Attached files

file filename
EX-31.1 - CERT PER 302 CEO - Atlanticus Holdings Corpex311.htm
EX-31.2 - CERT PER 302 CFO - Atlanticus Holdings Corpex312.htm
EX-10.1 - OUTSIDE DIRECTOR COMPENSATION PACKAGE - Atlanticus Holdings Corpex101.htm
EX-32.1 - CERT PER 906 CEO AND CFO - Atlanticus Holdings Corpex321.htm



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

 
------------------------------------------------------
 
FORM 10-Q
 
For the quarterly period ended September 30, 2010
 
 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 Holdings Corporation is not yet required to file Interactive Data Files.
 
CompuCredit is a smaller reporting company and is not a shell company.
 
As of October 31, 2010, 35,754,189 shares of common stock, no par value, of the registrant were outstanding. (This excludes 2,252,388 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)
     
 
Condensed Consolidated Balance Sheets
    1  
 
Condensed Consolidated Statements of Operations
    2  
 
Condensed Consolidated Statement of Equity
    3  
 
Condensed Consolidated Statements of Comprehensive Loss
    4  
 
Condensed Consolidated Statements of Cash Flows
    5  
 
Notes to Condensed Consolidated Financial Statements
    6  
Item 2.
Management’s Discussion and Analysis of Financial Condition and Results of Operations
    37  
Item 3.
Quantitative and Qualitative Disclosures About Market Risk
    71  
Item 4.
Controls and Procedures
    71  
   
PART II. OTHER INFORMATION
 
           
Item 1.
Legal Proceedings
    72  
Item 1A.
Risk Factors
    72  
Item 5.
Other Information
    92  
Item 6.
Exhibits
    92  
 
Signatures
    93  




 
 

 

CompuCredit Holdings Corporation and Subsidiaries
Condensed Consolidated Balance Sheets
(Dollars in thousands)
 
   
September 30, 2010
   
December 31, 2009
 
     (Unaudited)        
Assets
           
Cash and cash equivalents (including restricted cash of $39,672 at September 30, 2010 and $5,636 at December 31, 2009)
  $ 128,001     $ 190,655  
Securitized earning assets
          36,514  
Loans and fees receivable:
               
Loans and fees receivable, net (of $8,707 and $7,030 in deferred revenue and $16,823 and $15,030 in allowances for uncollectible loans and fees receivable at September 30, 2010 and December 31, 2009, respectively)
    79,069       70,928  
Loans and fees receivable pledged as collateral under structured financings, net (of $19,227 and $33,864 in deferred revenue and $30,799 and $38,414 in allowances for uncollectible loans and fees receivable at September 30, 2010 and December 31, 2009, respectively)
    139,146       214,439  
Loans and fees receivable, at fair value
    12,227       42,299  
Loans and fees receivable pledged as collateral under structured financings, at fair value
    457,486        
Investments in previously charged-off receivables
    30,654       29,669  
Investments in securities
    58,653       2,629  
Deferred costs, net
    3,358       4,432  
Property at cost, net of depreciation
    23,397       32,263  
Investments in equity-method investees
    8,099       13,517  
Intangibles, net
    2,495       2,816  
Goodwill
    43,245       43,422  
Income tax asset, net
          32,695  
Prepaid expenses and other assets
    26,097       32,554  
Total assets
  $ 1,011,927     $ 748,832  
Liabilities
               
Accounts payable and accrued expenses
  $ 62,594     $ 67,295  
Notes payable associated with structured financings, at face value
    113,496       164,368  
Notes payable associated with structured financings, at fair value
    451,141        
Convertible senior notes (Note 10)
    232,562       307,573  
Deferred revenue 
    1,529       1,875  
Income tax liability
    63,804        
Total liabilities
    925,126       541,111  
                 
Commitments and contingencies (Note 11)
               
                 
Equity
               
Common stock, no par value, 150,000,000 shares authorized: 46,250,658 shares issued and 38,009,115 shares outstanding at September 30, 2010 (including 2,252,388 loaned shares to be returned); and 58,596,545 shares issued and 49,970,111 shares outstanding at December 31, 2009 (including 2,252,388 loaned shares to be returned)
           
Additional paid-in capital
    406,626       500,064  
Treasury stock, at cost, 8,241,543 and 8,626,434 shares at September 30, 2010 and December 31, 2009, respectively
    (209,736 )     (219,714 )
Accumulated other comprehensive loss
    (3,901 )     (3,293 )
Retained deficit
    (123,504 )     (87,740 )
Total shareholders’ equity (Note 2)
    69,485       189,317  
Noncontrolling interests (Note 2)
    17,316       18,404  
Total equity
    86,801       207,721  
Total liabilities and equity (Note 2)
  $ 1,011,927     $ 748,832  
 
See accompanying notes.

 
1

 

CompuCredit Holdings Corporation and Subsidiaries
Condensed 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,
 
   
2010
   
2009
   
2010
   
2009
 
Interest income:
                       
Consumer loans, including past due fees
  $ 60,609     $ 17,987     $ 213,976     $ 56,755  
Other
    451       325       820       906  
Total interest income
    61,060       18,312       214,796       57,661  
Interest expense
    (11,599 )     (9,465 )     (45,434 )     (29,675 )
Net interest income before fees and related income on earning assets and provision for losses on loans and fees receivable
    49,461       8,847       169,362       27,986  
Fees and related income on earning assets
    112,605       58,890       394,098       142,462  
Losses upon charge off of loans and fees receivable recorded at fair value
    (86,971 )           (391,615 )      
Provision for losses on loans and fees receivable recorded at net realizable value
    (17,522 )     (16,712 )     (53,505 )     (47,520 )
Net interest income, fees and related income on earning assets
    57,573       51,025       118,340       122,928  
Other operating income (loss):
                               
Loss on securitized earning assets
          (216,416 )           (530,130 )
Servicing income
    1,621       21,999       5,447       92,873  
Ancillary and interchange revenues
    2,728       4,028       8,722       15,255  
Gain on repurchase of convertible senior notes
    5,681             28,374       160  
Gain on buy-out of equity-method investee members
                      20,990  
Equity in loss of equity-method investees
    (1,372 )     (2,170 )     (11,043 )     (12,185 )
Total other operating income (loss)
    8,658       (192,559 )     31,500       (413,037 )
Other operating expense:
                               
Salaries and benefits
    7,568       12,182       26,928       40,257  
Card and loan servicing
    31,245       55,930       107,481       166,680  
Marketing and solicitation
    6,545       4,418       17,688       12,472  
Depreciation
    3,371       4,520       10,487       16,161  
Goodwill impairment
                      20,000  
Other
    15,577       22,840       54,970       73,343  
Total other operating expense
    64,306       99,890       217,554       328,913  
Income (loss) from continuing operations before income taxes
    1,925       (241,424 )     (67,714 )     (619,022 )
Income tax (expense) benefit
    (600 )     2,791       (1,700 )     123,381  
Income (loss) from continuing operations
    1,325       (238,633 )     (69,414 )     (495,641 )
Discontinued operations:
                               
Loss on discontinued operations before income taxes
                      (6,599 )
Income tax benefit
                      2,310  
Loss on discontinued operations
                      (4,289 )
Net income (loss)
    1,325       (238,633 )     (69,414 )     (499,930 )
Net loss (income) attributable to noncontrolling interests
    436       (778 )     (565 )     13,658  
Net income (loss) attributable to controlling interests
  $ 1,761     $ (239,411 )   $ (69,979 )   $ (486,272 )
Income (loss) from continuing operations attributable to controlling interests per common share—basic
  $ 0.05     $ (5.02 )   $ (1.70 )   $ (10.11 )
Income (loss) from continuing operations attributable to controlling interests per common share—diluted
  $ 0.05     $ (5.02 )   $ (1.70 )   $ (10.11 )
Loss on discontinued operations attributable to controlling interests per common share—basic
  $     $     $     $ (0.09 )
Loss on discontinued operations attributable to controlling interests per common share—diluted
  $     $     $     $ (0.09 )
Net income (loss) attributable to controlling interests per common share—basic
  $ 0.05     $ (5.02 )   $ (1.70 )   $ (10.20 )
Net income (loss) attributable to controlling interests per common share—diluted
  $ 0.05     $ (5.02 )   $ (1.70 )   $ (10.20 )
 
See accompanying notes.

 
2

 

CompuCredit Holdings Corporation and Subsidiaries
Condensed Consolidated Statements of Shareholders’ Equity
For the Nine Months Ended September 30, 2010 (Unaudited)
(Dollars in thousands)

   
Common Stock
                                           
   
Shares Issued
   
Amount
   
Additional Paid-In Capital
   
Treasury Stock
   
Accumulated Other Comprehensive Loss
   
Retained
Deficit
   
Noncontrolling Interests
   
Comprehensive Loss
   
Total Equity
 
Balance at December 31, 2009
    58,596,545     $     $ 500,064     $ (219,714 )   $ (3,293 )   $ (87,740 )   $ 18,404           $ 207,721  
Cumulative effect of accounting pronouncement adoption (see Note 2)
                                  34,449       3,231             37,680  
Retirement of shares
    (12,180,604 )             (85,264 )                                   (85,264 )
Use of treasury stock for stock-based compensation plans
    (303,216 )           (10,368 )     10,602             (234 )                  
Issuance of restricted stock, net of forfeiture
    137,933                                                  
Amortization of deferred stock-based compensation costs
                7,055                                     7,055  
Purchase of treasury stock
                      (624 )                             (624 )
Tax effects of stock-based compensation plans
                (1,443 )                                   (1,443 )
Repurchase of noncontrolling interests
                (3,418 )                       (4,119 )           (7,537 )
Distributions to owners of noncontrolling interests
                                        (765 )           (765 )
Net (loss) income
                                  (69,979 )     565     $ (69,414 )     (69,414 )
Foreign currency translation adjustment, net of tax
                            (608 )                 (608 )     (608 )
Comprehensive loss
                                            $ (70,022 )      
Balance at September 30, 2010
    46,250,658     $     $ 406,626     $ (209,736 )   $ (3,901 )   $ (123,504 )   $ 17,316             $ 86,801  
 
 
See accompanying notes.

 
3

 

CompuCredit Holdings Corporation and Subsidiaries
Condensed Consolidated Statements of Comprehensive Income (Loss) (Unaudited)
(Dollars in thousands)
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net income (loss)
  $ 1,325     $ (238,633 )   $ (69,414 )   $ (499,930 )
Other comprehensive income (loss):
                               
Foreign currency translation adjustment
    3,069       (2,484 )     (609 )     10,763  
Income tax (expense) benefit related to other comprehensive loss
          1       1       (11,906 )
Comprehensive income (loss)
    4,394       (241,116 )     (70,022 )     (501,073 )
Comprehensive loss (income) attributable to noncontrolling interests
    436       (778 )     (565 )     13,660  
Comprehensive income (loss) attributable to controlling interests
  $ 4,830     $ (241,894 )   $ (70,587 )   $ (487,413 )
 
See accompanying notes.
 

 
4

 

CompuCredit Holdings Corporation and Subsidiaries
Condensed Consolidated Statements of Cash Flows (Unaudited)
(Dollars in thousands)
   
For the Nine Months Ended September 30,
 
   
2010
   
2009
 
Operating activities
           
Net loss
  $ (69,414 )   $ (499,930 )
Adjustments to reconcile net loss to net cash provided by operating activities:
               
Depreciation expense
    10,487       16,202  
Impairment of goodwill
          23,483  
Losses upon charge off of loans and fees receivable recorded at fair value
    391,615        
Provision for losses on loans and fees receivable
    53,505       48,212  
Amortization and impairment of intangibles
    321       1,518  
Accretion of deferred revenue
    (346 )     (21,500 )
Accretion of discount on convertible senior notes
    7,022       7,572  
Stock-based compensation expense
    7,055       6,738  
Retained interests adjustments, net
          960,764  
Unrealized gain on loans and fees receivable and underlying notes payable held at fair value
    (217,882 )      
Unrealized gain on trading securities
    (301 )     (309 )
Gain on repurchase of convertible senior notes
    (28,374 )     (160 )
Loss on equity-method investments
    11,043        
Gain on buy-out of equity-method investee members
          (20,990 )
Changes in assets and liabilities, exclusive of business acquisitions:
               
(Increase) decrease in uncollected fees on loans receivable
    (5,594 )     6,870  
Decrease (increase) in JRAS auto loans receivable
    31,168       (17,575 )
Decrease in deferred costs
    684       958  
Increase (decrease) in income tax liability
    95,222       (126,303 )
Decrease in prepaid expenses
    6,463       6,177  
Decrease in accounts payable and accrued expenses
    (6,649 )     (34,721 )
Other
    8,291       4,661  
Net cash provided by operating activities
    294,316       361,667  
Investing activities
               
Purchase of third-party interest in equity-method investee
          (19,542 )
(Increase) decrease in restricted cash
    (19,954 )     16,274  
Proceeds from equity-method investees
    5,145       53,483  
Investments in securitized earning assets
          (448,544 )
Proceeds from securitized earning assets
          209,695  
Investments in earning assets
    (786,663 )     (668,598 )
Proceeds from earning assets
    926,704       684,158  
Acquisitions of assets
          (621
Purchases and development of property, net of disposals
    (1,667 )     (2,444 )
Net cash provided by (used in) investing activities
    123,565       (176,139 )
Financing activities
               
Noncontrolling interests distributions, net
    (765 )     (774 )
Purchases of treasury stock
    (624 )     (119 )
Purchases of noncontrolling interests
    (7,537 )     (1,096
Purchase of outstanding stock subject to tender offer
    (85,264 )      
Proceeds from borrowings
    8,143       52,897  
Repayments of borrowings
    (428,250 )     (195,755 )
Net cash used in financing activities
    (514,297 )     (144,847 )
Effect of exchange rate changes on cash
    (274 )     760  
Net (decrease) increase in unrestricted cash
    (96,690 )     41,441  
Unrestricted cash and cash equivalents at beginning of period
    185,019       74,515  
Unrestricted cash and cash equivalents at end of period
  $ 88,329     $ 115,956  
Supplemental cash flow information
               
Effect of adoption of accounting pronouncements on restricted cash
  $ (14,082 )   $  
Cash paid for interest
  $ 39,911     $ 23,284  
Net cash income tax (refunds) payments
  $ (93,456 )   $ 131  
Supplemental non-cash information
               
Notes payable associated with capital leases
  $ 684     $ 1,011  
Issuance of stock options and restricted stock
  $ 1,127     $ 1,129  
See accompanying notes.

 
5

 

 CompuCredit Holdings Corporation and Subsidiaries
Notes to Condensed Consolidated Financial Statements
September 30, 2010
 
1.  
Basis of Presentation
 
We have prepared our condensed 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. In the opinion of management, all normal recurring adjustments considered necessary to fairly state the results for the interim periods presented have been included.
 
The preparation of condensed consolidated financial statements in conformity with GAAP requires management 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 condensed 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 condensed consolidated balance sheet at September 30, 2010, as well as the reported fair value of our securitized earning assets on our consolidated balance sheet at December 31, 2009; 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 condensed consolidated statement of operations for the three and nine months ended September 30, 2010, as well as our reported loss on retained interests in credit card receivables securitized which is a component of loss on securitized earning assets on our condensed consolidated statement of operations for the three and nine months ended September 30, 2009. 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 condensed consolidated balance sheets, as well as on the provision for losses on loans and fees receivable within our condensed consolidated statements of operations. Operating results for the three and nine months ended September 30, 2010 are not indicative of what our results will be for the year ending December 31, 2010.
 
We have reclassified certain amounts in our prior period condensed consolidated financial statements to conform to current period presentation, and we have eliminated all significant intercompany balances and transactions for financial reporting purposes.
 
In connection with our consideration of a potential spin-off of our U.S. and 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 May 28, 2010.  The spin-off remains subject to a number of conditions, including, among others:
 
·  
a recommendation by our management to our Board of Directors to approve the spin-off;
 
·  
approval from our Board of Directors;
 
·  
the SEC’s declaration of Purpose Financial’s registration statement on Form 10 to be effective;
 
·  
our and Purpose Financial’s receipt of any required permits, registrations and consents required under the securities or blue sky laws of states or other political subdivisions of the U.S. or of foreign jurisdictions in connection with the spin-off;
 
·  
the continued effectiveness of the private letter ruling that we received from the Internal Revenue Service;
 
·  
NASDAQ’s approval for listing of Purpose Financial’s common stock, subject to official notice of issuance;
 

 
6

 

 
·  
the transfer of our micro-loan businesses, and the associated licenses and registrations relating to these businesses, to Purpose Financial;
 
·  
the execution by the parties of separation and distribution agreements, transition services agreements, services agreements, employee matters agreements, tax sharing agreements, sublease and other appropriate agreements; and
 
·  
the lack of any effective order, injunction or decree issued by any court of competent jurisdiction or other legal restraint or prohibition preventing consummation of the spin-off or any of the transactions related thereto, including the transfers of assets and liabilities contemplated by the separation and distribution agreement.
 
 
We cannot assure you that any or all of these conditions will be met.
 
 
2.
Significant Accounting Policies and Condensed Consolidated Financial Statement Components
 
 
The following is a summary of significant accounting policies we follow in preparing our condensed consolidated financial statements, as well as a description of significant components of our condensed consolidated financial statements.
 
Restricted Cash
 
Restricted cash includes (1) certain collections on receivables within our Credit Cards segment (only as of the September 30, 2010 condensed consolidated balance sheet date pursuant to the accounting rules changes described in “Asset Securitization” below) and Auto Finance segment, the cash balances of which are required to be distributed to note holders under our debt facilities, and (2) cash collateral balances underlying standby letters of credit that have been issued in favor of certain regulators in connection with our retail micro-loan activities.
 
 Asset Securitization
 
At December 31, 2009, most of our credit card receivables were held by off-balance-sheet securitization trusts.  In June 2009, however, the Financial Accounting Standards Board (the “FASB”) issued new accounting rules that resulted in the consolidation of our securitization trusts onto our consolidated balance sheet effective as of January 1, 2010. As a result of these new accounting rules, cash and credit card receivables held by our securitization trusts and debt issued from those entities are presented as assets and liabilities on our condensed consolidated balance sheet as of September 30, 2010. Throughout the notes to our condensed consolidated financial statements, we use the term “securitizations” to refer to pre-2010 activities of our then-categorized off-balance-sheet securitization trusts (qualifying special purposes entities, or “QSPEs”). In contrast, we use the term “structured financings” to refer to non-recourse, asset-backed, on-balance-sheet debt financings either undertaken prior to 2010 or as accounted for under new accounting guidance effective as of January 1, 2010.
 
Loans and Fees Receivable
 
Our loans and fees receivable include:  (1) loans and fees receivable, at fair value; (2) loans and fees receivable pledged as collateral under structured financings, at fair value; (3) loans and fees receivable, net; and (4) loans and fees receivable pledged as collateral under structured financings, net;.
 
Loans and Fees Receivable, at Fair Value.  Our loans and fees receivable, at fair value, represent our de-securitized and reconsolidated lower-tier credit card receivables that are valued at fair value in our condensed consolidated financial statements, while our loans and fees receivable pledged as collateral under structured financings, at fair value, represent the receivables underlying our remaining credit card securitization trusts that were consolidated pursuant to accounting rules changes on January 1, 2010. Further details concerning our loans and fees receivable held at fair value are presented within Note 9, “Fair Value of Assets and Liabilities.”
 
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 retail and Internet micro-loan activities, our auto finance business and credit card accounts opened under our Investment in Previously Charged-off Receivables

 
7

 

 
segment’s balance transfer program.  This latter category of balance transfer program receivables is included as a component of our Credit Card segment data and aggregated $14.5 million (net of allowances for uncollectible loans and fees receivable and deferred revenue) or 2.1% of our consolidated loans and fees receivable (net or at fair value) as of September 30, 2010.
 
As applicable, we show loans and fees receivable net of both an allowance for uncollectible loans and fees receivable and unearned fees (or “deferred revenue”) in accordance with applicable accounting rules. We also divide our loans and fees receivable, net, into two separate categories on our condensed consolidated balance sheet:  (1) those that are unencumbered by asset-backed debt; and (2) those that are pledged as collateral for non-recourse asset-backed debt facilities.
 
The components of our aggregated categories of loans and fees receivable, net (in millions) as of the date of each of our condensed consolidated balance sheets are as follows:
 
   
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, 2010, the weighted average remaining accretion period for the $27.9 million of deferred revenue reflected in the above tables is 16.6 months.
 
A roll-forward of our allowance for uncollectible loans and fees receivable, net (in millions) is as follows:
 
   
For the Three Months Ended
September 30,
   
For the Nine Months Ended
September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Balance at beginning of period
  $ (48.5 )   $ (56.7 )   $ (53.4 )   $ (55.8 )
Provision for losses on loans and fees receivable recorded at net realizable value
    (17.5 )     (16.7 )     (53.5 )     (47.5 )
Charge offs
    20.4       15.0       66.6       47.8  
Recoveries
    (2.0 )     (0.9 )     (7.3 )     (3.8 )
Balance at end of period
  $ (47.6 )   $ (59.3 )   $ (47.6 )   $ (59.3 )
 

 

 
8

 

 
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,
 
   
2010
   
2009
   
2010
   
2009
 
Unrecovered balance at beginning of period
  $ 33,297     $ 59,271     $ 29,669     $ 47,676  
Acquisitions of defaulted accounts
    5,839       8,776       22,409       40,427  
Cash collections
    (17,158 )     (54,668 )     (45,858 )     (82,889 )
Cost-recovery method income recognized on defaulted accounts (included as a component of fees and related income on earning assets on our condensed consolidated statements of operations)
    8,676       16,475       24,434       24,640  
Unrecovered balance at end of period
  $ 30,654     $ 29,854     $ 30,654     $ 29,854  
Estimated remaining collections (“ERC”) (1)
  $ 98,829     $ 86,946     $ 98,829     $ 86,946  
 
(1)  
We anticipate collecting 44.7% of the ERC of the existing accounts over the next 12 months, with the balance to be collected thereafter.
 
We estimate the life of each pool of previously charged-off receivables acquired by us generally to be between 24 and 36 months for normal delinquency charged-off accounts and approximately 60 months for Chapter 13 Bankruptcy-related debt.
 
Previously charged-off receivables held as of September 30, 2010 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, 2010, $10.4 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 condensed 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 1.0% of our consolidated total assets.
 
For balance transfer program accounts, we include receivables in the above table until such time that the accounts qualify for a credit card issuance under the program.  Under our Investments in Previously Charged-Off Receivables segment’s cost recovery method, there is no remaining basis in such balance transfer program accounts at the time of card issuance.  Upon card issuance, all further activity with respect the accounts (e.g. cardholder purchases, payments, receivables levels, cash flows, finance charge and fee income and charge-off activities) is reported within our Credit Cards segment, with the exception of any cash flows representing further repayment of the acquired contractual charged-off balance, which continue to be reported as cash collections and cost-recovery method income in the above table.
 
Comparisons of data as of and for the three months ended September 30, 2010 with data as of and for the three months ended September 30, 2009 are affected by a 2005 forward flow contract into which our Investment in Previously Charged-off Receivables segment had entered to sell previously charged-off receivables to Encore Capital Group, Inc. (“Encore”)—a forward flow contract that subsequently terminated in the third quarter of 2009. In that quarter, we resolved disputes that had arisen with Encore under the contract, thereby resulting in the recognition of $21.2 million in then-deferred revenue in the third quarter of 2009 and a corresponding release of $8.7 million in escrowed restricted cash—both in exchange for Encore’s purchase of previously charged-off credit card receivables that had been offered to Encore throughout the period covered by the forward flow agreement (and

 
9

 

 
that had built up on our consolidated balance sheet throughout the latter half of 2008 and through September 2009) and Encore’s resumed offering of volumes of previously charged-off receivables it has purchased for placement under our balance transfer program. Inclusive of all liabilities extinguished and amounts received and paid in connection with our settlement with Encore, the settlement resulted in a net pre-tax gain of $11.0 million on our consolidated statement of operations for three months ended September 30, 2009.
 
Investments in Securities
 
We periodically invest in debt and equity securities, some of which we classify as trading securities and with respect to which we include realized and unrealized gains and losses in earnings, and some of which we classify as held to maturity or available for sale.  Additionally, we occasionally have received distributions of debt securities from our equity-method investees ($0.7 million held at September 30, 2010), and we have classified such distributed debt securities as held to maturity. As appropriate, we may invest in securities we believe provide returns in excess of those realized in our cash accounts.  Such was the case in the first quarter of 2010 during which we invested $75.0 million in publicly traded bond funds whose investment objectives are to invest in highly rated, investment-grade securities.  The carrying values (in thousands) of our investments in debt and equity securities are as follows:
 
   
As of
 
   
September 30, 2010
   
December 31, 2009
 
Held to maturity:
           
Investments in debt securities
  $ 714     $ 2,060  
Available for sale:
               
Investments in equity securities
    1,672        
Trading:
               
Investments in debt securities
    55,695        
Investments in equity securities
    572       569  
Total investments in debt and equity securities
  $ 58,653     $ 2,629  
 
Prepaid Expenses and Other Assets
 
Prepaid expenses and other assets include amounts paid to third parties for marketing and other services. Also included are (1) various deposits (totaling $1.1 million and $6.2 million as of September 30, 2010 and December 31, 2009, respectively) required to be maintained with our third-party issuing bank partners and retail electronic payment network providers (including $0.4 million and $4.9 million as of September 30, 2010 and December 31, 2009, respectively, associated with our ongoing servicing efforts in the U.K.), (2) vehicle inventory ($0.6 million and $4.1 million as of September 30, 2010 and December 31, 2009, respectively) held by our buy-here, pay-here auto operations that we expense as cost of goods sold (within fees and related income on earning assets on our condensed consolidated statements of operations) as we earn associated sales revenues, and (3) and deposits of $7.7 million and $10.0 million at September 30, 2010 and December 31, 2009, respectively, held at a former third-party issuing bank partner (Columbus Bank and Trust Company), the September 30, 2010 balance of which is to be returned to us upon notification by the Federal Deposit Insurance Corporation (the “FDIC”) to Columbus Bank and Trust Company of the FDIC’s concurrence with our computations of credits and refunds that we provided to credit card customers pursuant to our December 2008 settlement of litigation with the FDIC and the Federal Trade Commission (the “FTC”). Having fully complied with the FDIC and FTC restitution requirements through our provided cardholder credits and refunds, no contingencies to the release of the $7.7 million deposit exist beyond the communication by the FDIC to Columbus Bank and Trust Company of the FDIC’s concurrence with our provided restitution credits and refunds.

 
10

 
Deferred Costs
 
The principal components of our deferred costs historically have been unamortized costs associated with our (1) issuances of convertible senior notes and other debt facilities and (2) receivables origination activities. On January 1, 2009, we were required to adopt a GAAP pronouncement that resulted in the reclassification of $4.8 million of deferred loan costs associated with our convertible senior notes as a reduction to equity. See Note 10, “Convertible Senior Notes and Notes Payable,” for additional effects of our adoption of this pronouncement.
 
Income Taxes
 
We conduct business globally, and as a result, one or more of our subsidiaries files U.S. federal, state and/or foreign income tax returns. In the normal course of business we are subject to examination by taxing authorities throughout the world, including such major jurisdictions as the U.S., the U.K., and the Netherlands. With a few exceptions, we are no longer subject to U.S. federal, state, local, or foreign income tax examinations for years prior to 2007. Currently, we are under audit by various jurisdictions for various years, including by the Internal Revenue Service for the 2007 and 2008 tax years. Although the audits have not been concluded, we do not expect any changes to our reported tax positions in those years that would have a material effect on our consolidated financial statements.
 
We recognize potential accrued interest and penalties related to unrecognized tax benefits in income tax expense.  We recognized $0.6 million and $1.8 million in potential interest and penalties associated with uncertain tax positions during the three and nine months ended September 30, 2010, respectively, compared to $0.6 million and $2.0 million during the three and nine months ended September 30 2009, 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 a reduction in the amount of $2.0 million in the three months ended September 30, 2010 related to the closing of statutes of limitations.
 
We generally do not provide for income taxes on the undistributed earnings of our U.K. Internet micro-loan subsidiaries because we intend to reinvest these earnings indefinitely to finance foreign activities.  Because this treatment is premised on our future plans and expectations of future events, the possibility exists that amounts we declare as indefinitely reinvested offshore may ultimately be repatriated.  For instance, the actual cash needs of our U.S. entities may exceed our current expectations, or the actual cash needs of our foreign entities may be less than our current expectations.  These additional foreign earnings could be subject to additional tax if remitted, or deemed remitted, as a dividend, in the year in which we determine that amounts are no longer intended to be indefinitely reinvested offshore. Such a deemed remittance occurred in the three and nine months ended September 30, 2010 due to expiration of a long-standing U.S. income tax deferral provision which historically had shielded active finance company income earned in foreign jurisdictions from U.S. income tax. Although the active finance company income provisions expired for taxable years beginning on or after January 1, 2010, the U.S. Congress currently is working on legislation that would retroactively extend the active finance company income exception and permit retroactive and ongoing deferral of such income. Our specific foreign income source that previously had been protected from U.S. income taxation by reason of the active finance company income exception is the income earned by our U.K. Internet micro-loan operations. Although we cannot and did not assume enactment of laws to extend the active finance company income exception, the expiration of the exception had no effect on our effective tax rate during the three and nine months ended September 30, 2010 due to the effects of valuation allowances that we maintain against net deferred tax assets.

Our overall effective tax rates (computed considering results for both continuing and discontinued operations before income taxes in the aggregate) were 31.2% and -2.5% for three and nine months ended September 30, 2010, respectively, compared to 1.2% and 20.1% for the three and nine months ended September 30, 2009, respectively.  The variations in our effective tax rates between these periods are substantially related to (1)  fluctuations in our pre-tax earnings and losses, (2)  the U.K. tax expense exceeding the recognized tax benefits on our U.S. losses, after valuation allowances and (3)  interest accruals (net of releases) on our unrecognized tax benefits.  The effects of changes in valuation allowances provided against income statement-oriented U.S. federal, foreign and state deferred tax assets were increases of $5.2 million and $23.2 million in valuation allowances,

 
11

 

respectively, during the three and nine months ended September 30, 2010, versus corresponding increases of $85.1 million and $95.8 million in valuation allowances during the three and nine months ended September 30, 2009, respectively.
 
Fees and Related Income on Earning Assets
 
Fees and related income on earning assets primarily include:  (1) lending fees associated with our retail and Internet micro-loan activities; (2) fees associated with our credit card receivables during periods in which we hold them on balance sheet; (3) changes in the fair value of loans and fees receivable recorded at fair value; (4) changes in fair value of notes payable associated with structured financings recorded at fair value; (5) income on our investments in previously charged-off receivables; (6) gross profits and losses from auto sales within our Auto Finance segment; (7) gains associated with our investments in securities; and (8) gains realized in the three months ended September 30, 2010 associated with our settlement of litigation with Columbus Bank and Trust, one of our former third-party credit card issuing bank partners, and its parent corporation Synovus Financial Corporation (collectively, “CB&T”) as further discussed in Note 11, “Commitments and Contingencies.”
 
The components (in thousands) of our fees and related income on earning assets are as follows:
 

   
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
                     
 
 
Retail micro-loan fees
  $ 18,490     $ 19,393     $ 53,756     $ 52,635  
Internet micro-loan fees
    25,910       18,636       65,965       45,528  
Fees on credit card receivables held on balance sheet
    5,002             20,861        
Changes in fair value of loans and fees receivable recorded at fair value(1)
    61,183             186,846        
Changes in fair value of notes payable associated with structured financings recorded at fair value
    (19,158 )           31,036        
Income on investments in previously charged-off receivables
    8,676       16,475       24,434       24,640  
Gross (loss) profit on auto sales
    (478 )     4,274       (2,127 )     17,883  
Gains on investments in securities
    153       146       301       309  
Gains upon litigation settlement with former third-party issuing bank partner
    12,150             12,150        
Other
    677       (34 )     876       1,467  
Total fees and related income on earning assets
  $ 112,605     $ 58,890     $ 394,098     $ 142,462  
 
(1)  
The above changes in fair value of loans and fees receivable recorded at fair value excludes the impact of charge offs associated with these receivables which are separately stated on our condensed consolidated statements of operations. See Note 9, “Fair Values of Assets and Liabilities,” for further discussion of these receivables and their effects on our condensed consolidated statements of operations.

 
12

 

Loss on Securitized Earning Assets
 
Loss on securitized earning assets is the net of (1) securitization gains, (2) loss on retained interests in credit card receivables securitized, and (3) returned-check, cash advance and certain other fees associated with our securitized credit card receivables, all of which are detailed (in thousands) in the following table. This category on our condensed consolidated statement of operations is not applicable in 2010 given our consolidation of all of our former off-balance-sheet securitization trusts as required by accounting rules changes effective at the beginning of 2010.
 
   
For the Three Months Ended
September 30, 2009
   
For the Nine Months Ended
September 30, 2009
 
Securitization gains
  $ 113,961     $ 113,961  
Loss on retained interests in credit card receivables securitized
    (334,035 )     (657,869 )
Fees on securitized receivables
     3,658       13,778  
Total loss on securitized earning assets
  $ (216,416 )   $ (530,130 )
 
Recent Accounting Pronouncements
 
In June 2010, the FASB issued new disclosure rules related to the allowance for credit losses and credit quality of financing receivables.  The new requirements are intended to require an entity to provide a greater level of disaggregated information about the credit quality of its financing receivables and its allowance for credit losses, including a roll-forward of activity in the allowance and disclosure about credit quality indicators, past due information, and modifications of its financing receivables.  The new disclosure requirements are effective for interim and annual reporting periods ending on or after December 15, 2010.
 
In January 2010, the FASB issued new rules concerning fair value measurement disclosures.  The new disclosures require that we discuss the valuation techniques and inputs used to develop our fair value measurements and the effect that unobservable inputs may have on those measurements. Additional disclosure enhancements include disclosures of transfers in and/or out of Level 1, 2 or 3 and the reasons for those transfers.  The enhanced disclosures are effective for interim and annual reporting periods beginning after December 15, 2009, except for the separate disclosures about purchases, sales, issuances, and settlements relating to Level 3 measurements, which are effective for interim and annual reporting periods beginning after December 15, 2010.  The adoption of these new disclosure requirements that are effective for us in 2010 are reflected in our accompanying notes to the condensed consolidated financial statements.
 
In October 2009, the FASB issued new rules providing that at the date of issuance, a share-lending arrangement entered into on an entity's own shares in contemplation of a convertible debt offering or other financing is required to be measured at fair value and recognized as a debt issuance cost in the financial statements of the entity. The debt issuance cost is required to be amortized using the effective interest method over the life of the financing arrangement as interest cost.  The new rules also provide that the loaned shares are excluded from basic and diluted earnings per share calculations unless default of the share-lending arrangement occurs, at which time the loaned shares would be included in these calculations.  These new rules are effective for fiscal years, and interim periods within those years, beginning after December 15, 2009, are to be applied retrospectively to all arrangements outstanding on the effective date, and apply to loaned shares issued in connection with our November 2005 convertible senior notes.  Our implementation of these new rules had no effect on our consolidated financial statements during any period presented.

 
13

 
 
In June 2009, the FASB issued new accounting rules that, in addition to requiring certain new securitization and structured financing-related disclosures that we have incorporated into our condensed consolidated financial statements, resulted in the consolidation of our securitization trusts onto our condensed consolidated balance sheet effective as of January 1, 2010. As a result of these new accounting rules, cash and credit card receivables held by our securitization trusts and debt issued from those entities are presented as assets and liabilities on our condensed consolidated balance sheet effective on that date. Moreover, after adoption of these new accounting rules, we no longer reflect our securitization trusts’ results of operations within loss on retained interests in credit card receivables securitized, but instead report interest income and provisions for loan losses (as well as gains and/or losses associated with fair value changes) with respect to the credit card receivables held within our securitization trusts; similarly, we separately report interest expense (as well as gains and/or losses associated with fair value changes) with respect to the debt issued from the securitization trusts. Lastly, because we account for our securitization transactions under the new rules as secured borrowings rather than asset sales, we present the cash flows from these transactions as cash flows from financing activities, rather than as cash flows from investing activities. As noted on our condensed consolidated statement of equity for the nine months ended September 30, 2010, our January 1, 2010 adoption of these rules resulted in an increase in total equity of $37.7 million.
 
In May 2008, the FASB issued new rules addressing convertible instruments that may be settled in cash upon conversion (including partial cash settlement). These rules address instruments commonly referred to as Instrument C type instruments. Those instruments essentially require the issuer to settle the principal amount in cash and the conversion spread in cash or net shares at the issuer’s option. These rules are effective for fiscal periods beginning after December 15, 2008, did not permit early application, and are required to be applied retrospectively to all periods presented. Our January 1, 2009 adoption of these rules resulted in an increase in total equity of $56.1 million.
 
Subsequent Events
 
We evaluate events that occur subsequent to our condensed consolidated balance sheet date but before our condensed 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 balance sheet date, 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 balance sheet date but arose subsequent to that date. We have evaluated subsequent events, and based on our review, we have not identified any recognized or nonrecognized subsequent events that would have required adjustments to or disclosures in our condensed consolidated financial statements.

 
14

 
 
3.
Discontinued Operations
 
In May 2009, we discontinued our Retail Micro-Loans segment’s Arkansas operations based on regulatory opposition we faced within that state. Reflecting our discontinued Arkansas operations, the components (in thousands) of our discontinued operations are as follows:
 
   
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net interest income, fees and related income on earning assets
  $     $     $     $ 1,684  
Other operating expense
                      2,021  
Estimated loss upon sale
                      2,779  
Goodwill impairment
                      3,483  
Loss before income taxes
                      (6,599 )
Income tax benefit
                      2,310  
Net loss
  $     $     $     $ ( 4,289 )
 
There were no discontinued assets held for sale on our condensed consolidated balance sheets as of either September 30, 2010 or December 31, 2009.
 
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 noncontrolling interests representing 6% of MEM (within our Internet Micro-Loans segment) for £4.3 million ($6.6 million), thereby reducing outstanding noncontrolling interests in MEM from 24% at December 31, 2009 to 18% as of September 30, 2010.  Also 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.
 
Summary operating segment information (in thousands) is as follows:
 
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 on earning assets
  $ 9,474     $ 8,567     $ 15,672     $ 5,046     $ 18,814     $ 57,573  
Total other operating income
  $ 8,031     $ 494     $     $ 133     $     $ 8,658  
Income (loss) from continuing operations before income taxes
  $ (6,885 )   $ 2,482     $ 2,789     $ (3,324 )   $ 6,863     $ 1,925  
Loss on discontinued operations before income taxes
  $     $     $     $     $     $  
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  
 


 
15

 

 

Three Months Ended September 30, 2009
 
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
  $ (7,268 )   $ 16,585     $ 17,311     $ 11,132     $ 13,265     $ 51,025  
Total other operating (loss) income
  $ (192,727 )   $ 83     $     $ 85     $     $ (192,559 )
(Loss) income from continuing operations before income taxes
  $ (254,564 )   $ 7,041     $ 4,369     $ (1,518 )   $ 3,248     $ (241,424 )
Loss on discontinued operations before income taxes
  $     $     $     $     $     $  
Loans and fees receivable, gross
  $ 15,698     $     $ 37,350     $ 300,551     $ 30,290     $ 383,889  
Loans and fees receivable, net
  $ 12,277     $     $ 32,007     $ 242,221     $ 20,604     $ 307,109  
Loans and fees receivable held at fair value
  $     $     $     $     $     $  
Total assets
  $ 298,351     $ 31,700     $ 68,747     $ 268,179     $ 62,495     $ 729,472  
 

Nine 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
  $ (978 )   $ 24,056     $ 45,606     $ 2,782     $ 46,874     $ 118,340  
Total other operating income
  $ 29,952     $ 1,148     $     $ 400     $     $ 31,500  
(Loss) income from continuing operations before income taxes
  $ (70,311 )   $ 5,239     $ 6,606     $ (24,603 )   $ 15,355     $ (67,714 )
Loss on discontinued operations before income taxes
  $     $     $     $     $     $  
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, 2009
 
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
  $ (19,152 )   $ 24,533     $ 45,803     $ 39,130     $ 32,614     $ 122,928  
Total other operating (loss) income
  $ (413,664 )   $ 138     $     $ 488     $ 1     $ (413,037 )
(Loss) income from continuing operations before income taxes
  $ (609,354 )   $ (2,336 )   $ (13,258 )   $ (5,653 )   $ 11,579     $ (619,022 )
Loss on discontinued operations before income taxes
  $     $     $ (6,599 )   $     $     $ (6,599 )
Loans and fees receivable, gross
  $ 15,698     $     $ 37,350     $ 300,551     $ 30,290     $ 383,889  
Loans and fees receivable, net
  $ 12,277     $     $ 32,007     $ 242,221     $ 20,604     $ 307,109  
Loans and fees receivable held at fair value
  $     $     $     $     $     $  
Total assets
  $ 298,351     $ 31,700     $ 68,747     $ 268,179     $ 62,495     $ 729,472  
 


 
16

 
 
5.
Shareholders’ Equity
 
Retired Shares
 
In 2009, 1,398,681 of previously lent shares were returned to us.  All returned shares are excluded from our outstanding share counts. As of September 30, 2010, we had 2,252,388 loaned shares outstanding. See further discussion of our share lending arrangement in Note 10, “Convertible Senior Notes and Notes Payable.”
 
Additionally, pursuant to the closing of a tender offer in May 2010, we repurchased 12,180,604 shares of our common stock at a purchase price of $7.00 per share for an aggregate cost of $85.3 million.  These shares subsequently were retired.
 
Treasury Stock
 
At our discretion, we use treasury shares to satisfy option exercises and restricted stock vestings, and we use the cost approach when accounting for the repurchase and reissuance of our treasury stock. We reissued treasury shares totaling 3,529 and 518,215 at gross costs of $0.1 million and $10.6 million during three and nine months ended September 30, 2010, respectively, in satisfaction of restricted share and restricted share unit vestings; this compares to our reissuance of shares for these purposes of 3,254 and 114,898 at gross costs of $0.06 million and $2.1 million during the three and nine months ended September 30, 2009, respectively. Additionally, by having employees who were exercising options or vesting in their restricted stock grants exchange a portion of their stock for our payment of required tax withholdings, we also effectively purchased shares totaling 825 and 133,324 at gross costs of $0.004 million and $0.6 million during the three and nine months ended September 30, 2010, respectively, compared to our effective purchase of 786 and 37,674 shares at gross costs of $0.004 million and $0.1 million during the three and nine months ended September 30, 2009, respectively.
 
 
6.
Investments in Equity-Method Investees
 
In May 2009, we recognized a gain of $21.0 million that is separately classified on our condensed consolidated statement of operations associated with our buy-out of the remaining members of our then-longest standing equity-method investee, CSG (which was formed in July 2002 to acquire retained interests in a securitization that included $1.2 billion in credit card receivables originated by Providian Financial Corporation). Subsequent to this buy-out event, we have included the operations of this former equity-method investee and its underlying assets and liabilities within our consolidated results of operations and consolidated balance sheet categories, as opposed to the income from equity-method investees and investment in equity-method investee categories.
 
In the following tables, we summarize (in thousands) combined balance sheet and results of operations data for our equity-method investees (including 2009 results of operations data for CSG while we held it in equity-method investee form prior to our May 2009 buy-out of its other members):
 

   
As of
September 30, 2010
   
As of
December 31, 2009
 
Securitized earning assets
  $     $ 35,844  
Loans and fees receivable pledged as collateral under structured financings, at fair value
  $ 145,665     $  
Total assets
  $ 156,227     $ 38,332  
Notes payable associated with structured financings, at fair value
  $ 132,260     $  
Total liabilities
  $ 133,262     $ 1,319  
Members’ capital
  $ 22,965     $ 37,013  
 


 
17

 

 

   
For the Three Months Ended September 30,
   
For the Nine Months Ended September 30,
 
   
2010
   
2009
   
2010
   
2009
 
Net interest income, fees and related loss on earning assets
  $ (2,044 )   $     $ (26,957 )   $  
Fees and related loss on securitized earning assets
  $     $ (6,230 )   $     $ (37,241 )
Total other operating income (loss)
  $ 827     $ (5,315 )   $ 3,311     $ (33,920 )
Net loss
  $ (4,368 )   $ (5,892 )   $ (34,706 )   $ (28,892 )
 
           Reflected in the above 2010 results are the impacts of new accounting rules that resulted in the consolidation of the equity-method investees’ securitization trusts (including their cash, receivables and underlying debt) onto their balance sheets at fair value effective January 1, 2010.  They experienced a cumulative effect adjustment to opening retained earnings of $25.5 million associated with this change.
 
 
7.
Goodwill and Intangible Assets
 
Goodwill
 
Goodwill represents the excess of the purchase price and related costs over the value assigned to net tangible and identifiable intangible assets acquired and accounted for under the purchase method. Under applicable accounting rules, we are required to assess the fair value of all acquisition-related goodwill on a reporting unit basis. We review the recorded value of goodwill for impairment at least annually at the beginning of the fourth quarter of each year, or earlier if events or changes in circumstances indicate that the carrying amount may exceed fair value.
 
In connection with our May 2009 decision to discontinue our Arkansas retail micro-loan operations, we allocated goodwill between our retained Retail Micro-Loans segment operations and our discontinued Arkansas operations, thereby resulting in a $3.5 million impairment loss that is reported within loss on discontinued operations for the nine months ended September 30, 2009. In connection with this reallocation, we performed a valuation analysis with respect to the remaining goodwill associated with our continuing Retail Micro-Loans segment operations based on internal projections of residual cash flows and market data supporting valuation prices of similar companies at the time; this analysis yielded an additional $20.0 million goodwill impairment charge associated with continuing operations that is reflected within our consolidated statement of operations for the nine months ended September 30, 2009.
 
In April 2007, one of our then-majority-owned subsidiaries (in which we now hold a 100% interest) acquired 95% of the outstanding shares of MEM, our U.K.-based, Internet, micro-loan operations, for £11.6 million ($22.9 million) in cash as part of our underlying diversification efforts and to establish a micro-loan presence in the U.K. Under the original purchase agreement, a contingent performance-related earn-out could have been payable to the sellers on achievement of certain earnings measurements for the years ended 2007, 2008 and 2009. The maximum amount payable under this earn-out was £120.0 million, although none of the earn-out performance conditions was satisfied for 2007 and 2008. The MEM acquisition agreement was amended in the first quarter of 2009 to remove the sellers’ earn-out rights in exchange for a net 22.5% continuing minority ownership interest in MEM and a cash payment of £434,000 ($621,000), the aggregate value of which reflected the estimated fair value of the earn-out arrangement as of December 31, 2009.  The settlement of the earn-out resulted in a re-measurement of the carrying value of our investment in MEM in accordance with applicable accounting standards and additional goodwill of $5.6 million.

 
18

 

 

 
Relative to respective December 31 balances, changes (in thousands) in the carrying amount of goodwill for the nine months ended September 30, 2009 and 2010, respectively, by reportable segment are as follows:
 
   
Retail Micro-
Loans
   
Internet Micro-Loans
   
Consolidated
 
Balance as of December 31, 2008
  $ 43,214     $ 15,915     $ 59,129  
Goodwill related to settlement of contingent performance-related earn-out
          5,553       5,553  
Impairment loss
    (23,483 )           (23,483 )
Foreign currency translation
    —        2,214       2,214  
Balance as of September 30, 2009
  $ 19,731     $ 23,682     $ 43,413  
                         
Balance as of December 31, 2009
  $ 19,731     $ 23,691     $ 43,422  
Foreign currency translation
    —        (177 )     (177 )
Balance as of September 30, 2010
  $ 19,731     $ 23,514     $ 43,245  
 
Intangible Assets
 
In connection with our May 2009 decision to discontinue our Arkansas retail micro-loans operations, we allocated intangible assets that we determined had an indefinite benefit period between our retained Retail Micro-Loans segment operations and our discontinued Arkansas operations, thereby resulting in a $0.2 million impairment loss that is reported within loss on discontinued operations for the nine months ended September 30, 2009. This valuation analysis was based on internal projections of residual cash flows and market data supporting valuation prices of similar companies at the time.
 
We had $2.1 million of remaining intangible assets that we determined had an indefinite benefit period as of September 30, 2010 and December 31, 2009. The net unamortized carrying amount of intangible assets subject to amortization was $0.4 million and $0.7 million as of September 30, 2010 and December 31, 2009, respectively. Intangible asset-related amortization expense was $0.1 million and $0.3 million for the three and nine months ended September 30, 2010, respectively, and $0.3 million and $1.3 million for the three and nine months ended September 30, 2009, respectively.
 
8.
Securitizations
 
This note provides historical off-balance-sheet credit card receivables “securitizations” data relative to our December 31, 2009 condensed consolidated balance sheet and our condensed consolidated statement of operations for the three and nine months ended September 30, 2009. As noted previously in this report, the FASB issued new accounting rules that resulted in the consolidation of our securitization trusts (including their cash, receivables and underlying debt) onto our consolidated balance sheet effective as of January 1, 2010. As such, our 2010 condensed consolidated financial statements contain no comparable balances to the historical securitized earnings assets category, and associated income and loss categories, as shown in our condensed consolidated 2009 financial statements.
 

 
19

 
 
The table below summarizes (in thousands) our securitization facility activities for the period prior to consolidation of our securitization trust. As with other tables included herein, it does not include the securitization activities of our equity-method investees:
 
   
As of and for the Three Months
 Ended September 30, 2009
   
As of and for the Nine Months
Ended September 30, 2009
 
Gross amount of receivables securitized at period end 
  $ 1,671,930     $ 1,671,930  
Proceeds from new transfers of financial assets to securitization trusts
  $ 90,601     $ 395,330  
Proceeds from collections reinvested in revolving-period securitizations
  $ 106,872     $ 382,334  
Excess cash flows received on retained interests
  $ 24,893     $ 80,377  
Securitization gains
  $ 113,961     $ 113,961  
Loss on retained interests in credit card receivables securitized
    (334,035 )     (657,869 )
Fees on securitized receivables
     3,658        13,778  
Total loss on securitized earning assets
  $ (216,416 )   $ (530,130 )
 
During the three months ended September 30, 2009, based on inquiries from an unrelated party that held notes (with a face amount of $264 million) under a six-year term facility issued within our upper-tier originated portfolio master trust, an opportunity arose for us to repurchase the notes for $150 million in cash consideration, which represented a discount to the face amount of the notes. Upon completion of the transaction, and in recognition of the fact that we also owned the residual or retained interest in the upper-tier originated portfolio master trust, we sought to combine the purchased notes with our owned retained interest in the trust through cancellation of the notes by the trust. The cancellation of the notes by the trust increased our retained interest in the trust by the amount of collateral allocable to the cancelled series. Hence, we accounted for the transaction as a contribution of the notes (a “financial asset”) to our upper-tier originated portfolio master trust in exchange for retained interests in the trust, thereby generating a securitization gain during the three months ended September 30, 2009 equal to the difference between the face amount of the contributed notes ($264 million) and their fair value ($150 million).  Upon retirement of the notes by the trust, cash flow activities associated with the securitization trust continued in the ordinary course (e.g., the trust continued to draw under variable funding notes to the extent of any excess collateral maintained within the securitization trust and to collect payments on the underlying credit card receivables, and the trust continued to make distributions of cash to the transferor and other beneficial interest holders and to make payments to the servicer in accordance with governing trust documents). Moreover, the accounting for our retained interests in the securitization trust also continued in the ordinary course. In determining the fair value of our residual interests after the completion of the transaction, we applied our usual valuation model, considering only the underlying credit card receivables and remaining outstanding securitization notes after the transaction. Resulting changes in the fair value of our retained interests at the end of the relevant reporting period (as in all reporting periods) were included within the loss on retained interest in credit card receivables securitized subcategory of our loss on securitized earning assets category (the same category that included the $114.0 million securitization gain associated with the notes’ repurchase and contribution to the trust) on our 2009 consolidated statement of operations.
 
Our retained interests in credit card receivables securitized (labeled as securitized earning assets on our condensed consolidated balance sheets) include the following (in thousands) at December 31, 2009.  Amounts are not shown for 2010 due to the consolidation of these receivables on January 1, 2010:
 
   
As of December 31, 2009
 
I/O strip
  $  
Accrued interest and fees
     
Net servicing liability
    (15,458 )
Amounts due from securitization
    1,570  
Fair value of retained interests
    52,396  
Issuing bank partner continuing interests
    (1,994 )
Securitized earning assets
  $ 36,514  

 
20

 
 
Reflected within servicing income on our condensed consolidated statement of operations for the three and nine months ended September 30, 2009 were $17.9 million and $78.8 million, respectively of servicing income (fees) we received from our securitization trusts in that period. Changes in our net servicing liability for the nine months ended September 30, 2009 are summarized (in millions) in the following table.
 
   
For the Nine Months Ended September 30, 2009
 
Net servicing liability at beginning of period
  $ 10.7  
Changes in fair value of net servicing liability due to changes in valuations inputs, including receivables levels within securitization trusts, length of servicing period, servicing costs and changes in servicing compensation rates
    37.6  
Balance at end of period
  $ 48.3  
 
Other key assumptions we used to estimate the fair value of our retained interests in the credit card receivables securitized as of December 31, 2009 are presented (as weighted averages) below:

   
As of December 31, 2009
 
Net collected yield (annualized)
    31.3 %
Principal payment rate (monthly)
    2.2 %
Expected principal credit loss rate (annualized)
    27.2 %
Residual cash flows discount rate
    18.8 %
Servicing liability discount rate
    14.0 %
Life (in months) of securitized credit card receivables
    45.4  
 
Our managed receivables portfolio underlying our securitizations (including only those of our consolidated subsidiaries) as of September 30, 2009 was comprised of credit card receivables that we securitized and other investors’ shares of those securitized receivables. The following table summarizes (in thousands) the balances included within, and certain operating statistics associated with, our managed receivables portfolio underlying both the outside investors’ shares of and our retained interests in our credit card receivables securitizations as of September 30, 2009.  These figures include the results of our lower-tier credit cards prior to their re-consolidation in the fourth quarter of 2009.
 
   
As of and for the Three Months Ended
 September 30, 2009
 
Total managed principal balance
  $ 1,508,976  
Total managed finance charge and fee balance
    162,954  
Total managed receivables
    1,671,930  
Cash collateral at trust and amounts due from QSPEs
    35,703  
Total assets held by QSPEs
    1,707,633  
QSPE-issued notes to which we are subordinated
    (1,203,987 )
Face amount of residual interests in securitizations
  $ 503,646  
Receivables delinquent—60 or more days
  $ 267,619  
Net charge offs during the three months ended September 30, 2009
  $ 139,779  
 
Data in the above table are aggregated from the various QSPEs supporting our securitizations as of September 30, 2009.
 

 
21

 
 
9.
Fair Values of Assets and Liabilities
 
Because we account for the credit card receivables underlying our formerly off-balance-sheet securitization trusts at fair value, accounting rules that required the consolidation of these securitization trusts effective January 1, 2010 also required that we account for any debt underlying our formerly securitized credit card receivables at fair value effective as of January 1, 2010.
 
We elected the fair value option with respect to our investments in equity securities as well as our investments in loans and fees receivable associated with our credit card portfolios. With respect to our equity securities, we decided to measure these assets at fair value due to our intent to invest and redeem these investments with expected frequency. For our credit card loans and fees receivable and the notes payable that are secured by those receivables, both of which were contained in off-balance-sheet securitization trusts in either certain or all periods prior to January 1, 2010, we elected the fair value option because, in contrast to substantially all other assets on our consolidated balance sheets, we had significant experiences in determining the fair value of these assets and liabilities based on our models previously used to determine the fair value of residual interests in underlying off-balance-sheet securitization trusts prior to their consolidation in our financial statements effective no later than January 1, 2010.
 
We account for certain financial assets and liabilities at fair value based upon a three-tiered valuation system.  In general, fair values determined by Level 1 inputs use quoted prices (unadjusted) in active markets for identical assets or liabilities that we have the ability to access. Fair values determined by Level 2 inputs use inputs other than quoted prices included in Level 1 that are observable for the asset or liability, either directly or indirectly. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability, such as interest rates and yield curves that are observable at commonly quoted intervals. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. Where inputs used to measure fair value may fall into different levels of the fair value hierarchy, the level in the fair value hierarchy within which the fair value measurement in its entirety has been determined is based on the lowest level input that is significant to the fair value measurement in its entirety.
 
Valuations and Techniques for Assets Measured at Fair Value on a Recurring Basis
 
 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. For our assets measured on a recurring basis at fair value, the table below summarizes (in thousands) fair values as of September 30, 2010 by fair value hierarchy:
 
Assets
 
Quoted Prices in Active Markets for Identical
Assets (Level 1)
   
Significant Other
Observable Inputs
(Level 2)
   
Significant
Unobservable
Inputs (Level 3)
   
Total Assets
Measured at Fair
Value
 
Investment securities—trading 
  $ 56,267     $     $     $ 56,267  
Loans and fees receivable, at fair value
  $     $     $ 12,227     $ 12,227  
Loans and fees receivable pledged as collateral under structured financings, at fair value
  $     $     $ 457,486     $ 457,486  
 
Gains and losses associated with fair value changes for the above asset classes are detailed on our fees and related income on earning assets table within Note 2, “Significant Accounting Policies and Condensed Consolidated Financial Statement Components.”  All interest and dividend income associated with the above asset classes are recognized as earned and are included within total interest income on our condensed consolidated statements of operations.  For our Level 1 assets in the above table, total net gains were $0.1 million and $0.3 million for the three and nine months ended September 30, 2010, respectively, and $0.1 million and $0.3 million for the three and nine months ended September 30, 2009, respectively, all of which are included as a component of fees and related income on earning assets on our condensed consolidated statements of operations.  For our loans and fees receivable included in the above table, which represent liquidating portfolios closed to any possible re-pricing, 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.
 

 
22

 
 
For Level 3 assets measured at fair value on a recurring basis using significant unobservable inputs, the following table presents (in thousands) a reconciliation of the beginning and ending balances for the nine months ended September 30, 2010:
 
   
Loans and Fees Receivable, at Fair Value
   
Loans and Fees Receivable Pledged as Collateral under Structured Financings, at Fair Value
   
Securitized Earning Assets
   
Total
 
Beginning balance
  $ 42,299     $     $ 36,514     $ 78,813  
Transfers in due to adoption of new accounting guidance
          836,346        (36,514 )     799,832  
Total gains (losses)—realized/unrealized:
                               
Net revaluations of loans and fees receivable pledged as collateral under structured financings, at fair value
          125,541             125,541  
Net revaluations of loans and fees receivable, at fair value
    61,305                   61,305  
Purchases, issuances, and settlements, net
    (91,377 )     (509,887 )             (601,264 )
Impact of foreign currency translation gain
          5,486             5,486  
Net transfers in and/or out of Level 3
                       
Ending balance
  $ 12,227     $ 457,486     $     $ 469,713  
 
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. We provide below a brief description of the valuation techniques used for Level 3 assets.
 
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 condensed consolidated statements of operations, specifically as changes in fair value of loans and fees receivable recorded at fair value. The net revaluation of loans and fees receivable is based on the present value of future cash flows using a valuation model of expected cash flows and the estimated cost to service and collect those cash flows. We estimate the present value of these future cash flows using a valuation model consisting of internally developed estimates of assumptions third-party market participants would use in determining fair value, including estimates of net collected yield, principal payment rates, expected principal credit loss rates, costs of funds, discount rates and servicing costs.
 
Valuations and Techniques for Liabilities Measured at Fair Value on a Recurring Basis
 
 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. For our liabilities measured on a recurring basis at fair value, the table below summarizes (in thousands) fair values as of September 30, 2010 by fair value hierarchy:
 
Liabilities
 
Quoted Prices in Active Markets for Identical