form10q.htm


 
_________________________________________________________________________________________________
 
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549

 
 
 
FORM 10-Q
 
For the quarterly period ended September 30, 2011
 
 of
 
COMPUCREDIT HOLDINGS CORPORATION
 
a Georgia Corporation
 
IRS Employer Identification No. 58-2336689
 
SEC File Number 0-53717
 
Five Concourse Parkway, Suite 400
 
Atlanta, Georgia 30328
 
(770) 828-2000

 
 
 
CompuCredit’s common stock, no par value per share, is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Act”).
 
CompuCredit (1) is required to file reports pursuant to Section 13 or Section 15(d) of the Act, (2) has filed all reports required to be filed by Section 13 or 15(d) of the Act during the preceding 12 months and (3) has been subject to such filing requirements for the past ninety days.
 
CompuCredit has submitted electronically and posted on its corporate Web site, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).
 
CompuCredit is a smaller reporting company and is not a shell company.
 
As of October 31, 2011, 22,395,946 shares of common stock, no par value, of the registrant were outstanding. (This excludes 1,672,656 loaned shares to be returned as of that date.)

 
 


COMPUCREDIT HOLDINGS CORPORATION
FORM 10-Q
TABLE OF CONTENTS
 
Page
 
PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited)                                                                                                                   
     
 
Consolidated Balance Sheets                                                                                                                   
    1  
 
Consolidated Statements of Operations                                                                                                                   
    2  
 
Consolidated Statement of Equity                                                                                                                   
    3  
 
Consolidated Statements of Comprehensive Income (Loss)                                                                                                                   
    4  
 
Consolidated Statements of Cash Flows                                                                                                                   
    5  
 
Notes to Consolidated Financial Statements                                                                                                                   
    6  
Item 2.
    26  
Item 3.
Quantitative and Qualitative Disclosures About Market Risk                                                                                                                   
    42  
Item 4.
Controls and Procedures                                                                                                                   
    42  
   
 
           
Item 1.
Legal Proceedings                                                                                                                   
    43  
Item 1A.
Risk Factors                                                                                                                   
    43  
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds                                                                                                                   
    51  
Item 5.
Other Information                                                                                                                   
    52  
Item 6.
Exhibits                                                                                                                   
    52  
 
Signatures                                                                                                                   
    53  




 
 


CompuCredit Holdings Corporation and Subsidiaries
Consolidated Balance Sheets
(Dollars in thousands)
 
   
September 30,  2011
   
December 31, 2010
 
Assets
 
                 (unaudited)
       
Unrestricted cash and cash equivalents
  $ 105,996     $ 68,931  
Restricted cash and cash equivalents
    25,161       36,023  
Loans and fees receivable:
               
Loans and fees receivable, net (of $7,965 and $4,591 in deferred revenue and $5,896 and $9,282 in allowances for uncollectible loans and fees receivable at September 30, 2011 and December 31, 2010, respectively)
    61,989       50,805  
Loans and fees receivable pledged as collateral under structured financings, net (of $1,847 and $15,912 in deferred revenue and $10,304 and $28,340 in allowances for uncollectible loans and fees receivable at September 30, 2011 and December 31, 2010, respectively)
    38,719       118,801  
Loans and fees receivable, at fair value
    35,000       12,437  
Loans and fees receivable pledged as collateral under structured financings, at fair value
    275,815       373,155  
Investments in previously charged-off receivables
    39,818       29,889  
Investments in securities
    6,132       64,317  
Deferred costs, net
    2,551       3,151  
Property at cost, net of depreciation
    7,561       15,893  
Investments in equity-method investees
    53,189       8,279  
Intangibles, net
    66       2,378  
Prepaid expenses and other assets
    10,218       16,591  
Assets held for sale
    48,623       80,259  
Total assets
  $ 710,838     $ 880,909  
Liabilities
               
Accounts payable and accrued expenses
  $ 58,246     $ 50,861  
Notes payable associated with structured financings, at face value
    30,959       96,905  
Notes payable associated with structured financings, at fair value
    277,793       370,544  
Convertible senior notes (Note 9)
    197,497       229,844  
Deferred revenue 
    1,073       1,413  
Income tax liability
    62,955       60,411  
Liabilities related to assets held for sale
    2,808       9,114  
Total liabilities
    631,331       819,092  
                 
Commitments and contingencies (Note 10)
               
                 
Equity
               
Common stock, no par value, 150,000,000 shares authorized: 31,997,581 shares issued and 24,068,602 shares outstanding at September 30, 2011 (including 1,672,656 loaned shares to be returned); and 46,217,050 shares issued and 37,997,708 shares outstanding at December 31, 2010 (including 2,252,388 loaned shares to be returned)
           
Additional paid-in capital
    297,636       408,751  
Treasury stock, at cost, 7,928,979 and 8,219,342 shares at September 30, 2011 and December 31, 2010, respectively
    (185,941 )     (208,696 )
Accumulated other comprehensive loss
    (1,183 )     (5,608 )
Retained deficit
    (31,354 )     (151,609 )
Total shareholders’ equity (Note 2)
    79,158       42,838  
Noncontrolling interests (Note 2)
    349       18,979  
Total equity
    79,507       61,817  
Total liabilities and equity (Note 2)
  $ 710,838     $ 880,909  

See accompanying notes.

 
1


CompuCredit Holdings Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
 

   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
 September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Interest income:
                       
Consumer loans, including past due fees
  $ 35,802     $ 60,609     $ 117,281     $ 213,976  
Other
    241       416       1,015       775  
Total interest income
    36,043       61,025       118,296       214,751  
Interest expense
    (10,148 )     (11,600 )     (33,454 )     (45,435 )
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
    25,895       49,425       84,842       169,316  
Fees and related income on earning assets
    25,892       68,924       117,646       275,588  
Losses upon charge off of loans and fees receivable recorded at fair value
    (28,019 )     (86,971 )     (117,209 )     (391,615 )
Provision for losses on loans and fees receivable recorded at net realizable value
    (1,234 )     (8,330 )     (1,992 )     (27,294 )
Net interest income, fees and related income on earning assets
    22,534       23,048       83,287       25,995  
Other operating income (loss):
                               
Servicing income
    767       1,621       2,593       5,447  
Ancillary and interchange revenues
    2,359       2,728       7,324       8,722  
Gain on repurchase of convertible senior notes
    138       5,681       607       28,374  
Gain on buy-out of equity-method investee members
                619        
Equity in income (loss) of equity-method investees
    6,630       (1,372 )     28,757       (11,043 )
Total other operating income
    9,894       8,658       39,900       31,500  
Other operating expense:
                               
Salaries and benefits
    4,785       7,454       17,615       26,439  
Card and loan servicing
    18,107       21,010       56,314       77,958  
Marketing and solicitation
    1,181       593       2,386       1,292  
Depreciation
    539       2,685       4,322       8,580  
Other
    7,785       8,727       21,921       34,854  
Total other operating expense
    32,397       40,469       102,558       149,123  
Income from (loss on) continuing operations before income taxes
    31       (8,763 )     20,629       (91,628 )
Income tax (expense) benefit
    (619 )     1,648       (1,743 )     2,896  
(Loss on) income from continuing operations
    (588 )     (7,115 )     18,886       (88,732 )
Discontinued operations:
                               
Income from discontinued operations before income taxes
    2,052       10,688       117,189       23,914  
Income tax expense
    (42 )     (2,248 )     (4,142 )     (4,596 )
Income from discontinued operations
    2,010       8,440       113,047       19,318  
Net income (loss)
    1,422       1,325       131,933       (69,414 )
Net (income) loss attributable to noncontrolling interests (including $0 and $1,131 of income associated with noncontrolling interests in discontinued operations for the three and nine months ended September 30, 2011, versus to $1,050 and $2,269 of such income in the same 2010 periods) 
    277       436       (1,013 )     (565 )
Net income (loss) attributable to controlling interests
  $ 1,699     $ 1,761     $ 130,920     $ (69,979 )
(Loss on) income from continuing operations attributable to controlling interests per common share—basic
  $ (0.01 )   $ (0.16 )   $ 0.70     $ (2.11 )
(Loss on) income from continuing operations attributable to controlling interests per common share—diluted
  $ (0.01 )   $ (0.16 )   $ 0.70     $ (2.11 )
Income from discontinued operations attributable to controlling interests per common share—basic
  $ 0.09     $ 0.21     $ 4.15     $ 0.41  
Income from discontinued operations attributable to controlling interests per common share—diluted
  $ 0.09     $ 0.21     $ 4.13     $ 0.41  
Net income (loss) attributable to controlling interests per common share—basic
  $ 0.08     $ 0.05     $ 4.85     $ (1.70 )
Net income (loss) attributable to controlling interests per common share—diluted
  $ 0.08     $ 0.05     $ 4.83     $ (1.70 )
 

 
See accompanying notes.

 
2


CompuCredit Holdings Corporation and Subsidiaries
Consolidated Statement of Shareholders’ Equity
For the Nine Months Ended September 30, 2011 (Unaudited)
(Dollars in thousands)

   
Common Stock
                                           
   
Shares Issued
   
Amount
   
Additional Paid-In Capital
   
Treasury Stock
   
Accumulated Other Comprehensive Loss
   
Retained Deficit
   
Noncontrolling Interests
   
Comprehensive Income
   
Total Equity
 
Balance at December 31, 2010
    46,217,050     $     $ 408,751     $ (208,696 )   $ (5,608 )   $ (151,609 )   $ 18,979           $ 61,817  
Use of treasury stock for stock-based compensation plans
    (550,414 )           (13,804 )     24,469             (10,665 )                  
Issuance of restricted stock
    35,677                                                  
Amortization of deferred stock-based compensation costs
                2,337                                     2,337  
Purchase of treasury stock
                      (1,714 )                             (1,714 )
Repurchase of noncontrolling interests
                5,385                         (20,243 )           (14,858 )
Contributions by owners of noncontrolling interests
                                        600             600  
Redemption and retirement of shares
    (13,704,732 )           (105,000 )                                   (105,000 )
Net income
                                  130,920       1,013     $ 131,933       131,933  
Foreign currency translation adjustment, net of tax
                (33 )           4,425                   4,425       4,392  
Comprehensive income
                                            $ 136,358        
Balance at September 30, 2011
    31,997,581     $     $ 297,636     $ (185,941 )   $ (1,183 )   $ (31,354 )   $ 349             $ 79,507  


See accompanying notes.



 
3


CompuCredit Holdings Corporation and Subsidiaries
Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in thousands)




   
For the Three Months Ended
 September 30,
   
For the Nine Months Ended
 September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net income (loss)
  $ 1,422     $ 1,325     $ 131,933     $ (69,414 )
Other comprehensive income (loss):
                               
Foreign currency translation adjustment
    (314 )     3,069       2,079       (108 )
Amount of translation adjustment reclassified to earnings during the period
                2,301       (500 )
Income tax benefit related to other comprehensive income
    91             45       1  
Comprehensive income (loss)
    1,199       4,394       136,358       (70,021 )
Comprehensive loss (income) attributable to noncontrolling interests
    277       436       (1,013 )     (565 )
Comprehensive income (loss) attributable to controlling interests
  $ 1,476     $ 4,830     $ 135,345     $ (70,586 )


See accompanying notes.
 

 
4


CompuCredit Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
   
For the Nine Months Ended September 30,
 
   
2011
   
2010
 
Operating activities
           
Net income (loss)
  $ 131,933     $ (69,414 )
Adjustments to reconcile net income (loss) to net cash provided by operating activities:
               
Depreciation, amortization and accretion, net
    5,698       10,462  
Losses upon charge off of loans and fees receivable recorded at fair value
    117,209       391,615  
Provision for losses on loans and fees receivable
    17,550       53,505  
Accretion of discount on convertible senior notes
    5,112       7,022  
Stock-based compensation expense
    2,337       7,055  
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value
    (83,657 )     (217,882 )
Unrealized loss (gain) on trading securities
    358       (301 )
Other-than-temporary declines in investments in non-marketable debt securities
    5,330        
Gain on repurchase of convertible senior notes
    (607 )     (28,374 )
(Income) loss on equity-method investments
    (28,757 )     11,043  
Gain on buy-out of equity-method investee members
    (619 )      
Net gain on sale of subsidiary
    (101,359 )      
Changes in assets and liabilities, exclusive of business acquisitions and dispositions:
               
Increase in uncollected fees on non-securitized earning assets
    (9,862 )     (5,594 )
Decrease in JRAS auto loans receivable
    10,702       31,168  
Increase in tax liability
    39       95,222  
Decrease in prepaid expenses
    8,058       6,463  
Increase (decrease) in accounts payable and accrued expenses
    14,017       (6,649 )
Other
    (278 )     8,975  
Net cash provided by operating activities
    93,204       294,316  
Investing activities
               
Decrease (increase) in restricted cash
    12,349       (19,954 )
Investment in equity-method investees
    (34,336 )      
Proceeds from equity-method investees
    17,553       5,145  
Investments in earning assets
    (562,253 )     (786,663 )
Proceeds from earning assets
    763,819       926,704  
Net cash associated with newly acquired consolidated subsidiaries
    1,025        
Proceeds from sale of subsidiary
    147,449        
Purchases and development of property, net of disposals
    (1,390 )     (1,667 )
Net cash provided by investing activities
    344,216       123,565  
Financing activities
               
Noncontrolling interests contributions (distributions), net
    600       (765 )
Purchase of outstanding stock subject to tender offers
    (105,000 )     (85,264 )
Purchase of treasury stock
    (1,714 )     (624 )
Purchases of noncontrolling interests
    (4,067 )     (7,537 )
Proceeds from borrowings
    9,697       8,143  
Repayment of borrowings
    (306,127 )     (428,250 )
Net cash used in financing activities
    (406,611 )     (514,297 )
Effect of exchange rate changes on cash
    986       (274 )
Net increase (decrease) in unrestricted cash
    31,795       (96,690 )
Unrestricted cash and cash equivalents at beginning of period
    85,350       185,019  
Unrestricted cash and cash equivalents at end of period
  $ 117,145     $ 88,329  
Supplemental cash flow information
               
Effect of adoption of accounting pronouncements on restricted cash
  $     $ (14,082 )
Unrestricted cash included in assets held for sale
  $ 11,149     $  
Cash paid for interest
  $ 29,894     $ 39,911  
Net cash income tax payments (refunds)
  $ 5,891     $ (93,456 )
Supplemental non-cash information
               
Notes payable associated with capital leases
  $     $ 684  
Issuance of stock options and restricted stock
  $ 303     $ 1,127  

See accompanying notes.

 
5


 CompuCredit Holdings Corporation and Subsidiaries
Notes to Consolidated Financial Statements
September 30, 2011
 
1.  
Basis of Presentation
 
We have prepared our consolidated financial statements in accordance with accounting principles generally accepted in the United States of America (“GAAP”) for interim financial information and with the instructions to Form 10-Q and Article 10 of Securities and Exchange Commission (“SEC”) Regulation S-X. Accordingly, they do not include all of the information and notes required by GAAP for complete consolidated financial statements. They do include, however, all normal recurring adjustments that we consider necessary to fairly state our results for the interim periods.
 
The preparation of consolidated financial statements in conformity with GAAP requires us to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of our consolidated financial statements, as well as the reported amounts of revenues and expenses during the reporting period. Actual results could differ from these estimates. Certain estimates, such as credit losses, payment rates, costs of funds, discount rates and the yields earned on credit card receivables significantly affect the reported amount of two categories of credit card receivables that we report at fair value and our notes payable associated with structured financings, at fair value, as reported on our consolidated balance sheets; these estimates likewise affect our changes in fair value of loans and fees receivable recorded at fair value and changes in fair value of notes payable associated with structured financings recorded at fair value categories within our fees and related income on earning assets line item on our consolidated statements of operations. Additionally, estimates of future credit losses on our loans and fees receivable that we report at net realizable value, rather than fair value, have a significant effect on two categories of such loans and fees receivable, net, that we show on our consolidated balance sheets, as well as on the provision for losses on loans and fees receivable within our consolidated statements of operations. Operating results for the three and nine months ended September 30, 2011 are not indicative of what our results will be for the year ending December 31, 2011.
 
We have reclassified certain amounts in our prior period consolidated financial statements to conform to current period presentation, and we have eliminated all significant intercompany balances and transactions for financial reporting purposes.
 
In accordance with applicable accounting literature, we classified the net assets and liabilities of our Month End Money (“MEM”) business operations as held for sale on our December 31, 2010 consolidated balance sheet, and we have classified our MEM business operations as discontinued operations within our consolidated statements of operations for all periods presented. On April 1, 2011, we completed the planned sale of these operations for $195.0 million. We received net pre-tax proceeds of $170.5 million after the purchase of minority shares and other transaction-related expenditures, and inclusive of MEM’s excess working capital that was returned to us prior to completion of the transaction under the terms of the sales contract.  The sale resulted in a gain (net of related sales expenditures) of $106.0 million which is included as a component of discontinued operations on our consolidated statement of operations for the three and nine month periods ended September 30, 2011.
 
In connection with our consideration of a potential spin-off of our United States (“U.S.”) and United Kingdom (“U.K.”) micro-loan businesses, one of our subsidiaries, Purpose Financial Holdings, Inc. (“Purpose Financial”), filed a Form 10 Registration Statement and a related Information Statement with the SEC on January 4, 2010 and amended the Form 10 Registration Statement and related Information Statement in response to SEC comments most recently on November 30, 2010.  On April 13, 2011, we formally requested the withdrawal of this registration statement due to the completion of our MEM sale.
 
Also in accordance with applicable accounting literature, we have classified the net assets and liabilities of our Retail Micro-Loans segment as held for sale on our September 30, 2011 consolidated balance sheet, and we have classified this segment’s business operations as discontinued operations within our consolidated statements of operations for all periods presented. On August 5, 2011, we entered into a definitive agreement to sell our Retail Micro-Loans segment operations to a subsidiary of Advance America, Cash Advance Centers, Inc. On October 10, 2011, we completed the sale for $46.7 million, comprised of a $45.6 million contract amount and a working capital adjustment of approximately $1.1 million (an amount which may be subject to further post-closing adjustments and indemnities). Together with another $9.5 million of excess working capital we received immediately prior to completion of the transaction under its terms, and net of transaction-related expenditures, our net pre-tax proceeds are expected to approximate $53.8 million.
 
2.
Significant Accounting Policies and Consolidated Financial Statement Components
 
The following is a summary of significant accounting policies we use to prepare our consolidated financial statements, as well as a description of significant components of our consolidated financial statements.
 
Loans and Fees Receivable, Net.  Our two categories of loans and fees receivable, net, currently consist of receivables carried at net realizable value associated with our U.S. Internet micro-loan activities, credit card accounts opened under our Investment in Previously Charged-off Receivables segment’s balance transfer program, and our Auto Finance segment (the receivables of our former ACC and JRAS auto finance businesses being separately categorized as pledged as collateral for non-recourse asset-backed structured financing facilities).  Our balance transfer program receivables are included as a component of our Credit Cards segment data and aggregated $15.0 million (net of allowances for uncollectible loans and fees receivable and deferred revenue) or 3.6% of our consolidated loans and fees receivable (net or at fair value) as of September 30, 2011.  Our loans and fees receivable generally are unsecured; however, our auto finance loans are secured by the underlying automobiles in which we hold the vehicle title.
 
 
6

The components of our aggregated categories of loans and fees receivable, net (in millions) for reporting periods relevant to this Report are as follows:
 

   
Balance at
December 31,
2010
   
Additions
   
Subtractions
   
Transfer to Assets Held for Sale
   
Balance at
September 30,
2011
 
Loans and fees receivable, gross
  $ 227.7     $ 317.5     $ (376.2 )   $ (42.3 )   $ 126.7  
Deferred revenue
    (20.5 )     (33.3 )     38.2       5.8       (9.8 )
Allowance for uncollectible loans and fees receivable
    (37.6 )     (7.1 )     24.5       4.0       (16.2 )
Loans and fees receivable, net
  $ 169.6     $ 277.1     $ (313.5 )   $ (32.5 )   $ 100.7  
 

   
Balance at
December 31,
2009
   
Additions
   
Subtractions
   
Balance at
September 30,
2010
 
Loans and fees receivable, gross
  $ 379.7     $ 846.4     $ (932.4 )   $ 293.7  
Deferred revenue
    (40.9 )     (50.9 )     63.9       (27.9 )
Allowance for uncollectible loans and fees receivable
    (53.4 )     (53.5 )     59.3       (47.6 )
Loans and fees receivable, net
  $ 285.4     $ 742.0     $ (809.2 )   $ 218.2  
 
As of September 30, 2011 and 2010, the weighted average remaining accretion periods for the $9.8 million and $27.9 million, respectively, of deferred revenue reflected in the above tables were 15.5 and 16.6 months, respectively.
 
A roll-forward of our allowance for uncollectible loans and fees receivable, net (in millions) by category of loans and fees receivable is as follows:
 
 
For the Three Months Ended September 30, 2011
 
Credit Cards
   
Micro-Loans
   
Auto Finance
   
Other
   
Total
 
Allowance for uncollectible loans and fees receivable:
                             
Balance at beginning of period
  $ (2.8 )   $ (0.8 )   $ (15.0 )   $ (0.4 )   $ (19.0 )
Provision for loan losses
    (1.3 )     (0.9 )     1.2       (0.2 )     (1.2 )
Charge offs
    0.8       0.9       4.1             5.8  
Recoveries
    (0.2 )           (1.6 )           (1.8 )
Transfer to assets held for sale
                             
Sale of assets
                             
Balance at end of period 
  $ (3.5 )   $ (0.8 )   $ (11.3 )   $ (0.6 )   $ (16.2 )
Balance at end of period individually evaluated for impairment 
  $     $     $ (0.3 )   $     $ (0.3 )
Balance at end of period collectively evaluated for impairment
  $ (3.5 )   $ (0.8 )   $ (11.0 )   $ (0.6 )   $ (15.9 )
Loans and fees receivable:
                                       
Loans and fees receivable, gross
  $ 18.6     $ 2.2     $ 103.5     $ 2.4     $ 126.7  
Loans and fees receivable individually evaluated for impairment
  $     $     $ 0.6     $     $ 0.6  
Loans and fees receivable collectively evaluated for impairment
  $ 18.6     $ 2.2     $ 102.9     $ 2.4     $ 126.1  
 

 
For the Nine Months Ended September 30, 2011
 
Credit Cards
   
Micro-Loans
   
Auto
Finance
   
Other
   
Total
 
Allowance for uncollectible loans and fees receivable:
                             
Balance at beginning of period
  $ (4.0 )   $ (5.2 )   $ (28.3 )   $ (0.1 )   $ (37.6 )
Provision for loan losses (includes $5.1 million of provision netted within income from discontinued operations)
    (2.5 )     (7.1 )     3.0       (0.5 )     (7.1 )
Charge offs
    3.8       7.9       18.6             30.3  
Recoveries
    (0.8 )     (0.4 )     (5.3 )           (6.5 )
Transfers to assets held for sale
          4.0                   4.0  
Sale of assets
                0.7             0.7  
Balance at end of period 
  $ (3.5 )   $ (0.8 )   $ (11.3 )   $ (0.6 )   $ (16.2 )
Balance at end of period individually evaluated for impairment 
  $     $     $ (0.3 )   $     $ (0.3 )
Balance at end of period collectively evaluated for impairment
  $ (3.5 )   $ (0.8 )   $ (11.0 )   $ (0.6 )   $ (15.9 )
Loans and fees receivable:
                                       
Loans and fees receivable, gross
  $ 18.6     $ 2.2     $ 103.5     $ 2.4     $ 126.7  
Loans and fees receivable individually evaluated for impairment
  $     $     $ 0.6     $     $ 0.6  
Loans and fees receivable collectively evaluated for impairment
  $ 18.6     $ 2.2     $ 102.9     $ 2.4     $ 126.1  
 

 

 
7



 
 
For the Three Months Ended September 30, 2010
 
Credit Cards
   
Micro-Loans
   
Auto Finance
   
Other
   
Total
 
Allowance for uncollectible loans and fees receivable:
                             
Balance at beginning of period
  $ (4.0 )   $ (11.4 )   $ (33.1 )   $     $ (48.5 )
Provision for loan losses (includes $9.2 million of provision netted within income from discontinued operations)
    (2.2 )     (10.5 )     (4.8 )           (17.5 )
Charge offs
    1.4       10.4       9.3             21.1  
Recoveries
    (0.3 )     (0.2 )     (2.2 )           (2.7 )
Balance at end of period 
  $ (5.1 )   $ (11.7 )   $ (30.8 )   $     $ (47.6 )
Balance at end of period individually evaluated for impairment 
  $     $     $ (0.8 )   $     $ (0.8 )
Balance at end of period collectively evaluated for impairment
  $ (5.1 )   $ (11.7 )   $ (30.0 )   $     $ (46.8 )
Loans and fees receivable:
                                       
Loans and fees receivable, gross
  $ 18.6     $ 85.9     $ 189.2     $     $ 293.7  
Loans and fees receivable individually evaluated for impairment
  $     $     $ 2.5     $     $ 2.5  
Loans and fees receivable collectively evaluated for impairment
  $ 18.6     $ 85.9     $ 186.7     $     $ 291.2  

 
For the Nine Months Ended September 30, 2010
 
Credit Cards
   
Micro-Loans
   
Auto Finance
   
Other
   
Total
 
Allowance for uncollectible loans and fees receivable:
                             
Balance at beginning of period
  $ (5.0 )   $ (10.0 )   $ (38.4 )   $     $ (53.4 )
Provision for loan losses (includes $26.2 million of provision netted within income from discontinued operations)
    (4.0 )     (27.0 )     (22.5 )           (53.5 )
Charge offs
    5.0       26.0       36.3             67.3  
Recoveries
    (1.1 )     (0.7 )     (6.2 )           (8.0 )
Balance at end of period 
  $ (5.1 )   $ (11.7 )   $ (30.8 )   $     $ (47.6 )
Balance at end of period individually evaluated for impairment 
  $     $     $ (0.8 )   $     $ (0.8 )
Balance at end of period collectively evaluated for impairment
  $ (5.1 )   $ (11.7 )   $ (30.0 )   $     $ (46.8 )
Loans and fees receivable:
                                       
Loans and fees receivable, gross
  $ 18.6     $ 85.9     $ 189.2     $     $ 293.7  
Loans and fees receivable individually evaluated for impairment
  $     $     $ 2.5     $     $ 2.5  
Loans and fees receivable collectively evaluated for impairment
  $ 18.6     $ 85.9     $ 186.7     $     $ 291.2  
 
The components (in millions) of loans and fees receivable, net as of the date of each of our consolidated balance sheets are as follows: 
 
   
As of
 
   
September 30, 2011
   
December 31, 2010
 
Current loans receivable
  $ 109.4     $ 189.9  
Current fees receivable
    1.1       7.7  
Delinquent loans and fees receivable
    16.2       30.1  
Loans and fees receivable, gross
  $ 126.7     $ 227.7  
 
 
8

Delinquent loans and fees receivable reflect the principal, fee and interest components of loans that we did not collect on the contractual due date.  Amounts we believe we will not ultimately collect are included as a component in our overall allowance for uncollectible loans and fees receivable and typically are charged off 90 days from the point they become delinquent for our micro-loan receivables, 180 days from the point they become delinquent for our auto finance and credit card receivables, or sooner if facts and circumstances earlier indicate non-collectability.  Recoveries on accounts previously charged off are credited to the allowance for uncollectible loans and fees receivable and effectively offset our provision for loan losses in our accompanying consolidated statements of operations.
 
An aging of our delinquent loans and fees receivable, gross (in millions) as of September 30, 2011 and December 31, 2010 is as follows:
 
As of September 30, 2011
 
Credit Cards
   
Micro-Loans
   
Auto Finance
   
Other
   
Total
 
0-29 days past due
  $ 0.8     $ 0.4     $ 7.2     $     $ 8.4  
30-59 days past due
    0.6       0.3       2.4             3.3  
60 or more days past due
    1.5       0.7       2.3             4.5  
Delinquent loans and fees receivable, gross
  $ 2.9     $ 1.4     $ 11.9     $     $ 16.2  
Current loans and fees receivable, gross
    15.7       0.8       91.6       2.4       110.5  
Total loans and fees receivable, gross
  $ 18.6     $ 2.2     $ 103.5     $ 2.4     $ 126.7  
Balance of loans greater than 90-days delinquent still accruing interest and fees
  $     $     $ 1.8     $     $ 1.8  
 

As of December 31, 2010
 
Credit Cards
   
Micro-Loans
   
Auto Finance
   
Other
   
Total
 
0-29 days past due
  $ 0.8     $ 3.6     $ 11.6     $     $ 16.0  
30-59 days past due
    0.7       2.2       4.3             7.2  
60 or more days past due
    1.8       1.4       3.7             6.9  
Delinquent loans and fees receivable, gross
  $ 3.3     $ 7.2     $ 19.6     $     $ 30.1  
Current loans and fees receivable, gross
    15.4       38.4       143.5       0.3       197.6  
Total loans and fees receivable, gross
  $ 18.7     $ 45.6     $ 163.1     $ 0.3     $ 227.7  
Balance of loans greater than 90-days delinquent still accruing interest and fees
  $     $     $ 2.7     $     $ 2.7  
 

 

 
9


 
Investments in Previously Charged-Off Receivables
 
The following table shows (in thousands) a roll-forward of our investments in previously charged-off receivables activities:
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Unrecovered balance at beginning of period
  $ 31,280     $ 33,297     $ 29,889     $ 29,669  
Acquisitions of defaulted accounts
    19,191       5,839       38,675       22,409  
Cash collections
    (20,948 )     (17,158 )     (60,804 )     (45,858 )
Cost-recovery method income recognized on defaulted accounts (included as a component of fees and related income on non-securitized earning assets on our consolidated statements of operations)
    10,295       8,676       32,058       24,434  
Unrecovered balance at end of period
  $ 39,818     $ 30,654     $ 39,818     $ 30,654  

Previously charged-off receivables held as of September 30, 2011 are comprised principally of:  normal delinquency charged-off accounts; charged-off accounts associated with Chapter 13 Bankruptcy-related debt; and charged-off accounts acquired through our Investments in Previously Charged-Off Receivables segment’s balance transfer program prior to such time as credit cards are issued relating to the program’s underlying accounts. At September 30, 2011, $4.4 million of our investments in previously charged-off receivables balance was comprised of previously charged-off receivables that our Investments in Previously Charged-Off Receivables segment purchased from our other consolidated subsidiaries, and in determining our net income or loss as reflected on our consolidated statements of operations, we eliminate all material intercompany profits that are associated with these transactions.  Although we eliminate all intercompany profits associated with these purchases, we do not eliminate the corresponding purchases from our consolidated balance sheet categories so as to better reflect the ongoing business operations of each of our reportable segments and because the amounts represent just 0.6% of our consolidated total assets.
 
We estimate the life of each pool of previously charged-off receivables acquired by us generally to be between 60 months for normal delinquency charged-off accounts and approximately 84 months for Chapter 13 Bankruptcies. Our estimated remaining collections on the $39.8 million unrecovered balance of our investments in previously charged-off receivables as of September 30, 2011 amount to $186.9 million (before servicing costs), of which we expect to collect 39.8% over the next 12 months, with the balance to be collected thereafter.
 
Investments in Securities
 
The carrying values (in thousands) of our investments in debt and equity securities are as follows

   
As of
 
   
September 30,
2011
   
December 31,
2010
 
Held to maturity:
           
Investments in non-marketable debt securities
  $ 93     $ 2,414  
Available for sale:
               
Investments in non-marketable debt securities
    3,776       4,087  
Investments in non-marketable equity securities
    2,075       1,500  
Trading:
               
Investments in marketable debt securities
          55,770  
Investments in marketable equity securities
    188       546  
Total investments in securities
  $ 6,132     $ 64,317  
 
Investments in Equity-Method Investees
 
We account for investments using the equity method of accounting if we have the ability to exercise significant influence, but not control, over the investees. Significant influence is generally deemed to exist if we have an ownership interest in the voting stock of an incorporated investee of between 20% and 50%, although other factors, such as representation on an investee’s board of managers, specific voting and veto rights held by each investor and the effects of commercial arrangements, are considered in determining whether equity method accounting is appropriate. We use the equity method for our investment in a 33.3%-owned limited liability company made during the fourth quarter of 2004. We also use the equity method to account for our March 2011 investment to acquire a 50.0% interest in a joint venture that purchased all of the outstanding notes issued out of the structured financing trust underlying our U.K. portfolio of credit card receivables (the “U.K. Portfolio”). We record our respective interests in the income or losses of our equity-method investees within the equity in income (loss) of equity-method investees category on our consolidated statements of operations. The carrying amount of our equity-method investments is recorded on our consolidated balance sheets as investments in equity-method investees.
 
In January 2011, we acquired an additional 47.5% interest in a 47.5% equity-method investee which we had historically accounted for under the equity method of accounting, thereby bringing our aggregate interest in this entity to a 95.0% ownership threshold and leading us to conclude that the assets and liabilities of this entity should be consolidated within our consolidated balance sheets. Additionally, we acquired the remaining 5.0% noncontrolling interest in the April 2011 bringing our total ownership to 100% as of September 30, 2011.
 
Income Taxes
 
Our overall effective income tax rates (computed considering results for only continuing operations before income taxes) were 1,996.8% and 8.5% in the three and nine months ended September 30, 2011, respectively, compared to 18.8% and 3.2% for the three and nine months ended September 30, 2010, respectively.  We have experienced no material changes in effective tax rates associated with differences in filing jurisdictions, and the variations in our effective tax rates between the periods principally bear the effects of (1) changes in valuation allowances against income statement-oriented federal, foreign and state deferred tax assets and (2) variations in the level of our pre-tax income among the different reporting periods relative to the level of our permanent differences within such periods. Computed without regard to the effects of the valuation allowance changes, it is more likely than not that our effective tax rates would have been 3,398.5% and 50.9%, in the three and nine months ended September 30, 2011, respectively, compared to 62.5% and 35.6%  in the three and nine months ended September 30, 2010, respectively.
 
We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.  We recognized $0.6 million and $1.7 million in potential interest and penalties associated with uncertain tax positions during the three and nine months ended September 30, 2011, respectively, compared to $0.6 million and $1.8 million during the three and nine months ended September 30, 2010, respectively. To the extent such interest and penalties are not assessed as a result of a resolution of the underlying tax position, amounts accrued will be reduced and reflected as a reduction of income tax expense. We recognized such reductions in the amounts of $0.0 million and $2.0 million in the three months ended September 30, 2011 and September 30, 2010, respectively. Reductions during the three months ended September 30, 2010 resulted from closings of statutes of limitations, and we experienced no such closings during the three months ended September 30, 2011.

 
10


Fees and Related Income on Earning Assets
 
The components (in thousands) of our fees and related income on earning assets are as follows:
 
   
For the Three Months Ended
September 30, 2011
   
For the Nine Months Ended
September 30, 2011
 
   
2011
   
2010
   
2011
   
2010
 
Internet micro-loan fees
  $ 954     $ 718     $ 2,202     $ 1,210  
Fees on credit card receivables held on balance sheet
    2,454       5,002       8,441       20,861  
Changes in fair value of loans and fees receivable recorded at fair value (1)
    46,646       61,183       166,164       186,846  
Changes in fair value of notes payable associated with structured financings recorded at fair value
    (29,538 )     (19,158 )     (82,507 )     31,036  
Income on investments in previously charged-off receivables
    10,295       8,676       32,058       24,434  
Gross loss on auto sales
          (478 )     (111 )     (2,127 )
(Losses) gains on investments in securities
    (5,418 )     153       (5,277 )     301  
Loss on sale of JRAS assets
                (4,648 )      
Gains upon litigation settlement with former third-party issuing bank partner
          12,150             12,150  
Other
    499       678       1,324       877  
Total fees and related income on earning assets
  $ 25,892     $ 68,924     $ 117,646     $ 275,588  
 
(1)  
The above changes in fair value of loans and fees receivable recorded at fair value category excludes the impact of charge offs associated with these receivables which are separately stated on our consolidated statements of operations.  See Note 9, “Fair values of Assets and Liabilities,” for further discussion of these receivables and their effects on our consolidated statements of operations.
 
Subsequent Events
 
We evaluate subsequent events that occur after our consolidated balance sheet date but before our consolidated financial statements are issued. There are two types of subsequent events:  (1) recognized, or those that provide additional evidence with respect to conditions that existed at the date of the balance sheet, including the estimates inherent in the process of preparing financial statements; and (2) nonrecognized, or those that provide evidence with respect to conditions that did not exist at the date of the balance sheet but arose subsequent to that date. We have evaluated subsequent events occurring after September 30, 2011, and based on our evaluation, we did not identify any recognized or nonrecognized subsequent events that would have required further adjustments to our consolidated financial statements.
 
In October 2011, our CAR subsidiaries within our Auto Finance segment obtained a new credit facility with $40.0 million in available financing that can be drawn to the extent of CAR outstanding eligible principal receivables (of which $23.8 million was drawn as of October 31, 2011). This new facility is secured by the financial and operating assets of our CAR subsidiaries (such assets having a carrying value of $49.8 million at September 30, 2011), accrues interest at an annual rate equal to LIBOR plus 4.0%, matures in October 2014, and is subject to certain affirmative covenants, including a coverage ratio, a leverage ratio and a collateral performance test, the failure of which could result in required early repayment of all or a portion of the outstanding balance.
 
Also on October 10, 2011, we completed the sale of our Retail Micro-Loans segment operations to a subsidiary of Advance America, Cash Advance Centers, Inc. for $46.7 million, comprised of the $45.6 million contract amount and a working capital adjustment of approximately $1.1 million (an amount which may be subject to further post-closing adjustments and indemnities). Together with another $9.5 million of excess working capital that we received immediately prior to completion of the transaction under its terms, and net of transaction-related expenditures, our net pre-tax proceeds are expected to approximate $53.8 million.
 
In October and November 2011, in open market transactions, we purchased an aggregate $21.3 million in face amount of our 3.625% convertible senior notes due 2025, reducing our outstanding balance of the notes to $85.1 million.
 
Lastly, in November 2011, our Investment in Previously Charged-Off Receivables segment obtained a new credit facility. This facility initially provides for $35.0 million in available financing to facilitate the growth of its operations, can be drawn upon to the extent of outstanding eligible receivables within the segment’s operations, and accrues interest at an annual rate equal to LIBOR plus an applicable margin ranging from 3.25% to 4.75% based on certain financial metrics.  The facility is subject to certain affirmative covenants, including a coverage ratio, a leverage ratio, a collections minimum and a tangible net worth minimum, the failure of which could result in required early repayment of all or a portion of the outstanding balance.  The facility matures in November 2014.
 
 
11

 
3.
Discontinued Operations
 
On December 31, 2010, we entered into an agreement to sell our subsidiary with a controlling interest in MEM.  The transaction closed in April 2011 and resulted in a gain (net of related sales expenditures) of $106.0 million.  In accordance with applicable accounting literature, we classified MEM’s net assets as held for sale on our December 31, 2010 consolidated balance sheet, and we have reflected its operating results and gain on sale as discontinued operations within our consolidated statements of operations for all periods presented. Additionally, on August 5, 2011, we entered into an agreement to sell our Retail Micro-Loans segment to a subsidiary of Advance America, Cash Advance Centers, Inc.—a transaction we completed on October 10, 2011 and the details of which are disclosed throughout this Report. In accordance with applicable accounting literature, we have classified our Retail Micro-Loans segment’s net assets as held for sale on our September 30, 2011 consolidated balance sheet and have reflected its operating results as discontinued operations within our consolidated statements of operations for all periods presented.
 
The following tables reflect (in thousands) the components of our discontinued operations:
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
 September 30,
 
   
2011
   
2010
   
2011
   
2010
 
Net interest income, fees and related income on non-securitized earning assets
  $ 15,330     $ 34,525     $ 65,121     $ 92,345  
Gain on sale of assets
                103,706        
Other operating expense
    13,278       23,837       51,638       68,431  
Income before income taxes
    2,052       10,688       117,189       23,914  
Income tax expense
    (42 )     (2,248 )     (4,142 )     (4,596 )
Net income
  $ 2,010     $ 8,440     $ 113,047     $ 19,318  
Net income attributable to noncontrolling interests
  $     $ 1,050     $ 1,131     $ 2,269  
 
The table below presents the components (in thousands) of our consolidated balance sheet accounts classified as assets held for sale and liabilities related to assets held for sale:
   
As of
 
   
September 30, 2011
   
December 31, 2010
 
Assets held for sale:
           
Unrestricted cash and cash equivalents
  $ 11,149     $ 16,419  
Loans and fees receivable, net (of $6,110 and $5,218 in deferred revenue and $4,430 and $8,465 of allowances for uncollectible loans and fees receivable as of September 30, 2011 and December 31, 2010, respectively)
    33,508       32,786  
Property at cost, net of depreciation
    752       6,506  
Prepaid expenses and other assets
    1,058       1,537  
Intangibles, net
    2,156        
Goodwill
          23,011  
Total assets held for sale
  $ 48,623     $ 80,259  
Liabilities related to assets held for sale:
               
Accounts payable and accrued expenses
  $ 2,808     $ 3,396  
Income tax liability
          5,718  
Total liabilities related to assets held for sale
  $ 2,808     $ 9,114  
 


 
12


 
4.
Segment Reporting
 
We operate primarily within one industry consisting of five reportable segments by which we manage our business. Our five reportable segments are:  Credit Cards; Investments in Previously Charged-Off Receivables; Retail Micro-Loans; Auto Finance; and Internet Micro-Loans.  In March 2010, we acquired all of the noncontrolling interests in our Investments in Previously Charged-Off Receivables segment for $1.0 million, such that we now own 100% of this segment.  Similarly, in 2011 we purchased the remaining noncontrolling interests in our Credit Cards segment majority-owned subsidiaries for an aggregate purchase price of $4.1 million.
 
 
Summary operating segment information (in thousands) is as follows:
 
Three Months Ended September 30, 2011
 
Credit Cards
   
Investments in
Previously
Charged-Off
Receivables
   
Retail
Micro-Loans
   
Auto Finance
   
Internet Micro-Loans
   
Total
 
Net interest income, fees and related income on earning assets
  $ 3,471     $ 10,509     $     $ 8,300     $ 254     $ 22,534  
Total other operating income
  $ 8,951     $ 801     $     $ 130     $ 12     $ 9,894  
Income (loss) from continuing operations before income taxes
  $ (4,350 )   $ 3,239     $     $ 3,209     $ (2,067 )   $ 31  
Income from discontinued operations before income taxes
  $     $     $ 2,052     $     $     $ 2,052  
Loans and fees receivable, gross
  $ 20,957     $     $     $ 103,548     $ 2,215     $ 126,720  
Loans and fees receivable, net
  $ 16,750     $     $     $ 82,629     $ 1,329     $ 100,708  
Loans and fees receivable held at fair value
  $ 310,815     $     $     $     $     $ 310,815  
Total assets
  $ 560,465     $ 53,630     $     $ 92,272     $ 4,471     $ 710,838  
 

Nine Months Ended September 30, 2011
 
Credit Cards
   
Investments in
Previously
Charged-Off
Receivables
   
Retail
Micro-Loans
   
Auto Finance
   
Internet Micro-Loans
   
Total
 
Net interest income, fees and related income on earning assets
  $ 30,712     $ 32,133     $     $ 19,872     $ 570     $ 83,287  
Total other operating income
  $ 37,233     $ 2,269     $     $ 386     $ 12     $ 39,900  
Income (loss) from continuing operations before income taxes
  $ 11,235     $ 11,250     $     $ 2,741     $ (4,597 )   $ 20,629  
Income from discontinued operations before income taxes
  $     $     $ 6,139     $     $ 111,050     $ 117,189  
Loans and fees receivable, gross
  $ 20,957     $     $     $ 103,548     $ 2,215     $ 126,720  
Loans and fees receivable, net
  $ 16,750     $     $     $ 82,629     $ 1,329     $ 100,708  
Loans and fees receivable held at fair value
  $ 310,815     $     $     $     $     $ 310,815  
Total assets
  $ 560,465     $ 53,630     $     $ 92,272     $ 4,471     $ 710,838  
 

 
 
13


Three Months Ended September 30, 2010
 
Credit Cards
   
Investments in
Previously
Charged-Off
Receivables
   
Retail
Micro-Loans
   
Auto Finance
   
Internet Micro-Loans
   
Total
 
Net interest income, fees and related income (loss) on earning assets
  $ 9,474     $ 8,567     $     $ 5,046     $ (39 )   $ 23,048  
Total other operating income
  $ 8,031     $ 494     $     $ 133     $     $ 8,658  
(Loss) income from continuing operations before income taxes
  $ (6,932 )   $ 2,482     $     $ (3,324 )   $ (989 )   $ (8,763 )
Income from discontinued operations before income taxes
  $     $     $ 2,835     $     $ 7,853     $ 10,688  
Loans and fees receivable, gross
  $ 18,659     $     $ 40,291     $ 189,172     $ 45,649     $ 293,771  
Loans and fees receivable, net
  $ 14,478     $     $ 32,504     $ 139,146     $ 32,087     $ 218,215  
Loans and fees receivable held at fair value
  $ 469,713     $     $     $     $     $ 469,713  
Total assets
  $ 676,926     $ 36,316     $ 67,605     $ 155,950     $ 75,130     $ 1,011,927  
 

Nine Months Ended September 30, 2010
 
Credit Cards
   
Investments in
Previously
Charged-Off
Receivables
   
Retail
Micro-Loans
   
Auto Finance
   
Internet Micro-Loans
   
Total