ATLC-2014.06.30-10Q (1)
Table of Contents

SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
  
FORM 10-Q
 
For the quarterly period ended June 30, 2014
 
of
ATLANTICUS 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
 
Atlanticus’ common stock, no par value per share, is registered pursuant to Section 12(b) of the Securities Exchange Act of 1934 (the “Act”).
 
Atlanticus is not a well-known seasoned issuer, as defined in Rule 405 of the Securities Act of 1933.
 
Atlanticus (1) is required to file reports pursuant to Section 13 of the Act, (2) has filed all reports required to be filed by Section 13 of the Act during the preceding 12 months and (3) has been subject to such filing requirements for the past 90 days.
 
Atlanticus 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.
 
Atlanticus is a smaller reporting company and is not a shell company.
 
As of August 8, 2014, 13,976,542 shares of common stock, no par value, of Atlanticus were outstanding. This excludes 1,459,233 loaned shares to be returned.


Table of Contents

Table of Contents
 

Page
PART I. FINANCIAL INFORMATION
 
Item 1.
Financial Statements (Unaudited)
 
 
Consolidated Balance Sheets
 
 
Consolidated Statements of Operations
 
 
Consolidated Statements of Comprehensive Loss
 
 
Consolidated Statement of Shareholders' Equity
 
 
Consolidated Statements of Cash Flows
 
 
Notes to Consolidated Financial Statements
 
Item 2.
Management's Discussion and Analysis of Financial Condition and Results of Operations
 
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
 
Item 4.
Controls and Procedures
 
Part II. OTHER INFORMATION
 
Item 1.
Legal Proceedings
 
Item 1A.
Risk Factors
 
Item 2.
Unregistered Sales of Equity Securities and Use of Proceeds
 
Item 3.
Defaults Upon Senior Securities
 
Item 4.
Mine Safety Disclosure
 
Item 5.
Other Information
 
Item 6.
Exhibits
 
 
Signatures
 


Table of Contents

PART I—FINANCIAL INFORMATION
ITEM 1.
FINANCIAL STATEMENTS
 
Atlanticus Holdings Corporation and Subsidiaries
Consolidated Balance Sheets (Unaudited)
(Dollars in thousands)
 
June 30,
2014
 
December 31,
2013
Assets
 
 
 
Unrestricted cash and cash equivalents
$
32,921

 
$
50,873

Restricted cash and cash equivalents
19,093

 
18,871

Loans and fees receivable:
 

 
 

Loans and fees receivable, net (of $13,801 and $13,258 in deferred revenue and $20,386 and $24,214 in allowances for uncollectible loans and fees receivable at June 30, 2014 and December 31, 2013, respectively)
95,445

 
97,208

Loans and fees receivable, at fair value
9,489

 
12,080

Loans and fees receivable pledged as collateral under structured financings, at fair value
71,688

 
88,132

Rental merchandise, net of depreciation
11,082

 
28,849

Property at cost, net of depreciation
10,636

 
8,937

Investments in equity-method investees
32,397

 
35,134

Deposits
2,402

 
1,908

Prepaid expenses and other assets
14,099

 
10,243

Total assets
$
299,252

 
$
352,235

Liabilities
 

 
 

Accounts payable and accrued expenses
$
36,369

 
$
48,625

Notes payable, at face value
53,345

 
56,740

Notes payable associated with structured financings, at fair value
75,509

 
94,523

Convertible senior notes
96,254

 
95,934

Income tax liability
57,788

 
55,255

Total liabilities
319,265

 
351,077

Commitments and contingencies (Note 9)


 


Equity
 

 
 

Common stock, no par value, 150,000,000 shares authorized: 15,446,175 shares issued and outstanding (including 1,459,233 loaned shares to be returned) at June 30, 2014; and 15,594,325 shares issued and outstanding  (including 1,672,656 loaned shares to be returned) at December 31, 2013
—

 
—

Additional paid-in capital
211,020

 
210,315

Accumulated other comprehensive loss
(267
)
 
(737
)
Retained deficit
(230,766
)
 
(208,414
)
Total shareholders’ equity
(20,013
)
 
1,164

Noncontrolling interests
—

 
(6
)
Total equity
(20,013
)
 
1,158

Total liabilities and equity
$
299,252

 
$
352,235


 
See accompanying notes.

1
Table of Contents

Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Operations (Unaudited)
(Dollars in thousands, except per share data)
 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Interest income:
 
 
 
 
 
 
 
Consumer loans, including past due fees
$
17,387

 
$
16,681

 
$
37,344

 
$
36,505

Other
37

 
84

 
274

 
195

Total interest income
17,424

 
16,765

 
37,618

 
36,700

Interest expense
(6,158
)
 
(5,866
)
 
(12,345
)
 
(11,638
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
11,266

 
10,899

 
25,273

 
25,062

Fees and related income on earning assets
22,196

 
10,219

 
55,081

 
17,025

Losses upon charge off of loans and fees receivable recorded at fair value, net of recoveries
50

 
(4,351
)
 
(1,835
)
 
(10,149
)
Provision for losses on loans and fees receivable recorded at net realizable value
(6,731
)
 
(6,670
)
 
(14,606
)
 
(9,952
)
Net interest income, fees and related income on earning assets
26,781

 
10,097

 
63,913

 
21,986

Other operating income:
 

 
 

 
 
 
 
Servicing income
1,234

 
2,604

 
2,474

 
5,205

Other income
254

 
316

 
1,321

 
2,452

Equity in income of equity-method investees
841

 
957

 
3,247

 
5,264

Total other operating income
2,329

 
3,877

 
7,042

 
12,921

Other operating expense:
 

 
 

 
 
 
 
Salaries and benefits
4,664

 
4,371

 
9,762

 
8,780

Card and loan servicing
12,956

 
10,849

 
26,734

 
21,528

Marketing and solicitation
631

 
2,586

 
1,393

 
4,521

Depreciation
16,573

 
418

 
42,281

 
791

Other
4,791

 
5,078

 
10,331

 
11,156

Total other operating expense
39,615

 
23,302

 
90,501

 
46,776

Loss before income taxes
(10,505
)
 
(9,328
)
 
(19,546
)
 
(11,869
)
Income tax expense
(673
)
 
(462
)
 
(2,655
)
 
(908
)
Net loss
(11,178
)
 
(9,790
)
 
(22,201
)
 
(12,777
)
Net income attributable to noncontrolling interests
—

 
(59
)
 
(151
)
 
(80
)
Net loss attributable to controlling interests
$
(11,178
)
 
$
(9,849
)
 
$
(22,352
)
 
$
(12,857
)
Net loss attributable to controlling interests per common share—basic
$
(0.80
)
 
$
(0.71
)
 
$
(1.59
)
 
$
(0.93
)
Net loss attributable to controlling interests per common share—diluted
$
(0.80
)
 
$
(0.71
)
 
$
(1.59
)
 
$
(0.93
)

 
See accompanying notes.

2
Table of Contents

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

 
For the Three Months Ended June 30,
 
For the Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Net loss
$
(11,178
)
 
$
(9,790
)
 
$
(22,201
)
 
$
(12,777
)
Other comprehensive loss:
 

 
 

 
 
 
 
Foreign currency translation adjustment
386

 
(117
)
 
447

 
(1,511
)
Income tax expense related to other comprehensive income
(11
)
 
31

 
23

 
139

Comprehensive loss
(10,803
)
 
(9,876
)
 
(21,731
)
 
(14,149
)
Comprehensive income attributable to noncontrolling interests
—

 
(59
)
 
(151
)
 
(80
)
Comprehensive loss attributable to controlling interests
$
(10,803
)
 
$
(9,935
)
 
$
(21,882
)
 
$
(14,229
)

 

 

 

 

 

 

 

 

 

 

 

 

 
See accompanying notes.

3
Table of Contents

Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Equity
For the Six Months Ended June 30, 2014 (Unaudited)
(Dollars in thousands)
 
 
Common Stock
 
 
 
 
 
 
 
 
 
 
 
 
 
Shares Issued
 
Amount
 
Additional Paid-In Capital
 
Treasury Stock
 
Accumulated Other Comprehensive Loss
 
Retained Deficit
 
Noncontrolling Interests
 
Total Equity
Balance at December 31, 2013
15,594,325

 
$
—

 
$
210,315

 
$
—

 
$
(737
)
 
$
(208,414
)
 
$
(6
)
 
$
1,158

Compensatory stock issuances, net of forfeitures
77,600

 
—

 
—

 
—

 
—

 
—

 
—

 
—

Distributions to owners of noncontrolling interests
—

 
—

 
—

 
—

 
—

 
—

 
(145
)
 
(145
)
Amortization of deferred stock-based compensation costs
—

 
—

 
736

 
—

 
—

 
—

 
—

 
736

Redemption and retirement of shares
(225,750
)
 
—

 
(31
)
 
—

 
—

 
—

 
—

 
(31
)
Other comprehensive loss
—

 
—

 
—

 
—

 
470

 
(22,352
)
 
151

 
(21,731
)
Balance at June 30, 2014
15,446,175

 
$
—

 
$
211,020

 
$
—

 
$
(267
)
 
$
(230,766
)
 
$
—

 
$
(20,013
)


See accompanying notes.

4
Table of Contents

Atlanticus Holdings Corporation and Subsidiaries
Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
 
For the Six Months Ended June 30,
 
2014
 
2013
Operating activities
 
 
 
Net loss
$
(22,201
)
 
$
(12,777
)
Adjustments to reconcile net loss to net cash used in operating activities:
 

 
 

Depreciation of rental merchandise
40,746

 
—

Depreciation, amortization and accretion, net
643

 
656

Losses upon charge off of loans and fees receivable recorded at fair value
8,719

 
15,991

Provision for losses on loans and fees receivable
14,606

 
9,952

Interest expense from accretion of discount on convertible senior notes
321

 
293

Income from accretion of discount associated with receivables purchases
(16,438
)
 
(13,919
)
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value
(4,359
)
 
(9,490
)
Income from equity-method investments
(3,247
)
 
(5,264
)
Other non-cash adjustments to income
—

 
159

Changes in assets and liabilities:
 

 
 

Decrease (increase) in uncollected fees on earning assets
121

 
(295
)
Increase in income tax liability
2,589

 
740

(Increase) decrease in deposits
(494
)
 
200

Decrease (increase) in prepaid expenses
217

 
(83
)
Decrease in accounts payable and accrued expenses
(11,502
)
 
(3,558
)
Additions to rental merchandise
(22,975
)
 
—

Other
(1,313
)
 
3,183

Net cash used in operating activities
(14,567
)
 
(14,212
)
Investing activities
 

 
 

Increase in restricted cash
(207
)
 
(2,127
)
Investment in equity-method investees
—

 
(3,750
)
Proceeds from equity-method investees
6,332

 
7,211

Investments in earning assets
(100,915
)
 
(87,090
)
Proceeds from earning assets
122,617

 
121,761

Purchases and development of property, net of disposals
(3,183
)
 
(1,362
)
Net cash provided by investing activities
24,644

 
34,643

Financing activities
 

 
 

Noncontrolling interests (distributions) contributions, net
(145
)
 
26

Purchase and retirement of outstanding stock
(31
)
 
(866
)
Proceeds from borrowings
28,322

 
21,198

Repayment of borrowings
(56,445
)
 
(46,880
)
Net cash used in financing activities
(28,299
)
 
(26,522
)
Effect of exchange rate changes on cash
270

 
(867
)
Net decrease in unrestricted cash
(17,952
)
 
(6,958
)
Unrestricted cash and cash equivalents at beginning of period
50,873

 
67,915

Unrestricted cash and cash equivalents at end of period
$
32,921

 
$
60,957

Supplemental cash flow information
 

 
 

Cash paid for interest
$
18,602

 
$
11,287

Net cash income tax payments
$
66

 
$
168

Supplemental non-cash information
 

 
 

Issuance of stock options and restricted stock
$
931

 
$
522

Notes payable associated with capital leases
$
159

 
$
148


See accompanying notes.

5
Table of Contents

Atlanticus Holdings Corporation and Subsidiaries
Notes to Consolidated Financial Statements
June 30, 2014 and 2013
 
1.
Description of Our Business
 
Our accompanying consolidated financial statements include the accounts of Atlanticus Holdings Corporation (the “Company”) and those entities we control. We are primarily focused on providing financial services. Through our subsidiaries, we offer an array of financial products and services to a market largely represented by credit risks that regulators classify as “sub-prime.” As discussed further below, we reflect our business lines within two reportable segments:  Credit and Other Investments; and Auto Finance. See also Note 3, “Segment Reporting,” for further details.

2.
Significant Accounting Policies and Consolidated Financial Statement Components
 
The following is a summary of significant accounting policies we follow in preparing our consolidated financial statements, as well as a description of significant components of our consolidated financial statements.
 
Basis of Presentation and Use of Estimates
 
We prepare our consolidated financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”), under which we are required to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities as of the date of our consolidated financial statements, as well as the reported amounts of revenues and expenses during each reporting period. We base these estimates on information available to us as of the date of the financial statements. Actual results could differ materially 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 credit card receivables that we report at fair value and our notes payable associated with structured financings, at fair value; these estimates likewise affect the changes in these amounts reflected within our fees and related income on earning assets line item on our consolidated statements of operations. Additionally, estimates of future credit losses have a significant effect on loans and fees receivable, net, as shown on our consolidated balance sheets, as well as on the provision for losses on loans and fees receivable within our consolidated statements of operations.
 
We have eliminated all significant intercompany balances and transactions for financial reporting purposes.

Loans and Fees Receivable
 
Our loans and fees receivable include:  (1) loans and fees receivable, net; (2) loans and fees receivable, at fair value; and (3) loans and fees receivable pledged as collateral under structured financings, at fair value.
 
Components of our loans and fees receivable, net (in millions) are as follows:
 
Balance at December 31, 2013
 
Additions
 
Subtractions
 
Balance at June 30, 2014
Loans and fees receivable, gross
$
134.7

 
$
134.9

 
$
(140.0
)
 
$
129.6

Deferred revenue
(13.3
)
 
(17.0
)
 
16.5

 
(13.8
)
Allowance for uncollectible loans and fees receivable
(24.2
)
 
(14.6
)
 
18.4

 
(20.4
)
Loans and fees receivable, net
$
97.2

 
$
103.3

 
$
(105.1
)
 
$
95.4

 
Balance at December 31, 2012
 
Additions
 
Subtractions
 
Balance at June 30, 2013
Loans and fees receivable, gross
$
89.1

 
$
109.2

 
$
(98.8
)
 
$
99.5

Deferred revenue
(8.3
)
 
(15.1
)
 
13.9

 
(9.5
)
Allowance for uncollectible loans and fees receivable
(11.2
)
 
(10.0
)
 
7.6

 
(13.6
)
Loans and fees receivable, net
$
69.6

 
$
84.1

 
$
(77.3
)
 
$
76.4

 

6
Table of Contents

As of June 30, 2014 and June 30, 2013, the weighted average remaining accretion periods for the $13.8 million and $9.5 million, respectively, of deferred revenue reflected in the above tables were 11 months and 14 months, respectively.
A roll-forward (in millions) of our allowance for uncollectible loans and fees receivable by class of receivable is as follows: 

For the Three Months Ended June 30, 2014
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
Allowance for uncollectible loans and fees receivable:
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(10.9
)
 
$
(1.4
)
 
$
(10.8
)
 
$
(23.1
)
Provision for loan losses
 
(2.8
)
 
(0.1
)
 
(3.8
)
 
(6.7
)
Charge offs
 
5.3

 
0.4

 
4.2

 
9.9

Recoveries
 
(0.1
)
 
(0.3
)
 
(0.1
)
 
(0.5
)
Balance at end of period
 
$
(8.5
)
 
$
(1.4
)
 
$
(10.5
)
 
$
(20.4
)

For the Six Months Ended June 30, 2014
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
Allowance for uncollectible loans and fees receivable:
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(11.6
)
 
$
(1.4
)
 
$
(11.2
)
 
$
(24.2
)
Provision for loan losses
 
(7.0
)
 
0.1

 
(7.7
)
 
(14.6
)
Charge offs
 
10.3

 
0.5

 
8.7

 
19.5

Recoveries
 
(0.2
)
 
(0.6
)
 
(0.3
)
 
(1.1
)
Balance at end of period
 
$
(8.5
)
 
$
(1.4
)
 
$
(10.5
)
 
$
(20.4
)
Balance at end of period individually evaluated for impairment
 
$
—

 
$
(0.1
)
 
$
(0.2
)
 
$
(0.3
)
Balance at end of period collectively evaluated for impairment
 
$
(8.5
)
 
$
(1.3
)
 
$
(10.3
)
 
$
(20.1
)
Loans and fees receivable:
 
 

 
 

 
 

 
 

Loans and fees receivable, gross
 
$
14.5

 
$
64.0

 
$
51.1

 
$
129.6

Loans and fees receivable individually evaluated for impairment
 
$
—

 
$
0.2

 
$
0.3

 
$
0.5

Loans and fees receivable collectively evaluated for impairment
 
$
14.5

 
$
63.8

 
$
50.8

 
$
129.1



7
Table of Contents


For the Three Months Ended June 30, 2013
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
Allowance for uncollectible loans and fees receivable:
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(4.0
)
 
$
(2.6
)
 
$
(3.5
)
 
$
(10.1
)
Provision for loan losses
 
(3.7
)
 
0.5

 
(3.5
)
 
(6.7
)
Charge offs
 
1.5

 
1.2

 
1.0

 
3.7

Recoveries
 
(0.1
)
 
(0.3
)
 
(0.1
)
 
(0.5
)
Balance at end of period
 
$
(6.3
)
 
$
(1.2
)
 
$
(6.1
)
 
$
(13.6
)

For the Six Months Ended June 30, 2013
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
Allowance for uncollectible loans and fees receivable:
 
 
 
 
 
 
 
 
Balance at beginning of period
 
$
(4.6
)
 
$
(3.1
)
 
$
(3.5
)
 
$
(11.2
)
Provision for loan losses
 
(5.9
)
 
0.7

 
(4.8
)
 
(10.0
)
Charge offs
 
4.3

 
2.3

 
2.3

 
8.9

Recoveries
 
(0.1
)
 
(1.1
)
 
(0.1
)
 
(1.3
)
Balance at end of period
 
$
(6.3
)
 
$
(1.2
)
 
$
(6.1
)
 
$
(13.6
)
Balance at end of period individually evaluated for impairment
 
$
—

 
$
—

 
$
—

 
$
—

Balance at end of period collectively evaluated for impairment
 
$
(6.3
)
 
$
(1.2
)
 
$
(6.1
)
 
$
(13.6
)
Loans and fees receivable:
 
 

 
 

 
 

 
 

Loans and fees receivable, gross
 
$
13.2

 
$
60.7

 
$
25.6

 
$
99.5

Loans and fees receivable individually evaluated for impairment
 
$
—

 
$
—

 
$
—

 
$
—

Loans and fees receivable collectively evaluated for impairment
 
$
13.2

 
$
60.7

 
$
25.6

 
$
99.5


    

8
Table of Contents

The components (in millions) of loans and fees receivable, net as of the date of each of our consolidated balance sheets are as follows:
 
June 30, 2014
 
December 31, 2013
Current loans receivable
$
101.1

 
$
103.3

Current fees receivable
4.6

 
6.0

Delinquent loans and fees receivable
23.9

 
25.4

Loans and fees receivable, gross
$
129.6

 
$
134.7

 
An aging of our delinquent loans and fees receivable, gross (in millions) by class of receivable as of June 30, 2014 and December 31, 2013 is as follows:
Balance at June 30, 2014
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
30-59 days past due
 
$
1.1

 
$
6.1

 
$
2.6

 
$
9.8

60-89 days past due
 
1.2

 
2.1

 
2.0

 
5.3

90 or more days past due
 
4.6

 
1.2

 
3.0

 
8.8

Delinquent loans and fees receivable, gross
 
6.9

 
9.4

 
7.6

 
23.9

Current loans and fees receivable, gross
 
7.6

 
54.6

 
43.5

 
105.7

Total loans and fees receivable, gross
 
$
14.5

 
$
64.0

 
$
51.1

 
$
129.6

Balance of loans 90 or more days past due and still accruing interest and fees
 
$
—

 
$
1.2

 
$
3.0

 
$
4.2

 
 
 
 
 
 
 
 
 
Balance at December 31, 2013
 
Credit Cards
 
Auto Finance
 
Other Unsecured Lending Products
 
Total
30-59 days past due
 
$
1.6

 
$
5.6

 
$
2.5

 
$
9.7

60-89 days past due
 
1.9

 
1.7

 
2.2

 
5.8

90 or more days past due
 
5.6

 
1.1

 
3.2

 
9.9

Delinquent loans and fees receivable, gross
 
9.1

 
8.4

 
7.9

 
25.4

Current loans and fees receivable, gross
 
12.8

 
55.1

 
41.4

 
109.3

Total loans and fees receivable, gross
 
$
21.9

 
$
63.5

 
$
49.3

 
$
134.7

Balance of loans 90 or more days past due and still accruing interest and fees
 
$
—

 
$
0.1

 
$
3.2

 
$
3.3


Income taxes

We experienced negative effective income tax benefit rates of 6.4% and 13.6% for the three and six months ended June 30, 2014, respectively versus 5.0% and 7.7% for the three and six months ended June 30, 2013, respectively.  Our negative effective income tax benefit rates resulted principally from (1) the effects of legislative changes enacted during 2014 in certain state filing jurisdictions, (2) interest accruals on our liabilities for uncertain tax positions in both the three and six months ended June 30, 2014 and 2013, and (3) changes in valuation allowances against income statement-oriented federal, foreign and state deferred tax assets in both the three and six months ended June 30, 2014 and 2013.
 
We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.  We recognized $0.6 million and $1.2 million of potential interest and penalties associated with these uncertain tax positions during the three and six months ended June 30, 2014, respectively, compared to $0.5 million and $0.9 million during the three and six months ended June 30, 2013, respectively. To the extent interest and penalties are not assessed as a result of resolution of an uncertain tax position, amounts accrued are reduced and reflected as a reduction of income tax expense. We recognized no such reductions in either of the three and six months ended June 30, 2014 and 2013.



9
Table of Contents


Fees and Related Income on Earning Assets

The components (in thousands) of our fees and related income on earning assets are as follows:
 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Fees on credit products
$
6,407

 
$
5,385

 
$
11,794

 
$
9,301

Changes in fair value of loans and fees receivable recorded at fair value
1,975

 
8,342

 
6,667

 
25,065

Changes in fair value of notes payable associated with structured financings recorded at fair value
(1,151
)
 
(970
)
 
(2,308
)
 
(15,575
)
Rental revenue
14,710

 
—

 
36,643

 
—

Other
255

 
(2,538
)
 
2,285

 
(1,766
)
Total fees and related income on earning assets
$
22,196

 
$
10,219

 
$
55,081

 
$
17,025


The above changes in fair value of loans and fees receivable recorded at fair value category exclude the impact of charge offs associated with these receivables which are separately stated on our consolidated statements of operations.  See Note 6, “Fair Values of Assets and Liabilities,” for further discussion of these receivables and their effects on our consolidated statements of operations.

Recent Accounting Pronouncements

In May 2014, the FASB issued ASU No. 2014-09, “Revenue from Contracts with Customers.” ASU 2014-09 establishes a principles-based model under which revenue from a contract is allocated to the distinct performance obligations within the contract and recognized in income as each performance obligation is satisfied. Additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract is also required. ASU 2014-09 is effective for annual and interim reporting periods beginning after December 15, 2016 and early adoption is not permitted. Companies may use either a full retrospective or a modified retrospective approach to adopt ASU 2014-09. The Company has not yet determined the potential effects of the adoption of ASU 2014-09 on its consolidated financial statements.

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 June 30, 2014, and based on our evaluation, other than as disclosed below, we did not identify any recognized or nonrecognized subsequent events that would have required further adjustments to our consolidated financial statements.

On June 23, 2014 we announced a tender offer to purchase up to $100 million aggregate principal amount of our outstanding 5.875% convertible senior notes. Following the expiration of the offer on July 28, 2014, we repurchased $80,000 aggregate principal amount of outstanding 5.875% convertible senior notes for $25,200.

3.
Segment Reporting
 
We operate primarily within one industry consisting of two reportable segments by which we manage our business. Our two reportable segments are:  Credit and Other Investments, and Auto Finance. We renamed our Credit Cards and Other Investments segment as the Credit and Other Investments segment to encompass ancillary investments and product offerings that are largely start-up in nature and do not qualify for separate segment reporting.  All prior period data have been reclassified to this new current period presentation.

As of both June 30, 2014 and December 31, 2013, we did not have a material amount of long-lived assets located outside of the U.S., and only a negligible portion of our 2014 and 2013 revenues were generated outside of the U.S.

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Table of Contents

Summary operating segment information (in thousands) is as follows:
Three months ended June 30, 2014
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
11,492

 
$
5,895

 
$
17,387

Other
 
37

 
—

 
37

Total interest income
 
11,529

 
5,895

 
17,424

Interest expense
 
(5,812
)
 
(346
)
 
(6,158
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
5,717

 
$
5,549

 
$
11,266

Fees and related income on earning assets
 
$
22,155

 
$
41

 
$
22,196

Servicing income
 
$
1,075

 
$
159

 
$
1,234

Depreciation of rental merchandise
 
(15,735
)
 
—

 
(15,735
)
Equity in income of equity-method investees
 
$
841

 
$
—

 
$
841

(Loss) income before income taxes
 
$
(11,661
)
 
$
1,156

 
$
(10,505
)
Income tax expense
 
$
(316
)
 
$
(357
)
 
$
(673
)
Six months ended June 30, 2014
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
25,888

 
$
11,456

 
$
37,344

Other
 
274

 
—

 
274

Total interest income
 
26,162

 
11,456

 
37,618

Interest expense
 
(11,644
)
 
(701
)
 
(12,345
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
14,518

 
$
10,755

 
$
25,273

Fees and related income on earning assets
 
$
54,957

 
$
124

 
$
55,081

Servicing income
 
$
2,130

 
$
344

 
$
2,474

Depreciation of rental merchandise
 
(40,746
)
 
—

 
(40,746
)
Equity in income of equity-method investees
 
$
3,247

 
$
—

 
$
3,247

(Loss) income before income taxes
 
$
(21,724
)
 
$
2,178

 
$
(19,546
)
Income tax expense
 
$
(1,971
)
 
$
(684
)
 
$
(2,655
)
Total assets
 
$
237,163

 
$
62,089

 
$
299,252


11
Table of Contents

Three months ended June 30, 2013
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
10,866

 
$
5,815

 
$
16,681

Other
 
37

 
47

 
84

Total interest income
 
10,903

 
5,862

 
16,765

Interest expense
 
(5,603
)
 
(263
)
 
(5,866
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
5,300

 
$
5,599

 
$
10,899

Fees and related income on earning assets
 
$
12,581

 
$
(2,362
)
 
$
10,219

Servicing income
 
$
2,404

 
$
200

 
$
2,604

Depreciation of rental merchandise
 
—

 
—

 
—

Equity in income of equity-method investees
 
$
957

 
$
—

 
$
957

(Loss) income before income taxes
 
$
(8,794
)
 
$
(534
)
 
$
(9,328
)
Income tax expense
 
$
(101
)
 
$
(361
)
 
$
(462
)


Six months ended June 30, 2013
 
Credit and Other Investments
 
Auto Finance
 
Total
Interest income:
 
 
 
 
 
 
Consumer loans, including past due fees
 
$
24,910

 
$
11,595

 
$
36,505

Other
 
78

 
117

 
195

Total interest income
 
24,988

 
11,712

 
36,700

Interest expense
 
(10,942
)
 
(696
)
 
(11,638
)
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
 
$
14,046

 
$
11,016

 
$
25,062

Fees and related income on earning assets
 
$
19,321

 
$
(2,296
)
 
$
17,025

Servicing income
 
$
4,804

 
$
401

 
$
5,205

Depreciation of rental merchandise
 
—

 
—

 
—

Equity in income of equity-method investees
 
$
5,264

 
$
—

 
$
5,264

(Loss) income before income taxes
 
$
(12,765
)
 
$
896

 
$
(11,869
)
Income tax expense
 
$
(179
)
 
$
(729
)
 
$
(908
)
Total assets
 
$
292,342

 
$
59,088

 
$
351,430


4.
Shareholders' Equity
 
Retired Shares
 
During the three and six months ended June 30, 2014, we repurchased and contemporaneously retired 1,546 and 12,327 shares of our common stock at an aggregate cost of $4,252 and $30,881, respectively, pursuant to the return of stock by holders of equity incentive awards to pay tax withholding obligations. During the three and six months ended June 30, 2013, we repurchased and contemporaneously retired 109,027 and 237,563 shares of our common stock at an aggregate cost of $0.4 million and $0.9 million, respectively, pursuant to open market purchases and the return of stock by holders of equity incentive awards.

We had 1,459,233 loaned shares outstanding at June 30, 2014 (1,672,656 shares as of December 31, 2013), which were originally lent in connection with our November 2005 issuance of convertible senior notes. Lent shares are retired as they are returned to us.



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Table of Contents

5.
Investments in Equity-Method Investees
 
Our equity-method investments outstanding at June 30, 2014 consist of our 66.7% interest in a joint venture formed to purchase a credit card receivable portfolio and our 50.0% interest in a joint venture that was formed to purchase the outstanding notes issued out of the structured financing trust underlying our non-U.S. acquired credit card receivables (the “Non-U.S. Acquired Portfolio”).

In the following tables, we summarize (in thousands) combined balance sheet and results of operations data for our equity-method investees:
 
As of
 
June 30, 2014
 
December 31, 2013
Loans and fees receivable pledged as collateral under structured financings, at fair value
$
28,762

 
$
35,241

Investments in non-marketable debt securities, at fair value
$
30,120

 
$
36,158

Total assets
$
60,831

 
$
74,145

Notes payable associated with structured financings, at fair value
$
4,576

 
$
12,125

Total liabilities
$
4,676

 
$
12,251

Members’ capital
$
56,155

 
$
61,894

 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Net interest income, fees and related income on earning assets
$
1,193

 
$
1,937

 
$
5,309

 
$
10,574

Total other operating income
$
44

 
$
176

 
$
93

 
$
514

Net income
$
896

 
$
1,631

 
$
4,676

 
$
10,045

Net income attributable to our equity investment in investee
$
841

 
$
957

 
$
3,247

 
$
5,264

 
In June 2013, we increased, from 50.0% to 66.7% our overall ownership in the above mentioned joint venture formed in 2004 to purchase a credit card receivables portfolio. We continue to account for this investment using the equity method of accounting due to specific voting and veto rights held by each investor, which do not allow us to control this investee. The additional June 2013 investment in this investee was made at a discount to the fair value of the investee's assets, thereby resulting in a gain of approximately $0.9 million for us in the three months ended June 30, 2013 based on the investee's reporting of substantially all of its assets at their fair values under its fair value option election.

The above tables include our aforementioned 50.0% interest in the joint venture that purchased in March 2011 the outstanding notes issued out of our Non-U.S. Acquired Portfolio structured financing trust.  Separate financial data for this entity are as follows:
 
As of
 
June 30, 2014
 
December 31, 2013
Investments in non-marketable debt securities, at fair value
$
30,120

 
$
36,158

Total assets
$
30,241

 
$
36,770

Total liabilities
$
—

 
$
—

Members’ capital
$
30,241

 
$
36,770



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Table of Contents

 
Three months ended June 30,
 
Six months ended June 30,
 
2014
 
2013
 
2014
 
2013
Net interest income, fees and related income on earning assets
$
(287
)
 
$
(964
)
 
$
1,698

 
$
6,266

Net (loss) income
$
(300
)
 
$
(976
)
 
$
1,674

 
$
6,243

Net (loss) income attributable to our equity investment in investee
$
(150
)
 
$
(487
)
 
$
837

 
$
3,122


As noted in Note 7, “Notes Payable,” notes payable with a fair value of $30.1 million correspond with the $30.1 million investment in non-marketable debt securities, at fair value held by our equity method investee as noted in the above table.

6.
Fair Values of Assets and Liabilities
 
Valuations and Techniques for Assets
 
Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the asset or liability. The table below summarizes (in thousands) by fair value hierarchy the June 30, 2014 and December 31, 2013 fair values and carrying amounts of (1) our assets that are required to be carried at fair value in our consolidated financial statements and (2) our assets not carried at fair value, but for which fair value disclosures are required:
Assets – As of June 30, 2014 (1)
 
Quoted Prices in Active
Markets for Identical Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
 
Carrying Amount of Assets
Loans and fees receivable, net for which it is practicable to estimate fair value
 
$
—

 
$
—

 
$
104,188

 
$
88,990

Loans and fees receivable, net for which it is not practicable to estimate fair value (2)
 
$
—

 
$
—

 
$
—

 
$
6,455

Loans and fees receivable, at fair value
 
$
—

 
$
—

 
$
9,489

 
$
9,489

Loans and fees receivable pledged as collateral, at fair value
 
$
—

 
$
—

 
$
71,688

 
$
71,688


Assets – As of December 31, 2013 (1)
 
Quoted Prices in Active
Markets for Identical Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
 
Carrying Amount of Assets
Loans and fees receivable, net for which it is practicable to estimate fair value
 
$
—

 
$
—

 
$
94,579

 
$
92,924

Loans and fees receivable, net for which it is not practicable to estimate fair value (2)
 
$
—

 
$
—

 
$
—

 
$
4,284

Loans and fees receivable, at fair value
 
$
—

 
$
—

 
$
12,080

 
$
12,080

Loans and fees receivable pledged as collateral, at fair value
 
$
—

 
$
—

 
$
88,132

 
$
88,132

  
(1)
For cash, deposits and other short-term investments (including our investments in rental merchandise), the carrying amount is a reasonable estimate of fair value.
(2)
We do not disclose fair value for this portion of our loans and fees receivable, net because it is not practicable to do so.  These loans and fees receivable consist of a variety of receivables that are largely start-up in nature and for which we have neither sufficient history nor a comparable peer group from which we can calculate fair value.


14
Table of Contents

For those asset classes above that are required to be carried at fair value in our consolidated financial statements, gains and losses associated with fair value changes are detailed on our fees and related income on earning assets table within Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components.” For our loans and fees receivable included in the above table, we assess the fair value of these assets based on our estimate of future cash flows net of servicing costs, and to the extent that such cash flow estimates change from period to period, any such changes are considered to be attributable to changes in instrument-specific credit risk.

For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the six months ended June 30, 2014 and June 30, 2013:
 
Loans and Fees
Receivable, at
Fair Value
 
Loans and Fees
Receivable Pledged as
Collateral under
Structured
Financings, at Fair
Value
 
Total
Balance at January 1, 2014
$
12,080

 
$
88,132

 
$
100,212

Total gains—realized/unrealized:


 


 


Net revaluations of loans and fees receivable pledged as collateral under structured financings, at fair value
—

 
4,867

 
4,867

Net revaluations of loans and fees receivable, at fair value
1,800

 
—

 
1,800

Settlements, net
(4,391
)
 
(22,315
)
 
(26,706
)
Impact of foreign currency translation
—

 
1,004

 
1,004

Net transfers in and/or out of Level 3
—

 
—

 
—

Balance at June 30, 2014
$
9,489

 
$
71,688

 
$
81,177

Balance at January 1, 2013
$
20,378

 
$
133,595

 
$
153,973

Total gains—realized/unrealized:
 

 
 

 
 

Net revaluations of loans and fees receivable pledged as collateral under structured financings, at fair value
—

 
19,789

 
19,789

Net revaluations of loans and fees receivable, at fair value
5,276

 
—

 
5,276

Settlements, net
(9,992
)
 
(43,553
)
 
(53,545
)
Impact of foreign currency translation
—

 
(2,573
)
 
(2,573
)
Net transfers in and/or out of Level 3
—

 
—

 
—

Balance at June 30, 2013
$
15,662

 
$
107,258

 
$
122,920

  
The unrealized gains and losses for assets within the Level 3 category presented in the tables above include changes in fair value that are attributable to both observable and unobservable inputs.
 
Net Revaluation of Loans and Fees Receivable. We record the net revaluation of loans and fees receivable (including those pledged as collateral) in the fees and related income on earning assets category in our consolidated statements of operations, specifically as changes in fair value of loans and fees receivable recorded at fair value.

15
Table of Contents


For Level 3 assets carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) quantitative information about the valuation techniques and the inputs used in the fair value measurement as of June 30, 2014 and December 31, 2013:
Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements
 
Fair Value at June 30, 2014
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)(1)
Loans and fees receivable, at fair value
 
$
9,489

 
Discounted cash flows
 
Gross yield
 
25.1
%
 
 
 

 
 
 
Principal payment rate
 
3.5
%
 
 
 

 
 
 
Expected credit loss rate
 
13.9
%
 
 
 

 
 
 
Servicing rate
 
12.2
%
 
 
 

 
 
 
Discount rate
 
15.9
%
Loans and fees receivable pledged as collateral under structured financings, at fair value
 
$
71,688

 
Discounted cash flows
 
Gross yield
 
11.9% to 27.7% (20.8%)

 
 
 

 
 
 
Principal payment rate
 
1.7% to 3.2% (2.5%)

 
 
 

 
 
 
Expected credit loss rate
 
6.9% to 17.0% (12.6%)

 
 
 

 
 
 
Servicing rate
 
8.5% to 12.4% (10.2%)

 
 
 

 
 
 
Discount rate
 
15.9% to 16.2% (16.0%)


Quantitative Information about Level 3 Fair Value Measurements
Fair Value Measurements
 
Fair Value at December 31, 2013
 
Valuation Technique
 
Unobservable Input
 
Range (Weighted Average)(1)
Loans and fees receivable, at fair value
 
$
12,080

 
Discounted cash flows
 
Gross yield
 
23.7
%
 
 
 

 
 
 
Principal payment rate
 
3.5
%
 
 
 

 
 
 
Expected credit loss rate
 
14.6
%
 
 
 

 
 
 
Servicing rate
 
14.0
%
 
 
 

 
 
 
Discount rate
 
15.9
%
Loans and fees receivable pledged as collateral under structured financings, at fair value
 
$
88,132

 
Discounted cash flows
 
Gross yield
 
17.0% to 27.5% (23.4%)

 
 
 

 
 
 
Principal payment rate
 
1.7% to 3.2% (2.6%)

 
 
 

 
 
 
Expected credit loss rate
 
9.9% to 18.0% (14.9%)

 
 
 

 
 
 
Servicing rate
 
9.4% to 11.8% (10.3%)

 
 
 

 
 
 
Discount rate
 
15.9% to 16.2% (16.0%)


 
(1) Our loans and fees receivable, at fair value consist of a single portfolio with one set of assumptions.  As such, no range is given.


16
Table of Contents

Valuations and Techniques for Liabilities
 
Our assessment of the significance of a particular input to the fair value measurement in its entirety requires judgment and considers factors specific to the liability. The table below summarizes (in thousands) by fair value hierarchy the June 30, 2014 and December 31, 2013 fair values and carrying amounts of (1) our liabilities that are required to be carried at fair value in our consolidated financial statements and (2) our liabilities not carried at fair value, but for which fair value disclosures are required:

Liabilities – As of June 30, 2014
 
Quoted Prices in
Active Markets for
Identical Assets (Level 1)
 
Significant Other
Observable Inputs (Level 2)
 
Significant
Unobservable Inputs (Level 3)
 
Carrying Amount of Liabilities
Liabilities not carried at fair value
 
 
 
 
 
 
 
 
CAR revolving credit facility
 
$
—

 
$
—

 
$
25,500

 
$
25,500

ACC amortizing debt facility
 
$
—

 
$
—

 
$
415

 
$
415

Amortizing debt facilities
 
$
—

 
$
—

 
$
16,044

 
$
16,044

Revolving credit facility
 
$
—

 
$
—

 
$
4,000

 
$
4,000

U.K. credit card accounts revolving credit facility
 
$
—

 
$
—

 
$
7,226

 
$
7,226

5.875% convertible senior notes
 
$
—

 
$
54,392

 
$
—

 
$
95,804

Liabilities carried at fair value
 
 

 
 

 
 

 
 

Interest rate swap underlying CAR facility
 
$
—

 
$
40

 
$
—

 
$
40

Economic sharing arrangement liability
 
$
—

 
$
—

 
$
199

 
$
199

Notes payable associated with structured financings, at fair value
 
$
—

 
$
—

 
$
75,509

 
$
75,509



Liabilities - As of December 31, 2013
 
Quoted Prices in Active Markets for Identical Assets (Level 1)
 
 Significant Other Observable Inputs (Level 2)
 
Significant Unobservable Inputs (Level 3)
 
Carrying Amount of Liabilities
Liabilities not carried at fair value
 
 

 
 

 
 

 
 

CAR revolving credit facility
 
$
—

 
$
—

 
$
22,000

 
$
22,000

ACC amortizing debt facility
 
$
—

 
$
—

 
$
928

 
$
928

Amortizing debt facilities
 
$
—

 
$
—

 
$
21,411

 
$
21,411

Revolving credit facility
 
$
—

 
$
—

 
$
4,000

 
$
4,000

U.K. credit card accounts revolving credit facility
 
$
—

 
$
—

 
$
8,245

 
$
8,245

5.875% convertible senior notes
 
$
—

 
$
57,007

 
$
—

 
$
95,484

Liabilities carried at fair value
 
 

 
 

 
 

 
 

Interest rate swap underlying CAR facility
 
$
—

 
$
97

 
$
—

 
$
97

Economic sharing arrangement liability
 
$
—

 
$
—

 
$
354

 
$
354

Notes payable associated with structured financings, at fair value
 
$
—

 
$
—

 
$
94,523

 
$
94,523

 
Gains and losses associated with fair value changes for our notes payable associated with structured financing liabilities that are carried at fair value are detailed on our fees and related income on earning assets table within Note 2, “Significant Accounting Policies and Consolidated Financial Statement Components.” See Note 7, “Notes Payable,” for further discussion on our notes payable.  


17
Table of Contents

For our material Level 3 liabilities carried at fair value measured on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the six months ended June 30, 2014 and 2013.
 
Notes Payable Associated with
Structured Financings, at Fair Value
 
2014
 
2013
Beginning balance, January 1
$
94,523

 
$
140,127

Transfers in due to consolidation of equity-method investees
—

 
—

Total (gains) losses—realized/unrealized:
 

 
 

Net revaluations of notes payable associated with structured financings, at fair value
2,308

 
15,575

Repayments on outstanding notes payable, net
(22,425
)
 
(39,388
)
Impact of foreign currency translation
1,103

 
(2,701
)
Net transfers in and/or out of Level 3
—