed our acquisition of the Consumer Auto Receivablesbusiness unit for approximately $121.5 million including transaction costs. Theacquisition was financed using $88.2 million in debt with the remainderpaid in cash. The $88.2 million in debt was financed through an assetsecuritization transaction described above under “Liquidity, Funding andCapital Resources.

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·       InMay 2005, we issued $250.0 million aggregate principal amount of 3.625%Convertible Senior notes due 2025 to qualified institutional buyers in aprivate placement. During certain periods and subject to certain conditions,the $250.0 million of notes will be convertible by holders into cash and, ifapplicable, shares of our common stock at an initial conversion rate of 23.0309shares of common stock per $1,000 principal amount of notes, subject toadjustment; the conversion rate is based on an initial conversion price of$43.42 per share of common stock). Upon conversion of the notes, we willdeliver to holders of the notes cash of up to $1,000 per $1,000 aggregateprincipal amount of notes and, at its option, either cash or shares in respectof the remainder of the conversion obligation, if any. Beginning with thesix-month period commencing on May 30, 2012, we will pay contingentinterest on the notes during a six-month period if the average trading price ofthe notes is above a specified level. In addition, holders of the notes mayrequire us to repurchase the notes on each of May 30, 2012, 2015, and 2020and upon certain specified events.

·       In June of 2005, oneof our subsidiaries entered into a Forward Flow Contract agreeing to sellEncore up to $3.25 billion in face amount of the subsidiary’s futurecharged-off credit card receivable acquisitions at established pricing over thenext five years. In consideration, the subsidiary received $67.0 million. Basedon the Forward Flow Contract, our subsidiary is expected to purchase fordelivery to Encore over the life of the contract certain previously charged-offreceivables from trusts, the receivables of which are serviced by the Company,as well as certain previously charged-off receivables associated with theCompany’s largely fee-based credit card offering to consumers at the lower endof the FICO scoring range. Any shortfalls in delivery of minimum periodicdollar amounts of previously charged-off receivables to Encore could result inthe subsidiary being required to return a portion of the purchase price relatedto the Forward Flow Contract.

***Commitments andContingencies***

We have certaincontractual arrangements that would require us to make payments or providefunding if certain circumstances occur (“contingent commitments”). We do notcurrently expect that these contingent commitments will result in any amountsbeing paid by us. See Note 10, “Commitments and Contingencies,” to ourcondensed consolidated financial statements for further discussion of thesematters.

**Recent Accounting Pronouncements**

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

**Critical Accounting Estimates**

In many instances, theapplication of GAAP requires management to make estimates or to applysubjective principles to particular facts and circumstances. A variance in theestimates used or a variance in the application or interpretation of GAAP couldyield a materially different accounting result. It is impracticable for us tosummarize every accounting principle that requires us to use judgment orestimates in its application. In our Annual Report on Form 10-K forthe year ended December 31, 2004, we discuss the four areas (valuation ofretained interests, investments in previously charged-off receivables,non-consolidation of qualifying special purpose entities and allowance foruncollectible loans and fees) where we believe that the estimations, judgmentsor interpretations that we have made, if different, would have yielded the mostsignificant differences in our financial statements, and we urge you to reviewthat discussion. In addition, in Note 8, “Off Balance Sheet Arrangements,”to the condensed consolidated financial statements included in this report, wehave updated a portion of our sensitivity analysis with respect to retainedinterest valuations.

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**Related Party Transactions**

Since 2001, we have beensubleasing 7,316 square feet of excess office space to Frank J. Hanna, Jr.,for $21.50 per square foot. Frank J. Hanna, Jr. is the father of ourChairman and Chief Executive Officer, David G. Hanna, and one of our directors,Frank J. Hanna, III. The sublease rate is the same as the rate that we payon the prime lease. Total rent for the three months and six months ended June 30,2005 for the sublease was approximately $40,000 and $80,000, respectively.

See Note 2, “SignificantAccounting Policies,” to the consolidated financial statements included withinour Annual Report on Form 10-K for the year ended December 31,2004 for a discussion of the acquisition of previously defaulted receivables byour subsidiary, Jefferson Capital, from trusts serviced by us.

**Forward-Looking Information**

All statements in thisquarterly report concerning our operations, earnings and liquidity expectationsfor 2005 and all other statements regarding our future performance (includingthose using words such as “believe,” “estimate,” “project,” “anticipate, or “predict”)are forward-looking statements. These types of statements are used in ourdiscussions of: total interest income; interest expense; fees and other incomeon non-securitized earning assets; provision for loan losses; fees and otherincome on securitized earning assets; servicing income; equity in income ofequity-method investees; total other operating expense; net interest margin; assetquality; our Investments in Previously Charged-off Receivables segment; ourRetail Micro-Loans segment; and our liquidity, funding and capital resources,among others. These forward-looking statements are not guarantees of futureperformance and are subject to various assumptions, risks and other factorsthat could cause our actual results to differ materially from those suggestedby these forward-looking statements. These factors include, among others, thefollowing risks and others set forth under the caption “Risk Factors” inour Annual Report on Form 10-K for the year ended December 31, 2004:

(1)          The cash flows wereceive from our retained interests are a critical component of our financialperformance and are dependent upon the cash flows received on the receivablesunderlying our securitizations. The collectibility of the receivablesunderlying our securitizations is a function of many factors including thecriteria used to select to whom credit is extended, the pricing of the creditproducts, the length of the relationship with each customer, general economicconditions, the rate at which customers repay their accounts, the rate at whichcustomers change or become delinquent and the dynamic regulatory environment inwhich we operate. To the extent we have over estimated collectibility, in alllikelihood we have over estimated our financial performance.

(2)          We are substantiallydependent upon securitizations and other borrowed funds to fund the receivablesthat we originate or purchase. All of our securitization facilities are offinite duration (and ultimately will need to be extended or replaced) andcontain conditions that must be fulfilled in order for funding to be available.In the event that advance rates for securitizations are reduced, investors insecuritizations require a greater rate of return, we fail to meet therequirements for continued funding or large-scale securitizations otherwisebecome unavailable to us, we may not be able to maintain or grow our base ofreceivables or it may be more expensive for us to do so. In addition, a portionof our receivables cannot be financed through securitizations because ofadvance rate limitations and must be financed through equity that either is theresult of profitable operations or is raised from third parties or throughfunds borrowed elsewhere. The cost and availability of equity and borrowedfunds is dependent upon our financial performance, the performance of ourindustry generally, and general economic and market conditions. While werecently issued convertible notes on terms that we found attractive, there havebeen times throughout our history during which equity and debt financing wasexpensive and difficult to obtain.

(3)          Our financialperformance is, in part, a function of the aggregate amount of receivables thatwe have outstanding. In turn, this is a function of many factors includinginterest rates, seasonality, 

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general economicconditions, competition from other credit card issuers and other sources ofconsumer financing, access to funding as noted above and the success of ourmarketing efforts. To the extent that we have over-estimated the size or growthof our receivables, in all likelihood we have over-estimated our futureperformance.

(4)          Our operating expensesand our ability to effectively service receivables is dependent on our abilityto estimate the future size and general growth rate of the portfolio. One ofour servicing agreements causes us to make additional payments if weoverestimate the size or growth of our business. These additional payments areto compensate the servicer for increased staffing expenses it incurs inanticipation of our growth. If we grow slower than anticipated, we may stillhave higher servicing expenses than we actually need, thus reducing our netincome. We generally have sufficient office space, customer servicerepresentatives, collectors and computer capacity to accommodate expectedgrowth. However, we are dependent on labor markets to supply qualifiedemployees at appropriate compensation when needed. To the extent that growthoccurs unexpectedly, or the labor markets are tight at that time, we mayencounter difficulties in accommodating that growth effectively.

(5)          We operate in a heavilyregulated industry. Changes in bankruptcy, privacy or other consumer protectionlaws, including laws that regulate the creation and enforcement of consumerloans, or changes in the interpretation thereof, may adversely affect ourability to collect credit card account, micro-loans and other loan and feebalances or otherwise adversely affect our business or expose us to litigation.Similarly, regulatory changes or changes in interpretation of existingregulations could adversely affect our ability to market credit cards,stored-value cards, micro-loans or other products and services to our customers.The Retail Micro-Loan segment of our business operates in an increasinglyhostile regulatory environment, and there currently is a purported class actionlawsuit pending against us with respect to this business. Lastly, ouroperations routinely are subject to review by various governmental authorities,which may or may not subject us to fines, penalties or requirements that wechange our operations.

(6)          The accounting rules thatgovern our business are exceedingly complex, difficult to apply and in a stateof flux. As a result, how we value our credit card receivables and otherwiseaccount for our business (including whether we consolidate our securitizations)is subject to change depending upon the interpretation of, and changes in,those rules.

(7)          We routinely explorevarious opportunities to grow our business, including the purchase ofreceivable portfolios and other businesses. We have acquired several businesseswithin the past year and expect to acquire others in the future. There are anumber of risks attendant to any acquisition, including the possibility that wewill overvalue the assets to be purchased, that we will not be able tosuccessfully integrate the acquired business or assets and that we will not beable to produce the expected level of profitability from the acquired businessor assets. As a result, the impact of any acquisition on our future performancemay not be as favorable as expected and actually may be adverse.

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

**ITEM 3**.                QUANTITATIVEAND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

**Interest Rate Sensitivity and Market Risk**

Interest rate sensitivityis comprised of basis risk, gap risk and market risk. Basis risk is caused bythe difference in the interest rate indices used to price assets andliabilities. Gap risk is caused by the difference in repricing intervalsbetween assets and liabilities. Market risk is the risk of loss from adversechanges in market prices and rates. Our principal market risk is related tochanges in interest rates. This affects us directly in our lending andborrowing activities, as well as indirectly as interest rates may impact thepayment performance of our customers.

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We incur basis riskbecause we fund managed assets at a spread over commercial paper rates orLIBOR, while the rates on the underlying managed assets are indexed to theprime rate. This basis risk results from the potential variability over time inthe spread between the prime rate on the one hand, and commercial paper ratesand LIBOR on the other hand. We have not hedged our basis risk because webelieve that the cost of hedging this risk is greater than the benefits wewould get from elimination of this risk. We incur gap risk because the debtunderlying our securitization trust facilities reprices monthly; whereas, ourreceivables do not adjust unless we specifically adjust them with appropriatenotification. This gap risk, however, is relatively minor as we can reprice thesubstantial majority of our receivables very quickly in response to a ratechange.

As to the issue of marketrisk, we attempt to minimize the impact of interest rate fluctuations on netincome by regularly evaluating the risk inherent within our asset and liabilitystructure, especially our off balance sheet assets (such as securitizedreceivables) and their corresponding liabilities. The impact of interest ratefluctuations on our securitized receivables is reflected in the valuation ofour retained interests in credit card receivables securitized. This risk arisesfrom continuous changes in our asset and liability mix, changes in marketinterest rates (including such changes that are caused by fluctuations inprevailing interest rates, payment trends on our interest-earning assets andpayment requirements on our interest-bearing liabilities) and the generaltiming of all other cash flows. To manage our direct risk to interest rates,management actively monitors interest rates and the interest sensitivecomponents of our securitization structures. Management seeks to minimize theimpact of changes in interest rates on the fair value of assets, net income andcash flows primarily by matching asset and liability repricings. There can beno assurance, however, that we will be successful in our attempts to managesuch risks.

At June 30, 2005, asubstantial portion of our managed credit card receivables, including thoserelated to our equity-method investees, and other interest-earning assets hadvariable rate pricing, with receivables carrying annual percentage rates at aspread over the prime rate (6.25% at June 30, 2005), subject to interestrate floors. At June 30, 2005, $62.9 million of our total managedreceivables were priced at their floor rate, of which, $38.2 million ofthese receivables were closed and therefore ineligible to be repriced and theremaining $24.7 were open and eligible to be repriced. Every 10% increase inLIBOR that we experience until the accounts underlying these $62.9 millionin receivables reach their floor rate would result in an approximately $79,000after-tax negative impact on our annual cash flows. Nevertheless, to the extentwe choose to reprice any of the $24.7 million of receivables underlyingthe open accounts that are below their floor rate, we can mitigate against anypossible adverse impact on our cash flows.

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

**ITEM 4**.                CONTROLSAND PROCEDURES

(a)          Disclosure controls andprocedures.

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

(b)         Internal control overfinancial reporting.

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

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**PART II**—OTHERINFORMATION

**ITEM 1.**                LEGAL PROCEEDINGS

We are involved in variouslegal proceedings that are incidental to the conduct of our business. In one ofthese legal proceedings, CompuCredit Corporation and five of our subsidiariesare defendants in a purported class action lawsuit entitled Knox, et al. vs.First Southern Cash Advance, et al, No 5 CV 0445, filed in theSuperior Court of New Hanover county, North Carolina, on February 8, 2005.The plaintiffs allege that in conducting a so-called “payday lending” business,certain of our Retail Micro-Loan segment subsidiaries violated various lawsgoverning consumer finance, lending, check cashing, trade practices and loanbrokering. The plaintiffs further allege that CompuCredit is the alter ego ofour subsidiaries and is liable for their actions. The plaintiffs are seekingdamages of up to $75,000 per class member. We intend to vigorously defend thislawsuit. These claims are similar to those that have been asserted againstseveral other market participants in transactions involving small balance,short-term loans made to consumers in North Carolina.

**ITEM 2.**                CHANGES IN SECURITIES, USE OF PROCEEDS AND ISSUER PURCHASES OFEQUITY SECURITIES

***Issuance of $250.0 Million Convertible Senior Notes***

On May 27, 2005, we issued $250.0 million inaggregate principal amount of 3.625% Convertible Senior notes due 2025, at 100%of their principal amount. The notes will be convertible into cash and sharesof our common stock at an initial conversion rate of 23.0309 shares per $1,000principal amount of the notes (equal to a conversion price of $43.42 pershare).

The notes were sold to the initial purchasers withoutregistration in a private placement exempt from registration under Section 4(2) ofthe Securities Act of 1933, as amended. The initial purchasers represented tothe Company that they were qualified institutional buyers within the meaning ofRule 144A under the Securities Act.

For additional information regarding the notes, seeour Form 8-K filed as of May 31, 2005.

***Issuer Purchases of Equity Securities***

Thefollowing table provides information with respect to purchases we made of ourcommon stock during the six months ended June 30, 2004:
| ** **                            | ** ** | **Total Number of  Shares Purchased(1)** | ** ** | **Average Price Paid  per Share** | ** ** | **Total Number of   Shares Purchased as  Part of Publicly  Announced Plans or  Programs(2)** | ** ** | **Maximum Number of  Shares (or  Approximate Dollar  Value) That May Yet  Be Purchased Under  the Plans or Programs** | ** ** |
|---------------------------------------|------------|---------------------------------------------------------|------------|--------------------------------------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|------------|
| Balance as of  December 31, 2004 |       |                                                    | 2,248,500  |                                             |       |                                                                                                                                      | $          | 12.63                                                                                                                                                                             |       |   |   | 2,248,500 |   |   |   | 7,751,500 |   |   |
| May 2005                         |       |                                                    | 2,994,000  |                                             |       |                                                                                                                                      | $          | 33.40                                                                                                                                                                             |       |   |   | 2,994,000 |   |   |   | 4,757,500 |   |   |
| Total                                 |       |                                                    | 5,252,500  |                                             |       |                                                                                                                                      | $          | 24.45                                                                                                                                                                             |       |   |   | 2,248,500 |   |   |   | 4,757,500 |   |   |

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(1)          Excludes treasury stockused to satisfy stock option exercises of 163,000 and 343,854 for 2005 and2004, respectively.

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

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**ITEM 3.**                DEFAULTS UPON SENIOR SECURITIES

None.

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

We held our annual shareholders meeting on May 5,2005. Proxies for the meeting were solicited pursuant to Section 14(a) ofthe Securities Exchange Act of 1934, and there was no solicitation inopposition to management’s solicitations. The matters were submitted to a voteand the results thereof are set forth below.

(1)         Proposalto elect eight directors to hold office for a term of one year and until theirrespective successors are duly elected and qualified.
| **Nominee**                 | ** ** | ** ** | ** ** | **For** | ** ** | **Withheld** | ** ** |
|-----------------------------|------------|------------|------------|---------|------------|--------------|------------|
| David G. Hanna              |       | 46,551,812 |       | 756,284 |       |
| Richard W. Gilbert          |       | 46,375,989 |       | 932,107 |       |
| Frank J. Hanna, III    |       | 46,565,530 |       | 742,566 |       |
| Richard R.  House, Jr. |       | 46,375,989 |       | 932,107 |       |
| Gregory J. Corona           |       | 46,530,436 |       | 777,660 |       |
| Deal W. Hudson              |       | 46,530,436 |       | 777,660 |       |
| Mack F. Mattingly           |       | 46,799,022 |       | 509,074 |       |
| Nicholas B. Paumgarten      |       | 46,610,181 |       | 697,915 |       |
| Thomas G. Rosencrants       |       | 46,341,795 |       | 966,301 |       |

 

(2)         Approvalof performance-based criteria under the employment agreement with K. K.Srinivasan.

| **For**    | ** ** | **Against** | ** ** | **Abstain** | ** ** |
|------------|------------|-------------|------------|-------------|------------|
| 42,404,339 |       | 503,823     |       | 8,753       |       |

 

**ITEM 5.**                OTHER INFORMATION

None.

**ITEM 6.**                EXHIBITS

(a)          Exhibits
| Exhibit   Number | ** ** | ** **                                                                                                                                      | ** ** | **Description of Exhibit**                        | ** ** | **Incorporated by reference from   CompuCredit’s SEC filings unless   otherwise indicated:** |
|------------------|------------|-------------------------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------------------------------|------------|---------------------------------------------------------------------------------------------------|
| 4.1              |       | Indenture  dated May 27, 2005 between CompuCredit Corporation and Wachovia Bank,  National Association                                     |       | May 31,  2005 Form 8-K Exhibit 4.1 |
| 4.2              |       | Resale  Registration Rights Agreement dated May 27, 2005 among the Company and  the representatives of the initial purchasers of the Notes |       | May 31,  2005 Form 8-K Exhibit 4.1 |
| 10.17            |       | Asset Purchase  Agreement by and among CARS Acquisition LLC., certain sellers and guarantors,  December 10, 2004                           |       | Filed herewith                                    |
| 10.18            |       | Receivables  Financing Agreement by and among CAR Funding, Inc., certain sellers and  guarantors, dated as of April 1, 2005           |       | Filed  herewith                                   |
| 31.1             |       | Certification  per Section 302 of the Sarbanes-Oxley Act of 2002 for David G. Hanna                                                        |       | Filed  herewith                                   |
| 31.2             |       | Certification  per Section 302 of the Sarbanes-Oxley Act of 2002 for J.Paul  Whitehead, III                                           |       | Filed  herewith                                   |
| 32.1             |       | Certification  per Section 906 of the Sarbanes-Oxley Act of 2002 for David G. Hanna and  J.Paul Whitehead, III                        |       | Filed  herewith                                   |

 

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**SIGNATURES**

Pursuantto the requirements of the Securities Exchange Act of 1934, the registrant hasduly caused this report to be signed on its behalf by the undersigned thereuntoduly authorized.
|                     | COMPUCREDIT CORPORATION |
|---------------------|-------------------------|
| August 3, 2005 | By                      | /s/  J.PAUL WHITEHEAD, III |   |
|                |                    | J.Paul  Whitehead, III |   |
|                |                    | *Chief  Financial Officer* |   |
|                |                    | *(duly  authorized officer and principal  financial officer)* |   |

 

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