SECURITIES
AND EXCHANGE COMMISSION


WASHINGTON,
D.C. 20549


__________________________




FORM
10-K




For the
fiscal year ended December 31, 2009




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
believes that during the 2009 fiscal year, its executive officers, directors and
10% beneficial owners subject to Section 16(a) of the Act complied with all
applicable filing requirements, except as set forth under the caption
“Section 16(a) Beneficial Ownership Reporting Compliance” in CompuCredit’s
Proxy Statement for the 2010 Annual Meeting of Shareholders.




CompuCredit
is a smaller reporting company and is not a shell company.




The
aggregate market value of CompuCredit’s common stock (based upon the closing
sales price quoted on the NASDAQ Global Select Market) held by nonaffiliates as
of June 30, 2009 was $39.0 million. (For this purpose, directors and
officers have been assumed to be affiliates, and we have excluded 3,651,069 of
loaned shares at June 30, 2009.)




As of
February 28, 2010, 47,770,624 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.)




DOCUMENTS
INCORPORATED BY REFERENCE




Portions
of CompuCredit’s Proxy Statement for its 2010 Annual Meeting of Shareholders are
incorporated by reference into Part III.


Table of Contents


Table of Contents




Part
      IItem 1.
              Business
              1Item
      1A.
              Risk Factors
              22Item
      1B.
              Unresolved Staff Comments
              40Item
      2.
              Properties
              40Item
      3.
              Legal Proceedings
              40Part
      IIItem
      5.
              Market for Registrant’s Common Equity, Related Stockholder
      Matters and Issuer Purchases of  Equity
      Securities
              42Item
      6.
              Selected Financial Data
              43Item
      7.
              Management’s Discussion and Analysis of Financial Condition
      and Results of Operations
              43Item
      7A.
              Quantitative and Qualitative Disclosures About Market
      Risk
              73Item
      8.
              Financial Statements and Supplementary Data
              73Item
      9.
              Changes in and Disagreements with Accountants on Accounting
      and Financial Disclosure
              73Item
      9A.
              Controls and Procedures
              73Item 9B.
              Other Information
              73Part IIIItem
      10.
              Directors, Executive Officers and Corporate Governance
              74Item
      11.
              Executive Compensation
              74Item
      12.
              Security Ownership of Certain Beneficial Owners and
      Management and Related Stockholder Matters
              74Item
      13.
              Certain Relationships and Related Transactions, and
      Director Independence
              74Item
      14.
              Principal Accountant Fees and Services
              74Part IVItem 15.
              Exhibits and Financial Statement Schedules
              75







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Cautionary
Notice Regarding Forward-Looking Statements




We make
forward-looking statements in this Report and in other materials we file with
the Securities and Exchange Commission (“SEC”) or otherwise make public. In this
Report, both Item 1, “Business,” and Item 7, “Management’s Discussion
and Analysis of Financial Conditions and Results of Operations,” contain
forward-looking statements. In addition, our senior management might make
forward-looking statements to analysts, investors, the media and others.
Statements with respect to our expected revenue, income, receivables, income
ratios, net interest margins, marketing-based volatility and peak charge-off
vintages, acquisitions and other growth opportunities, divestitures and
discontinuations of businesses, location openings and closings, loss exposure
and loss provisions, delinquency and charge-off rates, impacts of account
actions that we may take including account closures and modifications, changes
in collection programs and practices, securitizations and gains and losses from
securitizations, changes in the credit quality of our on-balance-sheet loans and
fees receivable, the impact of actions by the Federal Deposit Insurance
Corporation (“FDIC”), Federal Trade Commission (“FTC”) and other regulators on
both us and the banks that issue credit cards on our behalf, account growth, the
performance of investments that we have made, operating expenses, the impact of
bankruptcy law changes, marketing plans and expenses, the profitability of our
Auto Finance segment, expansion and growth of our Investments in Previously
Charged-Off Receivables segment, growth and performance of receivables
originated over the Internet or television, our plans in the United Kingdom
(“U.K.”), the impact of our U.K. portfolio of credit card receivables (the “U.K.
Portfolio”) on our financial performance, sufficiency of available liquidity,
the prospect for improvements in the liquidity markets, future interest costs,
sources of funding operations and acquisitions, the profitability of our Retail
Micro-Loans segment, our entry into international markets, our ability to raise
funds or renew financing facilities, our income in equity-method investees, our
servicing income levels, gains and losses from investments in securities,
experimentation with new products and other statements of our plans, beliefs or
expectations are forward-looking statements. These and other statements using
words such as “anticipate,” “believe,” “estimate,” “expect,” “intend,” “plan,”
“project,” “target,” “can,” “could,” “may,” “should,” “will,” “would” and
similar expressions also are forward-looking statements.  Each
forward-looking statement speaks only as of the date of the particular
statement.  The forward-looking statements we make are not guarantees
of future performance and we have based these statements on our assumptions and
analyses in light of our experience and perception of historical trends, current
conditions, expected future developments and other factors we believe are
appropriate in the circumstances.   Forward-looking statements by
their nature involve substantial risks and uncertainties that could
significantly affect expected results, and actual future results could differ
materially from those described in such statements. Management cautions against
putting undue reliance on forward-looking statements or projecting any future
results based on such statements or present or prior earnings
levels.




Although
it is not possible to identify all factors, we continue to face many risks and
uncertainties. Among the factors that could cause actual future results to
differ materially are the risks and uncertainties described under “Risk Factors”
set forth in Part I, Item 1A, and the risk factors and other cautionary
statements in the other documents that we file with the SEC, including the
following:




·
            the
      extent to which federal, state, local and foreign governmental regulation
      of our various business lines limits or prohibits the operation of our
      businesses;




·
            current
      and future litigation and regulatory proceedings against
    us;




·
            the
      effect of the current adverse economic conditions on our revenues, loss
      rates and cash flows;




·
            the
      uncertainties related to, and the impact of, the contemplated spin-off of
      our micro-loan businesses;




·
            the
      fragmentation of our industry and competition from various other sources
      providing similar financial products, or other alternative sources of
      credit, to consumers;




·
            the
      adequacy of our allowance for uncollectible loans and fees receivable and
      estimates of loan losses;




·
            the
      availability of adequate financing;




·
            the
      possible impairment of goodwill;




·
            the
      future prospects of our Internet lending business in the U.K. and the
      United States (“U.S.”);




·
            our
      ability to reduce or eliminate overhead and other costs to lower levels
      consistent with the contraction of our loans and fees receivable and other
      income-producing assets;




·
            our
      relationship with the banks that provide certain services that are needed
      to operate our business; and




·
            theft
      and employee errors.






Most of
these factors are beyond our ability to control or predict. Any of these
factors, or a combination of these factors, could materially affect our future
financial condition or results of operations and the ultimate accuracy of the
forward-looking statements. There also are other factors that we may not
describe (generally because we currently do not perceive them to be material)
that could cause actual results to differ materially from our
expectations.




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




In this
Report, except as the context suggests otherwise, the words “Company,”
“CompuCredit Holdings Corporation,” “CompuCredit,” “we,” “our,” “ours” and “us”
refer to CompuCredit Holdings Corporation and its subsidiaries and predecessors.
CompuCredit owns Aspire®, CompuCredit®, Emblem®, Embrace®, Emerge®, Fanfare®,
Imagine®, Majestic®, Monument®, Purpose®, Purpose Money®, Salute®, Tribute® and
other trademarks and service marks in the “U.S.” and the U.K.





ii
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PART
I




ITEM 1.
            BUSINESS







Holding
Company Formation and Reorganization




On
June 30, 2009, we completed a reorganization through which CompuCredit
Corporation, our former parent company, became a wholly owned subsidiary of
CompuCredit Holdings Corporation. We effected this reorganization through a
merger pursuant to an Agreement and Plan of Merger, dated as of June 2,
2009, by and among CompuCredit Corporation, CompuCredit Holdings Corporation and
CompuCredit Merger Sub, Inc., and as a result of the reorganization, each
outstanding share of CompuCredit Corporation common stock was automatically
converted into one share of CompuCredit Holdings Corporation common
stock.




As a
result of the reorganization, CompuCredit Corporation common stock is no longer
publicly traded, and CompuCredit Holdings Corporation common stock commenced
trading on the NASDAQ Global Select Market on July 1, 2009 under the symbol
“CCRT,” the same symbol under which CompuCredit Corporation common stock was
previously listed and traded.  We continue to consider other
restructuring alternatives including a spin-off of one or more of our
operations.




Potential
Spin-Off of Micro-Loan Businesses




On
November 5, 2009, our Board of Directors authorized management to review and
evaluate the merits of a proposal to spin-off our U.S. and U.K. micro-loan
businesses into a separate, publicly traded company called Purpose Financial
Holdings, Inc. (“Purpose Financial”). Once management completes its review and
evaluation, the Board will discuss and consider the merits of the
proposal.  In connection with management’s review of the proposal to
spin-off our U.S. and U.K. micro-loan businesses,  Purpose Financial
filed a Form 10 Registration Statement and a related Information Statement on
January 4, 2010.  The spin-off remains subject to a number of
conditions, including, among others:




·
            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 all 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
      private letter ruling that we received from the Internal Revenue Service
      (“IRS”) not being revoked or modified in any material
    respect;




·
            NASDAQ’s
      approval for listing of Purpose Financial’s common stock, subject to
      official notice of issuance; and




·
            the
      nonexistence of any order, injunction or decree issued by any court of
      competent jurisdiction or other legal restraint or prohibition that might
      prevent the 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.




The Board
of Directors is contemplating the spin-off of Purpose Financial because it
believes that separating the micro-loan businesses from us may be in our and our
shareholders’ best interests.  This belief is based, in part, on the
following potential benefits which the spin-off is expected to
provide:




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·
            greater
      access for us to banks and potential investors that do not do business
      with companies that own micro-loan businesses, even where the business
      opportunity does not involve
micro-loans;




·
            increased
      ability for us to:  maintain and attract banking relationships;
      partner with private equity funds, hedge funds, and financial institutions
      in acquiring credit card portfolios and other assets; and obtain debt
      financing from financial institutions for credit card portfolio and other
      asset acquisitions and for day-to-day
  operations;




·
            ability
      of each company’s management to separately pursue the business strategies
      best suited to its long-term
interests;




·
            greater
      market recognition and valuation due to the ability of analysts,
      shareholders and prospective investors in each company to better evaluate
      the merits of each company; and




·
            stronger
      correlation between management incentives and each company’s
      performance.




General




A general
discussion of the business of CompuCredit Holdings Corporation follows. For
additional information about our business, including specific descriptions of
how we market and segment customers and other operational items, please visit
our website at www.compucredit.com.




We are a
provider of various credit and related financial services and products to or
associated with the financially underserved consumer credit market—a market
represented by credit risks that regulators classify as “sub-prime.” We
traditionally have served this market principally through our marketing and
solicitation of credit card accounts and other credit products and our servicing
of various receivables. We have contracted with third-party financial
institutions pursuant to which the financial institutions have issued general
purpose consumer credit cards, and we have purchased the receivables relating to
such accounts on a daily basis.




Our
product and service offerings also include:  small-balance, short-term
cash advance loans—generally less than $500 (or the equivalent thereof in the
British pound for pound-denominated loans) for 30 days or less and to which
we refer as “micro-loans;” installment loan and other credit products; and money
transfer and other financial services.  These loans and products are
marketed through retail branch locations in Alabama, Colorado, Kentucky,
Mississippi, Ohio, Oklahoma, South Carolina, Tennessee, and Wisconsin and over
the Internet in the U.S. and U.K.




We also
are collecting a portfolio of auto finance receivables that we previously
originated through franchised and independent auto dealers, purchasing and/or
servicing auto loans from or for a pre-qualified network of dealers in the
“buy-here, pay-here” used car business and selling used automobiles through our
own buy-here, pay-here lots.




Lastly,
our debt collections subsidiary purchases and collects previously charged-off
receivables from us, the trusts that we service and third parties.




We
reflect our business lines within five reportable segments by which we manage
our business:  Credit Cards; Investments in Previously Charged-Off
Receivables; Retail Micro-Loans; Auto Finance; and Internet Micro-Loans. We
describe these segments below. (See, Note 4, “Segment Reporting,” to our
consolidated financial statements included herein for segment-specific financial
data.)  If we consummate the spin-off, we will change our reportable
segments to three segments:  Credit Cards; Investments in Previously
Charged-Off Receivables; and Auto Finance. The following discussion is based on
the five reportable segments as they were structured for the fiscal year ended
December 31, 2009.




The most
significant business changes or events during the year ended December 31, 2009
were:




·
            The
      continuing effects of the economic downturn and the ongoing difficulties
      in the liquidity markets that have prevented us from raising new funds in
      order to originate credit card receivables and auto loans, thereby causing
      us to offer payment incentive programs to credit card customers, to close
      substantially all of our credit card accounts (other than those associated
      with our Investment in Previously Charged-Off Receivables segment’s
      balance transfer program), and to cease all auto loan origination efforts
      associated with our ACC operations (all of which have a negative impact on
      both short-term earnings and the potential for longer term profitability)
      and to continue with our expense paring
efforts;




·
            Our
      third quarter change in assumption in computing the fair value of our
      retained interests in our securitization trusts to reflect our
      determination during that quarter that a buyer of the residual interests
      we hold in our upper-tier and lower-tier originated portfolio master
      trusts would likely discount the price that they would pay for the
      residual


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interests
      to reflect the risk that the securitization facilities could soon enter
      early amortization status—thereby materially delaying the buyer’s receipt
      of cash flows until the underlying securitization facilities were
      completely repaid;




·
            Our
      recognition of a $114.0 million securitization gain in the third quarter
      in connection with the cancellation of certain notes issued out of our
      upper-tier originated portfolio master
trust;




·
            Our
      recognition of an $11.0 million net pre-tax gain in the third quarter
      associated with our settlement with Encore over its claims that we
      breached contract and its failure to purchase certain previously
      charged-off receivables accounts under its forward flow contract with
      us;




·
            Our
      third quarter repayment of $81.1 million of notes payable associated with
      our ACC and CAR operations within our Auto Finance segment as we were not
      able to reach satisfactory terms to renew or replace these debt facilities
      at that time, followed shortly thereafter in the fourth quarter by our
      issuance of a new, amortizing, non-recourse $103.5 million debt facility
      secured by auto finance receivables associated with our ACC operations
      within our Auto Finance segment and our issuance of a new, non-recourse
      $50.0 million line of credit secured by auto finance receivables
      associated with our CAR operations within our Auto Finance segment;
      and




·
            Our
      fourth quarter de-securitization of our lower-tier credit card
      receivables, our recording of these receivables on our balance sheet at
      their fair value in connection with our prior fair value option election
      made with respect to such receivables under applicable accounting rules,
      and our repayment of all securitization facilities that were secured by
      such receivables with the consent of the investor in the lower-tier
      originated portfolio master trust.




Credit Cards
Segment. Our Credit Cards segment consists of our credit card investment
and servicing activities, as conducted with respect to receivables underlying
accounts originated and portfolios purchased by us and our equity-method
investees. This segment includes the activities associated with substantially
all of our credit card products.




Our
credit card and other operations are heavily regulated, and over time we change
how we conduct our operations either in response to regulation or in keeping
with our goals of continuing to lead the industry in the application of
consumer-friendly credit card practices. For example, we made certain changes to
our collections programs and practices and changes to our billing and fee
crediting practices principally in 2007 in connection with our efforts to
address negative amortization regulatory requirements; those changes had the
effect of increasing our delinquencies and charge-off levels and ratios and
decreasing our net interest margins and other income ratios. Because our account
management practices are evolutionary and dynamic, it is possible that we may
make further changes to these practices, some of which may produce positive and
some of which may produce adverse effects on our operating results and financial
position. For example, we currently are assessing and may determine that further
adverse changes are necessary to implement the Credit Card Accountability
Responsibility and Disclosure Act of 2009 (the “CARD Act”) and regulations
issued in January 2010 by the Federal Reserve Board to implement the CARD
Act.




We
generally “securitize” our credit card receivables in order to obtain the most
favorable financing terms and rates, and in December 2007, we securitized a
significant portfolio (comprised of our lower-tier credit card receivables) in
an off-balance-sheet securitization. These receivables were subsequently
de-securitized and re-consolidated at their fair value during the fourth quarter
of 2009 as the outside investor in the securitization trust consented to our
repayment of the securitization facility underlying the trust and thus we became
the sole beneficiary in the trust.  Given these fourth quarter 2009
transactions, we have only two categories of credit card receivables that are
reported on our consolidated balance sheet at December 31, 2009—our lower-tier
credit card receivables (which are reported at fair value) and those credit card
receivables associated with our Investment in Previously Charged-Off Receivables
segment’s balance transfer program (which are reported at net realizable
value).  All other credit card receivables are securitized in
off-balance-sheet securitization trusts, our retained interests in which are
presented under the securitized earning assets caption on our consolidated
balance sheets. Our fees and related income on these securitized earning assets
include (1) securitization gains, (2) income from retained interests
in credit card receivables securitized and (3) returned-check, cash advance
and other fees.




Also
reflected within our Credit Cards segment results are equity in the income of
equity-method investees and servicing income revenue sources as well as income
or losses associated with ancillary investments in others’ asset-backed
securities. We earn servicing income from the trusts underlying our
securitizations and the securitizations of our equity-method
investees.


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During
periods in which we hold credit card receivables on our consolidated balance
sheet (i.e., in periods in which they are not securitized), our consolidated
statement of operations revenue categories most affected by delinquency and
credit loss trends with respect to such on-balance-sheet receivables are the net
interest income, fees and related income on non-securitized earnings assets
category (which is net of fair value adjustments for credit card receivables
reported at fair value and a provision for loan losses for credit card
receivables reported at net realizable value)).




In
contrast, for all off-balance-sheet credit card receivables, the fees and
related income on securitized earning assets category is the exclusive
consolidated statement of operations category that bears the effects of
delinquency and credit loss trends with respect to such credit card
receivables.




Our most
recent credit card receivables acquisition was an April 2007 acquisition of a
portfolio of approximately £490 million ($970 million) in face amount of
credit card receivables (associated with 594,000 underlying managed accounts)
from Barclaycard, a division of Barclays Bank PLC in the U.K. (the “U.K.
Portfolio”). We paid the purchase price of £383.5 million ($766.4 million)
in cash and then securitized the U.K. Portfolio’s receivables. Preceding this
acquisition were several other portfolio acquisitions aggregating $6.3 billion
in face amount of purchased credit card receivables from 1998 through 2005; such
acquisitions were made in some cases through our wholly owned subsidiaries, in
some cases through majority owned subsidiaries in which non-controlling
interests were owned by lending or investing partners, and in some cases through
equity-method investees in which lending and investing partners also had
interests. The effects of the 1998 through 2005 acquisitions on our financial
position and results of operations are significantly diminished relative to
prior periods and continue to further diminish with the liquidation of these
acquired portfolios.




We decide
whether to grow receivables levels through our origination efforts or to acquire
other portfolios based upon several factors, including credit quality and
financing availability and costs. We assess credit quality using an analytical
model that we believe predicts the likelihood of payment more accurately than
traditional credit scoring models. For instance, we have identified factors
(such as delinquencies, defaults and bankruptcies) that under some circumstances
we weight differently than do other credit providers. Our analysis enables us to
better identify consumers within the financially underserved market who are
likely to be better credit risks than otherwise would be expected. Similarly, we
apply our analytical model to entire portfolios to identify those that may be
more valuable than the seller or other potential purchasers might
recognize.




Customers
at the lower end of the FICO scoring range intrinsically have higher loss rates
than do customers at the higher end of the FICO scoring range. As a result,
during periods in which we have experienced originations or repricings of
acquired credit card receivables portfolios, we have priced our products to
reflect this greater risk—with these customers paying higher prices for our
products than they would pay if their FICO scores were higher. As such, our
products are subject to greater regulatory scrutiny than the products of prime
lenders who can price their credit products at much lower levels than we can.
See “Consumer and Debtor Protection Laws and Regulations—Credit Cards Segment”
and Item 1A, “Risk Factors.”




As is
customary in our industry, we have financed most of our credit card receivables
by selling them to a securitization vehicle, such as a trust, that in turn
issues notes or sells participation interests. The rates of return that
purchasers have required and the percentage of the funding that the purchasers
have been willing to provide (as contrasted with the subordinated portion that
we must provide), which is known as the advance rate, have been our two most
significant financial considerations.




Beginning
in 2007, as financing became increasingly difficult to obtain on terms as
favorable as those that we previously obtained, we significantly curtailed our
marketing efforts and the issuance of new cards. The financing environment
worsened significantly in 2008 and did not recover sufficiently to support our
credit card originations in 2009. We are concerned that the traditional
securitization markets may not return to any degree of efficient and effective
functionality for us for the foreseeable future. As a result, we are closely
monitoring and managing our liquidity position and have closed substantially all
accounts to new purchases. We also have taken other actions (including reducing
our overhead infrastructure, which was built to accommodate higher account
originations and managed receivables levels) in an effort to bolster our cash
position. Some of these actions, while prudent given the challenging liquidity
environment, have the effect of reducing our profitability. For example, in an
environment in which funding is available, we ordinarily would be seeking to
market new accounts and expand credit lines for our most profitable consumers,
but in the current environment, our liquidity situation mandates that we reduce
our credit lines and exposure—even to our most profitable
customers.




The
current global financial crisis differs in key respects from our experiences
during the last financial downturn that we experienced in 2001 through 2003.
First, while we had difficulty obtaining asset-backed securitization financing
for our originated portfolio activities at attractive advance rates during that
prior time period, the credit spreads (above base pricing indices like LIBOR) at
that time were not as wide (expensive) as they now are. Additionally, while we
were quite successful during that time period in obtaining asset-backed
securitization financing for portfolio acquisitions at attractive advance
rates,


4
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pricing
and other terms, that financing currently is not available from traditional
market participants. Last and most significant is the adverse impact that the
current global liquidity crisis has had on the U.S. and worldwide economies
(including real estate and other asset values and the labor markets).
Unemployment is significantly higher than during 2001 through 2003 and is
forecasted by some economists to increase further. Lower asset values and higher
rates of job loss and the overall level of unemployment recently have translated
into reduced payment rates and higher charge off rates within the credit card
industry generally and for us specifically. This extended period of reduced
payment rates and higher charge off rates has resulted in significantly
curtailed cash flows to us from our securitization trusts (e.g., the terms of
our securitization facilities have required them to accumulate or retain cash or
use it to repay investor notes on an accelerated basis, rather than distribute
it to us) and has caused significant impairments in the values of our retained
interests in our securitized credit card receivables.




Investments in
Previously Charged-Off Receivables Segment. Our Investments in Previously
Charged-Off Receivables segment consists of the operations of our debt
collection subsidiary, Jefferson Capital Systems, LLC (“Jefferson Capital”).
Through this subsidiary, as market conditions and other factors justify, we
acquire and sell previously charged-off credit card receivables and apply our
collection expertise to the receivables we own. Revenues in this segment are
classified as fees and related income on non-securitized earning assets in our
consolidated statements of operations.




In 2005,
our Investment in Previously Charged-off Receivables segment entered into a
forward flow contract to sell previously charged-off receivables to a subsidiary
of Encore Capital Group, Inc. (collectively with all other subsidiaries or
affiliates of Encore Capital Group, Inc. to which we refer, “Encore”). On
July 10, 2008, Encore did not purchase certain accounts as contemplated by
the forward flow contract, alleging that we breached certain representations and
warranties set forth in the contract (based upon then-outstanding allegations
made by the Federal Trade Commission (“FTC”)). Subsequently, both our subsidiary
and Encore advised one another that they were in default of various obligations
under the contract and various related agreements among them, and the parties
proceeded to resolve these disputes through arbitration. Immediately prior to
the arbitration panel hearing in the third quarter of 2009, we settled our
outstanding disputes with Encore. The settlement resulted in the recognition of
the remaining $21.2 million in deferred revenue in the third quarter of 2009 and
a corresponding release of $8.7 million in 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 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
gain of $11.0 million which is reflected in our consolidated statements of
operations for the year ended December 31, 2009.




With
settlement of the Encore dispute and its commitment under the settlement terms
to resume placements of balance transfer program volumes to us, we expect
improving trends and results associated with the balance transfer program within
our Investments in Previously Charged-Off Receivables segment. Beyond the
committed Encore placement volumes under the program, we also believe that the
current economic environment could lead to increased opportunities for growth in
the balance transfer program as consumers with less access to credit create
additional demand and can lead to increased placements from third
parties.  We also note that we began exploring a balance transfer
program in the U.K. in the second quarter of 2008; this program generated modest
revenues in 2009 and although it is expected to grow rapidly, its results are
not anticipated to be material in 2010.




Most of
our Investments in Previously Charged-Off Receivables segment’s acquisitions of
normal delinquency charge offs recently have been comprised of previously
charged-off receivables from the credit card receivables we own and the
securitization trusts we service. Until the dispute arose with Encore in 2008,
the segment had, almost simultaneously with each of its purchases from these
securitization trusts, sold these charge offs for a fixed sales price under its
five-year forward flow contract with Encore rather than retained them on its
balance sheet. With these essentially simultaneous pass-through transactions,
the segment had not previously experienced any substantial mismatch between the
timing of its collections expenses and the production of revenues under its cost
recovery method of accounting. This changed in the third quarter of 2008,
however, as a result of Encore’s refusal to purchase receivables under the
forward flow contract. During the term of this now-settled dispute, our
Investment in Previously Charged-Off receivables segment retained its purchased
charge offs on its balance sheet and undertook collection activities to maximize
its return on these purchases. The retention of these receivables caused
significant reductions in its earnings given the mismatching of cost recovery
method collection expenses with their associated revenues (i.e., as collection
expenses were incurred up front, while revenue recognition was delayed until
complete recovery of each respective acquired portfolio’s investment). However,
our third quarter 2009 settlement with Encore allowed our Investments in
Previously Charged-Off Receivables segment to dispose of volumes of previously
charged off receivables that had built up on its balance sheet during the term
of the Encore dispute and record the $11.0 million net pre-tax gain described
above.


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With the
Encore settlement now behind us, we do not expect our Investments in Previously
Charged-Off Receivables segment to return immediately to pre-dispute
profitability levels. Encore will no longer be purchasing the portfolios of
previously charged-off receivables that this segment purchases from us and from
the securitization trusts we service.  As such, the segment will
likely hold such previously charged-off receivables on its balance sheet and
collect on them—thereby giving rise to the aforementioned cost-recovery-induced
expense and revenue timing mismatches. Additionally, even if our Investments in
Previously Charged-Off Receivables segment were to identify a buyer for its
holdings of these previously charged-off receivables, it is likely that such a
buyer would pay significantly less than Encore did. Under its fixed-price
commitment, Encore was paying a price that was reflective of the high valuations
being placed on charged-off paper in the market generally in 2005, rather than
in today’s environment in which the relative supply of charged-off paper is
greater. Moreover, the volumes of previously charged off receivables coming out
of the securitizations trusts that we service will fall significantly from the
volumes that our Investments in Previously Charged-Off Receivables segment
purchased prior to the beginning of the Encore dispute.




Notwithstanding
the above-discussed factors surrounding our Investments in Previously
Charged-Off Receivables segment’s purchases of previously charged-off
receivables from us and the securitization trusts we service, an increase in the
availability of third-party charged-off paper has created several opportunities
for us since the fourth quarter of 2008. We have been able to complete several
large purchases of charged-off portfolios from third parties at attractive
pricing.  The increasing supply of charged-off paper also is likely to
result in further opportunities to acquire third-party charged-off receivables
portfolios at prices under which we can generate significant returns, and
subject to liquidity constraints, we expect to increase our purchases of charged
off portfolios from third parties in the coming year.




Retail
Micro-Loans Segment.Our Retail Micro-Loans segment consists of a network
of storefront locations that, depending on the location, provide some or all of
the following products or services:  (1) small-balance, short-term
cash advance loans—generally less than $500 for 30 days or less and to
which we refer as “micro-loans;” (2) installment loan and other credit products;
and (3) money transfer and other financial services. These loans and products
are marketed through retail branch locations in Alabama, Colorado, Kentucky,
Mississippi, Ohio, Oklahoma, South Carolina, Tennessee, and Wisconsin. The
assets associated with our retail micro-loan operations were principally
acquired during 2004 and early 2005. Our revenues in this segment primarily
consist of fees and/or interest earned on our cash advance, installment loan and
other credit products, as well as various transactional fees earned on our money
transfer and other financial services. Our Retail Micro-Loans segment marketed,
originated, invested in, and/or serviced $440.3 million in micro-loans
during 2009, which resulted in 2009 revenue of $73.1 million and net loans
and fees receivables of $34.0 million at December 31, 2009.




In most
of the states in which our Retail Micro-Loans segment operates, we make loans
directly to customers against personal checks, which are held until the
customers repay the loan principal and fees or until the holding period has
expired (typically 14 days). This form of business is generally referred to as a
“deferred presentment” service. In exchange for this service, we receive an
earned check fee typically ranging from approximately 15% to 17% of the advance
amount. This deferred presentment model operates under the authority of
state-governed enabling statutes. The form and structure of these deferred
presentments may change in accordance with corresponding changes in state, local
and federal law.




We also
cash checks for our customers at a fee calculated as a percentage of the face of
the check in certain locations. We also may charge and collect additional fees
for loan originations, returned checks, late fees and other fees as allowed by
governing laws and statures. Currently, origination fees range from $15 to $30
dollars but are subject to change pursuant to changes in applicable laws. Fees
for returned items declined due to NSF and closed accounts are typically set by
state and range from $30 to $50, while late fees, which also vary by state, can
be as high as $50.




Customers
obtain micro-loans from us by visiting our retail storefronts and completing the
loan application process. Once the application is completed by the customer, the
store personnel review the documents to ensure that the information provided is
accurate and sufficient to make an informed underwriting
decision.  Once approved by our underwriting model, the customer signs
an agreement that outlines the micro-loan terms. The customer then provides a
check or ACH authorization to cover the amount of the micro-loan plus any fees
or interest associated with the micro-loan. By signing the micro-loan agreement,
the customer agrees to return on the date specified, typically his/her pay date
to “buy back” his/her check or revoke his/her ACH authorization, thus repaying
the micro-loan including any fees or interest outstanding. Should the customer
fail to return on the specified date, we may deposit his/her check or initiate
the ACH previously authorized by the customer. In addition to the balance of the
micro-loan and associated fees or interest, we may also seek to collect any
applicable NSF and/or late fees accrued.




In states
where permissible by law, we may offer alternative products to micro-loan
customers as well as to customers who do not obtain micro-loans from us. Product
and service offerings include check cashing, as well as services offered by
independent third parties through contractual agreements with us. These
third-party products and services include tax preparation services, money order
and wire transfer services and bill payment services.




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Our
deferred presentment service businesses are regulated directly and indirectly
under various federal and state consumer protection and other laws, rules and
regulations, including the federal Truth-In-Lending Act, the federal Equal
Credit Opportunity Act, the federal Fair Credit Reporting Act, the federal Fair
Debt Collection Practices Act, the federal Gramm-Leach-Bliley Act and federal
Telemarketing and Consumer Fraud and Abuse Prevention Act. These statutes and
their enabling regulations, among other things, impose disclosure requirements
when a consumer loan or cash advance is advertised and when the account is
opened. In addition, various state statutes limit the rate and fees that may be
charged, prohibit discriminatory practices in extending credit, impose
limitations on the number and form of transactions and restrict the use of
consumer credit reports and other account-related information. Many of the
states in which these businesses operate have various licensing requirements and
impose certain financial or other conditions in connection with their licensing
requirements. Any adverse change in or interpretation of existing laws or
regulations or the failure to comply with any such laws and regulations could
result in fines, class-action litigation, or interruption or cessation of
certain business activities. Any of these events could have a material adverse
effect on our business. In addition, there can be no assurance that amendments
to such laws and regulations or new or more restrictive laws or regulations, or
interpretations thereof, will not be adopted in the future which may make
compliance more difficult or expensive, further limit or restrict fees and other
charges, curtail current operations, restrict our ability to expand operations
or otherwise materially adversely affect our businesses or
prospects.  For example in the state of South Carolina, new laws have
been enacted to require the use of a database to limit consumers to one
outstanding micro-loan.  The effects of this new regulation could
result in a loss of customers because many of our customers currently have
outstanding loans with our competitors in addition to us, and they will be
forced to choose and utilize the services of only one micro-loan provider. We
are active in the Financial Service Centers of America (“FISCA”) and continually
monitor federal, state and local regulatory activity through FISCA, as well as
state and local lobbyists.




From the
inception of our retail micro-loan operations through mid-2007, we embarked on a
strategy of converting our mono-line micro-loan storefronts into neighborhood
financial centers offering a wide array of financial products and services,
including auto insurance, stored-value cards, check cashing, money transfer,
money order, bill payment, auto title loans and tax preparation service
assistance. These new products had some success in improving foot traffic within
our storefronts and increasing our revenues on a per store basis. In certain
states, however, we saw increasingly stringent lending regulations (which in
many cases precluded the execution of our multi-product line strategy) and
possible evidence of market saturation, both of which resulted in revenue growth
that did not meet our expectations. At the same time, we saw rising
delinquencies and charge offs in almost all of the states where we had retail
micro-loan operations. After evaluating the operations of our Retail Micro-Loans
segment on a state-by-state basis, it became evident during 2007 that the
potential risk-adjusted returns expected in certain states did not justify the
ongoing required investment in the operations of those states. As a result,
during the fourth quarter of 2007, we decided to pursue a sale of our Retail
Micro-Loans segment’s operations in six states:  Florida; Oklahoma;
Colorado; Arizona; Louisiana; and Michigan. Through a series of staged closings
with a single buyer, the first of which was completed July 31, 2008,
we completed the sale of operations in three states (Florida, Louisiana, and
Arizona) in the third quarter of 2008. By September 30, 2008, we had closed all
remaining storefronts in Michigan and our unprofitable storefronts in Colorado
and Oklahoma. For a limited number of profitable storefronts in Colorado and
Oklahoma, however, we elected to continue operations, and we have removed these
storefronts from discontinued operations in our consolidated statements of
operations for all periods presented. Our various discontinued operations within
these six states are included in the discontinued operations category in our
consolidated statements of operations for all periods presented.




During
the first quarter of 2008, after reevaluating the capital required for
sustaining start-up losses associated with our eighty-one store locations in
Texas, we decided to pursue a sale of our Texas store locations—a sale that was
completed in April 2008. We have included our Texas results in the discontinued
operations category in our consolidated statements of operations for all periods
presented.   In connection with our decision to sell our Texas
retail micro-loans operations and hold those operations for sale, we allocated
goodwill between our retained Retail Micro-Loans segment operations and our
discontinued Texas operations, thereby resulting in a $1.1 million impairment
loss that is reported within loss from discontinued operations in
2008. This valuation analysis was based on then-current internal
projections and then-existing market data supporting valuation prices of similar
companies.




Additionally,
during the second quarter of 2009, we elected to close all the remaining
locations in Arkansas due to an increasingly negative regulatory
environment.  We have included our Arkansas results in the
discontinued operations category in our consolidated statements of operations
for all periods presented.  In connection with our second quarter 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




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is
reported within loss from discontinued operations in the year ended December 31,
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 current internal projections of
residual cash flows and existing market data supporting valuation prices of
similar companies; this analysis yielded an additional $20.0 million goodwill
impairment charge associated with these continuing operations that is reflected
within our condensed consolidated statement of operations for the year ended
December 31, 2009.




During
the first half of 2006, we began exploring potential international market
opportunities for our Retail Micro-Loans segment. As part of this effort, we
focused on potential opportunities in the U.K.  To test market
receptiveness for our products in the U.K. we opened a total of four locations
during 2006 and 2007.  Subsequently, capital requirements to continue
these exploratory operations became excessive and we decided to discontinue our
efforts and closed these locations during 2009.




During
2009 and 2008, we closed 9 and 10 locations, respectively (other than those
closed as part of our discontinued operations) and did not open any new
locations.  Included in the 2009 store closures are all of our
storefront locations associated with our U.K. storefront
operations.  Currently, we are not planning to expand the current
number of locations in any new or existing markets; instead, we likely will
continue to look at closing individual locations that do not meet our
profitability thresholds. In addition, we will continue to evaluate our
risk-adjusted returns in the states comprising the continuing operations of our
Retail Micro-Loans segment.




Auto Finance
Segment.Our Auto Finance segment includes a variety of auto
sales and lending activities.




Our
original platform, CAR, acquired in April 2005, purchases auto loans at a
discount and services auto loans for a fee; its customer base includes a
nationwide network of pre-qualified auto dealers in the buy-here, pay-here used
car business.




We also
own substantially all of JRAS, a buy-here, pay-here dealer we acquired in 2007.
Through the JRAS platform, we sell vehicles to consumers and provide the
underlying financing associated with the vehicle sales. Customer purchases are
financed for periods of time between 24 and 42 months and credit is approved and
payments are received in each storefront. We currently retain all loans and the
servicing rights and obligations for all contracts. As of December 31, 2008,
JRAS had twelve retail lots in four states. In the first quarter of 2009, we
undertook steps to close four lots in two states, and we closed an additional
two lots in two states in the second quarter of 2009 leaving a remaining six
lots as of December 31, 2009. The capital requirements to bring JRAS’s sales for
its twelve locations to a level necessary to completely cover fixed overhead
costs and consistently generate profits were more than we are willing to
undertake given the current liquidity environment. We currently do not intend to
expand JRAS’s operations, and we currently are evaluating the closure of
additional JRAS lots.




Lastly,
our ACC platform acquired during 2007 historically purchased retail installment
contracts from franchised car dealers. We ceased origination efforts within the
ACC platform during 2009 and outsourced the collections on its portfolio of auto
finance receivables.




During
the third quarter of 2009, we paid off our CAR debt facility and one of the debt
facilities underlying our ACC originated receivables as we were not able to
reach satisfactory terms to renew or replace these debt facilities at that time.
In the fourth quarter of 2009, however, we were able to obtain financing against
our ACC auto finance receivables, and in  connection with that
transaction, we repaid a $23.3 million debt facility secured by certain ACC auto
finance receivables, combined those receivables with other ACC auto finance
receivables and pledged the aggregated liquidating pool of ACC receivables
against a $103.5 million amortizing debt facility. Also in that quarter, we
obtained a new, non-recourse $50.0 million line of credit secured by auto
finance receivables associated with our CAR operations.




In our
CAR operations, we generate revenues on purchased loans through interest earned
on the face value of the installment agreements combined with discounts on loans
purchased. We generally earn discount income over the life of the applicable
loan. Additionally, we generate revenues from servicing loans on behalf of
dealers for a portion of actual collections and by providing back-up servicing
for others’ similar quality securitized assets. We offer a number of other
products to our network of buy-here, pay-here dealers (including a product under
which we lend directly to the dealers), but the vast majority of our activities
are represented by our purchases of auto loans at discounts and our servicing of
auto loans for a fee.




Collectively,
we currently serve 795 dealers through our Auto Finance segment in 46 states and
the District of Columbia.


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We were
required to make a determination of the fair value of goodwill and intangible
assets within our Auto Finance segment in the third quarter of 2008 because our
refinancing of certain debt facilities in September 2008 under higher pricing
and reduced leverage (i.e., advance rates against underlying asset values)
caused us to expect both lower profit margins and higher capital requirements
(and hence diminished profit and growth potential relative to our acquisition
date expectations). In connection with this determination, we recorded a
non-cash goodwill impairment charge of $29.2 million in the third quarter of
2008. We also recorded a non-cash impairment charge of $1.7 million in the
fourth quarter of 2008 to write off our remaining Auto Finance segment goodwill
(associated with our JRAS reporting unit) pursuant to our annual goodwill
impairment testing. With these two impairment determinations and charges in
2008, we no longer have any recorded goodwill within our Auto Finance
segment.




To
summarize the current status of our Auto Finance segment, our CAR operations are
performing well in the current environment (achieving consistent profitability
with very modest growth), our JRAS operations currently are losing money and
have contracted significantly during 2009, and our ACC origination and internal
servicing activities have ceased and its liquidating pool of auto finance
receivables has been pledged against non-recourse debt and is being serviced by
an outsourced third-party contractor.




Internet
Micro-Loans Segment.  Our Internet Micro-Loans
segment currently is comprised of our U.K. and U.S.-based Internet, micro-loan
operations.




In
April 2007, we acquired 95% of the outstanding shares of Month-End Money
(“MEM”), our U.K.-based, Internet, micro-loan operations, for £11.6 million
($22.3 million) in cash. 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 22.5% continuing minority
ownership interest in MEM. The settlement of the contingent earn-out resulted in
a re-measurement of the carrying value of our investment in MEM in accordance
with applicable accounting literature and additional goodwill of $5.6
million.




Using
proprietary analytics to market, underwrite and manage loans to consumers in
need of short-term financial assistance, MEM loans are made for a period of up
to 40 days and are repayable in full on the customer’s next payday.  A
typical customer is 22 to 35 years of age, has average net monthly income of
£1,300, works in an office or skilled environment and borrows £200. In exchange
for this service, we receive a fee, typically equal to 25% of the advance
amount.




Internet
micro-loans in the U.K. are predominantly made by directing the customer to the
MEM website generally through direct marketing. Once at the website, the
customer completes an online application for a loan by providing his or her
name, address, employment information, desired loan amount and bank account
information.  This information is automatically screened for fraud and
other indicators and based on this information an application is immediately
approved or declined.  In some cases, additional information may be
required from the applicant prior to making a loan decision.  Once a
loan is approved, the customer agrees to the terms of the loan and the amount
borrowed is directly deposited into a customer’s bank account. At the agreed
upon repayment date, the customer’s debit card is automatically charged for the
full amount of the loan plus applicable fees. If repayment is not made at the
agreed upon repayment date, MEM will continually seek to contact the customer in
order to collect the amount due. We will either seek full repayment or by
agreement with the customer collect the amount under a repayment schedule of up
to six months (depending on the amount due). After 90 days of in-house
collection activity, the account will be transferred to a third-party collection
agency with an aim of maximizing recovery of the charged-off debt.




Our MEM,
U.K.-based, Internet, micro-loan operations are subject to U.K. regulations that
provide similar consumer protections to those provided under the U.S. regulatory
framework. MEM is directly licensed and regulated by the Office of Fair Trading
(“OFT”).  MEM is governed by an extensive regulatory framework,
including the following:  Consumer Credit Act, Data Protection Act;
Privacy and Electronic Communications Regulations; Consumer Protection and
Unfair Trading regulations; Financial Services (Distance Marketing) Regulations;
Enterprise Act; Money Laundering Regulations and ASA adjudications. The
aforementioned legislation imposes strict rules on the look and content of
consumer contracts, how interest rates are calculated and stated, advertising in
all forms, who we can contact and disclosures to consumers, among others. The
regulators such as the OFT provide guidance on consumer credit practices
including collections.  The regulators are constantly reviewing
legislation and guidance in many areas of consumer credit. MEM is involved in
discussions with the regulators via trade groups while keeping up to date with
any regulatory changes and implementing them where and when
required.




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Also
currently included within our Internet Micro-Loans segment are our U.S.-based,
Internet micro-loan operations, which are start-up and limited in nature and are
not yet material to our consolidated results of operations. We intend to
continue testing underwriting techniques and marketing approaches within the
U.S. at a measured pace, and depending upon the results of this testing, we may
grow Internet-based micro-loan cash advance lending within the U.S.






Because
of the start-up nature of our U.S. Internet micro-loan operations, MEM
represents the only significant continuing operations within our Internet
Micro-Loans segment. We have experienced positive impacts from these operations
throughout 2009, and we expect to continue to profitably grow this business at a
modest pace in 2010. Our Internet micro-loan operations originated
$264.2 million in micro-loans during 2009, resulting in 2009 revenue of
$65.3 million and net loans and fees receivables of $23.5 million at
December 31, 2009.




How
Do We Operate?




Credit Cards
Segment.  Historically, we have marketed unsecured
general-purpose credit cards through our contractual relationships with
third-party financial institutions. Under our issuing bank agreements, the
issuing banks have owned the credit card accounts, and we have purchased
receivables underlying the accounts.




During
periods in which credit card accounts are open (i.e., not closed to purchases
like substantially all of our credit card accounts are currently), on a daily
basis, we purchase the credit card receivables generated in the accounts
originated by the banks issuing our credit cards. We in turn securitize
substantially all of the receivables generated each day by selling the
receivables to securitization trusts. When we sell the receivables, we receive
cash proceeds and a retained interest in the applicable trust. The cash proceeds
we receive from investors when we sell receivables in our securitizations are
less than the cash we use to initially purchase the credit card receivables. The
retained interest we receive equals this difference and is a use of our cash.
Our retained interests are subordinate to the other investors’ interests. The
receivables sold in our securitizations generate future cash flows as
cardholders remit payments, which include repayments of principal, interest and
various fees on their accounts. These payments are remitted to the
securitization trusts and then disbursed in accordance with the securitization
agreements. We receive all of the excess cash flows from the securitizations,
which represent collections on the accounts in excess of the interest paid to
the investors, servicing fees paid to us, credit losses and required
amortization or other principal payments. We use the cash proceeds that we
receive when we sell the receivables to help fund the new receivables generated
in the accounts. We use cash flows generated from operations, as well as cash
from the issuance of debt and equity, to fund our retained interests in the
receivables generated in the accounts.




As noted,
the above discussion focuses on an environment in which we are actively
marketing new credit card accounts, credit card accounts are open to cardholder
purchases, and we are financing these activities through the securitization
markets—an environment in which we do not find ourselves today. For over two
years, we have not been able to access the securitization markets to facilitate
any of our traditional credit card marketing activities, and all of our credit
card receivables securitization arrangements currently are in amortization
status—which for us means that the only cash flows we are receiving from the
securitization trusts are compensation for our servicing efforts until such
time, if any, that all of the non-recourse securitization facilities underlying
each securitization trust are completely repaid.




We also
historically have acquired distressed and other portfolios of sub-prime credit
card receivables. We typically have acquired these portfolios at a substantial
discount due to the likelihood that a large percentage of the receivables will
be charged off as the underlying debtors default. We use our credit models to
predict the extent to which the underlying debtors will be able to repay us,
which we factor into the price that we pay for a portfolio. Our profitability in
these transactions hinges on whether the underlying debtors in the aggregate
remit payments that exceed the price we paid for the portfolio. While portfolio
acquisitions historically have been a significant component of our business and
a significant source of profitability for us, we have not acquired a credit card
receivables portfolio since 2007. We are, however, pursuing several portfolio
acquisitions and servicing opportunities at this time, although we cannot be
certain that we will be successful in completing any such transactions.




See our
consolidated financial statements included herein and our “Liquidity, Funding
and Capital Resources” section of Management’s Discussion and Analysis of
Financial Conditions and Results of Operations for further details on our
securitizations.




Retail
Micro-Loans Segment. Our Retail Micro-Loans segment operates through a
subsidiary, which serves as a holding company for the several separate
subsidiaries required to support these operations. This business is conducted by
subsidiaries that operate separately in each state. Each of these operating
subsidiaries has a board of managers and management distinct from those of
CompuCredit, has been capitalized at a level that we believe is appropriate for
its business, conducts its operations independently of the other operating
subsidiaries and on an arms’-length basis with its parent and other
CompuCredit-related entities, has its own books and records and maintains its
assets independently of the


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other
operating companies and other CompuCredit-related entities except insofar as
certain cash management and administrative functions that are or may be
performed under administrative service contracts on a collective basis for the
benefit of the operating subsidiaries. Each of these subsidiaries is operated as
an independent entity in accordance with the laws of the state of its
formation.




Auto Finance
Segment. Our CAR
operations within our Auto Finance segment are licensed and/or authorized to
acquire loans in the 46 states and the District of Columbia in which they
presently operate. These operations acquire and service aged or newly originated
receivables principally from buy-here, pay-here used car dealers. Acquired
receivables are purchased at a discount to par, and typically have a remaining
maturity of 20 to 30 months.




JRAS
sells vehicles to consumers and provides the underlying financing associated
with the vehicle sales. Customer purchases are generally financed for periods of
time between 24 and 42 months and credit is approved and payments are received
in each storefront. JRAS currently retains all loans and the servicing rights
and obligations for all of its sales contracts.




Internet
Micro-Loans Segment. Our Internet Micro-Loans segment operates through
separate U.K. and U.S. subsidiaries required to support our operations. Each of
these operating subsidiaries has a board of managers and management distinct
from those of CompuCredit, has been capitalized at a level that we believe is
appropriate for its business, conducts its operations independently of the other
operating subsidiaries and on an arms’-length basis with other
CompuCredit-related entities, has its own books and records and maintains its
assets independently of the other CompuCredit-related entities except insofar as
certain cash management and administrative functions that are or may be
performed under administrative service contracts on a collective basis for the
benefit of the operating subsidiaries. Each of these subsidiaries is operated as
an independent entity in accordance with the laws of the jurisdiction of its
formation.




How
Do We Collect and Evaluate Data?




Our
general business model is predicated upon our ability to successfully predict
the performance of sub-prime receivables, irrespective of whether the
receivables arise from portfolio acquisitions or through other origination
channels. In other words, we do not wholly focus on the financial institution
that originated the particular receivable, but, rather, on how it will perform.
We believe our unique skill set is our ability to predict this credit behavior
and to service the portfolio in a superior manner to ensure maximum performance.
To this end, we have developed proprietary information management systems that
support our decision-making functions, including target marketing, solicitation,
application processing, account management and collections activities. These
information systems take advantage of a state-of-the-art data warehouse and
ancillary data management systems that maintain information regarding a customer
throughout the customer’s relationship with us. The systems’ purpose is to
gather, store and analyze the data necessary to facilitate our target marketing
and risk management decisions.




Our
information systems capture customer information gathered either from prior
owners of our acquired receivables or in the target marketing, application and
solicitation phases of an originated customer relationship and throughout the
remainder of our relationship with the customer, including customer credit
behavior and payment patterns. By combining and storing such information, we
have established an analytical database linking “static” historical data with
“dynamic” actual customer performance. Our portal interfaces and business
intelligence tools allow management to access and analyze the information
management system on demand.




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




How
Do We Obtain Our Customers?




Credit Cards
Segment. As noted above, we view our customers the same regardless of
whether we acquire them through traditional marketing activities or via
portfolio purchases. For our credit card lending activities, we believe we have
developed an effective model for predicting the credit behavior of consumers who
are classified by regulators as sub-prime credit risks, and this model works for
credit card receivables generated through acquisition and through our other
origination channels. We believe we can use this model to predict the credit
behavior of these consumers with sub-prime-related products and asset classes
other than credit cards. Since 1996, we have worked with national credit bureaus
to develop proprietary risk evaluation systems using credit bureau data. Our
systems enable us to segment customers into narrower ranges within each FICO
scoring range. The FICO scoring, developed by Fair, Isaac &
Co., Inc., is the most commonly used credit risk score in


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the U.S.
consumer credit industry. The purpose of the FICO score is to rank consumers
relative to their probability of non-payment on a consumer loan. We believe that
sub-segmenting our market within FICO scoring ranges enables us to better
evaluate credit risk and to price our products effectively. Within each FICO
scoring range, we evaluate potential customers using credit and marketing
segmentation methods derived from a variety of data sources. We place potential
customers into product offering segments based upon combinations of factors.
During periods (unlike the current period) in which we are actively marketing
credit card accounts, we focus our marketing programs (direct mail,
telemarketing, Internet, etc.) on those customer segments that appear to have
high income potential when compared to other segments and demonstrate acceptable
credit and bankruptcy risks. Our objective is to use our systems to evaluate
credit risk more effectively than the use of FICO scores alone.




Our
target marketing system is intended to provide the same competitive advantage
when evaluating portfolios as when originating customers through marketing
campaigns. We believe that our ability to evaluate credit risk within FICO
scoring ranges enables us to determine a portfolio’s overall credit risk more
accurately than many portfolio sellers and potential purchasers. This risk
evaluation expertise is designed to enable us to avoid portfolio purchases in
which the final discount does not accurately reflect the credit risk of the
portfolio. Conversely, we may bid more aggressively for portfolios in which the
perceived credit risk, as reflected by the FICO scores, is significantly higher
than our forecast of credit risk.




Retail
Micro-Loans Segment.Our subsidiaries obtain new retail micro-loan
customers through direct marketing on the Internet and radio, as well as through
local advertising in appropriate markets. All new customers are required to have
an active bank account and a regular source of income, of which they must
provide positive evidence, prior to obtaining most micro-loan product offerings.
Once approved, a customer signs a lending agreement detailing the terms of the
loan and, depending upon the type of micro-loan product, may write a personal
check to cover the amount of the loan plus a finance charge.




Auto Finance
Segment. Our CAR operations within this unit acquire existing retail
installment contracts directly from buy-here, pay-here used car dealers and
small finance companies, while our JRAS operations lend directly to the
customers who purchase their used cars. CAR also enters agreements to service
retail installment contracts.




We
develop and maintain relationships with buy-here, pay-here used car dealers and
franchised and independent auto dealerships through a direct sales force, and we
analyze markets through the acquisition of data from industry-related service
providers, which provide information that indicates sufficient dealer and
customer densities. We also conduct direct advertising campaigns in specific
target markets in conjunction with industry-focused advertising in established
magazines and periodicals. This segment also sponsors and participates in most
state and local auto dealer associations and is a sponsor in national
organizations such as the NIADA and NABD.




Internet
Micro-Loans Segment.Internet micro-loans are predominantly
made by directing the customer to the applicable company website generally
through direct marketing. Once at the website, the customer completes an online
application for a loan by providing his or her name, address, employment
information, desired loan amount and bank account information.  This
information is automatically screened for fraud and other indicators and based
on this information an application is immediately approved or
declined.  In some cases, additional information may be required from
the applicant prior to making a loan decision.  Once a loan is
approved, the customer agrees to the terms of the loan and the amount borrowed
is provided to the customer generally through a deposit to a customer’s bank
account.




What
Other Services Do We Offer to Our Customers?




Credit Cards
Segment. While not offered currently, during periods in which credit card
accounts are open to cardholder purchases, we offer several ancillary products
and services to our cardholder customers, including memberships, insurance
products, subscription services and debt waiver. These products and services are
offered throughout our relationship with a customer, and we have several
relationships with third-party providers of such products. We provide marketing
support and a billing platform for these third-party products, and the
third-party providers are fully responsible for the fulfillment of the products.
Our responsibility is to ensure that enrollment and cancellation of the products
purchased by our customers are properly processed and billed to the customers at
the rates established.




The
success of our ancillary products business is a function principally of whether
credit card accounts are open to cardholder purchases (and substantially all of
our customer accounts currently are not), as well as the number and variety of
our product offerings, the marketing channels leveraged to sell these products
and the customers to whom we market these products. The profitability of our
ancillary products and services is affected by new credit card account growth,
the levels at which customer credit card accounts are open to cardholder
purchases, the response rates to product solicitations, the volume and frequency
of marketing programs and the operating expenses associated with the programs.
Although a wide range of our


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customers
purchase ancillary products and services, such product and service sales
generally are higher to new customers and tend to diminish throughout our
relationship with our cardholders. As a result, we anticipate that during
periods of low new account growth, our profitability from ancillary products and
services will either grow at a reduced rate or decline.




How
Do We Maintain the Accounts and Mitigate Our Risks?




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




For
credit card accounts that are open to cardholder purchases (and very few such
accounts exist in our portfolio currently), we monitor authorizations, and we
limit customer credit availability for transaction types we believe present
higher risks, such as foreign transactions, cash advances, etc. We generally
seek to manage credit lines to reward financially underserved customers who are
performing well and to mitigate losses from delinquent customer
segments.  During periods when we have the liquidity available to fund
increased line usage, we periodically review accounts exhibiting favorable
credit characteristics are for credit line increases. We also employ strategies
to reduce otherwise open credit lines for customers demonstrating indicators of
increased credit or bankruptcy risk. Data relating to account performance are
captured and loaded into our proprietary database for ongoing analysis. We
adjust account management strategies as necessary, based on the results of such
analyses. Additionally, we use industry-standard fraud detection software to
manage the portfolio. We route accounts to manual work queues and suspend
charging privileges if the transaction-based fraud models indicate a high
probability of fraudulent card use.




Retail and
Internet Micro-Loans.  In a practice that we believe to be
unique within the retail micro-loans industry, we began in 2008 to apply
risk-based scorecards developed from propriety risk models to customer lending
relationships within our retail and U.K.- and U.S.-based Internet micro-loan
operations. Through employing these proprietary scorecards within these
operations, along with efficiencies created within our collections practices, we
have experienced significant reductions in delinquencies and charge offs
relative to both our historical performance and other industry participants.
While the use of these scorecards has reduced loan size and store revenues in
certain cases, it has significantly improved our profitability per
transaction.




Auto Finance
Segment. Our CAR operations manage credit quality and loss mitigation at
the dealer portfolio level through the implementation of dealer-specific loss
reserve accounts. In most instances, the reserve accounts are
cross-collateralized across all business presented by any single dealer. CAR
monitors performance at the dealer portfolio level (by product type) to adjust
pricing or the reserve account or to determine if the dealer is to be excluded
from our account purchase program.




CAR
applies specific purchase guidelines based upon each product offering, and we
establish delegated approval authorities to assist in the monitoring of
transactions during the loan acquisition process. Dealers are subject to
specific approval criteria, and individual accounts are typically verified for
accuracy before, during and after the acquisition process. Dealer portfolios
across the business segment are monitored and compared against expected
collections and peer dealer performance. Monitoring of dealer pool vintages,
delinquencies and loss ratios helps determine past performance and expected
future results, which are used to adjust pricing and reserve requirements. Our
CAR operations manage risk through diversifying their receivables among 795
active dealers.




For our
JRAS operations, credit quality and loss mitigation initially are dependent upon
our obtaining a first lien in the auto being financed. As a result, for credit
evaluation purposes, we consider a portion of these loans to be unsecured and
evaluate the creditworthiness of the customers in that context. When a JRAS
customer defaults and JRAS repossesses the auto, JRAS can resell the car to
another customer.




How
Do We Collect from Our Customers?




Credit Cards
Segment. The goal of the collections process is to collect as much of the
money that is owed to us in the most cost effective and customer friendly manner
possible. To this end, we employ the traditional cross-section of letters and
telephone calls to encourage payment. However, recognizing that our objective is
to maximize the amount collected, we also


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will
offer customers flexibility with respect to the application of payments in order
to encourage larger or prompter payments. For instance, in certain cases we vary
from our general payment application priority (i.e., of applying payments first
to finance charges, then to fees, and then to principal) by agreeing to apply
payments first to principal and then to finance charges and fees or by agreeing
to provide payments or credits of finance charges and principal to induce or in
exchange for an appropriate customer payment. Application of payments in this
manner also permits our collectors to assess real time the degree to which a
customer’s payments over the life of an account have covered the principal
credit extensions to the customer. This allows our collectors to readily
identify our potential “economic” loss associated with the charge off of a
particular account (i.e., the excess of principal loaned to the customer over
payments received back from the customer throughout the life of the account).
With this information, our collectors work with our customers in a way intended
to best protect us from economic loss on the cardholder relationship. Our
selection of collection techniques, including, for example, the order in which
we apply payments or the provision of payments or credits to induce or in
exchange for customer payment, impacts the statistical performance of our
portfolios that we reflect under the “Credit Cards Segment” caption within
Item 7, “Management’s Discussion and Analysis of Financial Condition and
Results of Operations.”




We
consider management’s experience in operating professional collection agencies,
coupled with our proprietary systems, to be a competitive advantage in
minimizing delinquencies and charge offs. Our collectors employ various and
evolving tools when working with a cardholder, and they routinely test and
evaluate new tools in their drive toward improving our collections with the
greatest degree of efficiency possible. These tools include programs under which
we may reduce or eliminate a cardholder’s APR or waive a certain amount of
accrued fees, provided the cardholder makes a minimum number or amount of
payments. In some instances, we may agree to match a customer’s payments, for
example, with a commensurate payment or reduction of finance charges or waiver
of fees. In other situations, we may actually settle with customers and adjust
their finance charges and fees, for example, based on their commitment and their
follow through on their commitment to pay certain portions of the balances they
owe. Our collectors may also decrease a customer’s minimum payment under certain
collection programs. Additionally, we employ re-aging techniques as discussed
below. We also may occasionally use our marketing group to assist in determining
various programs to assist in the collection process. Moreover, we willingly
participate in the Consumer Credit Counseling Service (“CCCS”) program by
waiving a certain percentage of a customer’s debt that is considered our “fair
share” under the CCCS program. All of our programs are utilized based on the
degree of economic success they achieve.




We
constantly are monitoring and adapting our collection strategies, techniques,
technology and training to optimize our efforts to reduce delinquencies and
charge offs. We use our systems to develop these proprietary collection
strategies and techniques, which we employ in our operations. We analyze the
output from these systems to identify the strategies and techniques that we
believe are most likely to result in curing a delinquent account in the most
cost-effective manner, rather than treating all accounts the same based on the
mere passage of time.




Our
collection strategies include utilizing both internal and third-party collectors
and creating a competitive process of rewarding the most effective and efficient
group of collectors from within our system and among third-party agencies. We
divide our portfolios into various groups that are statistically equivalent and
provide these groups of accounts to our various internal and external collection
resources. We compare the results of the internal and external collectors
against one another to determine which techniques and which collection groups
are producing the best results.




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




We
discontinue charging interest and fees when credit card receivables become
contractually ninety or more days past due (and in certain circumstances where
it is necessary in order to avoid so-called “negative amortization”), and we
charge off credit card receivables when they become contractually more than
180 days past due (or within 30 days of notification and confirmation
of a customer’s bankruptcy or death). However, if a cardholder makes a payment
greater than or equal to two minimum payments within a month of the charge-off
date, we may reconsider whether charge-off status remains appropriate.
Additionally, in some cases of death, receivables are not charged off if, with
respect to the deceased customer’s account, there is a surviving, contractually
liable individual or an estate large enough to pay the debt in
full.




Our
determination of whether an account is contractually past due is relevant to our
delinquency and charge-off data included under the “Credit Cards Segment”
caption within Item 7, “Management’s Discussion and Analysis of Financial
Condition and Results of Operations.” Various factors are relevant in analyzing
whether an account is contractually past due


14
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(i.e.,
whether an account has not satisfied its minimum payment due requirement), which
for us is the trigger for moving receivables through our various delinquency
buckets and ultimately to charge-off status. We consider a cardholder’s
receivable to be delinquent if the cardholder fails to pay a minimum amount
computed as a fixed percentage of his or her statement balance (3% or 4% of the
outstanding balance in some cases and in other cases 1% of the outstanding
balance plus any finance charges and late fees billed in the current
cycle).




Additionally,
in an effort to increase the value of our account relationships, we re-age
customer accounts that meet applicable regulatory qualifications for re-aging.
It is our policy to work cooperatively with customers demonstrating a
willingness and ability to repay their indebtedness and who satisfy other
criteria, but are unable to pay the entire past due amount. Generally, to
qualify for re-aging, an account must have been opened for at least nine months
and may not be re-aged more than once in a twelve-month period or twice in a
five-year period. In addition, an account on a workout program may qualify for
one additional re-age in a five-year period. The customer also must have made
three consecutive minimum monthly payments or the equivalent cumulative amount
in the last three billing cycles. If a re-aged account subsequently experiences
payment defaults, it will again become contractually delinquent and will be
charged off according to our regular charge-off policy. The practice of re-aging
an account may affect delinquencies and charge offs, potentially delaying or
reducing such delinquencies and charge offs.




Retail and
Internet Micro-Loans. Generally, for our traditional retail cash advance
micro-loan product, upon the establishment of a relationship with a customer,
the store will schedule when the customer is expected to return to our retail
location and repay the cash advance. Prior to that date, the store will attempt
to contact the customer to confirm scheduling.





If a customer
does not return to repay the cash advance, the store manager will either attempt
to contact the customer to schedule another payment date through a promise to
pay or deposit the personal check issued to us by the customer when he or she
received his or her cash advance loan. Re-scheduling of payment dates is
generally attempted first to improve customer relations and enhance overall
collections.




If the
store manager is unable to re-schedule a payment date, the customer’s check
is deposited. If the check does not clear, either due to insufficient funds, a
closed account or a stop-payment order, the branch employees use additional
collection efforts. These collection efforts typically include contacting the
customer by phone or in person to obtain a promise to pay, sending collection
letters to the customer or attempting to deposit the customer’s check if funds
become available. After attempting to collect at the store level for 30 days,
the delinquent account is moved to one of two competing centralized collection
sites. These sites attempt to collect the debt in full but have the authority to
negotiate a lesser payment in order to satisfy the debt. If these collection
efforts fail, the debt may be sold to either our own debt collections subsidiary
or to a third party to attempt collection.




For our
Internet-based micro-loan products, a customer will sign an agreement
acknowledging when a loan will be repaid (typically the customer’s next payday).
On the agreed-upon day, the loan will be repaid either through a debit to the
consumers checking account or through a charge to a customer’s debit
card.  If repayment is not made at the agreed upon repayment date, we
will continually seek to contact the customer in order to collect the amount
due. We will either seek full repayment or by agreement with the customer
collect the amount under a repayment schedule of up to six months (depending on
the amount due). After 90 days of in-house collection activity, the account will
be transferred to a third-party collection agency with an aim of maximizing
recovery of the charged-off debt.




Auto Finance
Segment. Accounts that CAR purchases from approved dealers initially are
collected by the originating branch or service center location using a
combination of traditional collection techniques. Auto Finance segment accounts
that have been loaded into our data processing system are centrally serviced to
leverage auto dialer processing for early stage collections. The collection
process includes contacting the customer by phone or mail, skip tracing and
using starter interrupt devices to minimize delinquencies. Uncollectible
accounts in our CAR operation generally are returned to the dealer under an
agreement with the dealer to charge the balance on the account against the
dealer’s reserve account. We generally do not repossess autos in our CAR
operation as a result of the agreements that we have with the dealers. JRAS
customarily repossesses autos following the default and resells those autos
directly to other customers. Within our liquidating portfolio of ACC auto
finance receivables, we customarily repossess autos following default and sell
those autos at national auctions; there almost always is a deficiency for an ACC
sale, at which point we assess whether to pursue or, more often, not pursue that
deficiency.




Consumer
and Debtor Protection Laws and Regulations




Credit Cards
Segment. Our business is regulated directly and indirectly under various
federal and state consumer protection, collection and other laws, rules and
regulations, including the CARD Act, the federal Truth-In-Lending Act, the
federal Equal Credit Opportunity Act, the federal Fair Credit Reporting Act, the
federal Fair Debt Collection Practices Act,


15
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the
federal Gramm-Leach-Bliley Act and the federal Telemarketing and Consumer Fraud
and Abuse Prevention Act. These statutes and their enabling regulations, among
other things, impose disclosure requirements when a consumer credit loan is
advertised, when the account is opened and when monthly billing statements are
sent. In addition, various statutes limit the liability of credit cardholders
for unauthorized use, prohibit discriminatory practices in extending credit,
impose limitations on the types of charges that may be assessed and restrict the
use of consumer credit reports and other account-related information. Some of
our products are designed for customers at the lower end of the FICO scoring
range. To offset the higher loss rates among these customers, these products
generally are priced higher than our other products. Because of the greater
credit risks inherent in these customers and the higher prices that we have had
to charge for these products, they, and the banks that have issued them on our
behalf, are subject to significant regulatory scrutiny. If regulators, including
the FDIC (which regulates the lenders that have issued these products on our
behalf) and the FTC, object to these products or how we have marketed them, then
we could be required to modify or discontinue them. Over the past several years,
we have modified both our products and how we have marketed them in response to
comments from regulators. Also, in December 2008, we settled litigation
associated with allegations that the FDIC and FTC had made about some of our
credit card marketing practices.




Investments in
Previously Charged-Off Receivables Segment. Our business is regulated
directly and indirectly under various federal and state consumer protection and
other laws, rules and regulations, including the federal Truth-In-Lending Act,
the federal Equal Credit Opportunity Act, the federal Fair Credit Reporting Act,
the federal Fair Debt Collection Practices Act, the federal Gramm-Leach-Bliley
Act, the U.S. Bankruptcy Code and the federal Telemarketing and Consumer Fraud
and Abuse Prevention Act. These statutes and their enabling regulations, among
other things, establish specific regulations that debt collectors must follow
when collecting consumer accounts and contain specific restrictions when
communicating with customers, including the time, place and manner of the
communications. In addition, some states require licensure prior to attempting
collection efforts.




Retail and
Internet Micro-Loans. Our micro-loan products and services are subject to
extensive state, federal and foreign regulation. The regulation of our industry
is intended primarily for the protection of consumers and is constantly changing
as new regulations are introduced at the foreign, federal, state and local
levels and existing regulations are repealed, amended and modified. As we
develop new product and service offerings, we may become subject to additional
foreign, federal, state and local regulations. State and local governments also
may seek to impose new licensing requirements or interpret or enforce existing
requirements in new ways. In addition, changes in current laws or to the
prevailing interpretations thereof and future laws or regulations may restrict
or eliminate our ability to continue our current methods of operation or expand
our operations; such laws regularly are proposed, introduced or adopted at the
state and federal level in the U.S. and in the U.K. These regulations govern or
affect, among other things, interest rates and other fees, check cashing fees,
lending practices, recording and reporting of certain financial transactions,
privacy of personal consumer information and collection practices. This evolving
regulatory landscape creates various uncertainties and risks for the operation
of our business, any of which could have a material adverse effect on our
business, prospects, results of operations or financial condition. See “Risk
Factors” and “Our Business—Legal Proceedings.”




Federal Regulation -Although
states provide the primary regulatory framework under which we offer cash
advances within the U.S., certain federal laws also impact our business. Our
products and services are subject to a variety of federal laws and regulations,
such as the Truth-in-Lending Act, the Equal Credit Opportunity Act, the Fair
Credit Reporting Act, the Fair Debt Collection Practices Act, the
Gramm-Leach-Bliley Act, the Bank Secrecy Act, the Money Laundering Act, and the
Uniting and Strengthening America by Providing Appropriate Tools Required to
Intercept and Obstruct Terrorism Act (the “PATRIOT Act”) and the regulations
promulgated for each. Among other things, these laws (1) require disclosure of
the principal terms of each transaction when a consumer loan or cash advance is
advertised and when an account is opened, (2) prohibit misleading advertising,
(3) protect against discriminatory lending practices and (4) proscribe unfair
credit practices. The Truth-in-Lending Act and Regulation Z, adopted under
the Truth-in-Lending Act, require disclosure of, among other things, the
pertinent elements of consumer credit transactions, including the dollar amount
of the finance charge and the charge expressed in terms of an APR. Any failure
to comply with any of these federal laws and regulations could have a material
adverse effect on our business, prospects, results of operations and financial
condition.




Our
marketing efforts and the representations we make about our products and
services also are subject to federal and state unfair and deceptive practices
statutes. The Federal Trade Commission enforces the Federal Trade Commission Act
and the state attorneys general and private plaintiffs enforce the analogous
state statutes. If we are found to have violated any of these statutes, that
violation could have a material adverse effect on our business, results of
operations and financial condition.




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Various
anti-cash advance legislation has been proposed or introduced in the U.S.
Congress. Congressional members continue to receive pressure to adopt such
legislation from consumer advocates and other industry opposition groups. In
February 2009, Senator Richard Durbin introduced a bill in Congress to establish
a federal cap of 36% on the effective APR on all consumer loan transactions.
Likewise, Representative Luis Gutierrez introduced a bill on the same day that
would, among other things, place a 15 cent per dollar borrowed ($.15/$1.00)
cap on fees for cash advances, ban rollovers (payment of a fee to extend the
term of a cash advance or other short-term financing), and require lenders to
offer an extended payment plan that would severely restrict lenders’ U.S. cash
advance products. Most recently, Representative Barney Frank introduced a bill
that would create the Consumer Financial Protection Agency
(“CFPA”).  This agency would take certain consumer regulatory
responsibility of financial products from seven other agencies and centralize it
in one office. It would have the authority and accountability to supervise,
examine, and enforce consumer financial protection laws.  In December
2009, the House of Representatives passed the Wall Street Reform and Consumer
Protection Act of 2009(H.R. 4173), which incorporated the
CFPA.  The timing of any Senate action on this legislation is
uncertain. Also, the Obama Administration agenda states that U.S. President
Barack Obama and Vice President Joseph Biden seek to extend a 36% APR limit to
all consumer credit transactions. Any U.S. federal legislative or regulatory
action that severely restricts or prohibits cash advance and similar services,
if enacted, could have a material adverse impact on our business, prospects,
results of operations and financial condition. Any federal law that would impose
a national 36% APR limit on our services, like that proposed in the Durbin bill,
if enacted, likely would eliminate our ability to continue our current
operations.




State Regulation -Our
business is regulated under a variety of enabling state statutes, including cash
advance, deferred presentment, check cashing, money transmission, small loan and
credit services organization laws, all of which are subject to change and which
may impose significant costs, limitations or prohibitions on the way we conduct
or expand our business. As of December 31, 2009, 36 states had specific laws
that permitted cash advances or a similar form of short-term consumer loans. As
of December 31, 2009, we operated in 8 of these 36 states under traditional
enabling statutes, and we offered a small loan product in Ohio under the Ohio
Mortgage Loan Act. Currently, we do not conduct business in the remaining states
or in the District of Columbia because we do not believe it is economically
attractive to operate in these jurisdictions due to specific legislative
restrictions, such as interest rate ceilings, an unattractive population density
or unattractive location characteristics. However, we may open storefronts in
any of these states if we believe doing so may become economically attractive
because of a change in any of these variables.




The scope
of state regulation, including the fees and terms of our products and services,
varies from state to state. Most states with laws that specifically regulate our
products and services establish allowable fees and/or interest and other charges
to consumers. In addition, many states regulate the maximum amount, maturity and
renewal or extension of cash advances or loans. The terms of our products and
services vary from state to state in order to comply with the laws and
regulations of the states in which we operate. We are active in FISCA and
continually monitor federal, state and local regulatory activity through FISCA,
as well as state and local lobbyists.




The
states with laws that specifically regulate our products and services typically
limit the principal amount of a cash advance or loan and set maximum fees and
interest rates that customers may be charged. Some states also limit a
customer’s ability to renew a cash advance and require various disclosures to
consumers. State statutes often specify minimum and maximum maturity dates for
cash advances and, in some cases, specify mandatory cooling-off periods between
transactions. Our collection activities regarding past due amounts are subject
to consumer protection laws and state regulations relating to debt collection
practices. In addition, some states restrict the advertising content of our
marketing materials. Several state statutes limit the rate and fees that may be
charged, prohibit discriminatory practices in extending credit, impose
limitations on the number and form of transactions and restrict the use of
consumer credit reports and other account-related information. Many of the
states in which our businesses operate have various licensing requirements and
impose certain financial or other conditions in connection with their licensing
requirements.  Any adverse change in or interpretation of existing
laws or regulations or the failure to comply with any such laws and regulations
could result in fines, class-action litigation, or interruption or cessation of
certain business activities. Any of these events could have a material adverse
effect on our business. In addition, there can be no assurance that amendments
to such laws and regulations or new or more restrictive laws or regulations, or
interpretations thereof, will not be adopted in the future which may make
compliance more difficult or expensive, further limit or restrict fees and other
charges, curtail current operations, restrict our ability to expand operations
or otherwise materially adversely affect our businesses or
prospects.




During
the last few years, legislation has been introduced or adopted in some states
that prohibits or severely restricts our products and services. In 2008, bills
that would severely restrict or effectively prohibit cash advances if adopted as
law were introduced in 21 states. Also, in 2009, the enabling statutes in both
Kentucky and South Carolina were amended to require, among other things, the use
of a common database to track and limit the number of micro-loans a consumer may
have at a given time. The effects of these new regulations could result in a
loss of customers as many of our customers




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currently
have outstanding loans with our competitors in addition to us and they will be
forced to utilize the services of only one micro-lender.  In addition,
Mississippi has a sunset provision in its cash advance laws that requires
renewals of the laws by the state legislature at periodic intervals, and the
cash advance laws will expire in 2012 if no further action is taken; an
expiration of these laws could have a detrimental impact on our ability to issue
existing or new loan products within the state.




Laws
prohibiting cash advances and similar products and services or making them less
profitable, or even unprofitable, could be passed in any other state at any time
or existing enabling laws could expire or be amended, any of which would have a
material adverse effect on our business, prospects, results of operations and
financial condition. For instance, in November 2008, a new Ohio law became
effective that capped interest rates on cash advances and limited the number of
advances a customer may take in any one year. In response to this legislation,
we now offer a small loan product that is not as profitable as our former cash
advance product; should there be legislative or regulatory changes in Ohio in
the future that affect the viability of our small loan product offering, there
could be a material adverse effect on our business, prospects, results of
operations and financial condition. Laws prohibiting our products and services
or making them unprofitable could be passed in any other state at any time or
existing enabling laws could expire or be amended.




Statutes
authorizing cash advance and similar products and services typically provide the
state agencies that regulate banks and financial institutions with significant
regulatory powers to administer and enforce the law. In most states, we are
required to apply for a license, file periodic written reports regarding
business operations and undergo comprehensive state examinations to ensure that
we comply with applicable laws. Under statutory authority, state regulators have
broad discretionary power and may impose new licensing requirements, interpret
or enforce existing regulatory requirements in different ways or issue new
administrative rules, even if not contained in state statutes, that affect the
way we do business and may force us to terminate or modify our operations in
particular states. They also may impose rules that are generally adverse to our
industry. Any new licensing requirements or rules, or new interpretations of
existing licensing requirements or rules, or failure to follow licensing
requirements or rules could have a material adverse effect on our business,
prospects, results of operations and financial condition.




In some
cases, we rely on the interpretations of the staff of state regulatory bodies
with respect to the laws and regulations of their respective jurisdictions.
These staff interpretations generally are not binding legal authority and may be
subject to challenge in administrative or judicial proceedings. Additionally, as
the staff of state regulatory bodies change, it is possible that their
interpretations of applicable laws and regulations also may change to the
detriment of our business. As a result, our reliance on staff interpretations
could have a material adverse effect on our business, results of operations and
financial condition.




Additionally,
state attorneys general and banking regulators are scrutinizing cash advances
and other alternative financial products and services and taking actions that
require us to modify, suspend or cease operations in their respective states.
For example, our subsidiaries decided to exit North Carolina, West Virginia and
Arkansas in settlement of reviews by applicable state regulators. During the
third quarter of 2006, our subsidiaries completed the process of closing 52
branch locations in North Carolina and 11 branch locations in West Virginia, and
in the second quarter of 2009, one of our subsidiaries completed the process of
closing 27 locations in Arkansas. Similar or additional actions could be taken
against our industry in the future by other state attorneys general and banking
regulators requiring us to suspend or cease operations in such jurisdictions and
have a material adverse effect on our business, prospects, results of operations
and financial condition.




State-specific
legislative or regulatory action can reduce our revenues and/or margins in a
state, cause us to temporarily operate at a loss in a state, or even cause us to
cease or suspend our operations in a state. From time to time, we may also
choose to operate in a state even if legislation or regulations cause us to
operate at a loss in that state.




Local Regulation -In
addition to state and federal laws and regulations, our business can be subject
to various local rules and regulations such as local zoning regulations. Any
actions taken in the future by local zoning boards or other local governing
bodies to require special use permits for, or impose other restrictions on
providers of, cash advance and similar services could have a material adverse
effect on our business, results of operations and financial
condition.




Foreign Regulation -MEM is
subject to U.K. regulations that provide similar consumer protections to those
provided under the U.S. regulatory framework. MEM is directly licensed and
regulated by the OFT. MEM is governed by an extensive regulatory framework, with
the key legislation as follows:  Consumer Credit Act, Data Protection
Act; Privacy and Electronic Communications Regulations; Consumer Protection and
Unfair Trading regulations; Financial Services (Distance Marketing) Regulations;
Enterprise Act; Money Laundering Regulations and ASA adjudications. The
aforementioned legislation imposes strict rules on the look and content of
consumer contracts, how interest rates are calculated and stated, advertising in
all forms, who we can contact and disclosures to consumers, among others. The
regulators such as the OFT




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provide
guidance on consumer credit practices including collections.  The
regulators are constantly reviewing legislation and guidance in many areas of
consumer credit. MEM is involved in discussions with the regulators via trade
groups while keeping up to date with any regulatory changes and implementing
them where and when required.




The OFT
currently is undertaking a review of what it perceives as “high cost credit,”
which includes the sector in which we operate in the U.K. The results of this
review are expected to be released in the early part of 2010. While it is
impossible to speculate on what the results of this review will be, should the
OFT adopt some of the restrictions that have been applied in certain U.S.
jurisdictions (e.g., interest rate caps or restrictions on repeat borrowings or
multiple simultaneous borrowings), there could be materially adverse effects on
our business, results of operations and financial condition.




Auto Finance
Segment. This segment is regulated directly and indirectly under various
federal and state consumer protection and other laws, rules and regulations,
including the federal Truth-In-Lending Act, the federal Equal Credit Opportunity
Act, the federal Fair Credit Reporting Act, the federal Fair Debt Collection
Practices Act, the federal Gramm-Leach-Bliley Act and the federal Telemarketing
and Consumer Fraud and Abuse Prevention Act. These statutes and their enabling
regulations, among other things, impose disclosure requirements. In addition,
various state statutes limit the interest rates and fees that may be charged,
limit the types of interest computations (e.g., interest bearing or
pre-computed) and refunding processes that are permitted, prohibit
discriminatory practices in extending credit, impose limitations on fees and
other ancillary products and restrict the use of consumer credit reports and
other account-related information. Many of the states in which this segment
operates have various licensing requirements and impose certain financial or
other conditions in connection with these licensing requirements.




Competition




Credit Cards
Segment. We face substantial competition from other consumer lenders, the
intensity of which varies depending upon economic and liquidity cycles. Our
credit card business competes with national, regional and local bankcard
issuers, other general-purpose credit card issuers and retail credit card
issuers. Large credit card issuers, including but not limited to JP Morgan
Chase, Bank of America, CitiBank, and Capital One, may compete with us for
customers in a variety of ways, including but not limited to interest rates and
fees. Many of these competitors are substantially larger than we are, have
significantly greater financial resources than we do and have significantly
lower costs of funds than we have. In addition, most of our largest competitors
are banks and do not have to rely on third parties to issue their credit cards.
Customers choose credit card issuers largely on the basis of price, including
interest rates and fees, credit limit and other product features. Customer
loyalty is often limited in this area. As such, we may lose entire accounts or
account balances to competing credit card issuers.




Our competitors are
continually introducing new strategies to attract customers and increase their
market share via techniques such as advertising, target marketing, balance
transfers and price competition. In response to competition, some issuers of
credit cards have lowered interest rates and offered incentives to retain
existing customers and attract new ones. These competitive practices, as well as
competition that may develop in the future, could harm our ability to obtain
customers and maintain profitability.




Investments in
Previously Charged-Off Receivables Segment. The consumer debt collection
industry is highly fragmented and competitive. We compete with a wide range of
other purchasers of charged-off consumer receivables, including third-party
collection agencies, other financial service companies and credit originators
that manage their own consumer receivables.




Some of
our competitors are larger and more established and may have substantially
greater financial, technological, personnel and other resources than we have,
including greater access to capital markets. We believe that no individual
competitor or group of competitors has a dominant presence in the market.
Competitive pressures affect the availability and pricing of receivables
portfolios, as well as the availability and cost of qualified debt
collectors.




We face
bidding competition in our acquisition of charged-off consumer receivables
portfolios. Some of our current competitors, and possible new competitors, may
have more effective pricing and collection models, greater adaptability to
changing market needs and more established relationships in our industry than we
have. Moreover, our competitors may elect to pay prices for portfolios that we
determine are not reasonable and, in that event, our volume of portfolio
purchases may be diminished.




We
believe that our management’s experience and expertise in identifying,
evaluating, pricing and acquiring consumer receivable portfolios and managing
collections coupled with our strategic alliances with third-party servicers give
us a competitive advantage. However, we cannot be assured that we will be able
to compete successfully against current or future competitors or that
competition will not increase in the future. Because our Investments in
Previously Charged-Off Receivables segment serves in some respects as a hedge
for the sale of charged-off credit card receivables by our Credit Cards


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segment,
the adverse effects of competition for our Investments in Previously Charged-Off
Receivables segment typically would serve to benefit the operating results of
our Credit Cards segment.




Retail and
Internet Micro-Loans. Competition for our micro-loan operations
originates from numerous sources both in the U.S. and the U.K. Our subsidiaries
compete with traditional financial institutions (e.g., major banks such as Bank
of America, JP Morgan or CitiBank) that offer similar products such as overdraft
protection, cash advances and other personal loans, as well as with other
micro-loan companies with both retail and Internet-based operations that offer
substantially similar products and pricing models to ours. Key competitors, in
addition to traditional financial institutions, include Cash America, Dollar
Financial Corp., First Cash Financial Services and Advance America Cash Advance
Centers, among others, some of whom have multiple store operations located
throughout the U.S. and the U.K.   Internet-based micro-lenders
include Cash Net in the U.S. and Dollar Financial and Cash America in the U.K.,
among others.




Differentiation
among micro-loan providers is often relegated to location of branches, customer
service, convenience and confidentiality. Due to the low barriers to entry
within the market in terms of both cost and regulatory safe harbors within
certain states, the micro-loan industry recently has experienced a period of
significant growth, with multiple local chains and single unit operators often
operating within the same market. The competition created by these operations
could restrict our businesses’ ability to effectively earn adequate returns or
grow at desired rates in certain markets.




Auto Finance
Segment. Competition within the auto finance sector is very widespread
and fragmented. Our auto finance operations target a customer base and dealer
profile that often times are not capable of accessing indirect lending from
major financial institutions or captive finance companies. We compete mainly
with a handful of national and regional companies focused on this credit segment
(e.g., Credit Acceptance Corp., WestLake Financial, Mid-Atlantic Finance,
AmeriCredit, Drive Financial and Western Funding, Americas Car Mart) and a large
number of smaller, regional based private companies with a narrow geographic
focus. Individual dealers with access to capital may also compete in this
segment through the purchase of receivables from peer dealers in their
markets.




Employees




As of
December 31, 2009, we had 2,561 employees, most of which are employed
within the U.S., principally in Florida, Georgia, Minnesota, Nevada, North
Carolina and Utah; also included in this employee count are a limited number of
employees in India and 329 employees in the U.K. We note, however, that in the
first quarter of 2010 and in furtherance of our cost reduction efforts, we took
actions (including issuing planned termination notices to affected U.S. call
center employees) to better leverage our global infrastructure, thereby
outsourcing portions of our U.S. credit card customer service and collections
operations.




We
consider our relations with our employees to be good. Our employees are not
covered by a collective-bargaining agreement, and we have never experienced any
organized work stoppage, strike or labor dispute.




Trademarks,
Trade Names and Service Marks




CompuCredit
and our subsidiaries have registered and continue to register, when appropriate,
various trademarks, trade names and service marks used in connection with our
businesses and for private-label marketing of certain of our products. We
consider these trademarks and service marks to be readily identifiable with, and
valuable to, our business. This Annual Report on Form 10-K also contains
trade names and trademarks of other companies that are the property of their
respective owners.




Additional
Information




CompuCredit
is incorporated in Georgia. Our principal executive offices are located at Five
Concourse Parkway, Suite 400, Atlanta, Georgia 30328, and the telephone number
at that address is (770) 828-2000. Our Internet address is www.compucredit.com. We make
available free of charge on our Internet website our annual reports on
Form 10-K, quarterly reports on Form 10-Q, current reports on
Form 8-K, proxy statements and amendments to those reports as soon as
reasonably practicable after we electronically file such material with, or
furnish it to, the SEC.




Certain
corporate governance materials, including our Board of Directors committee
charters and our Code of Business Conduct and Ethics, are posted on our website
under the heading “For Investors.” From time to time, the corporate governance
materials on our website may be updated as necessary to comply with rules issued
by the SEC or NASDAQ, or as desirable to further the continued effective and
efficient governance of our company.


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In
addition, in connection with our contemplated spin-off of our micro-loan
businesses, Purpose Financial has filed a registration statement on Form 10
(File No. 001-34597) with the SEC. You may obtain additional information
regarding the spin-off and Purpose Financial by reviewing the registration
statement and corresponding information statement.







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ITEM 1A.                     RISK
FACTORS




An
investment in our common stock or other securities involves a number of risks.
You should carefully consider each of the risks described below before deciding
to invest in our common stock. If any of the following risks develops into
actual events, our business, financial condition or results of operations could
be negatively affected, the market price of our common stock or other securities
could decline and you may lose all or part of your investment.




Investors
should be particularly cautious regarding investments in our common stock or
other securities at the present time in light of the current economic
circumstances.  We are predominately a sub-prime lender, and our
customers have been adversely impacted by the loss of jobs and the overall
decline in the economy.  Moreover, we have no meaningful access to
liquidity.




Our
Cash Flows and Net Income Are Dependent Upon Payments on the Receivables
Underlying Our Securitizations and From Our Other Credit Products




The
collectibility of the receivables underlying our securitizations and those that
we hold and do not securitize is a function of many factors including the
criteria used to select who is issued credit, the pricing of the credit
products, the lengths of the relationships, general economic conditions, the
rate at which customers repay their accounts or become delinquent, and the rate
at which customers use their cards or otherwise borrow funds from
us.  Deterioration in these factors, which we recently have
experienced, adversely impacts our business.  In addition, to the
extent we have over-estimated collectibility, in all likelihood we have
over-estimated our financial performance. Some of these concerns are discussed
more fully below.




We may not
successfully evaluate the creditworthiness of our customers and may not price
our credit products so as to remain profitable. The creditworthiness of
our target market generally is considered “sub-prime” based on guidance issued
by the agencies that regulate the banking industry. Thus, our customers
generally have a higher frequency of delinquencies, higher risks of nonpayment
and, ultimately, higher credit losses than consumers who are served by more
traditional providers of consumer credit. Some of the consumers included in our
target market are consumers who are dependent upon finance companies, consumers
with only retail store credit cards and/or lacking general purpose credit cards,
consumers who are establishing or expanding their credit, and consumers who may
have had a delinquency, a default or, in some instances, a bankruptcy in their
credit histories, but have, in our view, demonstrated recovery. We price our
credit products taking into account the perceived risk level of our customers.
If our estimates are incorrect, customer default rates will be higher, we will
receive less cash from the receivables and the value of our retained interests
and our loans and fees receivable will decline, all of which will have a
negative impact on performance. Payment rates by our customers have declined
recently and, correspondingly, default rates have increased.  It is
unclear how long these changes will last and whether, for instance, the federal
government’s economic stimulus programs will partially or fully offset
them.




Economic
slowdowns increase our credit losses.During periods of economic slowdown
or recession, we experience an increase in rates of delinquencies and frequency
and severity of credit losses. Our actual rates of delinquencies and frequency
and severity of credit losses may be comparatively higher during periods of
economic slowdown or recession than those experienced by more traditional
providers of consumer credit because of our focus on the financially underserved
consumer market, which may be disproportionately impacted. Other economic and
social factors, including, among other things, changes in consumer confidence
levels, the public’s perception of the use of credit and changing attitudes
about incurring debt, and the stigma of personal bankruptcy, also can impact
credit use and account performance. Moreover, adverse changes in economic
conditions in states where customers are located, including as a result of
severe weather, can have a direct impact on the timing and amount of payments of
receivables. Recent trends in the U.S. economy indicate that we have entered a
period of economic downturn or recession, and we have seen reduced payments and
an increase in default rates over the past several months.  If this
trend continues, it will more significantly, and more negatively, impact our
business.




We are subject to
foreign economic and exchange risks.Because of our MEM and other
investments in the U.K.,we
have exposure to fluctuations in the U.K. economy, recent fluctuations in which
have been significantly negative. We also have exposure to fluctuations in the
relative values of the U.S. dollar and the British pound. Because the British
pound has experienced a net decline in value relative to the U.S. dollar since
we made the most significant of our investments in the U.K., we have experienced
significant transaction and translation losses within our financial
statements.




Because a
significant portion of our reported income is based on management’s estimates of
the future performance of securitized receivables, differences between actual
and expected performance of the receivables may cause fluctuations in net
income. Significant portions of our reported income (or losses) are based
on management’s estimates of cash flows we


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expect to
receive from the interests that we retain when we securitize receivables. The
expected cash flows are based on management’s estimates of interest rates,
default rates, payment rates, cardholder purchases, costs of funds paid to
investors in the securitizations, servicing costs, discount rates and required
amortization payments. These estimates are based on a variety of factors, many
of which are not within our control. Substantial differences between actual and
expected performance of the receivables will occur and will cause fluctuations
in our net income. For instance, higher than expected rates of delinquency and
loss could cause our net income to be lower than expected. Similarly with
respect to financing agreements secured by our on-balance-sheet receivables,
levels of loss and delinquency could result in our being required to repay our
lenders earlier than expected, thereby reducing funds available to us for future
growth. Because all of our securitization facilities are now in amortization
status—which for us generally means that the only meaningful cash flows that we
are receiving from the securitization trusts are those associated with our
contractually specified fee for servicing the receivables—recent payment and
default trends have substantially reduced the cash flow that we receive from
these securitized receivables.




Our portfolio of
receivables is not diversified and originates from customers whose
creditworthiness is considered sub-prime. Historically, we have obtained
the receivables that we securitize and retain on our balance sheet in one of two
ways—we have either originated the receivables or purchased pools of receivables
from other issuers. In either case, substantially all of our receivables are
from financially underserved borrowers—borrowers represented by credit risks
that regulators classify as “sub-prime.” Our reliance on sub-prime receivables
has negatively impacted and may in the future negatively impact, our
performance. Our various past and current losses might have been mitigated had
our portfolios consisted of higher-grade receivables in addition to our
sub-prime receivables. We have no immediate plans to issue or acquire
significant higher-grade receivables.




Seasonal factors
may result in fluctuations in our net income. Our quarterly income may
fluctuate substantially as a result of seasonal consumer spending. In
particular, our customers may borrow or charge more and carry higher balances
during the year-end holiday season and during the late summer vacation and
back-to-school period, resulting in corresponding increases in the
receivables.




The timing and
volume of originations with respect to our lower-tier credit card offerings
causes significant fluctuations in quarterly income. During periods,
unlike the current period, in which we are marketing lower-tier credit card
accounts, fluctuations in the timing or the volume of our originations of
receivables cause fluctuations in our quarterly income. Factors that affect the
timing or volume include marketing efforts, the general economy and the other
factors discussed in this section. For example, given the significant and
variable growth rates that we have experienced in the past for our lower-tier
credit card offerings and given the appreciably shorter vintage life cycles for
these offerings relative to our more traditional credit card offerings, we
experienced, and in the future may experience, significant volatility of
quarterly earnings from these offerings based on the varying levels of marketing
and receivables origination in the quarters preceding peak vintage charge-off
periods. Our lower-tier credit card receivables tend to follow similar patterns
of delinquency and write off, with the peak period of write offs occurring
approximately eight to nine months following account origination. During periods
of sustained growth, the negative impact of these peak periods generally is
offset by the impact of new receivables. During periods of no or more limited
growth, it is not. We substantially reduced our credit card marketing efforts
beginning in August 2007 and more recently have stopped issuing new cards,
thereby eliminating our growth. This followed a period of substantial marketing
efforts and growth. One impact of this was an increase in write offs during the
first, second and third quarters of 2008 that were not offset by
growth.  In addition, commencing early in the fourth quarter of 2008,
like others in our industry, we reduced credit lines and closed accounts in
order to ensure that we had the capacity to fund new purchases on the remaining
accounts and to reduce our risk exposure, and in 2009, we continued account
closures so that substantially all of our credit card accounts are now closed to
cardholder purchases. This has resulted, and is likely to continue to result, in
an overall decline in the amount of outstanding receivables.




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




Due to the lack
of historical experience with Internet customers, we may not be able to target
successfully these customers or evaluate their creditworthiness. There is
less historical experience with respect to the credit risk and performance of
customers acquired over the Internet. As a result, we may not be able to target
and evaluate successfully the creditworthiness of these potential customers
should we engage in marketing efforts to acquire these customers. Therefore, we
may encounter difficulties managing the expected delinquencies and losses and
appropriately pricing our products.




We
Are Substantially Dependent Upon Securitizations and Other Borrowed Funds to
Fund the Receivables That We Originate or Purchase


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All of our
securitization and financing facilities are of finite duration (and ultimately
will need to be extended or replaced) and contain financial covenants and other
conditions that must be fulfilled in order for funding to be available.
Moreover, most of these facilities currently are in amortization stages (and are
not allowing for the funding of any new loans), either based on their original
terms or because we have not met financial or asset performance-related
covenants.  If future advance rates (i.e., the percentage on a dollar
of receivables that lenders will lend us) for securitizations or financing
facilities remain depressed or are reduced, investors in securitizations or
financing facilities lenders require currently high or even greater rates of
return, or securitization or financing arrangements otherwise continue to be
unavailable to us on acceptable terms, we will not be able to maintain or grow
our base of receivables. In addition, because of advance rate limitations, we
retain subordinated “retained interests” in our securitizations that must be
funded through profitable operations, equity raised from third parties or funds
borrowed elsewhere. The cost and availability of equity and borrowed funds is
dependent upon our financial performance, the performance of our industry
generally and general economic and market conditions, and at times equity and
borrowed funds have been both expensive and difficult to obtain. Most recently,
funding for sub-prime lending has been largely unavailable. Some of these
concerns are discussed more fully below.




As our
securitization and financing facilities mature or experience early amortization
events, the proceeds from the underlying receivables will not be available to us
for reinvestment or other purposes. Absent early amortization events,
repayment for our securitization facilities typically has begun approximately
one year prior to their maturity dates. Once repayment begins and until the
facility is paid, payments from customers on the underlying receivables are
accumulated to repay the investors and no longer are reinvested in new
receivables. When a securitization facility matures, the underlying trust
continues to own the receivables, and the maturing facility retains its priority
in payments on the underlying receivables until it is repaid in full. As a
result, new purchases need to be funded using debt, equity or a replacement
facility subordinate to the maturing facility’s interest in the underlying
receivables. If we are obligated to repay a securitization facility and we also
are unable to obtain alternative sources of liquidity, such as debt, equity or
new securitization facilities that are structurally subordinate to the facility
being repaid, we generally are forced to prohibit new purchases in some or all
of our accounts in order to reduce our need for any additional
cash.  Such is our situation currently, and in response to this
situation, we have closed substantially all of our credit card accounts to new
purchases.




The
documents governing our securitization facilities provide that, upon the
occurrence of certain adverse events known as “early redemption events,” and
sometimes called “early amortization events,” investors can accelerate payments.
Early redemption events include portfolio performance triggers, the termination
of certain of our affinity agreements with third-party financial institutions to
originate credit cards, breach of certain representations, warranties and
covenants, insolvency or receivership, and servicer defaults, and may include
the occurrence of an early redemption event with respect to another
securitization transaction. Our upper-tier originated portfolio master trust
variable funding facility also provides for the triggering of an early
redemption event based on a total consolidated equity test, a maximum permitted
reduction in quarterly total consolidated equity levels test, a change of
control in CompuCredit or other corporate finance events. Early redemption
events have occurred for several of our securitization facilities, and as a
result, principal payments are being made to investors to reduce their notes in
our securitizations. Until these investors are repaid in full, we will receive
no further funds from the receivables other than the servicing fees provided for
in the documents governing the securitizations. These servicing fees are
significantly less than the cash flows that we recently have received as holders
of the retained interests. Under our early amortization status with respect to
our upper-tier originated portfolio master trust securitization facility, we
estimate it could take several years to repay investors, after which time we
would again receive other funds from the receivables to the extent that the
receivables are sufficient to provide for investor repayment. During this
intervening period, our liquidity will be negatively impacted, our financial
results will suffer and we may need to (although we currently do not anticipate
needing to) obtain alternative sources of funding, which under current market
conditions is very difficult for us to do.




We may be unable
to obtain capital from third parties needed to fund our existing securitizations
and loans and fees receivable, investors and lenders under our securitization
and debt facilities may be unable or unwilling to meet their contractual
commitments to provide us funding, or we may be forced to rely on more expensive
funding sources than those that we have today. We need equity or debt
capital to fund our retained interests in our securitizations and the difference
between our loans and fees receivable and the amount that lenders will advance
or lend to us against those receivables. Investors should be aware of our
dependence on third parties for funding and our exposure to increases in costs
for that funding. External factors, including the general economy, impact our
ability to obtain funds. These factors have been significant enough in the
recent past that we have not been able to raise cash by issuing additional debt
or equity or by selling a portion of our retained interests at acceptable
pricing. As a result, like all participants in the sub-prime market place, we
continue to operate under significant liquidity constraints, which may worsen
and could require us to sell assets at less than favorable prices.




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Expected losses
and delinquencies have prevented us from securitizing future receivables on
terms similar to those that traditionally have been available and from obtaining
favorable financing for non-securitized receivables. Our anticipated
delinquencies and losses have impacted our ability to complete securitization
and financing transactions on acceptable terms. In the event we need additional
funding, we are likely to have to rely on alternative, and potentially more
expensive, funding sources if even available. In recent months, payment rates
have declined significantly and defaults correspondingly have increased.
Although we are uncertain about the ultimate impact of these changes on our
ability to securitize future receivables, particularly given that there is no
active securitization market at the current time, we expect it to have an
adverse impact.




The performance
of our competitors impacts the costs of our securitizations and financing
facilities. Generally speaking, investors in our securitizations also
invest in our competitors’ securitizations, and lenders against our receivables
also lend against our competitors’ receivables. When these investors and lenders
evaluate their investments and lending arrangements, they typically do so based
on overall industry performance. Thus, independent of our own performance, when
our competitors perform poorly, we typically experience negative investor and
lender sentiment, and the investors in our securitizations and lenders against
our receivables require greater returns, particularly with respect to
subordinated interests in our securitizations. Largely because of difficulties
in the sub-prime mortgage market, investors have been substantially more
reluctant, if even willing, to invest and those that have been willing to invest
have sought greater returns.




Rating
agencies have been aggressively reducing ratings across broad segments of the
consumer finance sector, and ratings on securitization facilities underlying
pools we service have been downgraded.  Rating agency actions have
impacted the securitization industry and are likely to impact our future ability
to issue new debt.




Although
due to conditions in the broader economic market, there currently are no
securitization opportunities for us, should these opportunities return in the
future, we expect investors to require higher returns. As a result, when we sell
our retained interests in securitizations at that time, the total returns to
buyers may be greater than the discount rates we are using to value the retained
interests for purposes of our financial statements. This would result in losses
for us at the time of the sales as the total proceeds from the sales would be
less than the carrying amount of the retained interests in our financial
statements. We also might increase the discount rates used to value all of our
other retained interests, which would result in further losses. Conversely, if
we sold our retained interests for total returns to investors that were less
than our current discount rates, we would record income from the sales, and we
potentially would decrease the rates used to value all of our other retained
interests, which would result in additional income.




Our growth is
dependent on our ability to add new securitization and financing
facilities. We finance our receivables through securitizations and
financing facilities. Beginning in 2007, largely as a result of difficulties in
the sub-prime mortgage market, new financing generally has been unavailable to
sub-prime lenders, and the financing that has been available has been on
significantly less favorable terms. As a result, beginning in the third quarter
of 2007, we significantly curtailed our marketing for new credit cards and
currently are not issuing a significant number of new cards. Moreover,
commencing in October 2008 we reduced credit lines and closed a significant
number of accounts in response to the unavailability of financing and to reduce
our risk exposure. These activities continued into 2009 and, as a result,
substantially all of our credit cards are now closed to cardholder purchases. If
additional securitization and financing facilities are not available in the
future on terms we consider acceptable, we will not be able to grow our business
and it will continue to contract in size.




We may be
required to pay to investors in our securitizations an amount equal to the
amount of securitized receivables if representations and warranties regarding
those receivables are inaccurate. The representations and warranties made
to us by sellers of receivables we have purchased may be inaccurate. In
securitization transactions, in reliance on the representations and warranties
that we have received, we make similar representations and warranties to
investors and, generally speaking, if there is a breach of our representations
and warranties, we could be required to pay the investors the amount of the
non-compliant receivables. Thus, our reliance on a representation or warranty of
a receivables seller, which proves to be false and causes a breach of one of our
representations or warranties, could subject us to a potentially costly
liability.




Our
Financial Performance Is, in Part, a Function of the Aggregate Amount of
Receivables That Are Outstanding




The
aggregate amount of outstanding receivables is a function of many factors
including purchase rates, payment rates, interest rates, seasonality, general
economic conditions, competition from other credit card issuers and other
sources of consumer financing, access to funding, the timing and extent of our
marketing efforts and the success of our marketing efforts.


25
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Our business
currently is contracting. Growth is a product of a combination of
factors, many of which are not in our control. Factors include:




•
            the
      level of our marketing efforts;




•
            the
      success of our marketing efforts;




•
            the
      degree to which we lose business to
competitors;




•
            the
      level of usage of our credit products by our
  customers;




•
            the
      availability of portfolios for purchase on attractive
    terms;




•
            levels
      of delinquencies and charge offs;




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




•
            our
      ability to sell retained interests on favorable
  terms;




•
            the
      level of costs of soliciting new
customers;




•
            our
      ability to employ and train new
personnel;




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




•
            general
      economic and other factors beyond our
control.




We
substantially eliminated our marketing efforts and have aggressively reduced
credit lines and closed accounts. In addition, the general economy has been
experiencing a significant downturn, which has significantly impacted not just
the level of usage of our credit products by our customers but also levels of
payments and delinquencies and other performance metrics. As a result, our
business currently is contracting, and until market conditions reverse, we do
not expect to grow our business.




Our decisions
regarding marketing have a significant impact on our growth. We can
increase or decrease the size of our outstanding receivables balances by
increasing or decreasing our marketing efforts. Marketing is expensive, and
during periods when we have less liquidity than we like or when prospects for
continued liquidity in the future do not look promising, we may decide to limit
our marketing and thereby our growth. We decreased our marketing during 2003,
although we increased our marketing in 2004 through 2006 because of our improved
access to capital. Similarly, we significantly curtailed our marketing in August
2007 because of uncertainty regarding future access to capital as a result of
difficulties in the sub-prime mortgage market and currently have ceased
substantially all card marketing activities.




Our operating
expenses and our ability to effectively service our accounts are dependent on
our ability to estimate the future size and general growth rate of the
portfolio. Some of our servicing and vendor agreements require us to make
additional payments if we overestimate the size or growth of our business. These
additional payments compensate the servicers and vendors for increased staffing
expenses and other costs they incur in anticipation of our growth. In addition,
if we overestimate our growth, we have excess facilities and
capacity.  We currently have substantial excess capacity.




Intense
competition for customers may cause us to lose receivables to
competitors. Historically, we have faced intense competition from other
providers of credit cards.  While we are not actively soliciting new
accounts at the current time, we do hope to resume account growth in the future,
and we would expect to lose receivables to competitors that offer lower interest
rates and fees or other more attractive terms or features. We believe that
customers choose credit card issuers and other lenders largely on the basis of
interest rates, fees, credit limits and other product features. For this reason,
customer loyalty is often limited. Our ability to maintain and grow our business
depends largely upon the success of our marketing efforts. Our credit card
business competes with national, regional and local bank and other credit card
issuers. Our other businesses have substantial competitors as well. Some of
these competitors already may use or may begin using many of the programs and
strategies that we have used to attract new accounts. In addition, many of our
competitors are substantially larger than we are and have greater financial
resources. Further, the Gramm-Leach-Bliley Act of 1999, which permits the
affiliation of commercial banks, insurance companies and securities firms, may
increase the level of competition in the financial services market, including
the credit card business.


26
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We
Operate in a Heavily Regulated Industry




Changes
in bankruptcy, privacy or other consumer protection laws, or to the prevailing
interpretation thereof, may expose us to litigation, adversely affect our
ability to collect account balances in connection with our traditional credit
card business, our debt collection subsidiary’s charged-off receivables
operations, and our auto finance and micro-loan activities, or otherwise
adversely affect our operations. Similarly, regulatory changes could adversely
affect our ability or willingness to market credit cards and other products and
services to our customers. The accounting rules that govern our business are
exceedingly complex, difficult to apply and in a state of flux. As a result, how
we value our receivables and otherwise account for our business (including
whether we consolidate our securitizations) is subject to change depending upon
the changes in, and, interpretation of, those rules. Some of these issues are
discussed more fully below.




Reviews and
enforcement actions by regulatory authorities under banking and consumer
protection laws and regulations may result in changes to our business practices,
may make collection of account balances more difficult or may expose us to the
risk of fines, restitution and litigation.Our operations, and the
operations of the issuing banks through which we originate credit products, are
subject to the jurisdiction of federal, state and local government authorities,
including the SEC, the FDIC, the Office of the Comptroller of the Currency, the
FTC, U.K. banking authorities, state regulators having jurisdiction over
financial institutions and debt origination and collection and state attorneys
general. Our business practices, including the terms of our products and our
marketing, servicing and collection practices, are subject to both periodic and
special reviews by these regulatory and enforcement authorities. These reviews
can range from investigations of specific consumer complaints or concerns to
broader inquiries into our practices generally. If as part of these reviews the
regulatory authorities conclude that we are not complying with applicable law,
they could request or impose a wide range of remedies including requiring
changes in advertising and collection practices, changes in the terms of our
products (such as decreases in interest rates or fees), the imposition of fines
or penalties, or the paying of restitution or the taking of other remedial
action with respect to affected customers. They also could require us to stop
offering some of our products, either nationally or in selected states. To the
extent that these remedies are imposed on the issuing banks through which we
originate credit products, under certain circumstances we are responsible for
the remedies as a result of our indemnification obligations with those banks. We
also may elect to change practices or products that we believe are compliant
with law in order to respond to regulatory concerns. Furthermore, negative
publicity relating to any specific inquiry or investigation could hurt our
ability to conduct business with various industry participants or to attract new
accounts and could negatively affect our stock price, which would adversely
affect our ability to raise additional capital and would raise our costs of
doing business.




As
discussed in more detail below, in March 2006, one of our subsidiaries stopped
processing and servicing micro-loans in North Carolina in settlement of a review
by the North Carolina Attorney General, and also in 2006, we terminated our
processing and servicing of micro-loans for third-party banks in three other
states in response to a position taken in February 2006 with respect to banks
generally by the FDIC.




In June
2006, we entered into an assurance agreement with the New York Attorney General
in order to resolve an inquiry into our marketing and other materials and our
servicing and collection practices, principally as a result of New York Personal
Property Law Section 413. Pursuant to this agreement, we agreed to pay a
$0.5 million civil penalty to the State of New York and to refund certain fees
to New York cardholders, which resulted in cash payments of under $2.0 million
and a charge against a $5.0 million liability that we accrued for this purpose.
In addition, we assured the New York Attorney General that we would not engage
in certain marketing, billing, servicing and collection practices.




Also,
commencing in June 2006, the FDIC began investigating the policies, practices
and procedures used in connection with our credit card originating financial
institution relationships. In December 2006, the FTC commenced a related
investigation. In June 2008, both of the regulators commenced actions against us
and the FDIC commenced actions against two of the banks that historically have
issued cards on our behalf. We settled the actions against us in December
2008.




If any
additional deficiencies or violations of law or regulations are identified by us
or asserted by any regulator, or if the FDIC, FTC or any other regulator
requires us to change any of our practices, the correction of such deficiencies
or violations, or the making of such changes, could have a materially adverse
effect on our financial condition, results of operations or business. In
addition, whether or not we modify our practices when a regulatory or
enforcement authority requests or requires that we do so, there is a risk that
we or other industry participants may be named as defendants in litigation
involving alleged violations of federal and state laws and regulations,
including consumer protection laws. Any failure to comply with legal
requirements by us or the issuing banks through which we originate credit
products in connection with the issuance of those products, or by us or our
agents as the servicer of our accounts, could significantly impair our ability
to collect the full amount of the account balances. The institution of any
litigation of this nature, or any judgment against us or any other industry
participant in any litigation of this nature, could adversely affect our
business and financial condition in a variety of ways.


27
 Table of Contents




Increases in
required minimum payment levels have impacted our business adversely. For
some time, regulators of credit card issuers have requested or required that
issuers increase their minimum monthly payment requirements to prevent so-called
“negative amortization,” in which the monthly minimum payment is not sufficient
to reduce the outstanding balance even if new purchases are not made. This can
be caused by, among other things, the imposition of over-limit, late and other
fees. Prior to changes to our minimum payment requirements over the past few
years, we historically had followed a more consumer-friendly practice of not
treating cardholders as delinquent (with commensurate adverse credit agency
reporting) provided they made a minimum payment of only 3% or 4% (depending upon
the credit card product) of their outstanding balance (i.e., exclusive of the
requested over-limit, late and other fees). However, in response to comments
about minimum payments and negative amortization received from the FDIC in the
course of its routine examinations of the banks that issue credit cards on our
behalf, we made a number of changes to our practices over the past several
years, including our discontinuation of finance charges and fee billings on
credit card accounts once they become ninety or more days delinquent, the
reversal of fees and finance charges on the accounts of cardholders who made
payments so that those accounts would not be in negative amortization, and the
modification of our minimum payment requirements in some cases to require a
minimum payment equal to 1% of the outstanding balance plus any finance charges
and late fees billed in the current cycle. Based on our various changes to our
practices in this area, only an insignificant portion of our U.S. credit card
receivables experience negative amortization. The changes that we have made have
adversely impacted and are likely in the future to adversely impact amounts
collected from cardholders and therefore our reported fee income and delinquency
and charge-off statistics. Additionally, should regulators require more rapid
amortization of credit card account balances by banks, we could be required to
may make further payment and fee-related changes that could adversely affect our
financial position and future results of operations.




Adverse
regulatory actions with respect to issuing banks have adversely impacted our
business and could continue to do so in the future. It is possible that a
regulatory position or action taken with respect to any of the issuing banks
through which we have originated credit products or for whom we service
receivables might result in the bank’s inability or unwillingness to originate
future credit products on our behalf or in partnership with us. For instance, in
February 2006 the FDIC effectively asked insured financial institutions not to
issue cash advance and installment micro-loans through third-party servicers. As
a result of this request, the issuing bank for which we provided services in
four states stopped making new loans. Similarly, certain banks for which we
traditionally had marketed credit card accounts stopped issuing new accounts
(before our liquidity-based decision to stop new account marketing efforts),
principally because of the FDIC and FTC investigations and litigation discussed
elsewhere. In the future, regulators may find other aspects of the products that
we originate or service objectionable, including, for instance, the terms of the
credit offerings (particularly for our higher priced lower-tier products), the
manner in which we market them or our servicing and collection practices. Our
credit card operations are entirely dependent on our issuing bank relationships,
and their regulators could at any time limit their ability to issue some or all
products on our behalf, or that we service on their behalf, or to modify those
products significantly. Any significant interruption of those relationships
would result in our being unable to originate new receivables and other credit
products, which, during periods, unlike the current period, in which we are
actively marketing, would have a materially adverse impact on our
business.




Changes to
consumer protection laws or changes in their interpretation may impede
collection efforts or otherwise adversely impact our business practices.
Federal and state consumer protection laws regulate the creation and enforcement
of consumer credit card receivables and other loans. Many of these laws (and the
related regulations) are focused on sub-prime lenders and are intended to
prohibit or curtail industry-standard practices as well as non-standard
practices. For instance, Congress enacted legislation that regulates loans to
military personnel through imposing interest rate and other limitations and
requiring new disclosures, all as regulated by the Department of
Defense. Similarly, in 2009 Congress enacted legislation that required
changes to a variety of marketing, billing and collection practices. The Federal
Reserve recently has adopted significant changes to a number of practices that
will be effective July 2010. While our practices are in compliance with most of
these proposed changes, some (e.g., limitations on the ability to assess
up-front fees) could significantly impact our lower-tier products. Changes in
the consumer protection laws could result in the following:




•
            receivables
      not originated in compliance with law (or revised interpretations) could
      become unenforceable and uncollectible under their terms against the
      obligors;




•
            we
      may be required to credit or refund previously collected
      amounts;




•
            certain
      fees could be prohibited or restricted, which would reduce the
      profitability of certain accounts;




•
            certain
      of our collection methods could be prohibited, forcing us to revise our
      practices or adopt more costly or less effective
  practices;


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 Table of Contents




•
            limitations
      on the content of marketing materials could be imposed that would result
      in reduced success for our marketing
efforts;




•
            federal
      and state laws may limit our ability to recover on charged-off receivables
      regardless of any act or omission on our
part;




•
            reductions
      in statutory limits for finance charges could require us to reduce our
      fees and charges;




•
            some
      of our products and services could be banned in certain states or at the
      federal level;




•
            federal
      or state bankruptcy or debtor relief laws could offer additional
      protections to customers seeking bankruptcy protection, providing a court
      greater leeway to reduce or discharge amounts owed to us;
    and




•
            a
      reduction in our ability or willingness to lend to certain individuals,
      such as military personnel.




Material
regulatory developments are likely to impact our business and results from
operations.




Negative
publicity may impair acceptance of our products. Critics of sub-prime
credit and micro-loan providers have in the past focused on marketing practices
that they claim encourage consumers to borrow more money than they should, as
well as on pricing practices that they claim are either confusing or result in
prices that are too high. Consumer groups, Internet chat sites and media reports
frequently characterize sub-prime lenders as predatory or abusive toward
consumers and may misinform consumers regarding their rights. If these negative
characterizations and misinformation become widely accepted by consumers, demand
for our products and services could be adversely impacted. Increased criticism
of the industry or criticism of us in the future could hurt customer acceptance
of our products or lead to changes in the law or regulatory environment, either
of which would significantly harm our business.




Because
of the Recent and Ongoing Contraction of Our Credit Cards and Auto Finance
Businesses and the Growth of Our Retail and Internet Micro-Loan Businesses, Our
Micro-Loan Businesses Are Now a Larger Component of Our Financial Position and
Results of Operations




Legislative,
regulatory and consumer activism toward the micro-loans industry is particularly
active and at times particularly hostile, and changes in applicable laws and
regulations or interpretations thereof, or our failure to comply with such laws
and regulations, could have a materially adverse effect on our micro-loan
businesses, their prospects, our results of operations and our financial
condition.Our micro-loan businesses are subject to numerous
foreign, federal, state and local laws and regulations, which are subject to
change and which may impose significant costs, limitations or prohibitions on
the way we conduct or expand these businesses. These regulations govern or
affect, among other things, interest rates and other fees, check cashing fees,
lending practices, recording and reporting of certain financial transactions,
privacy of personal consumer information and collection practices. As we develop
new product and service offerings, we may become subject to additional federal,
state and local regulations. State and local governments also may seek to impose
new licensing requirements or interpret or enforce existing requirements in new
ways. In addition, changes in current laws and future laws or regulations may
restrict or eliminate our ability to continue our current methods of operation
or expand our operations; such laws regularly are proposed, introduced or
adopted at the state and federal level in the U.S. and in the U.K.




A federal law
that imposes a national cap on our micro-loan fees and interest likely would
eliminate our ability to continue our current micro-loan businesses in the
U.S.Various anti-cash advance legislation has been proposed
or introduced in the U.S. Congress. Congressional members continue to receive
pressure to adopt such legislation from consumer advocates and other industry
opposition groups. In February 2009, Senator Richard Durbin introduced a bill in
Congress to establish a federal cap of 36% on the effective annual percentage
rate (“APR”) on all consumer loan transactions. Likewise, U.S. Representative
Luis Gutierrez introduced a bill on the same day that would, among other things,
place a 15 cent per dollar borrowed ($.15/$1.00) cap on fees for cash
advances, ban rollovers (payment of a fee to extend the term of a cash advance
or other short-term financing), and require lenders to offer an extended payment
plan that would severely restrict lenders’ U.S. cash advance products. Most
recently, Representative Barney Frank introduced a bill that would create the
CFPA.  This agency would take certain consumer regulatory
responsibility of financial products from seven other agencies and centralize it
in one office. It would have the authority and accountability to supervise,
examine, and enforce consumer financial protection laws.  In December
2009, the House of Representatives passed the Wall Street Reform and Consumer
Protection Act of 2009(H.R. 4173), which incorporated the
CFPA.  The timing of any Senate action on this legislation is
uncertain. Also, the Obama Administration agenda states that U.S. President
Barack Obama and Vice President Joseph Biden seek to extend a 36% APR limit to
all consumer credit transactions. Any U.S. federal legislative or regulatory
action that severely restricts or prohibits cash advance and similar services,
if enacted, could have a material adverse impact


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 Table of Contents




on our
business, prospects, results of operations and financial condition. Any federal
law that would impose a national 36% APR limit on our services, like that
proposed in the Durbin bill, if enacted, likely would eliminate our ability to
continue our current operations.




The micro-loans
industry is regulated under federal law and subject to federal and state unfair
and deceptive practices statutes. Our failure to comply with these regulations
and statutes could have a material adverse effect on our business, prospects,
results of operations and financial condition.Although states provide
the primary regulatory framework under which we offer cash advances within the
U.S., certain federal laws also impact our business. See “Our Business—U.S.
Federal Regulation.” We must comply with the federal Truth-in-Lending Act and
Regulation Z adopted under that act. Additionally, we are subject to the
Equal Credit Opportunity Act, the Fair Debt Collection Practices Act, the Fair
Credit Reporting Act and the Gramm-Leach-Bliley Act. We also are subject to the
Bank Secrecy Act, the Money Laundering Act, and the PATRIOT Act. Any failure to
comply with any of these federal laws and regulations could have a material
adverse effect on our business, prospects, results of operations and financial
condition.




Our
marketing efforts and the representations we make about our products and
services also are subject to federal and state unfair and deceptive practices
statutes. The Federal Trade Commission enforces the Federal Trade Commission Act
and the state attorneys general and private plaintiffs enforce the analogous
state statutes. If we are found to have violated any of these statutes, that
violation could have a material adverse effect on our business, results of
operations and financial condition.




The micro-loans
industry is highly regulated under state law. Changes in state laws and
regulations or interpretations thereof, or our failure to comply with such laws
and regulations, could have a material adverse effect on our business,
prospects, results of operations and financial condition.Our
business is regulated under a variety of enabling state statutes, including cash
advance, deferred presentment, check cashing, money transmission, small loan and
credit services organization laws, all of which are subject to change and which
may impose significant costs, limitations or prohibitions on the way we conduct
or expand our business. As of December 31, 2009, 36 states had specific laws
that permitted cash advances or a similar form of short-term consumer loans. As
of December 31, 2009, we operated in 8 of these 36 states under traditional
enabling statutes, and we offered a small loan product in Ohio under the Ohio
Mortgage Loan Act. Currently, we do not conduct business in the remaining states
or in the District of Columbia because we do not believe it is economically
attractive to operate in these jurisdictions due to specific legislative
restrictions, such as interest rate ceilings, an unattractive population density
or unattractive location characteristics. However, we may open storefronts in
any of these states if we believe doing so may become economically attractive
because of a change in any of these variables.




During
the last few years, legislation has been introduced or adopted in some states
that prohibits or severely restricts our products and services. In 2008, bills
that would severely restrict or effectively prohibit cash advances if adopted as
law were introduced in 21 states. Also, in 2009, the enabling statutes in both
Kentucky and South Carolina were amended to require, among other things, the use
of a common database to track and limit the number of micro-loans a consumer may
have at a given time. Such new or modified legislation could have a material
adverse impact on our results of operations. In addition, Mississippi has a
sunset provision in its cash advance laws that requires renewals of the laws by
the state legislature at periodic intervals, and the cash advance laws will
expire in 2012 if no further action is taken; an expiration of these laws could
have a detrimental impact on our ability to issue existing or new micro-loan
products within the state.




Laws
prohibiting cash advances and similar products and services or making them less
profitable, or even unprofitable, could be passed in any other state at any time
or existing enabling laws could expire or be amended, any of which would have a
material adverse effect on our business, prospects, results of operations and
financial condition. For instance, in November 2008, a new Ohio law became
effective that capped interest rates on cash advances and limited the number of
advances a customer may take in any one year. In response to this legislation,
we now offer a small loan product that is not as profitable as our former cash
advance product; should there be legislative or regulatory changes in Ohio in
the future that affect the viability of our small loan product offering, there
could be a material adverse effect on our business, prospects, results of
operations and financial condition.




Statutes
authorizing cash advance and similar products and services typically provide the
state agencies that regulate banks and financial institutions with significant
regulatory powers to administer and enforce the law. In most states, we are
required to apply for a license, file periodic written reports regarding
business operations and undergo comprehensive state examinations to ensure that
we comply with applicable laws. Under statutory authority, state regulators have
broad discretionary power and may impose new licensing requirements, interpret
or enforce existing regulatory requirements in different ways or issue new
administrative rules, even if not contained in state statutes, that affect the
way we do business and may force us to terminate or modify our operations in
particular states. They also may impose rules that are generally adverse to our
industry. Any new licensing requirements or rules, or new interpretations of
existing licensing requirements or rules, or


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 Table of Contents




failure
to follow licensing requirements or rules could have a material adverse effect
on our business, prospects, results of operations and financial
condition.




In some
cases, we rely on the interpretations of the staff of state regulatory bodies
with respect to the laws and regulations of their respective jurisdictions.
These staff interpretations generally are not binding legal authority and may be
subject to challenge in administrative or judicial proceedings. Additionally, as
the staff of state regulatory bodies change, it is possible that their
interpretations of applicable laws and regulations also may change to the
detriment of our business. As a result, our reliance on staff interpretations
could have a material adverse effect on our business, results of operations and
financial condition.




Additionally,
state attorneys general and banking regulators are scrutinizing cash advances
and other alternative financial products and services and taking actions that
require us to modify, suspend or cease operations in their respective states.
For example, our subsidiaries decided to exit North Carolina, West Virginia and
Arkansas in settlement of reviews by applicable state regulators. During the
third quarter of 2006, our subsidiaries completed the process of closing 52
branch locations in North Carolina and 11 branch locations in West Virginia, and
in the second quarter of 2009, one of our subsidiaries completed the process of
closing 27 locations in Arkansas. Similar or additional actions could have a
material adverse effect on our business, prospects, results of operations and
financial condition.




Our industry is
subject to various local rules and regulations. Changes in these local
regulations or interpretations thereof could have a material adverse effect on
our business, prospects, results of operations and financial
condition.In addition to state and federal laws and
regulations, our business can be subject to various local rules and regulations
such as local zoning regulations. Any actions taken in the future by local
zoning boards or other local governing bodies to require special use permits
for, or impose other restrictions on providers of, cash advance and similar
services could have a material adverse effect on our business, results of
operations and financial condition.




Our operations in
the U.K. are subject to differing laws and regulations. Our inability to operate
in the U.K. in compliance with applicable laws and regulations and changes in
those applicable laws and regulations could have a material adverse effect on
our business, prospects, results of operations and financial
condition.  In the U.K., consumer lending is governed by the
Consumer Credit Act of 1974, which was amended by the Consumer Credit Act of
2006, and related rules and regulations. Our subsidiaries in the U.K. must
maintain licenses from the OFT, which is responsible for regulating consumer
credit and competition, for policy-making and for consumer protection. The U.K.
also has strict rules regarding the presentation, form and content of loan
agreements, including statutory warnings and the layout of financial
information. Our non-compliance with these rules could render a loan agreement
unenforceable. Our inability to obtain and maintain the required licenses or to
comply with the applicable rules or regulations in the U.K. could limit our
expansion opportunities and/or could result in a material adverse effect on our
business, results of operations and financial condition.




The OFT
currently is undertaking a review of what it perceives as “high cost credit,”
which includes the sector in which we operate in the U.K. The results of this
review are expected to be released in the early part of 2010. While it is
impossible to speculate on what the results of this review will be, should the
OFT adopt some of the restrictions that have been applied in certain U.S.
jurisdictions (e.g., interest rate caps or restrictions on repeat borrowings or
multiple simultaneous borrowings), there could be materially adverse effects on
our business, results of operations and financial condition.




Our ability to
find additional micro-loan growth opportunities may be limited. We may
not be able to maintain or further expand our market presence in our current
markets or successfully enter new markets through the opening of new storefronts
or acquisitions. Moreover, the start-up costs and the losses from initial
operations attributable to each newly opened storefront place demands upon our
liquidity and cash flow, and we may not be able to satisfy these
demands.




Because our
Retail Micro-Loans and Internet Micro-Loans segments currently lack product and
business diversification, these segments’ revenues and earnings may be
disproportionately negatively impacted by external factors and may be more
susceptible to fluctuations than more diversified
companies.  The primary business activity of our micro-loan
businesses is offering cash advance products. If we are unable to maintain our
cash advance products business and/or diversify our operations, our revenues and
earnings could decline. Our current lack of product and business diversification
could inhibit our opportunities for growth, reduce our revenues and profits and
make us more susceptible to earnings fluctuations than many of our competitors
who are more diversified and provide other services such as pawn lending, title
lending or other similar services. External factors, such as changes in laws and
regulations or interpretations thereof, new entrants and enhanced competition,
also could make it more difficult for us to operate as profitably as a more
diversified company could operate. Any internal or external change in our
industry could result in a decline in our revenues and earnings, which could
have a material adverse effect on our business, prospects, results of operations
and financial condition.


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Prior efforts by
our micro-loan businesses to expand their product offerings at our micro-loan
storefronts did not prove successful.  Our inability to introduce or
manage new products or alternative methods for conducting business in an
efficient and profitable manner could have a material adverse effect on our
business, prospects, results of operations and financial
condition.  From 2004 through mid-2007, we embarked on a
strategy of converting our mono-line micro-loan storefronts into neighborhood
financial centers offering a wide array of financial products and services,
including auto insurance, stored-value cards, check cashing, money transfer,
money order, bill payment, auto title loans and tax preparation service
assistance. These new products had some success in improving foot traffic within
our storefronts and increasing our revenues on a per store basis. In certain
states, however, we saw increasingly stringent lending regulations (which in
many cases precluded the execution of our multi-product line strategy) and
possible evidence of market saturation, both of which resulted in revenue growth
that did not meet our expectations.  As a result, we discontinued many
of these product offerings in mid-2007.




In order
to offer new products, we need to comply with additional regulatory and
licensing requirements. Each of these changes, alternative methods of conducting
business and new products are subject to risk and uncertainty and require
significant investment in time and capital, including additional marketing
expenses, legal costs and other incremental start-up costs. For these reasons
and based on our prior experience in offering alternative products, we may not
be able to introduce any new products in a successful or timely manner.
Furthermore, our failure to offer new products in an efficient manner, or low
customer demand for any of these new products, could have a material adverse
effect on our business, prospects, results of operations and financial
condition.




Current and
future litigation and regulatory proceedings against our micro-loan businesses
could have a material adverse effect on our business, prospects, results of
operations and financial condition.  Our micro-loan businesses
are subject to lawsuits and regulatory proceedings that could generate adverse
publicity and cause us to incur substantial expenditures. See Part I,
Item 3, “Legal Proceedings.” Adverse rulings in lawsuits or regulatory
proceedings could significantly impair our business and/or force us to cease
doing business in one or more states or other geographic areas.




Our
micro-loan businesses are likely to be subject to further litigation and
proceedings in the future. The consequences of an adverse ruling in any current
or future litigation or proceeding could cause us to have to refund fees and/or
interest collected, refund the principal amount of advances, pay treble or other
multiple damages, pay monetary penalties and/or modify or terminate our
operations in particular states. We also may be subject to adverse publicity.
Defense of any lawsuits or proceedings, even if successful, requires substantial
time and attention of our senior officers and other management personnel that
would otherwise be spent on other aspects of our business and requires the
expenditure of significant amounts for legal fees and other related costs.
Settlement of lawsuits also may result in significant payments and modifications
to our operations. Any of these events could have a material adverse effect on
our business, prospects, results of operations and financial
condition.




Adverse economic
conditions may significantly and adversely affect our micro-loan businesses’
prospects, results of operations, financial condition and access to
liquidity.  The current global economic crisis may adversely
affect our micro-loan businesses in several ways. For example, the rise in
unemployment levels likely will reduce the number of customers who qualify for
our products and services, which in turn may reduce our revenues. Similarly,
reduced consumer confidence and spending may decrease the demand for our
products. Also, the widespread loss of jobs, housing foreclosures and general
economic uncertainty may affect our loss experience. Our methodology for
establishing our provision for loan losses is based in large part on our
historic loss experience. If customer behavior changes as a result of current
economic conditions, our provision may be inadequate. Additionally, should our
micro-loan businesses require external sources of liquidity to fund customer
advances in the future (they do not today), they may be unable to access that
liquidity due to the current state of the credit markets.  If they are
unable to obtain external liquidity, our ability to finance their current
operations could be impaired. Lastly, given the unprecedented nature of the
current economic crisis, our micro-loan businesses may be adversely affected in
ways that we are unable to anticipate.




The concentration
of our micro-loan businesses’ revenues in certain geographic areas could
adversely affect us. As of December 31, 2009, we operated retail
storefronts in nine states.  Total revenues withinKentucky, Ohio, South Carolina and Wisconsin,our four largest states
(measured by revenue), accounted for approximately 40.7% of our retail
micro-loans revenue during 2009. While we believe we have a diverse geographic
presence within the U.S., for the near term we expect that significant
micro-loan business revenues will continue to be generated by certain states,
largely due to the currently prevailing economic, demographic, regulatory,
competitive and other conditions in those states. For example, during 2009,
Kentucky, Ohio, South Carolina and Wisconsin each accounted for more than 7.6%
of our retail micro-loans revenue, with Ohio accounting for 16.4% of our retail
micro-loans revenue during that period. Changes to prevailing economic,
demographic, regulatory or any other conditions in the markets in which we
operate could lead to a


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reduction
in demand for our products and services, a decline in our revenues or an
increase in our provision for loan losses that could result in a deterioration
of our financial condition. A regulatory change similar to the recent change in
Ohio, for example, or an action by a state regulator similar to those in North
Carolina, West Virginia and Arkansas, in any one of our larger states may have a
material adverse effect on our business, prospects, results of operations or
financial condition.




Moreover,
our U.K. Internet-based micro-loan operations comprised 46.8% of our micro-loan
businesses’ revenue during 2009; as such, a regulatory change in the U.K. to
reduce the profitability of or otherwise limit or ban our product offerings in
the U.K. could have a material adverse effect on our business, prospects,
results of operations or financial condition.




Competition in
the micro-loans industry could cause our micro-loan businesses to lose market
share, experience increased customer acquisition costs or reduce their interest
and fees, possibly resulting in a decline in our revenues and
earnings.The industry in which our micro-loan businesses
operate has low barriers to entry and is highly fragmented and very competitive.
We believe that the market may become even more competitive as the industry
matures and/or consolidates. We compete with services provided by traditional
financial institutions, such as overdraft protection, and with other cash
advance providers, small loan providers, pawn stores, short-term consumer
lenders, other financial service entities and other retail businesses that offer
consumer loans or other products and services that are similar to ours. We also
compete with companies offering cash advances and short-term loans over the
Internet as well as by phone. Some of these competitors have larger local or
regional customer bases, more locations and substantially greater financial,
marketing and other resources than we have. As a result of this increasing
competition, we could lose market share or experience increased customer
acquisition costs, or we may need to reduce our interest and fees, possibly
resulting in a decline in our revenues and earnings.




Media reports and
public perception of cash advances and similar loans as being predatory or
abusive could materially adversely affect our business, prospects, results of
operations and financial condition.Consumer advocacy groups
and certain media reports advocate for governmental and regulatory action to
prohibit or severely restrict our micro-loan businesses’ products and services.
The consumer groups and media reports typically focus on the cost to a consumer
and typically characterize our micro-loan businesses’ products and services as
predatory or abusive toward consumers. If this negative characterization of
advances becomes widely accepted by consumers, demand for our micro-loan
businesses’ products and services could significantly decrease, which could
materially adversely affect our business, results of operations and financial
condition. Negative perception of our micro-loan businesses’ products and
services could also result in increased regulatory scrutiny and litigation,
encourage restrictive local zoning rules, make it more difficult to obtain
government approvals necessary to open new storefronts and cause industry trade
groups, such as the Community Financial Services Association of America, to
promote policies that cause our business to be less profitable. These trends
could materially adversely affect our business, prospects, results of operations
and financial condition.




Our micro-loan
businesses’ provision for loan losses may increase and net income may decrease
if we are unable to collect customers’ personal checks that are returned due to
non-sufficient funds (“NSF”) in the customers’ accounts or other
reasons.In 2009 and 2008, our retail storefront operations
deposited or presented an Automated Clearing House (“ACH”) authorization for
approximately 7.0% and 8.9%, respectively, of all the customer checks we
received and approximately 72.9% and 75.8%, respectively, of these deposited
customer checks or ACH authorizations were returned unpaid or rejected because
of non-sufficient funds in the customers’ bank accounts or because of closed
accounts or stop-payment orders. Total retail storefront charge offs in 2009 and
2008 were approximately $9.6 million and $9.9 million, respectively. An increase
in returned checks or rejected ACH authorizations would increase our provision
for loan losses and our allowance for uncollectible loans and fees
receivable.




MEM, our
U.K. Internet-based micro-loans business, uses an electronic debit card process
to electronically charge our payments against the customers’ bank accounts for
loan repayment and fees due. In 2009 and 2008, approximately 6.2% and 6.1%,
respectively, of these electronically charged payments against our customers’
bank accounts were charged back or rejected because of non-sufficient funds in
the customers’ bank accounts or because of closed accounts or charge-back
orders. If repayment is not made at the agreed upon repayment date, MEM will
continually seek to contact the customer in order to collect the amount due. MEM
either seeks full repayment or by agreement with the customer collects the
amount under a repayment schedule of up to six months (depending on the amount
due). After 90 days of in-house collection activity, the account will be passed
to a third-party collection agency with an aim of maximizing recovery of the
charged-off debt. Total U.K. charge-offs, net of recoveries, in 2009 and 2008
were approximately $18.0 million and $16.1 million, respectively. An increase in
charged-back or rejected electronic payments would increase our provision for
loan losses and our allowance for uncollectible loans and fees
receivable.




Our micro-loan
businesses have a significant amount of goodwill that is subject to periodic
review and testing for impairment.  A significant portion of
our micro-loan businesses’ total assets is comprised of goodwill. Under
generally accepted accounting principles, goodwill is subject to periodic review
and testing to determine if it is impaired. These tests


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require
projections of future cash flows. Unfavorable trends in our industry and
unfavorable events or disruptions to our operations can affect these projections
and estimates. Significant impairment charges, although not affecting cash flow,
could have a material impact on our operating results and financial
position.




Our continued
expansion of our micro-loan operations within the U.K. may contribute materially
to increased costs and negatively affect our business, prospects, results of
operations and financial condition.  We have devoted
significant management time and financial resources to expanding our micro-loan
operations within the U.K. Our international operations have increased the
complexity of our organization and the administrative, operating and legal cost
of operating our business. Penetrating new markets likely will require
additional marketing expenses and incremental start-up costs. Additionally, our
foreign business is subject to local regulations, tariffs and labor controls to
which other domestic businesses are not subject. Our financial results also may
be negatively affected by tax rates in the U.K. or as a result of withholding
requirements and tax treaties with the U.K. Moreover, if political, regulatory
or economic conditions deteriorate in the U.K., our ability to further expand
and maintain our international operations could be impaired or the costs of
doing so could increase, either of which could further erode our business,
prospects, results of operations and financial condition.




Our micro-loan
businesses are dependent on cash management services from banks to operate their
businesses. If banks decide to stop providing cash management services to
companies in the micro-loans industry, it could have a material adverse effect
on our business, prospects, results of operations and financial
condition.  Certain banks have notified us and other companies
in the cash advance and check-cashing industries that they will no longer
maintain bank accounts for these companies due to reputational risks and
increased compliance costs of servicing money services businesses and other cash
intensive industries. If one of our larger depository banks requests that we
close our bank accounts or puts other restrictions on how we use its services,
we could face higher costs of managing our cash and limitations on our ability
to maintain or expand our business, both of which could have a material adverse
effect on our business, prospects, results of operations and financial
condition.




In our
U.S. retail storefront operations, we use an electronic check conversion process
to electronically present most of our past due checks to the customers’ bank
accounts. This process uses either the ACH or the VISA Point-of-Sale (“VISA
POS”) network. We depend on our banks to settle our ACH transactions and on VISA
and certain participating financial institutions to operate the VISA POS system.
If our banks decide to no longer process our ACH transactions due to increased
credit risk or other reasons or if a financial institution were to exit the VISA
POS payment network or if VISA stopped supporting this network, our ability to
collect on past due accounts could be adversely affected and our cost of
collections could increase.




Our U.K.
Internet micro-loan operations use an electronic debit card process to
electronically charge payments against our customers’ bank accounts. We depend
on our banks to settle these transactions and on certain participating
institutions to operate the debit card payment system. If they were to decide to
cease processing our transactions due to increased credit risk or other reasons,
our ability to collect on accounts could be adversely affected and our cost of
collections could increase—thereby possibly having a material adverse effect on
our business, prospects, results of operations and financial
condition.




Our micro-loans
businesses are seasonal in nature, which causes our revenues, collection rates
and earnings to fluctuate. These fluctuations could have a material adverse
effect on our business, prospects, results of operations and financial
condition.  Our micro-loans businesses are seasonal due to the
impact of fluctuating demand for our products and services and fluctuating
collection rates throughout the year. Demand has historically been highest in
the third and fourth quarters of each year, corresponding to the back-to-school
and holiday seasons, and lowest in the first quarter of each year, corresponding
to our customers’ receipt of income tax refunds. Typically, our provision for
loan losses is the lowest as a percentage of revenues in the first quarter of
each year, corresponding to our customers’ receipt of income tax refunds, and
increases as a percentage of revenues for the remainder of each year. This
seasonality requires us to manage our cash flows over the course of the year. If
our revenues or collections were to fall substantially below what we would
normally expect during certain periods, our ability to service any potential
future debt, pay any potential future dividends on our common stock and meet our
other liquidity requirements may be adversely affected, which could have a
material adverse effect on our business, prospects, results of operations and
financial condition.




In
addition, our micro-loans businesses’ quarterly results have fluctuated in the
past and are likely to continue to fluctuate in the future because of the
seasonal nature of our business. Therefore, our quarterly revenues and results
of operations are difficult to forecast, which in turn could cause our quarterly
results not to meet the expectations of securities analysts or investors. Our
failure to meet expectations could cause a material drop in the market price of
our common stock.




Because we
maintain a significant supply of cash in our storefronts, we may be subject to
cash shortages due to employee and third-party theft and errors. We also may be
subject to liability as a result of crimes at our centers.
Because


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our
retail storefront business requires us to maintain a significant supply of cash
in each of our storefronts, we are subject to the risk of cash shortages
resulting from employee and third-party theft and errors. Although we have
implemented various programs to reduce these risks, maintain insurance coverage
for theft and provide security for our employees and facilities, employee and
third- party theft and errors may still occur. Cash shortages from employee and
third-party theft and errors were approximately $48,045 (0.04% of revenue) in
2009 and $396,459 (0.4% of revenue) in 2008. The extent of these cash shortages
could increase as we expand the nature and scope of our products and services.
Theft and errors could lead to cash shortages and could adversely affect our
business, prospects, results of operations and financial condition. It also is
possible that crimes such as armed robberies may be committed at our
storefronts. We could be subject to legal claims or adverse publicity arising
from such crimes. For example, we may be subject to legal claims if an employee,
customer or bystander suffers bodily injury, emotional distress or death. Any
such event may have a material adverse effect on our business, prospects,
results of operations and financial condition.




Regular turnover
among our managers and employees at our storefronts makes it more difficult for
us to operate our storefronts and increases our costs of operations, which could
have an adverse effect on our business, prospects, results of operations and
financial condition.  The annual 2009 turnover among our
storefront managers was approximately 23.3% and among our other storefront
employees was approximately 58.4%. Approximately 7.9% of the turnover has
traditionally occurred in the first six months following the hire date of our
center managers and employees. This turnover increases our cost of operations
and makes it more difficult to operate our storefronts.  If we are
unable to retain our employees in the future, our business, prospects, results
of operations and financial condition could be adversely affected.




Our
Recent Entry Into, Subsequent Expansion of, and More Recent Contraction of Our
Automobile Lending Activities Involve Unique Risks In Addition to Others
Described Herein




Automobile
lending exposes us not only to most of the risks described above but also to
additional risks, including the regulatory scheme that governs installment loans
and those attendant to relying upon automobiles and their repossession and
liquidation value as collateral. In addition, one of our Auto Finance segment
businesses acquires loans on a wholesale basis from used car dealers, for which
we rely upon the legal compliance and credit determinations by those
dealers.




The
decline in automobile sales has resulted in a decline in the overall demand for
automobile loans.  Sales of both new and used cars have declined
precipitously over the past few years. While the unavailability of funding may
have had a greater impact on our business, the decline in demand was
consequential as well as it adversely affects the volume of our lending
transactions and our recoveries of repossessed vehicles at auction. The
continuation of this decline in demand will adversely impact our
business.




Funding for
automobile lending is difficult to obtain and expensive. In large part
due to market concerns regarding sub-prime lending, it is extremely difficult to
find lenders willing to fund our automobile lending activities. Our inability to
obtain debt facilities with desirable terms (e.g., interest rates and advance
rates) and the other capital necessary to fund growth within our Auto Finance
segment, will cause periods (like our current period) of liquidations in our
Auto Finance segment receivables and reductions in profitability and returns on
equity. We also may not be able to renew or replace our two remaining Auto
Finance segment facilities when they become due (one of which has already
expired in the ordinary course but with respect to which the lender has not yet
required repayment as it evaluates a potential extension), in which event our
Auto Finance segment could experience significant liquidity constraints and
diminution in reported asset values as lenders retain significant cash flows
within underlying structured financings or otherwise under security arrangements
for repayment of their loans.  If we cannot renew or replace
facilities or otherwise are unduly constrained from a liquidity perspective, we
may choose to sell part or all of our auto loan portfolios, possibly at less
than favorable prices.




Our automobile
lending business is dependent upon referrals from dealers. Currently we
provide automobile loans only to or through used car dealers (including JRAS,
our own captive buy-here, pay-here dealer acquired in January 2007). Providers
of automobile financing have traditionally competed based on the interest rate
charged, the quality of credit accepted and the flexibility of loan terms
offered. In order to be successful, we not only will need to be competitive in
these areas, but also will need to establish and maintain good relations with
dealers and provide them with a level of service greater than what they can
obtain from our competitors.




The financial
performance of our automobile loan portfolio is in part dependent upon the
liquidation of repossessed automobiles. Principally in instances of
customer non-repayment of our ACC business auto loans, we regularly repossess
automobiles and sell repossessed automobiles at wholesale auction markets
located throughout the U.S. Auction proceeds from these sales and other
recoveries rarely are sufficient to cover the outstanding balances of the
contracts; where we experience these shortfalls, we will experience credit
losses. Decreased auction proceeds resulting from depressed prices at which used
automobiles may be sold in periods of economic slowdown or recession have
resulted in higher credit losses for


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us.
Additionally, higher gasoline prices (like those experienced during 2008) tend
to decrease the auction value of certain types of vehicles, such as
SUVs.




Repossession of
automobiles entails the risk of litigation and other claims. Although we
contract with reputable repossession firms to repossess automobiles on defaulted
loans, it is not uncommon for consumers to assert that we were not entitled to
repossess an automobile or that the repossession was not conducted in accordance
with applicable law. These claims increase the cost of our collection efforts
and, if correct, can result in awards against us.




We
Routinely Explore Various Opportunities to Grow Our Business, to Make
Investments and to Purchase and Sell Assets




We
routinely consider acquisitions of, or investments in, portfolios and other
assets as well as the sale of portfolios and portions of our business. There are
a number of risks attendant to any acquisition, including the possibility that
we will overvalue the assets to be purchased and that we will not be able to
produce the expected level of profitability from the acquired business or
assets. Similarly, there are a number of risks attendant to sales, including the
possibility that we will undervalue the assets to be sold. As a result, the
impact of any acquisition or sale on our future performance may not be as
favorable as expected and actually may be adverse.




Portfolio purchases may
cause fluctuations in reported credit card managed receivables data, which may
reduce the usefulness of historical credit card managed loan data in evaluating
our business. Our reported managed credit card receivables data may fluctuate
substantially from quarter to quarter as a result of recent and future credit
card portfolio acquisitions. As of December 31, 2009, credit card portfolio
acquisitions accounted for 31.9% of our total credit card managed receivables
portfolio based on our ownership percentages.




Receivables
included in purchased portfolios are likely to have been originated using credit
criteria different from the criteria of issuing bank partners that have
originated accounts on our behalf. Receivables included in any particular
purchased portfolio may have significantly different delinquency rates and
charge-off rates than the receivables previously originated and purchased by us.
These receivables also may earn different interest rates and fees as compared to
other similar receivables in our receivables portfolio. These variables could
cause our reported managed receivables data to fluctuate substantially in future
periods making the evaluation of our business more difficult.




Any
acquisition or investment that we make will involve risks different from and in
addition to the risks to which our business is currently exposed. These include
the risks that we will not be able to integrate and operate successfully new
businesses, that we will have to incur substantial indebtedness and increase our
leverage in order to pay for the acquisitions, that we will be exposed to, and
have to comply with, different regulatory regimes and that we will not be able
to apply our traditional analytical framework (which is what we expect to be
able to do) in a successful and value-enhancing manner.




Other
Risks of Our Business




Climate change
and related regulatory responses may impact our
business.  Climate change as a result of emissions of
greenhouse gases is a significant topic of discussion and may generate federal
and other regulatory responses in the near future, including the imposition of a
so-called “cap and trade” system.  It is impracticable to predict with
any certainty the impact on our business of climate change or the regulatory
responses to it, although we recognize that they could be
significant.  The most direct impact is likely to be an increase in
energy costs, which would increase slightly our operating costs, primarily
through increased utility and transportations costs.  In addition,
increased energy costs could impact consumers and their ability to incur and
repay indebtedness.  However, it is too soon for us to predict with
any certainty the ultimate impact, either directionally or quantitatively, of
climate change and related regulatory responses.




We are a holding
company with no operations of our own.As a result, our
cash flow and ability to service our debt is dependent upon distributions from
our subsidiaries.  Our ability to service our debt is dependent upon
the cash flows and operating earnings of our subsidiaries.  The
distribution of subsidiary earnings, or advances or other distributions of funds
by subsidiaries to us, all of which are subject to statutory and could be
subject to contractual restrictions, are contingent upon the subsidiaries’ cash
flows and earnings and are subject to various business and debt covenant
considerations.In addition, we
are considering further restructuring options, including the spin-off of our
micro-loan businesses.




If we ever
consolidate the entities that hold our receivables, there will be a number of
changes to our financial statements. When we securitize receivables, they
are owned by special purpose entities that are not consolidated with us for
financial reporting purposes. The rules governing whether these entities are
consolidated are complex and evolving and subject to periodic review. For
instance, changes effective for us at the end of 2009 will require us to
consolidate our securitizations as of the beginning of 2010. As a result of the
accounting rules changes expected to be effective for us as of


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January
1, 2010, cash and credit card receivables held by our securitization trusts and
debt issued from those entities will be presented as assets and liabilities on
our consolidated balance sheet effective on that date. Because we expect to
exercise the fair value option permitted under the new rules, we expect
favorable initial effects on our reported financial condition. Moreover, after
adoption of these new accounting rules, we will no longer reflect our
securitization trusts’ results of operations within losses on retained interests
in credit card receivables securitized, but will 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 will begin to 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
will account for our securitization transactions under the new rules as secured
borrowings rather than asset sales, we will begin to present the cash flows from
these transactions as cash flows from financing activities, rather than as cash
flows from investing activities.




Unless we obtain
a bank charter, we cannot issue credit cards other than through agreements with
banks. Because we do not have a bank charter, we currently cannot issue
credit cards other than through agreements with banks. Previously we applied for
permission to acquire a bank and our application was denied. Unless we obtain a
bank or credit card bank charter, we will continue to rely upon banking
relationships to provide for the issuance of credit cards to our customers. Even
if we obtain a bank charter, there may be restrictions on the types of credit
that it may extend. Our various issuing bank agreements have scheduled
expirations dates. If we are unable to extend or execute new agreements with our
issuing banks at the expirations of our current agreements with them, or if our
existing or new agreements with our issuing banks were terminated or otherwise
disrupted, there is a risk that we would not be able to enter into agreements
with an alternate provider on terms that we consider favorable or in a timely
manner without disruption of our business.




Historically,
a substantial portion of our receivables were generated through accounts owned
by Columbus Bank and Trust (“CB&T”), which has terminated its relationship
with us. In addition, CB&T has refused to provide us the portion of the
proceeds that it received in connection with the Visa® and
MasterCard®
initial public offerings that is attributable to the accounts that it originated
on our behalf. For a more complete discussion of the litigation pending between
CB&T and us, see Part I, Item 3, “Legal Proceedings.”




We are party to
substantial litigation. As more fully discussed above, we are defendants
in a significant number of legal proceedings. This includes litigation relating
to our relationship with CB&T; litigation with holders of our convertible
senior notes concerning past and possible future distributions to our
shareholders, included the proposed spin-off of our micro-loan businesses; and
litigation relating to our payday lending operations and other litigation
customary for a business of our nature. In each case we believe that we have
meritorious defenses or that the positions we are asserting otherwise are
correct. However, adverse outcomes are possible in each of these matters, and we
could decide to settle one or more of these matters in order to avoid the cost
of litigation or to obtain certainty of outcome. Adverse outcomes or settlements
of these matters could require us to pay damages, make restitution, change our
business practices or take other actions at a level, or in a manner, that would
adversely impact our business.




We may not be
able to purchase charged-off receivables at sufficiently favorable prices or
terms for our debt collection operations to be successful. The
charged-off receivables that are acquired and serviced (or resold) by Jefferson
Capital, our debt collection subsidiary, have been deemed uncollectible and
written off by the originators. Jefferson Capital seeks to purchase charged-off
receivables portfolios only if it expects projected collections or prices
received for sales of such charged-off receivables to exceed its acquisition and
servicing costs. Accordingly, factors causing the acquisition price of targeted
portfolios to increase could reduce the ratio of collections (or sales prices
received) to acquisitions costs for a given portfolio, and thereby negatively
affect Jefferson Capital’s profitability. The availability of charged-off
receivables portfolios at favorable prices and on favorable terms depends on a
number of factors, including the continuation of the current growth and
charge-off trends in consumer receivables, our ability to develop and maintain
long-term relationships with key charged-off receivable sellers, our ability to
obtain adequate data to appropriately evaluate the collectibility of portfolios
and competitive factors affecting potential purchasers and sellers of
charged-off receivables, including pricing pressures, which may increase the
cost to us of acquiring portfolios of charged-off receivables and reduce our
return on such portfolios.




Additionally,
sellers of charged-off receivables generally make numerous attempts to recover
on their non-performing receivables, often using a combination of their in-house
collection and legal departments as well as third-party collection agencies.
Charged-off receivables are difficult to collect, and we may not be successful
in collecting amounts sufficient to cover the costs associated with purchasing
the receivables and funding our Jefferson Capital operations.




The analytical
model we use to project credit quality may prove to be inaccurate. We
assess credit quality using an analytical model that we believe predicts the
likelihood of payment more accurately than traditional credit scoring models.
For instance, we have identified factors (such as delinquencies, defaults and
bankruptcies) that under some circumstances we weight differently than do other
credit providers. We believe our analysis enables us to better identify
consumers within the


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financially
underserved market who are likely to be better credit risks than otherwise would
be expected. Similarly, we apply our analytical model to entire portfolios in
order to identify those that may be more valuable than the seller or other
potential purchasers might recognize. However, we may not be able to achieve the
collections forecasted by our analytical model. If any of our assumptions
underlying our model proves materially inaccurate or changes unexpectedly, we
may not be able to achieve our expected levels of collection, and our revenues
will be reduced, which would result in a reduction of our earnings.




Because we
outsource account-processing functions that are integral to our business, any
disruption or termination of that outsourcing relationship could harm our
business. We outsource account and payment processing, and in 2009, we
paid Total System Services, Inc. $20.4 million for these services. If these
agreements were not renewed or were terminated or the services provided to us
were otherwise disrupted, we would have to obtain these services from an
alternative provider, such as First Data Resources, Inc., which currently
provides only limited account and payment processing for us. There is a risk
that we would not be able to enter into a similar agreement with an alternate
provider on terms that we consider favorable or in a timely manner without
disruption of our business.




If we obtain a
bank charter, any changes in applicable state or federal laws could adversely
affect our business. From time-to-time we have explored the possibility
of acquiring a bank or credit card bank. If we obtain a bank or credit card bank
charter, we will be subject to the various state and federal regulations
generally applicable to similar institutions, including restrictions on the
ability of the banking subsidiary to pay dividends to us. Any future changes of
applicable state and federal laws or regulations could adversely affect the
bank’s business and operations.




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




Any disruption in
the availability of our information systems could adversely affect our
operations. We rely upon our information systems to manage and operate
business. Our back-up systems and security measures could fail to prevent a
disruption in our information systems. Any disruption in our information systems
due to catastrophic events or otherwise could adversely affect our business,
prospects, results of operations and financial condition.




Our systems,
procedures, controls and existing personnel may not be adequate to support new
or replacement products or to expand into new geographic
areas.Our results of operations depend substantially on the
ability of our officers and key employees to manage changing business conditions
and unpredictable regulations and to implement and improve our technical,
administrative, financial control and reporting systems. Our ability to maintain
or further expand our business may require us to develop new or replacement
products. In addition, business conditions could make it necessary for us to
expand our operations in new geographic areas. Our systems, procedures, controls
and existing personnel may not be adequate to support new or replacement
products or operations in new geographic areas.




Risks
Related to the Potential Spin-Off of our Micro-Loan Businesses




Our Board of
Directors may decide not to approve the spin-off of our micro-loan businesses;
even if, our Board of Directors  approves the spin-off, the
consummation of the spin-off will be subject to a number of
conditions.  Our Board of Directors and management are
evaluating the proposed spin-off to determine whether the separation of the
micro-loan businesses is in our best interests as well as those of our
shareholders.  The Board of Directors may decide not to approve the
spin-off if at any time it determines, in its sole discretion, that Purpose
Financial and we are better served being a combined company.  Even if
the Board of Directors approves the spin-off, the consummation of the spin-off
will be subject to a number of conditions, including: (i) the SEC’s declaration
of Purpose Financial’s registration statement on Form 10 to be effective;
(ii) our and Purpose Financial’s receipt of all 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; (iii) the private letter ruling that we received from the IRS
not being revoked or modified in any material respect; (iv) NASDAQ’s approval
for listing of Purpose Financial’s common stock, subject to official notice of
issuance; and (v) the nonexistence of any order, injunction or decree issued by
any court of competent jurisdiction or other legal restraint or prohibition that
might prevent the consummation of the spin-off or any of the transactions
related thereto, including the transfers of assets and


38
 Table of Contents




liabilities
contemplated by the separation and distribution agreement that would be entered
into between Purpose Financial and us. If we are not able to meet these
conditions, we may not be able to complete the spin-off in a timely
manner.




If the spin-off
is completed, our operational and financial profile will change as a result of
the separation of Purpose Financial from our other businesses. As a
result, our diversification of revenue sources will diminish, and it is possible
that our results of operations, cash flows, working capital and financing
requirements may be subject to increased volatility.




If the spin-off
is determined to be taxable for U.S. federal income tax purposes, we and our
shareholders that are subject to U.S. federal income tax could incur significant
U.S. federal income tax liabilities.  In connection with the
spin-off, we received a private letter ruling from the IRS to the effect that,
among other things, the contribution by us of the assets of the micro-loan
businesses to Purpose Financial and the distribution will qualify as a
transaction that is tax-free for U.S. federal income tax purposes under Sections
355 and 368(a)(1)(D) of the Internal Revenue Code of 1986 (the “Code”). The
ruling relies on certain facts, assumptions, representations and undertakings
from Purpose Financial and us regarding the past and future conduct of the
companies’ respective businesses and other matters. If any of these facts,
assumptions, representations or undertakings is incorrect or not otherwise
satisfied, we and our shareholders may not be able to rely on the ruling and
could be subject to significant tax liabilities. Notwithstanding the private
letter ruling, the IRS could determine on audit that the spin-off is taxable if
it determines that any of these facts, assumptions, representations or
undertakings are not correct or have been violated or for other reasons,
including as a result of certain significant changes in the stock ownership of
Purpose Financial or us after the spin-off.




If the spin-off
is completed, we will be subject to restrictions on acquisitions involving our
stock and other stock issuances and possibly other corporate opportunities in
order to enable the spin-off to qualify for tax-free treatment.Even if
the spin-off otherwise qualifies for tax-free treatment under Sections
368(a)(1)(D) and 355 of the Code, it may result in corporate level taxable gain
to us under Section 355(e) of the Code if 50% or more, by vote or value, of
our common stock or Purpose Financial’s common stock is acquired or issued as
part of a plan or series of related transactions that includes the distribution.
For this purpose, any acquisitions or issuances of our common stock within two
years before the distribution, and any acquisitions or issuances of our common
stock or Purpose Financial’s common stock within two years after the
distribution, generally are presumed to be part of such a plan, although we or
Purpose Financial may be able to rebut that presumption. We are not aware of any
such acquisitions or issuances of our common stock within the two years before
the distribution. If an acquisition or issuance of our common stock or Purpose
Financial’s common stock triggers the application of Section 355(e) of the
Code, we would recognize taxable gain as described above, and certain
subsidiaries of ours or subsidiaries of Purpose Financial would incur
significant federal income tax liabilities as a result of the application of
Section 355(e) of the Code.




Under the
tax sharing agreement that would be entered into between Purpose Financial and
us, there are restrictions on our ability to take actions that could cause the
spin-off or certain internal transactions undertaken in anticipation of the
spin-off to fail to qualify as tax-favored transactions, including entering
into, approving or allowing any transaction that results in a change in
ownership of more than 50% of our common stock, a redemption of equity
securities, a sale or other disposition of a substantial portion of our assets,
an acquisition of a business or assets with equity securities to the extent one
or more persons would acquire 50% or more of our common stock, or engaging
in certain internal transactions. These restrictions apply for the two-year
period after the spin-off, unless we obtain a private letter ruling from the
Internal Revenue Service or an unqualified opinion that such action will not
cause the spin-off or the internal transactions undertaken in anticipation of
the spin-off to fail to qualify as tax-favored transactions, and such letter
ruling or opinion, as the case may be, is acceptable to the parties. In
addition, Purpose Financial would be subject to similar restrictions under the
tax sharing agreement. Moreover, the tax sharing agreement generally would
provide that a party thereto is responsible for any taxes imposed on any other
party thereto as a result of the failure of the spin-off or certain internal
transactions to qualify as a tax-favored transaction under the Code if such
failure is attributable to certain post-spin actions taken by or in respect of
the responsible party or its shareholders, regardless of whether the actions
occur more than two years after the spin-off, the other party’s consent to such
actions or such party obtains a favorable letter ruling or opinion as described
above. For example, we would be responsible for the acquisition of us by a third
party at a time and in a manner that would cause such failure. These
restrictions may prevent us from entering into transactions which might be
advantageous to our shareholders.




Risks
Relating to an Investment in Our Common Stock




The price of our
common stock may fluctuate significantly, and this may make it difficult for you
to resell your shares of our common stock when you want or at prices you find
attractive. The price of our common stock on the NASDAQ Global
Market constantly changes. We expect that the market price of our common stock
will continue to fluctuate. The market price of our common stock may fluctuate
in response to numerous factors, many of which are beyond our control. These
factors include the following:




•
            actual
      or anticipated fluctuations in our operating
  results;




•
            changes
      in expectations as to our future financial performance, including
      financial estimates by securities analysts and
  investors;




•
            the
      overall financing environment, which is critical to our
    value;




•
            the
      operating and stock performance of our competitors and other sub-prime
      lenders;




•
            announcements
      by us or our competitors of new products or services or significant
      contracts, acquisitions, strategic partnerships, joint ventures or capital
      commitments;




•
            changes
      in interest rates;




•
            the
      announcement of enforcement actions or investigations against us or our
      competitors or other negative publicity relating to us or our
      industry;




39
 Table of Contents




•
            changes
      in accounting principles generally accepted in the United States of
      America (“GAAP”), laws, regulations or the interpretations thereof that
      affect our various business activities and
  segments;




•
            general
      domestic or international economic, market and political
      conditions;




•
            additions
      or departures of key personnel; and




•
            future
      sales of our common stock and the share lending
  agreement.




In
addition, the stock markets from time to time experience extreme price and
volume fluctuations that may be unrelated or disproportionate to the operating
performance of companies. These broad fluctuations may adversely affect the
trading price of our common stock, regardless of our actual operating
performance.




Future sales of
our common stock or equity-related securities in the public market, including
sales of our common stock pursuant to share lending agreements or short sales
transactions by purchasers of convertible notes securities, could adversely
affect the trading price of our common stock and our ability to raise funds in
new stock offerings.Sales of significant amounts of our common stock or
equity-related securities in the public market, including sales pursuant to
share lending agreements, or the perception that such sales will occur, could
adversely affect prevailing trading prices of our common stock and could impair
our ability to raise capital through future offerings of equity or
equity-related securities. Future sales of shares of common stock or the
availability of shares of common stock for future sale, including sales of our
common stock in short sales transactions by purchasers of our convertible notes,
may have a material adverse effect on the trading price of our common
stock.




Our business is
going through a substantial period of transition and we are exploring various
options.Because
of the unavailability of financing for our traditional business, we are
exploring various options designed to produce the greatest benefit possible for
our shareholders.  Currently these options include the payment of cash
dividends and the spin-off of our micro-loan businesses, and we may consider
additional options in the future.  On December 31, 2009, we paid a
$.50 per share dividend to our shareholders.  We are considering
future cash dividends as well.  In connection with management’s review
of the proposal to spin-off our micro-loan businesses, our subsidiary Purpose
Financial filed a Form 10 Registration Statement and a related Information
Statement with the SEC.  To date, our Board of Directors has not
approved any further dividends or the spin-off of Purpose Financial, and it is
premature to suggest whether they will.




We have the
ability to issue preferred shares, warrants, convertible debt and other
securities without shareholder approval. Our common shares may be
subordinate to classes of preferred shares issued in the future in the payment
of dividends and other distributions made with respect to common shares,
including distributions upon liquidation or dissolution. Our articles of
incorporation permit our Board of Directors to issue preferred shares without
first obtaining shareholder approval. If we issued preferred shares, these
additional securities may have dividend or liquidation preferences senior to the
common shares. If we issue convertible preferred shares, a subsequent conversion
may dilute the current common shareholders’ interest. We have similar abilities
to issue convertible debt, warrants and other equity securities.




Our executive
officers, directors and parties related to them, in the aggregate, control a
majority of our voting stock and may have the ability to control matters
requiring shareholder approval. Our executive officers, directors
and parties related to them own a large enough stake in us to have an influence
on, if not control of, the matters presented to shareholders. As a result, these
shareholders may have the ability to control matters requiring shareholder
approval, including the election and removal of directors, the approval of
significant corporate transactions, such as any reclassification,
reorganization, merger, consolidation or sale of all or substantially all of our
assets and the control of our management and affairs. Accordingly, this
concentration of ownership may have the effect of delaying, deferring or
preventing a change of control of us, impede a merger, consolidation, takeover
or other business combination involving us or discourage a potential acquirer
from making a tender offer or otherwise attempting to obtain control of us,
which in turn could have an adverse effect on the market price of our common
stock.




Note
Regarding Risk Factors




The risk
factors presented above are all of the ones that we currently consider material.
However, they are not the only ones facing our company. Additional risks not
presently known to us, or which we currently consider immaterial, may also
adversely affect us. There may be risks that a particular investor views
differently from us, and our analysis might be wrong. If any of the risks that
we face actually occur, our business, financial condition and operating results
could be materially adversely affected and could differ materially from any
possible results suggested by any forward-looking statements that we have made
or might make. In such case, the trading price of our common stock could
decline, and you could lose part or all of your investment. We expressly disclaim any obligation
to update or revise any forward-looking statements, whether as a result of new
information, future events or otherwise, except as required by
law.





ITEM 1B.
              UNRESOLVED
      STAFF COMMENTS




None.




ITEM 2.
            PROPERTIES




Our
principal executive offices, comprising approximately 223,000 square feet, and
our operations centers and collection facilities for our Credit Cards segment,
comprising approximately 217,000 square feet, are located in leased premises in:
Atlanta, Georgia; St. Cloud, Minnesota; North Wilkesboro, North Carolina; and
Salt Lake City, Utah. Our Investments in Previously Charged-Off Receivables
segment principally operates out of the St. Cloud, Minnesota facility. Our
Retail Micro-Loans segment is headquartered within the same location as our
principal executive offices in Atlanta, Georgia with approximately 19,000 square
feet of leased space; its storefront locations in the various states in which it
operates average approximately 1,550 square feet per store of leased space. Our
Auto Finance segment principally operates out of Lake Mary, Florida in
approximately 12,800 square feet of leased space, with additional offices and
branch locations in various states. Our operations in the U.K. include
approximately 54,100 of aggregate square feet of leased space in Crawley,
Bicester and London.We believe that our
facilities are suitable to our business and that we will be able to lease or
purchase such additional facilities as our needs require.




ITEM 3.
                LEGAL
      PROCEEDINGS


We are
involved in various legal proceedings that are incidental to the conduct of our
business. The most significant of these are described below.





CompuCredit
Corporation and five other subsidiaries are defendants in a purported class
action lawsuit entitledKnox,
et al., vs. First Southern Cash Advance, et al.,
No. 5 CV 0445, filed in the Superior Court of New Hanover County,
North Carolina, on February 8, 2005. The plaintiffs allege that in
conducting a so-called “payday lending” business, certain of our Retail
Micro-Loans segment subsidiaries violated various laws governing consumer
finance, lending, check cashing, trade practices and loan brokering. The
plaintiffs further allege that CompuCredit Corporation is the alter ego of our
subsidiaries and is liable for their actions. The plaintiffs are seeking damages
of up to $75,000 per class member, and attorney’s fees. We are vigorously
defending this lawsuit. These claims are similar to those that have been
asserted against several other market participants in transactions involving
small balance, short-term loans made to consumers in North
Carolina.




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 Table of Contents




On
May 23, 2008, CompuCredit Corporation and one of our other subsidiaries
filed a complaint against CB&T in the Georgia State Court, Fulton County,
(subsequently transferred to the Georgia Superior Court, Fulton County) in
an action entitledCompuCredit
Corporation et al. vs. CB&T et al., Civil Action
No. 08-EV-004730-F. Among other things, the complaint as now amended
alleges that CB&T, in violation of its contractual obligations, failed to
provide us rebates, marketing fees, revenues or other fees or discounts that
were paid or granted by Visa®,
MasterCard®, or
other card associations with respect to or apportionable to accounts covered by
CB&T’s agreements with us and other consideration due to us. The complaint
also alleges that CB&T refused to approve changes requested by us to the
terms of the credit card accounts and refused to permit certain marketing, all
in violation of the agreements among the parties. Also in this litigation,
CB&T has asserted claims against CompuCredit Corporation for alleged failure
to follow certain account management guidelines and for reimbursement of certain
legal fees that it has incurred associated with CompuCredit Corporation’s
contractual relationship with CB&T.  Settlement discussions are at
an advanced stage, but CompuCredit cannot provide any assurances regarding their
outcome.




On
July 14, 2008, CompuCredit Corporation and four of our officers, David G.
Hanna, Richard R. House, Jr., Richard W. Gilbert and J. Paul Whitehead III, were
named as defendants in a purported class action securities case filed in the
U.S. District Court for the Northern District of Georgia entitledWaterford Township General
Employees Retirement System vs. CompuCredit Corporation, et al., Civil
Action No. 08-CV-2270. On August 22, 2008, a virtually identical case was
filed entitledSteinke vs.
CompuCredit Corporation et al., Civil Action No. 08-CV-2687.
In general, the complaints alleged that we made false and misleading statements
(or concealed information) regarding the nature of our assets, accounting for
loan losses, marketing and collection practices, exposure to sub-prime losses,
ability to lend funds, and expected future performance. The complaints were
consolidated, and a consolidated complaint was filed. We filed a motion to
dismiss, which the court granted on December 4, 2009. In its order, the court
allowed the plaintiff to amend its complaint, but the plaintiff failed to do so
timely. On January 13,
2010, the court entered final judgment, with prejudice, in favor of all
defendants.  The appeal period for the court’s final judgment expired on
February 12, 2010.




CompuCredit
Corporation received a demand dated August 25, 2008, from a shareholder, Ms. Sue
An, that CompuCredit Corporation take action against all of its directors and
two of its officers for alleged breaches of fiduciary duty. In general, the
alleged breaches are the same as the actions that were the subject of the class
action securities case prior to its dismissal. Our Board of Directors appointed
a special litigation committee to investigate the allegations; that
investigation has now been concluded; and we have communicated that conclusion
to Ms. Sue An’s legal counsel. Ms. An has filed suit, which is in the early
stages.  We will vigorously contest the allegations in that
complaint.




Our debt
collections subsidiary, Jefferson Capital, was a party to a series of agreements
with Encore. In general, Encore was obligated to purchase from Jefferson Capital
certain defaulted credit card receivables. The agreements also required Encore
to sell certain charged-off receivables to Jefferson Capital under its balance
transfer program and chapter 13 bankruptcy agreements. On July 10, 2008,
Encore did not purchase certain accounts as contemplated by the agreements,
alleging that we breached certain representations and warranties set forth in
the agreements, generally as a result of the allegations made by the FTC and
settled by us in December 2008. This dispute was submitted to the American
Arbitration Association for resolution.  Immediately prior to the
arbitration panel hearing in the third quarter of 2009, we settled our
outstanding disputes with Encore. The settlement resulted in the recognition of
the remaining $21.2 million in deferred revenue in the third quarter of 2009 and
a corresponding release of $8.7 million in 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 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
gain of $11.0 million which is reflected in our consolidated statements of
operations for the year ended December 31, 2009.




On
December 21, 2009, certain holders of our 3.625% Convertible Senior Notes Due
2025 and 5.875% Convertible Senior Notes Due 2035 filed a lawsuit in the U.S.
District Court for the District of Minnesota seeking, among other things, to
enjoin our December 31, 2009 cash distribution to shareholders and a potential
future spin-off of our micro-loan businesses. We prevailed in court at a
December 29, 2009 hearing concerning the plaintiffs’ motion for a temporary
restraining order against our December 31, 2009 cash distribution to
shareholders, and that distribution was made as originally contemplated on that
date. On January 26, 2010, we filed a motion to dismiss all
claims.  Subsequently, on February 22, 2010, the plaintiffs purported
to file an amended complaint, seeking, among other things damages in connection
with our December 31, 2009 cash dividend and an injunction preventing future
distributions to shareholders, including the proposed spin-off of our micro-loan
businesses.  The litigation remains pending and we do not know when
the court will rule on our motion to dismiss. Consequently, should our Board of
Directors ultimately approve a spin-off of our micro-loan businesses, it is
possible that the spin-off ultimately might be delayed or enjoined by court
order.


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PART
II




ITEM 5.
            MARKET
      FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER
      PURCHASES OF EQUITY SECURITIES




Our
common stock is traded on the NASDAQ Global Select Market under the symbol
“CCRT.” The following table sets forth, for the periods indicated, the high and
low sales prices per share of our common stock as reported on the NASDAQ Global
Select Market. As of February 26, 2010, there were 69 holders of our common
stock, not including persons whose stock is held in nominee or “street name”
accounts through brokers, banks and intermediaries.





2008
            
            High
            
            
            Low1st
      Quarter 2008
            
            $
            14.70
            
            
            $
            7.652nd
      Quarter 2008
            
            $
            10.95
            
            
            $
            6.003rd
      Quarter 2008
            
            $
            7.32
            
            
            $
            3.924th
      Quarter 2008
            
            $
            5.53
            
            
            $
            1.802009
            
            High
            
            
            Low1st
      Quarter 2009
            
            $
            6.21
            
            
            $
            1.702nd
      Quarter 2009
            
            $
            3.79
            
            
            $
            2.293rd
      Quarter 2009
            
            $
            5.70
            
            
            $
            2.084th
      Quarter 2009
            
            $
            4.71
            
            
            $
            1.89




The
closing price of our common stock on the NASDAQ Global Select Market on
February 26, 2010 was $3.46.




On
December 3, 2009, we declared a $.50 per share cash dividend on our common
stock, which was paid on December 31, 2009, and we are contemplating additional
cash and stock dividends. See Item 7, “Management’s Discussion and Analysis
of Financial Condition and Results of Operations—Liquidity, Funding and Capital
Resources.”




Other
than shares effectively repurchased to pay for tax withholdings upon employee
restricted stock vestings, we repurchased no shares pursuant to publicly
announced plans or programs during 2009.




Equity
Compensation Plan Information




We
maintain two stock-based employee compensation plans (our Employee Stock
Purchase Plan or “ESPP” and our 2008 Equity Incentive Plan), which we assumed
from CompuCredit Corporation in connection with the June 30, 2009 holding
company formation reorganization. The 2008 Equity Incentive Plan provides
for grants of stock options, stock appreciation rights, restricted stock
awards, restricted stock units and incentive awards. The maximum
aggregate number of shares of common stock that may be issued under this plan
and to which awards may relate is 2,000,000 shares. Upon shareholder approval of
the 2008 Equity Incentive Plan in May 2008, all remaining shares available for
grant under our previous stock option and restricted stock plans were
terminated.




All
employees, excluding executive officers, are eligible to participate in the
ESPP. Under the ESPP, employees can elect to have up to 10% of their annual
wages withheld to purchase common stock in CompuCredit up to a fair market value
of $10,000. The amounts deducted and accumulated by each participant are used to
purchase shares of common stock at the end of each one-month offering period.
The price of stock purchased under the ESPP is approximately 85% of the fair
market value per share of our common stock on the last day of the offering
period.




The following table
provides information about our outstanding option and restricted stock unit
awards as of December 31, 2009.


Plan
      Category
            
            Number
      of
              Securities to Be
              Issued
      upon Exercise of
              Outstanding
              Options
      and Restricted Stock Units (1)
            
            
            Weighted-
              Average Exercise
              Price of
              Outstanding
              Options
            
            
            Number of Securities
      Remaining Available for
              Future Issuance under
              Employee
      Compensation Plans (Excluding
              Securities
      Reflected in
              First
      Column) (2)Equity
      compensation plans previously approved bysecurity
      holders
            
            
            1,222,312
            
            
            $
            31.75
            
            
            
            1,454,939Equity
      compensation plans not approved by security holders
            
            
            —
            
            
            
            —
            
            
            
            —Total
            
            
            1,222,312
            
            
            $
            31.75
            
            
            
            1,454,939





(1)
            Does
      not include outstanding shares of previously awarded restricted
      stock.


(2)
            Includes
      1,366,165 options or other share-based awards available under our 2008
      Equity Incentive Plan and 88,774 shares available under our ESPP as of
      December 31, 2009.







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ITEM 6.
            SELECTED
      FINANCIAL DATA




As a
“smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not
required to provide this information.




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




The
following discussion should be read in conjunction with our consolidated
financial statements and the related notes included therein where certain terms
have been defined. This discussion with respect to comparative 2008 results has
been updated to consider the effects of retrospective adjustments associated
with new accounting pronouncements that became effective for us on January 1,
2009—specifically, guidance which resulted in the reclassification of our prior
liability for minority interests to a new noncontrolling interests component of
total equity, and guidance which resulted in reclassifications of consolidated
balance sheet balances from deferred loan costs and convertible senior notes to
additional paid-in capital and associated reclassifications among retained
earnings and deferred tax liabilities. Retrospective application of this
guidance also had the effect of increasing interest expense and, accordingly,
decreasing net income within our consolidated statements of operations for the
year ended December 31, 2008. Note 2 to our consolidated financial statements
describes the retrospective application of these new accounting methods in
greater detail.




This
Management’s Discussion and Analysis of Financial Condition and Results of
Operations includes forward-looking statements. We have based these
forward-looking statements on our current plans, expectations and beliefs about
future events. There are risks that our actual experience will differ materially
from the expectations and beliefs reflected in the forward-looking statements in
this section. See “Cautionary Notice Regarding Forward-Looking
Statements.”




OVERVIEW




We are a
provider of various credit and related financial services and products to or
associated with the financially underserved consumer credit market—a market
represented by credit risks that regulators classify as “sub-prime.” We
traditionally have served this market principally through our marketing and
solicitation of credit card accounts and other credit products and our servicing
of various receivables. We have contracted contract with third-party financial
institutions pursuant to which the financial institutions have issued general
purpose consumer credit cards and we have purchased the receivables relating to
such accounts on a daily basis.




Our
product and service offerings also include small-balance, short-term cash
advance loans—generally less than $500 (or the equivalent thereof in the British
pound for pound-denominated loans) for 30 days or less and to which we
refer as “micro-loans;” installment loan and other credit products; and money
transfer and other financial services. These loans and products are marketed
through retail branch locations in Alabama, Colorado, Kentucky, Mississippi,
Ohio, Oklahoma, South Carolina, Tennessee, and Wisconsin and over the Internet
in the U.S. and U.K.




We also
are collecting a portfolio of auto finance receivables that we previously
originated through franchised and independent auto dealers, purchasing and/or
servicing auto loans from or for a pre-qualified network of dealers in the
buy-here, pay-here used car business and selling used automobiles through our
own buy-here, pay-here lots.




Lastly,
our debt collections subsidiary purchases and collects previously charged-off
receivables from us, the trusts that we service and third parties.




The most
significant changes to our business during the year ended December 31, 2009
were:




·
            The
      continuing effects of the economic downturn and the ongoing difficulties
      in the liquidity markets that have prevented us from raising new funds in
      order to originate credit card receivables and auto loans, thereby causing
      us to offer payment incentive programs to credit card customers, to close
      substantially all of our credit card accounts (other than those associated
      with our Investment in Previously Charged-Off Receivables segment’s
      balance transfer program), and to cease all auto loan origination efforts
      associated with our ACC operations (all of which have a negative impact on
      both short-term earnings and the potential for longer term profitability)
      and to continue with our expense paring
efforts;




·
            Our
      third quarter change in assumption in computing the fair value of our
      retained interests in our securitization trusts to reflect our
      determination during that quarter that a buyer of the residual interests
      we hold in our upper-tier and lower-tier originated portfolio master
      trusts would likely discount the price that they would pay for the
      residual interests to reflect the risk that certain of the securitization
      facilities could soon enter early amortization status—thereby materially
      delaying the buyer’s receipt of cash flows until the underlying
      securitization facilities were completely
  repaid;




·
            Our
      recognition of a $114.0 million securitization gain in the third quarter
      connection with the cancellation of certain notes issued out of our
      upper-tier originated portfolio master
trust;




·
            Our
      recognition of an $11.0 million net pre-tax gain in the third quarter
      associated with our settlement with Encore over its claims that we
      breached contract and its failure to purchase certain previously
      charged-off receivables accounts under its forward flow contract with
      us;




·
            Our
      third quarter repayment of $81.1 million of notes payable associated with
      our ACC and CAR operations within our Auto Finance segment as we were not
      able to reach satisfactory terms to renew or replace these debt facilities
      at that time, followed shortly thereafter in the fourth quarter by our
      issuance of a new, amortizing, non-recourse $103.5 million debt facility
      secured by auto finance receivables associated with our ACC operations
      within our Auto Finance segment and our issuance of a new, non-recourse
      $50.0 million line of credit secured by auto finance receivables
      associated with our CAR operations within our Auto Finance segment;
      and




·
            Our
      fourth quarter de-securitization of our lower-tier credit card
      receivables, our recording of these receivables on our balance sheet at
      their fair value in connection with our prior fair value option election
      made with respect to such receivables under applicable accounting rules,
      and our repayment of all securitization facilities that were secured by
      such receivables with the consent of the investor in the lower-tier
      originated portfolio master trust.




Most
critical to us of all of the above is the disruption we continue to see in
global liquidity markets and the ongoing weakness of the world economy. As is
customary in our industry, we finance most of our credit card receivables
through the asset-backed securitization markets—markets that worsened
significantly in 2008 and have not sufficiently recovered thus far. We are
concerned that the traditional securitization markets may not return to any
degree of efficient and effective functionality for us in the near term, and
even if they were available to us now, the current regulatory and economic
environment and our current liquidity position are not attractive enough for us
to want to originate new credit card receivables (other than through our
Investment in Previously Charged-Off Receivables segment’s balance transfer
program).  Moreover, although we were able to achieve two new debt
issuances within our Auto Finance segment in the fourth quarter of 2009, they do
not provide sufficient additional capital to allow for long-term meaningful
growth within that segment.  While our retail and Internet micro-loan
businesses and our Investment in Previously Charged-Off Receivables segment are
capable of modest growth with little or no additional capital requirements, we
would need to deploy more of our capital or obtain additional sources of capital
to achieve more significant consolidated-level, long-term growth.




43
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In the
current environment wherein the only material cash flows we are receiving within
our Credit Cards segment are those associated with servicing compensation until
our securitization facilities are fully repaid, we are closely monitoring and
managing our liquidity position, reducing our overhead infrastructure (which was
built to accommodate higher account originations and managed receivables levels)
and further leveraging our global infrastructure in order to maximize returns to
shareholders on existing assets. Some of these actions, while prudent to
maximize cash returns on existing assets, have the effect of reducing our
potential for profitability both in the near term and over the long term. Our
hope is that our reductions in personnel, overhead and other costs (through
increased outsourcing) to levels that our Credit Cards segment can support with
servicing compensation as its only cash inflow will not cause further
impairments in the fair values of our retained interests in our securitized
credit card receivables; however, this outcome cannot be assured.





Our
credit card and other operations are heavily regulated, and over time we change
how we conduct our operations either in response to regulation or in keeping
with our goals of continuing to lead the industry in the application of
consumer-friendly credit card practices. We have made several significant
changes to our practices over the past several years, and because our account
management practices are evolutionary and dynamic, it is possible that we may
make further changes to these practices, some of which may produce positive, and
others of which may produce adverse, effects on our operating results and
financial position. For example, we currently are assessing and may determine
that further adverse changes are necessary to implement the CARD Act and
regulations issued in January 2010 by the Federal Reserve Board to implement the
CARD Act.




Subject to the availability of
liquidity to us at attractive terms and pricing, which is difficult if not
impossible to obtain in the current market, our shareholders should expect us to
continue to (1) evaluate and pursue for acquisition additional credit card
receivables portfolios, and potentially other financial assets that are
complementary to our financially underserved credit card business and (2)
evaluate and pursue additional opportunities to repurchase our convertible
senior notes and other debt at discounts to their face amounts. Absent the
availability of investment alternatives (either in other portfolios or in our
own debt) at prices necessary to provide attractive returns for our
shareholders, we will continue to look to maximize shareholder value through the
distribution of excess cash to shareholders (as was done at December 31, 2009)
or through a potential spin-off of our micro-loan
businesses.  Additionally, given that financing for growth and
acquisitions currently is constrained, our shareholders should expect us to
pursue less capital intensive activities, like servicing credit card receivables
and other assets for third parties (and in which we have limited or no equity
interests), that allow us to leverage our expertise and infrastructure until we
can finance and complete any potential acquisitions.




Potential
Spin-Off of Micro-Loan Businesses




On
November 5, 2009, our Board of Directors authorized management to review and
evaluate the merits of a proposal to spin-off our U.S. and U.K. micro-loan
businesses into a separate, publicly traded company called Purpose Financial
Holdings, Inc. (“Purpose Financial”). Once management completes its review and
evaluation, the Board will discuss and consider the merits of the
proposal.




In
connection with management’s review of the proposal to spin-off our U.S. and
U.K. micro-loan businesses, Purpose Financial filed a Form 10 Registration
Statement and a related Information Statement with the SEC on January 4,
2010.  The spin-off remains subject to a number of conditions,
including, among others:




·
            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 all 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
      private letter ruling that we received from the Internal Revenue Service
      (“IRS”) not being revoked or modified in any material
    respect;




·
            NASDAQ’s
      approval for listing of Purpose Financial’s common stock, subject to
      official notice of issuance; and




·
            the
      nonexistence of any order, injunction or decree issued by any court of
      competent jurisdiction or other legal restraint or prohibition that might
      prevent the 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.




44
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CONSOLIDATED RESULTS
OF OPERATIONS


(In
      thousands)
              
              2009
              
              
              2008
              
              
              Income
      Increases (Decreases) from 2009 to 2008Earnings:
              
              
              
              
              (as
      adjusted)Total
      interest income
              
              $
              76,757
              
              
              $
              97,989
              
              
              $
              (21,232
              )Interest
      expense
              
              
              (42,066
              )
              
              
              (52,878
              )
              
              
              10,812Fees
      and related income on non-securitized earning assets:Retail
      micro-loan fees
              
              
              73,075
              
              
              
              69,790
              
              
              
              3,285Internet
      micro-loan fees
              
              
              64,641
              
              
              
              42,623
              
              
              
              22,018Fees
      on credit card receivables held on balance sheet
              
              
              101
              
              
              
              6,367
              
              
              
              (6,266
              )Changes
      in fair value of loans and fees receivable recorded at fair
      value
              
              
              (1,096
              )
              
              
              —
              
              
              
              (1,096
              )Income
      on investments in previously charged-off receivables
              
              
              31,014
              
              
              
              38,816
              
              
              
              (7,802
              )Gross
      profit on auto sales
              
              
              20,329
              
              
              
              32,389
              
              
              
              (12,060
              )Gains
      (losses) on investments in securities
              
              
              276
              
              
              
              (6,622
              )
              
              
              6,898Other
              
              
              2,979
              
              
              
              6,115
              
              
              
              (3,136
              )Other
      operating income:Securitization
      gains
              
              
              113,961
              
              
              
              —
              
              
              
              113,961Loss
      on retained interest in credit card receivables
securitized
              
              
              (676,236
              )
              
              
              (135,561
              )
              
              
              (540,675
              )Fees
      on securitized receivables
              
              
              16,209
              
              
              
              28,527
              
              
              
              (12,318
              )Servicing
      income
              
              
              104,981
              
              
              
              181,883
              
              
              
              (76,902
              )Ancillary
      and interchange revenues
              
              
              17,917
              
              
              
              55,283
              
              
              
              (37,366
              )Gain
      on repurchase of convertible senior notes
              
              
              1,421
              
              
              
              61,671
              
              
              
              (60,250
              )Gain
      on buy-out of equity-method investee members
              
              
              20,990
              
              
              
              —
              
              
              
              20,990Equity
      in (loss) income of equity-method investees
              
              
              (16,881
              )
              
              
              22,319
              
              
              
              (39,200
              )Total
              
              $
              (191,628
              )
              
              $
              448,711
              
              
              $
              (640,339
              )Provision
      for loan losses
              
              
              94,349
              
              
              
              70,611
              
              
              
              (23,738
              )Operating
      expenses:Salaries
      and benefits
              
              
              51,885
              
              
              
              67,434
              
              
              
              15,549Card
      and loan servicing
              
              
              207,466
              
              
              
              279,610
              
              
              
              72,144Marketing
      and solicitation
              
              
              16,699
              
              
              
              46,255
              
              
              
              29,556Depreciation
              
              
              20,099
              
              
              
              32,483
              
              
              
              12,384Goodwill
      impairment
              
              
              20,000
              
              
              
              30,868
              
              
              
              10,868Foreign
      currency transaction losses
              
              
              28,531
              
              
              
              1,559
              
              
              
              (26,972
              )Other
              
              
              94,510
              
              
              
              121,443
              
              
              
              26,933Noncontrolling
      interests
              
              
              (10,461
              )
              
              
              (2,145
              )
              
              
              8,316
  45
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  Year
Ended December 31, 2009, Compared to Year Ended December 31,
2008




Total
interest income. Total
interest income consists primarily of finance charges and late fees earned on
loans and fees receivable that are not securitized in off-balance-sheet
securitization transactions—principally from our Auto Finance
segment.  The decrease is primarily due to the ongoing attrition
within our auto finance receivables portfolios as we do not originate sufficient
new loans to replace those of consumers who either pay off their balances or
become delinquent and charge off.




Also
included within total interest income (under the other category on our
consolidated statements of operations) is interest income we earn on our various
investments in debt securities, including interest earned on bonds distributed
to us from our equity-method investees and on a subordinated, certificated
interest in a securitization trust owned by one of our majority-owned
subsidiaries. Principal amortization caused a reduction in interest income
levels associated with some of these investments. Moreover, the elimination of
our holdings of bonds issued by other third-party asset-backed securitizations
contributed further to our reduced other interest income relative to that
experienced in 2008. Subsequent to the end of our second quarter of 2008, we
liquidated our remaining investments in third-party asset-backed securities in
response to margin calls; as a result, we do not have any continuing interest
income associated with these investments.




We
significantly restricted growth within our Auto Finance segment beginning with
the third quarter of 2008, and we expect interest income within our Auto Finance
segment to decline with net liquidations in its receivables levels for the
foreseeable future. However, because changes in accounting rules will require us
to consolidate our securitized credit card receivables onto our balance sheet
effective in the first quarter of 2010, our ongoing total interest income is
expected to grow significantly in the first quarter of 2010 and then decline in
subsequent quarters thereafter along with expected net liquidations of our
credit card and auto finance receivables.




Interest
expense. The
decreases are primarily due to repurchases of our convertible senior notes
during 2008 and 2009, as well as our declining interest expense levels
associated with the reduced levels of collateralized financing of our
investments in third-party asset-backed securitizations. With our disposition of
these investments immediately after the close of our second quarter of 2008, we
will not incur any further interest costs associated with the financing of these
investments.




Our noted
declines in interest costs were partially offset, however, by higher interest
costs within MEM, reflecting the funding of receivables growth within these
operations through draws against available credit lines. Because MEM’s cash
flows at moderate growth levels allowed it to de-lever in 2009 and pay off its
outstanding debt by year end, we have no current plans to pursue leverage
against this business line and therefore do not expect to incur any further
interest costs related to this business line for the foreseeable
future.




Increased
pricing on debt facilities within our Auto Finance segment (as of the third
quarter of 2008, as well as with ACC’s $103.5 million amortizing debt facility
entered into in the fourth quarter of 2009) also partially offset our noted
declines in interest costs. Notwithstanding higher pricing with these
facilities, however, our Auto Finance segment interest costs are expected to
continue to decline with net liquidations of our Auto Finance segment
receivables for the foreseeable future.




The
above-noted net declines in interest costs will be partially offset in the
future by increasing non-cash interest charges as a result of our adoption of
new Instrument C accounting rules effective January 1, 2009. The amount of
interest expense attributable to our adoption of the new rules will gradually
increase over time with trending higher levels of discount accretion into
interest expense, thereby slowing the downward trend we have been seeing in
total interest costs. Based on our 2009 adoption of the Instrument C accounting
rules coupled with our retrospective application of these rules to 2008, we
experienced $10.2 million of non-cash, discount accretion-related interest
expense in the year ended December 31, 2009 and $10.1 million of non-cash,
discount accretion-related interest expense in the year ended December 31, 2008,
respectively. Offsetting the expected trending higher interest costs that we
expect due to discount accretion in each passing quarter under the new rules,
however, was the effect of the aforementioned repurchases of our convertible
senior notes which could be further reduced by future repurchases of convertible
senior notes if they become available at attractive rates.




Additionally,
the consolidation of debt facilities underlying our credit card securitization
as will be required in the first quarter of 2010 pursuant to accounting rule
changes is expected to cause our interest expense to increase above current
levels in the first quarter of 2010. As these debt facilities are repaid
commensurate with net liquidations of the underlying credit card receivables
that serve as collateral for the facilities, our interest expense is expected to
decline from its heightened first quarter of 2010 level.




Fees
and related income on non-securitized earning assets. The significant factors affecting our
levels of fees and related income on non-securitized earning assets
include:




·
            increases
      in Internet micro-loan fees, reflecting the organic growth of our MEM
      operations;




·
            decreases
      in income on investments in previously charged-off receivables in 2009
      principally reflecting the adverse effects of our dispute with Encore
      (which we settled in September 2009 at a $11.0 million gain) over Encore’s
      failure to continue purchases of previously charged-off receivables under
      our forward flow contract as discussed in detail within the Investment in
      Previously Charged-Off Receivables Segment section below—offset somewhat,
      however, by growth in the segment’s balance transfer program and Chapter
      13 bankruptcy activities;




·
            lower
      gross profits on automotive vehicle sales in 2009 relating to our JRAS
      operations primarily due to our closure of four lots during the first
      quarter of 2009 and two additional lots in the second quarter of 2009,
      coupled with slower sales on its remaining lots;
  and




·
            lower
      levels of losses associated with our investments in securities primarily
      due to our cessation of a significant majority of these activities as we
      liquidated our remaining investments in third-party asset-backed
      securities in response to margin calls in the second quarter of 2008.As we
      have now disposed of all of our investments in third-party asset-backed
      securities, we expect no further losses on those
    investments.




Because
of its settlement with Encore, prospects for near-term profits and revenue
growth within our Investments in Previously Charged-off Receivables segment are
now enhanced. This segment continues to purchase pools of charged-off
receivables at favorable pricing which reflects an oversupply of charged-off
paper in the marketplace. Moreover, this segment continues to seek and obtain
third-party financing for future purchases.  Nevertheless, the
economic downturn’s impact on the segment’s ability to collect certain pools of
previously charged-off paper at sufficient levels to earn its desired returns
and corporate-level liquidity constraints on the amount of capital that we are
willing and able to allocate to this segment for its purchase of previously
charged-off paper at its desired levels could prevent this segment from growing
as rapidly as desired.




Additionally,
we expect Auto Finance segment gross profits to be lower in 2010 than we
experienced in 2009 given our decision to close two more of JRAS’s lots during
the second quarter of 2009 and our current evaluation of additional lot closures
early in 2010.




46
 Table of Contents





Two
developments within our Credit Cards segment are expected to cause changes to
our fees and related income on non-securitized earning assets in 2010. The first
of these developments is our December 2009 reconsolidation of the credit card
receivables previously held off-balance sheet within our lower-tier originated
portfolio master trust given our December 2009 repayment (with investor consent)
of the remaining outstanding debt within that trust. Second is the expected
consolidation onto our balance sheet in the first quarter of 2010 of all of the
other receivables held within our securitization trusts along with the debt
facilities with respect to which they serve as collateral; new accounting rules
will require this consolidation effective as of January 1, 2010. We expect the
following changes to our fees and related income on non-securitized earnings
assets as a result of these developments:




·
            a
      significant increase in our fees on non-securitized credit card
      receivables category in the first quarter of 2010 that will decline over
      subsequent quarters with net liquidations in our credit card
      receivables;




·
            a
      significant increase in the interest expense associated with the
      consolidated debt that will decline over subsequent quarters with net
      liquidations in our credit card receivables and corresponding payments
      made on those debt balances; and




·
            because
      of our fair value option elections with respect to newly consolidated
      credit card receivables and their associated debt facilities as of the
      beginning of 2010, potential volatility in two new categories within our
      details of fees and related income on non-securitized earning assets—those
      being gains and losses associated with changes in the fair value of credit
      card receivables and gains and losses associated with changes in the fair
      value of the debt facilities with respect to which such credit card
      receivables serve as collateral.




Lastly,
we currently expect continued growth in fees from our U.K.-based, Internet,
micro-loan operations within MEM as this entity continues to execute on its
growth plans. Moreover, with the re-commencement of loan generation within our
Ohio retail micro-loan storefronts coupled with new underwriting criteria, we
expect increased retail micro-loan fees as well as continued and higher
profitability for the Retail Micro-Loans segment in 2010.




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 other fees associated with our securitized credit card
receivables.




Given the
current net liquidating status of each of our credit card receivables portfolios
within their respective securitization trusts, we have not recognized any
securitization gains during 2009 apart from the securitization gain experienced
in connection with our third quarter purchase (and subsequent cancellation) of
securitization facility notes. Moreover, because of new accounting rules that
will require the consolidation of all of our off-balance-sheet securitization
trusts effect January 1, 2010, we will not have securitization gains in the
future.




We have
experienced significantly higher 2009 losses on retained interests in credit
card receivables securitized. Throughout 2008, we saw significant declines in
the levels of receivables within our originated portfolios, which resulted in
significantly lower fee billings for 2009. Also contributing to higher 2009
losses were (1) our inability to re-price accounts that were owned by CB&T
at market-appropriate pricing (a matter that is the subject of litigation
between us and CB&T), (2) certain adverse changes to our retained interest
valuation assumptions given ongoing current negative trends in the U.S. and U.K.
economies, including those associated with our third quarter 2009 conclusion
that a buyer of our residual interests in our upper and lower-tier originated
portfolio master trusts would likely discount the price that they would pay for
the residual interests to reflect the risk that the securitization facilities
could soon enter early amortization status (a risk that has borne out in
subsequent months), (3) the closure of substantially all credit card accounts
underlying our pool of securitized credit card receivables, which negatively
affected the fair value of our interest-only strips embedded within our loss on
retained interests in credit card receivables securitized computations and
resulted in accelerations of charge offs as some customers are either unwilling
or unable to pay down on existing balances once their accounts have been closed,
and (4) the effects of significant fee and finance charge credits that we have
provided to customers primarily in the first through third quarters of 2009
under incentive programs aimed at stimulating prompt and increased payments from
customers in the face of reductions in payment rates due to deteriorating
economic conditions. While we do not anticipate having to make future fee and
finance charge credits to stimulate payments at the same levels as those
experienced in 2009, additional incentive programs and/or account actions could
continue to depress fee billings into 2010 and beyond. However, based on the
significance of the write-downs we have taken in 2009 associated with retained
interests in our securitized credit card receivables, future losses on our
credit card receivables are expected to be significantly below loss levels
experienced in 2009; additionally and as previously noted, these losses will be
reflected separately in 2010 within different line items (and not in the loss on
retained interests in credit card receivables securitized line item) on our
statements of operations given (1) new accounting requirements that require
consolidation of our securitized credit card receivables and their underlying
debt effective January 1, 2010, and (2) December 2009 reconsolidation of the
credit card receivables previously held off-balance sheet within our lower-tier
originated portfolio master trust given our December 2009 repayment (with
investor consent) of the remaining outstanding debt within that
trust.




In the
Credit Cards Segment
section below, we provide further details concerning delinquency and credit
quality trends, which have affected the levels of our loss on retained interests
in credit card receivables securitized and fees on securitized receivables in
2009 and prior periods and which will affect our provision for loan losses and
credit card receivables fair value gain or loss income statement categories in
2010 and future periods.




47
 Table of Contents





Servicing
income.Servicing income
has decreased due to the effects on our servicing compensation of liquidations
in our credit card receivables portfolios and those of our equity-method
investees for which we have been engaged as servicer. While we currently are
negotiating with investors in certain of our securitization trusts to increase
our servicing compensation rates for 2010 and beyond, if we are unsuccessful in
such negotiations or in acquiring new credit card receivables portfolios or
contracts to service portfolios for third parties, we anticipate further
decreases in our servicing income levels with the contraction of our credit card
receivables levels in 2010.




Ancillary
and interchange revenues. During periods, unlike our current
period, in which we are actively originating credit card accounts or in which
credit card accounts are open to cardholder purchases, we market to cardholders
other ancillary products, including credit and identity theft monitoring, health
discount programs, shopping discount programs, debt waivers and life insurance.
The significant decline in our ancillary revenues associated with these
activities and our interchange revenues corresponds with our 2008 and 2009
account closure actions and the net liquidations we have experienced in all of
our credit card receivables portfolios in 2009. Absent portfolio acquisitions,
we expect only immaterial amounts of ancillary and interchange revenues in the
future.




Gain
on repurchase of convertible senior notes.In 2009, we repurchased $1.3 million in
face amount of our $250.0 million aggregate principal amount of 3.625%
convertible senior notes due 2025 and $2.0 million in face amount of our $300.0
million aggregate principal amount of 5.875% convertible senior notes due 2035.
The purchase price for these notes totaled $1.1 million (including accrued
interest) and resulted in a gain of $1.4 million (net of the notes’ applicable
portion of deferred costs that we wrote off upon their repurchase). Similarly,
in 2008, we repurchased $18.2 million in face amount of our $250.0 million
aggregate principal amount of 3.625% convertible senior notes due 2025 and $61.7
million in face amount of our $300.0 million aggregate principal amount of
5.875% convertible senior notes due 2035. The purchase price for these notes
totaled $47.2 million (including accrued interest) and resulted in a gain of
$112.2 million (net of the notes’ applicable portion of deferred costs that we
wrote off upon their repurchase). We are actively pursuing repurchases of our
convertible senior notes in 2010, which would result in additional as of yet
unknown gains upon such repurchases.




Gain on buy-out
of equity-method investee members. In May 2009, we bought out the other
members of our then-longest standing equity-method investee, and we recognized a
$21.0 million gain based on the re-measurement to fair value of our previously
held equity interest in the equity-method investee.  This gain will be
realized through cash collections on a portfolio of credit card receivables
owned by this entity over the life of the portfolio.




Equity
in income of equity-method investees. The adverse 2009 results with respect
to our equity-method investees reflects the effects of worsening economic
conditions on the performance of the credit card receivables underlying our
equity-method investees’ retained interests holdings and the valuations thereof,
as well as our continued gradual liquidation of the receivables balances
associated with these equity-method investees.  We expect to see
continued liquidations in these portfolios for the foreseeable future, and we
expect future results (whether loss or income) from our current equity-method
investees that will not be material to our financial condition or operating
results.




Provision for
loan losses.
Our provision for loan losses covers aggregate loss exposures on
(1) principal receivable balances, (2) finance charges and late fees
receivable underlying income amounts included within our total interest income
category, and (3) other fees receivable. The decrease in the provision for
loan losses is primarily due to the declines in outstanding receivables we have
experienced in our Auto Finance segment, offset slightly, however, by increased
loss estimates for those receivables.




While we
expect no significant deviations in our credit risks, delinquencies and loss
rates in 2010 versus 2009 (other than potential improvements if and as the
economy improves) and while we expect reductions in our provisions for loan
losses associated with our rapidly liquidating pool of auto finance receivables,
the following factors are expected to cause growth in our provision for loan
losses in 2010 relative to 2009:  (1) new accounting requirements that
require consolidation of our securitized credit card receivables and their
underlying debt effective January 1, 2010, which will shift the credit losses
associated with such receivables from the loss on retained interests in credit
card receivables securitized line item to the provision for loan losses line
item on our consolidated statements of operations; and (2) increased 2010 loan
losses associated with our plans to continue modestly growing our retail and
Internet micro-loans receivables.




48
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Further
details concerning credit loss trends and expectations by segment are provided
throughout our forthcoming discussion and analysis of each segment.




Total other
operating expense Total other operating expense decreased, reflecting the
following:




·
            decreases
      in marketing and solicitation costs given the ongoing dislocation of the
      liquidity markets and our corresponding curtailment of substantially all
      of our credit card marketing
efforts;




·
            diminished
      salaries and benefits costs resulting from our ongoing cost-cutting
      efforts as we continue to adjust our internal operations to reflect the
      declining size of our existing
portfolios;




·
            decreases
      within card and loan servicing expenses, primarily as a result of credit
      card and other loan portfolio liquidations—such decreases being partially
      offset by increased costs associated with MEM, which we have expanded
      throughout 2008 and 2009;




·
            decreases
      in depreciation due to cost containment measures, specifically a
      diminished level of capital investments by us in light of liquidity
      constraints; and




·
            lower
      other expenses (which include, for example, rent and other occupancy
      costs, legal and professional fees, transportation and travel costs,
      telecom and data processing costs, insurance premiums, and other overhead
      cost categories) as we continue to adjust our associated internal costs
      based on the declining size of our existing
  portfolios;




offset,
however, by:




·
            a
      goodwill impairment charge of $20.0 million in the second quarter of 2009
      related to our Retail Micro-Loans segment precipitated by our closure of
      Arkansas storefronts and depressed market valuations;
  and




·
            The
      reclassification (from accumulated other comprehensive loss on our
      consolidated balance sheet to a loss in our consolidated statement of
      operations) of our $26.1 million accumulated foreign currency translation
      adjustment associated with our U.K. Portfolio as we completely wrote our
      investment in that portfolio off in the fourth quarter of
      2009.




While we
incur certain base levels of fixed costs, the majority of our operating costs
are variable based on the levels of accounts we market and receivables we
service (both for our own account and for others) and the pace and breadth of
our search for, acquisition of and introduction of new business lines, products
and services. We have substantially reduced our exploration of new products and
services and research and development efforts pending improvements in the
liquidity markets. In addition, we have terminated various operations that were
start-up in nature and were not individually meeting our current capital
allocation requirements. Given our current focus on cost-cutting and maximizing
shareholder returns in light of the continuing dislocation in the liquidity
markets and significant uncertainties as to when these markets will improve, we
expect further reductions in marketing efforts and expense levels and in most
other cost categories discussed above over the next several quarters. We
continue to perform extensive reviews of all areas of our businesses for cost
savings opportunities to better align our costs with our currently liquidating
portfolio of managed receivables. As an example, and as noted elsewhere in this
Report, we took actions (including issuing planned termination notices to
affected U.S. call center employees) to better leverage our global
infrastructure, thereby outsourcing portions of our U.S. credit card customer
service and collections operations in the first quarter of 2010, and given the
lower costs of labor within the countries where our outsourcing vendors are
located, we expect lower costs associated with our credit card customer service
and collection operations in 2010.




Notwithstanding
the above and notwithstanding some legal cost savings we have seen since our
December 2008 settlement of litigation with the FTC and FDIC and our third
quarter 2009 settlement with Encore, we continue to incur heightened legal costs
and will continue to incur these costs at heightened levels until we resolve all
outstanding litigation. Additionally, while it is relatively easy for us to
scale back our variable expenses, it is much more difficult for us to
appreciably reduce our fixed and other costs associated with an infrastructure
(particularly within our Credit Cards segment) that was built to support growing
managed receivables and levels of managed receivables that are significantly
higher than both our current levels and the levels that we expect to see given
our liquidity-related receivables contraction efforts. Although we are in
negotiations with investors in certain of our securitization trusts to increase
our servicing compensation rates, our inability to reduce these costs as rapidly
as our receivables reductions is expected to put continuing pressure on our
liquidity position and our ability to be profitable.




Noncontrolling
interests. We
reflect the ownership interests of noncontrolling holders of equity in our
majority-owned subsidiaries (including management team holders of shares in our
subsidiary entities; see Note 17, “Stock-Based Compensation”) as noncontrolling
interests in our consolidated statements of operations. Generally, the levels of
loss or  income that are allocated to (or considered attributable to)
noncontrolling interests in any particular accounting period is (and is expected
to continue) declining. This is consistent with liquidations of acquired credit
card portfolios within securitization trusts, the retained interests of which
are owned by our majority-owned subsidiaries. These trends within our
majority-owned subsidiaries, coupled with the challenges they have faced given
liquidity constraints and dislocation in the economy, generally have resulted in
net losses for our majority-owned subsidiaries over the past several quarters.
Contributors to the recent losses experienced by our majority-owned subsidiaries
include losses stemming from reduced income on our retained interests in
securitized credit card receivables within these subsidiaries in part associated
with more conservative valuation assumptions used with respect to their retained
interest valuations and losses incurred within the majority-owned subsidiary
that is a holding company within our Investments in Previously Charged-off
Receivables segment principally given its now-settled (as of September 2009)
dispute with Encore as discussed throughout this report.  Further
contributing to our recent general trend of net losses attributable to
noncontrolling interests are new accounting rules that we adopted effective
January 1, 2009 requiring us to continue to allocate losses to the
noncontrolling interests of our majority-owned subsidiaries even if the
allocation results in a deficit balance in the noncontrolling interests’ capital
accounts; as such, the adoption of these rules provides us with modestly lower
net losses attributable to controlling interests as we allocate to
noncontrolling interests a portion of the losses that otherwise would have been
absorbed by controlling interests prior to the effective date of these
rules.




But for
the ownership interests of noncontrolling holders of equity in MEM (which is
experiencing growing profitability), we would have experienced greater net
losses within our majority-owned subsidiaries and hence a greater allocation of
losses to noncontrolling interests in recent quarters. In December 2009, we
repurchased for $2.2 million certain noncontrolling interests in MEM
representing 2.5% of the total outstanding ownership of MEM.




49
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Income
taxes.Our
overall effective tax benefit rates (computed considering results for both
continuing and discontinued operations before income taxes in the aggregate)
were 24.7% and 32.8% in 2009 and 2008, respectively. We have experienced no
material changes in effective tax benefit rates associated with differences in
filing jurisdictions, and the variations in effective tax benefit rates between
these periods are substantially related to the effects of $70.6 million in
valuation allowances provided against income statement-oriented U.S. federal,
state and foreign deferred tax assets in 2009. As computed without regard to the
effects of all U.S. federal, state, local and foreign tax valuation allowances
taken against income statement-oriented deferred tax assets, our effective tax
benefit rates would more likely than not have been 34.3% and 33.7% in 2009 and
2008, respectively.




Credit
Cards Segment




Included
at the end of this “Credit Cards Segment” section under the heading “Definitions
of Financial, Operating and Statistical Measures” are definitions for various
terms we use throughout our discussion of the Credit Cards segment.




Our
Credit Cards segment includes our activities relating to investments in and
servicing of our various credit card portfolios, as well as the performance of
our various investments in asset-backed debt and equity securities prior to our
dispositions of substantially all of such securities holdings by June 30, 2008.
The revenues we earn from credit card activities primarily include finance
charges, late fees, over-limit fees, annual fees, activation fees, monthly
maintenance fees, returned check fees and cash advance fees. Also, while
insignificant currently, revenues (during previous periods of account
origination and in which accounts were open to cardholder purchases) also have
included those associated with (1) our sale of ancillary products such as
memberships, insurance products, subscription services and debt waiver, as well
as (2) interchange fees representing a portion of the merchant fee assessed by
card associations based on cardholder purchase volumes underlying credit card
receivables.




The way we record these
receivables in our consolidated balance sheets and in our consolidated
statements of operations depends on the form of our ownership. While the
underlying activities are similar between each of our portfolios, there are
differences, and how we reflect these activities in our financial statements
differs dramatically depending on our ownership form. These forms
include:




•
            originated
      or purchased;




•
            securitized
      or non-securitized; and




•
            consolidated
      or non-consolidated.




Our
originated portfolios include the credit card receivables of customers obtained
through our own marketing efforts, whereas our purchased portfolios include the
credit card receivables of customer accounts that were originated by others
prior to our acquisitions of the portfolios at varying but generally significant
purchase discounts. We historically have spent a substantial amount on marketing
to originate new cardholder accounts, although we currently have discontinued
substantially all credit card marketing activities. We expense the majority of
our credit card marketing costs when we incur them. New cardholders also require
greater servicing efforts than established accounts. Originated accounts
generally do not charge off until after the account is open for at least six
months. During prior periods of rapid growth in originated cardholder accounts,
we historically showed high relative servicing and marketing expenses but low
relative charge offs of delinquent accounts. On the other hand, when we have
purchased credit card portfolios from others, we historically have purchased
them at substantial discounts. We generally have earned fees from the
cardholders immediately after the purchase and have not had to bear the high
marketing costs associated with the origination of the accounts. The receivables
we purchase in portfolio transactions are in various stages of delinquency, and
some will charge off, for example, in the first month after we purchase them. In
computing our managed receivables statistics (see discussion below), we apply a
portion of our purchase discount to offset the face amount of those receivables
we believe have a high probability of charging off in the first few months
following a portfolio acquisition.




With the
exception of our credit card receivables associated with our lower-tier
originated portfolio master trust (which were de-securitized and reconsolidated
onto our consolidated balance sheet in December 2009), substantially all of
our credit card receivables have been securitized through off-balance-sheet
securitizations. In these securitizations, we sold the receivables to a trust,
and generally recognized gains on such sales that we refer to as a
securitization gains. Because we have sold these receivables in accordance with
applicable accounting standards, we have removed them from our consolidated
balance sheets. We record the operating activities associated with our
securitized credit card receivables in the fees and related income on
securitized earning assets category in our consolidated statements of
operations. The sub-categories of income on these securitized receivables
include: (1) the securitization gains noted above; (2) income from
(and more recently, loss on) retained interests in credit card receivables
securitized, which generally includes finance charges, late fees, over-limit
fees, annual fees, and monthly maintenance fees; and (3) fees on
securitized receivables, which includes activation fees, returned-check fees,
cash advance fees and other fees. We record fee charge offs for securitized
receivables as an offset to their related revenues, and we account for net
principal charge offs as an offset in determining income from retained interests
in credit card receivables securitized. We note at this point that none of our
off-balance-sheet securitizations are expected to continue to qualify for
off-balance-sheet treatment under new accounting rules that become effective for
us on January 1, 2010; at that time, and in all subsequent periods, the credit
card receivables held within our securitization trusts (and their associated
debt) will be consolidated onto our consolidated balance sheets at fair value,
and the income and expenses associated with our on-balance-sheet consolidation
of these items will flow through as separate line items on our consolidated
statements of operations similar to as described in the following
paragraph.




During
any periods in which we hold credit card receivables on our balance sheet (e.g.,
prior to our securitization or after our de-securitization of them), we record
the finance charges and late fees in the consumer loans, including past due fees
category on our consolidated statements of operations, we include the
over-limit, annual, monthly maintenance, returned-check, cash advance and other
fees in the fees and other income on non-securitized earning assets category on
our consolidated statements of operations, and we reflect the charge offs within
our provision for loan losses. Additionally, with our December 2009
de-securitization and reconsolidation of the credit card receivables held within
our lower-tier originated portfolio master trust at fair value under our fair
value option election, we expect to show the future effects of fair value
changes as a component of fees and related income on non-securitized earning
assets in our consolidated statements of operations. Moreover, we expect similar
treatment of future changes in the fair value of our credit card receivables
expected to be consolidated onto our balance sheet under accounting rule changes
effective January 1, 2010.




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We
historically have originated and purchased our credit card portfolios through
subsidiary entities. Generally, if we control through direct ownership or exert
a controlling interest in the entity, we consolidate it and reflect its
operations as noted above. If we exert significant influence but do not control
the entity, we record our share of its net operating results in the equity in
income of equity-method investees category on our consolidated statements of
operations.




We also
earn servicing income from the trusts underlying our securitizations and the
securitizations of our equity-method investees. For both the securitized and
non-securitized credit card receivables of our consolidated entities, we record
the ancillary and interchange revenues in a separate line on our consolidated
statements of operations.




Background




We make
various references within our discussion of the Credit Cards segment to our
managed receivables. In calculating managed receivables data, we assume that
none of the credit card receivables underlying our off-balance-sheet
securitization facilities was ever transferred to a securitization trust, and we
present our credit card receivables as if we still owned them. We reflect the
portion of the receivables that we own within our managed receivables data,
whether or not we consolidate the entity in which the receivables are held.
Therefore, managed receivables data include both our securitized and
non-securitized credit card receivables. They include the receivables we manage
for our consolidated subsidiaries, except for the noncontrolling interest
holders’ shares of the receivables, and they also include only our share of the
receivables that we manage for our equity-method investees.




Financial,
operating and statistical data based on aggregate managed receivables are vital
to any evaluation of our performance in managing our credit card portfolios,
including our underwriting, servicing and collecting activities and our valuing
of purchased receivables. In allocating our resources and managing our business,
management relies heavily upon financial data and results prepared on this
“managed basis.” Analysts, investors and others also consider it important that
we provide selected financial, operating and statistical data on a managed basis
because this allows a comparison of us to others within the specialty finance
industry. Moreover, our management, analysts, investors and others believe it is
critical that they understand the credit performance of the entire portfolio of
our managed receivables because it reveals information concerning the quality of
loan originations and the related credit risks inherent within the securitized
portfolios and our retained interests in their underlying securitization
trusts.




Reconciliation
of the managed receivables data to our GAAP financial statements requires:
(1) recognition that substantially all of our credit card receivables have
been sold in securitization transactions; (2) an understanding that our
managed receivables data are based on billings and actual charge offs as they
occur, without regard to any changes in our allowance for uncollectible loans
and fees receivable; (3) inclusion of our economic share of (or equity
interest in) the receivables that we manage for our equity-method investees; and
(4) removal of our noncontrolling interest holders’ shares of the managed
receivables underlying our GAAP consolidated results.




As noted
above, we typically purchased credit card receivables portfolios at substantial
discounts. In our managed basis statistical data, we apply a portion of these
discounts against receivables acquired for which charge off is considered
likely, including accounts in late stages of delinquency at the date of
acquisition; this portion is measured based on our acquisition date estimate of
the shortfall of cash flows expected to be collected on the acquired portfolios
relative to the face amount of receivables represented within the acquired
portfolios. We refer to the balance of the discount for each purchase not needed
for credit quality as accretable yield, which we accrete into net interest
margin in our managed basis statistical data using the interest method over the
estimated life of each acquired portfolio. As of the close of each financial
reporting period, we evaluate the appropriateness of the credit quality discount
component of our acquisition discount and the accretable yield component of our
acquisition discount based on actual and projected future results.




Asset
Quality




Our
delinquency and charge-off data at any point in time reflect the credit
performance of our managed receivables. The average age of the credit card
accounts underlying our receivables, the timing of portfolio purchases, the
success of our collection and recovery efforts and general economic conditions
all affect our delinquency and charge-off rates. The average age of the accounts
underlying our credit card receivables portfolio also affects the stability of
our delinquency and loss rates. We consider this delinquency and charge-off data
in the valuation of our retained interests in credit card receivables
securitized which is a component of securitized earning assets on our
consolidated balance sheets.




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Our
strategy for managing delinquency and receivables losses consists of account
management throughout the customer relationship. This strategy includes credit
line management and pricing based on the risks of the credit card accounts. See
also our discussion of collection strategies under the heading “How Do We
Collect from Our Customers?” in Item 1, “Business,” of this Report.




The
following table presents the delinquency trends of the credit card receivables
that we manage, as well as charge-off data and other managed loan statistics (in
thousands; percentages of total):


At or for the
      Three Months Ended2009
            
            
            2008Dec.
      31
            
            
            Sept.
      30
            
            
            Jun.
      30
            
            
            Mar.
      31
            
            
            Dec.
      31
            
            
            Sep.
      30
            
            
            Jun.
      30
            
            
            Mar.
      31Period-end managed
      receivables
            
            $
            1,523,105
            
            
            $
            1,751,037
            
            
            $
            2,049,503
            
            
            $
            2,299,925
            
            
            $
            2,714,375
            
            
            $
            3,041,877
            
            
            $
            3,126,936
            
            
            $
            3,378,827Period-end
      managed accounts
            
            
            2,080
            
            
            
            2,620
            
            
            
            3,031
            
            
            
            3,392
            
            
            
            3,801
            
            
            
            4,171
            
            
            
            4,358
            
            
            
            4,775Percent
      30 or more days past due
            
            
            22.5
            %
            
            
            21.0
            %
            
            
            20.5
            %
            
            
            23.3
            %
            
            
            23.8
            %
            
            
            18.8
            %
            
            
            18.0
            %
            
            
            21.4
            %Percent
      60 or more days past due
            
            
            17.1
            %
            
            
            15.8
            %
            
            
            15.7
            %
            
            
            18.7
            %
            
            
            17.4
            %
            
            
            13.9
            %
            
            
            13.4
            %
            
            
            17.8
            %Percent
      90 or more days past due
            
            
            12.1
            %
            
            
            11.1
            %
            
            
            11.6
            %
            
            
            14.6
            %
            
            
            12.7
            %
            
            
            9.8
            %
            
            
            9.7
            %
            
            
            14.3
            %Average
      managed receivables
            
            $
            1,633,455
            
            
            $
            1,916,291
            
            
            $
            2,190,561
            
            
            $
            2,530,390
            
            
            $
            2,903,953
            
            
            $
            3,079,867
            
            
            $
            3,227,006
            
            
            $
            3,558,518Combined
      gross charge-off ratio
            
            
            42.7
            %
            
            
            45.9
            %
            
            
            54.4
            %
            
            
            52.6
            %
            
            
            33.9
            %
            
            
            33.0
            %
            
            
            50.6
            %
            
            
            50.2
            %Net
      charge-off ratio
            
            
            33.5
            %
            
            
            30.0
            %
            
            
            29.7
            %
            
            
            20.7
            %
            
            
            14.8
            %
            
            
            15.4
            %
            
            
            21.5
            %
            
            
            20.6
            %Adjusted
      charge-off ratio
            
            
            33.0
            %
            
            
            29.5
            %
            
            
            29.2
            %
            
            
            20.2
            %
            
            
            14.2
            %
            
            
            14.5
            %
            
            
            20.3
            %
            
            
            19.1
            %Total
      yield ratio
            
            
            30.5
            %
            
            
            55.7
            %
            
            
            34.0
            %
            
            
            36.2
            %
            
            
            46.4
            %
            
            
            44.4
            %
            
            
            45.3
            %
            
            
            47.4
            %Gross
      yield ratio
            
            
            22.1
            %
            
            
            21.5
            %
            
            
            20.6
            %
            
            
            22.0
            %
            
            
            25.3
            %
            
            
            24.8
            %
            
            
            23.1
            %
            
            
            24.3
            %Net
      interest margin
            
            
            14.0
            %
            
            
            14.7
            %
            
            
            11.7
            %
            
            
            3.7
            %
            
            
            13.6
            %
            
            
            14.8
            %
            
            
            12.3
            %
            
            
            13.2
            %Other
      income ratio
            
            
            5.9
            %
            
            
            22.7
            %
            
            
            (4.8
            )%
            
            
            (1.9
            )%
            
            
            9.8
            %
            
            
            7.7
            %
            
            
            (0.8
            )%
            
            
            (0.8
            )%Operating
      ratio
            
            
            16.8
            %
            
            
            11.4
            %
            
            
            10.2
            %
            
            
            9.3
            %
            
            
            8.6
            %
            
            
            9.1
            %
            
            
            9.8
            %
            
            
            9.4
            %




Managed
receivables.The consistent
quarterly declines in our period-end and average managed receivables over the
last eight quarters reflect the net liquidating state of substantially all of
our individual credit card receivable portfolios. Recent account actions,
including account closures and finance charge and fee credits under incentive
programs aimed at increasing cardholder payment rates, have resulted in an
accelerated pace of reductions in our managed receivables balances. Beyond the
significant effect on our managed receivables balances of finance charge and fee
credits aimed at improving customer payment rates, balances have fallen rapidly
in recent quarters as (1) we have suspended charging privileges on substantially
all of our accounts and thus there are far fewer purchases than in prior periods
and (2) many customers are either unwilling or unable to continue making
payments on these closed accounts given the current economic landscape, thereby
leading to delinquencies and ultimate charge offs of the accounts and their
underlying receivables.  With the isolated exception of our balance
transfer program within our Investments in Previously Charged-Off Receivables
segment (the post-card issuance activities of which are reported within our
Credit Cards segment), we have curtailed our credit card marketing efforts in
light of dislocation in the liquidity markets and our uncertainty as to when and
if these markets will rebound sufficiently to facilitate organic growth in our
credit card receivables operations and as a result do not anticipate meaningful
additions in the near term to offset the balance contractions noted
above.




Delinquencies.
Delinquencies have the potential to impact net income in the form of net credit
losses. Delinquencies also are costly in terms of the personnel and resources
dedicated to resolving them. We intend for the account management strategies we
use on our portfolio to manage and, to the extent possible, reduce the higher
delinquency rates that can be expected in a more mature managed portfolio such
as ours. These account management strategies include conservative credit line
management, purging of inactive accounts and collection strategies intended to
optimize the effective account-to-collector ratio across delinquency categories.
We further describe these collection strategies under the heading “How Do We
Collect from Our Customers?” in Item 1, “Business.”  We measure
the success of these efforts by measuring delinquency rates. These rates exclude
accounts that have been charged off.




Our
lower-tier credit card receivables typically experience substantially higher
delinquency rates and charge-off levels than those of our other originated and
purchased portfolios. Throughout 2008 and 2009 our delinquency statistics have
benefited from a mix change whereby disproportionate charge-off levels for our
lower-tier credit card portfolios relative to those of our other credit card
receivables have caused a decline in lower-tier credit card receivables as a
percentage of our aggregate managed credit card receivables.




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The
accounts underlying our lower-tier credit card receivables generally have a
shorter life cycle than our other accounts, with peak charge offs occurring
approximately eight to nine months after activation. Our lower-tier credit card
account growth has fluctuated significantly. We experienced record account
growth in the second and third quarters of 2007, moderate account originations
in the fourth quarter of 2007, significantly lower and trending lower account
originations throughout 2008, and very few originations in 2009. This “marketing
volume-based volatility” results in increasing delinquencies in the months
shortly following periods of high growth, followed by high charge offs generally
in the third quarter following activation. For example, in the first quarter of
2008, we experienced the initial charge offs from a record 1.5 million
aggregate originations of the second and third quarters of 2007. A portion of
these accounts underlying our lower-tier credit card offerings was significantly
delinquent at the end of the fourth quarter of 2007, and many accounts charged
off in the first two quarters of 2008. Compounding the impacts on delinquency
rates is the fact that we had significantly reduced new originations in the
fourth quarter of 2007 and thereafter and as such did not receive any benefit of
adding new current (i.e., non-delinquent) receivables, which would serve to
suppress delinquency rates somewhat (“denominator effect”). A modest offset to
the so-called denominator effect in recent quarters, however, is the relative
maturity of all of our credit card receivables portfolios. Given our
significantly reduced marketing and origination activities, most of our credit
card accounts have now passed through peak delinquency and charge-off stages of
their vintage cycles.




Notwithstanding
the above and the general observation that our delinquencies and charge offs are
lower in more mature portfolios that have passed through their peak delinquency
and charge-off stages, we took significant account actions that caused a rise in
delinquencies in the fourth quarter of 2008 and in the first quarter of
2009—namely significant credit line reductions and account closures. We know
from our experience with purchasing credit card portfolios from others that when
we reduce credit lines and close accounts, we cause an acceleration of
delinquencies and charge offs for those cardholders, many of whom ultimately
would have charged off after a longer period of account utilization. We do not
believe, however, that credit line reductions and account closures cause
good-performing cardholders to charge off at significantly higher levels. This
is to say that we believe credit line reductions and account closures cause an
accelerating shift forward in our credit card charge-off curves, rather than
causing a lift in these curves.




We do
note, however, that our fall 2008 credit line reductions and account closures
certainly did not account for all of the increase in delinquencies at December
31, 2008 and the further trending year over year increases in quarter-end
delinquencies throughout 2009. We saw a significant downward shift in payments
rates generally beginning in November 2008, and our delinquency statistics
reflect this and the effects of continued economic weakness and increasing
unemployment rates on the ability of our cardholders to make their required
minimum payments. Higher delinquencies at December 31, 2008 and March 31, 2009
translated into higher charge-off rates in the first two quarters of 2009. Now
that the largest wave of account reduction and account closure-related charge
offs has cycled through, we ordinarily would expect to begin to see the
relatively lower delinquency and charge-off benefits of our more mature
portfolios. However, with growing unemployment levels and continuing economic
weakness in both of our U.S. and U.K. credit card receivables markets, we note
that while delinquencies have declined throughout 2009, they generally have run
higher than prior year quarter-end delinquency rates. We have seen further
deterioration throughout 2009 in payment rates and higher delinquencies and
charge offs—even for our generally better performing cardholders who remain with
us after credit line reduction and account closure actions.




Lastly,
given that certain securitization facilities (including, as of January 2010, the
securitization facility underlying our largest portfolio of credit card
receivables within our upper-tier originated portfolio master trust) have
entered early amortization, the effect of which is to reduce the cash flows we
receive from the securitization trusts, it is conceivable that we may experience
further deterioration in payment rates and higher delinquencies and charge offs;
the liquidity challenges associated with such reduced cash inflows to us may
cause us to have to reduce our servicing personnel and costs, thereby reducing
the effectiveness of our collection efforts.




Charge
offs. We generally charge off credit card receivables when they become
contractually 180 days past due or within 30 days of notification and
confirmation of a customer’s bankruptcy or death. However, if a cardholder makes
a payment greater than or equal to two minimum payments within a month of the
charge-off date, we may reconsider whether charge-off status remains
appropriate. Additionally, in some cases of death, receivables are not charged
off if, with respect to the deceased customer’s account, there is a surviving,
contractually liable individual or an estate large enough to pay the debt in
full.




Our
lower-tier credit card offerings have higher charge offs relative to their
average managed receivables balances, than do our other portfolios. The growth
in these receivables throughout 2007 changed the mix of our receivables by
weighting the lower-tier credit card portfolio more heavily than in prior years.
Based on this mix change, we generally would expect our charge-off ratios to
increase during periods of disproportionate growth in our lower-tier credit card
receivables. We saw this mix change effect given our record lower-tier credit
card originations through the third quarter of 2007, which adversely impacted
our combined gross charge-off ratio and our net charge-off ratio through the
second quarter of 2008. All things being equal, we would expect reduced
charge-off ratios in future quarters due to a mix change in the other direction
whereby recent disproportionate charge-off levels for our lower-tier credit card
portfolios relative to those of our other credit card receivables have caused a
decline in lower-tier credit card receivables as a percentage of our aggregate
managed credit card receivables. As previously mentioned, however, recent credit
line reduction and account closure actions and the effects of continued economic
weakness and increasing unemployment rates have resulted in higher quarterly
charge offs in 2009 than in comparable 2008 quarters. The trend of higher year
over year quarterly charge-off levels is expected to reverse when comparing
expected 2010 with actual 2009 charge-off levels.




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Combined gross
charge-off ratio. Our combined gross charge-off ratio was significantly
elevated in the first two quarters of 2008 due primarily to marketing
volume-based fluctuations caused by greater volumes of our lower-tier credit
card accounts originated in prior quarters that reached their peak charge-off
levels in those quarters. Because we had incurred the peak charge offs in the
first two quarters of 2008 associated with our record lower-tier credit card
account originations of the second and third quarters of 2007, the third and
fourth quarter 2008 combined gross charge-off ratios dropped dramatically from
the first half of 2008 to below the average combined gross charge-off ratio we
experienced in 2007. The increase in combined gross charge-off levels
experienced in 2009 is largely attributable to (1) credit line reduction and
account closure actions undertaken in the fall of 2008, which have resulted in
an acceleration of charge offs, and (2) the significantly adverse effects of
continued economic weakness and increasing unemployment rates. We did experience
a modest drop in our combined gross charge-off ratio in the second half of 2009,
and we expect a further modest drop in this ratio in 2010.




Net charge-off
ratio.The
net charge-off ratio measures principal charge offs, net of recoveries.
Variations in the rates of growth or decline in the net charge-off ratio
relative to those of our combined gross charge-off ratio can be caused by (1)
the relative volumes of principal versus fee credits provided to customers
associated with settlement programs and payment incentive programs—such credits
being treated as charge offs in our various managed receivables statistics and
(2) the relative percentage of our charge offs within our lower-tier credit card
portfolio (for which fee charge offs relative to principal charge offs are much
greater than our with our other originated and purchased portfolios). For
example, the net charge-off ratio increased at a greater rate than the gross
charge-off ratio in the second quarter of 2008 because peak vintage charge offs
of our lower-tier credit card receivables before that quarter reversed prior
experienced trending changes in mix toward a greater percentage of our portfolio
being comprised of relatively low principal balance lower-tier credit card
receivables. See our net interest margin and other income ration discussions for
further discussion of the relative volumes of principal versus fee credits
provided to customers on settlement programs.




Adjusted
charge-off ratio.This ratio reflects our
net charge offs, less credit quality discount accretion with respect to our
acquired portfolios. Therefore, its trend line should follow that of our net
charge-off ratio, adjusted for the diminishing impact of past portfolio
acquisitions and for the additional impact of new portfolio acquisitions.
Because our most recent portfolio acquisition was our second quarter 2007 U.K.
Portfolio acquisition, we expect the gap between the net charge-off ratio and
the adjusted charge-off ratio to continue to decline absent the purchase of
another portfolio at a discount to the face amount of its
receivables.




Total yield ratio
and gross yield ratio. As noted previously, the mix
of our managed receivables generally shifted throughout 2008 and 2009 away from
those receivables of our lower-tier credit card offerings. Those receivables
have higher delinquency rates and late and over-limit assessments than do our
other portfolios, and thus have higher total yield and gross yield ratios as
well. Accordingly, the generally trending decline in our total yield and gross
yield ratios is consistent with disproportionate reductions in our lower-tier
credit card receivables over this period.




Our total
and gross yield ratios have also been adversely affected over the past several
quarters by our 2007 U.K. Portfolio acquisition. Its total and gross yields are
below average as compared to our other portfolios, and the rate of decline in
this portfolio has lagged behind the rate of decline in our other portfolios’
receivables, thus continuing to suppress our yield ratios.




Our
generally lower trending total and gross yield ratios also bear the effects of
late 2007 negative amortization-related changes to our billing practices. In
November 2007, we began to reverse fees and finance charges on the accounts of
cardholders who made their contractual payments to us so that those accounts
would not be in negative amortization.




Significant
generally trending declines in our total yield and gross yield ratios are noted
throughout 2008 and 2009 related to the relative delinquency status of our
credit card receivables. We note that we do not bill finance charges and fees on
accounts ninety or more days delinquent. We include these accounts in our
average managed receivables, but generate no yield from them, and our total and
gross yield ratios decline as a result.




Favorably
affecting our fourth quarter 2008 total and gross yield ratios were changes to
terms and re-pricings for many of our credit card accounts to reflect the higher
risks and costs we face in the current economic climate. In fact, these ratios
suffered somewhat in 2008 prior to these changes to terms and re-pricings as we
were effectively prohibited against making such changes by one of our issuing
bank partners—a matter that currently is subject to our claims against this
issuing bank partner in litigation. While our recent changes to terms and
re-pricings are expected to help somewhat with our economics going forward, they
have not been adequate enough to offset the adverse 2009 effects on our total
and gross yield ratios of the significantly greater late stage delinquencies
(for which we do not bill finance charges or fees) that correspond with our
credit line reduction and account closure actions and with the significantly
adverse effects of continued economic weakness and increasing unemployment rates
as discussed above.




Finally,
the significant level of recent lower-tier credit card account closures and the
significantly higher pace at which lower-tier credit card receivables have
charged off relative to other managed receivables have both negatively impacted
total yield and gross yield ratio calculations. Annual fee billings, which are
much greater on lower-tier credit card accounts than for other accounts, have
diminished substantially within the total yield calculation, and late fees on
lower-tier credit card accounts (which are typically much higher on a
percentage-of-receivables-basis than for other accounts) are much less of an
input into our total yield and gross yield ratio calculations as the mix of our
receivables has shifted away from lower-tier credit card accounts towards our
other more traditional accounts. Because we do not anticipate marketing any new
lower-tier credit card accounts for the foreseeable future, we anticipate that
our total yield and gross yield ratios will not return to levels historically
experienced for the foreseeable future.




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Notwithstanding
the above factors causing trending declines in our total and gross yield ratios,
the total yield ratio is skewed higher in the 3rd
quarter of 2009, the 4th
quarter of 2008, and the 2nd
quarter of 2008 due to gains associated with debt repurchases in those quarters
as detailed and quantified in the discussion of our other income ratio
below.




Net interest
margin. Because
of the significance of the late fees charged on our lower-tier credit card
receivables as a percentage of outstanding receivables balances, we generally
would expect our net interest margin to increase as our lower-tier credit card
receivables become a larger percentage and to decrease as they become a smaller
percentage of our overall managed receivables. Principally by reason of peak
lower-tier credit card receivables charge-off vintage levels in the first and
second quarters of 2008, we have experienced reductions in our lower-tier credit
card receivables levels as a percentage of our managed credit card receivables
over the past several quarters. Accordingly, this is the principal factor that
has contributed to the continued general declining trend in our net interest
margins relative to those experienced in prior years.




Our net
interest margin is also affected by the effects of our 2007 U.K. Portfolio
acquisition. The net interest margin for this portfolio is below the weighted
average rate of our other portfolios, and the impact of this portfolio continues
to be felt as our originated portfolios continue to decline at a faster pace
than our acquired U.K. Portfolio, thus increasing the impact of this portfolio’s
lower net interest margin on the overall results.




Our net
interest margins in the first and second quarters of 2008 were depressed due to
changes within our lower-tier credit card receivables portfolio. This portfolio
generated lower finance charge and late fee billings in the first two quarters
of 2008 due to the significant portion of the accounts within that portfolio
that were in late stages of delinquency—stages for which we do not bill finance
charges or late fees. Further, many accounts within that portfolio reached peak
charge-off vintage levels and charged off during those quarters, resulting in
higher finance charge and late fee charge offs netting against yields in the
determination of our net interest margin for the quarters. Because large volumes
of second and third quarter of 2007 lower-tier credit card receivables had
rolled through their peak charge-off vintage levels by the end of the second
quarter of 2008, the net interest margin increased for the third quarter of
2008. It declined in the fourth quarter of 2008, however, because of continued
reductions in our lower-tier credit card receivables as a percentage of our
total managed receivables and because of a heightened level of negative
amortization-related credits issued in that quarter.




Given our
credit line reduction and account closure actions undertaken in the fall of
2008, we experienced further declines in our net interest margin for the first
quarter of 2009 as reduced finance and late fee billings, coupled with an
acceleration of charge offs contributed to depress our net interest margin to
historic lows. These effects were exacerbated by significant finance charge and
fee credits issued in the first quarter of 2009 under incentive programs aimed
at increasing payment rates. We experienced improvements in our net interest
margins in subsequent 2009 quarters, however, because relative to our first
quarter of 2009 incentive payment programs, other 2009 quarters’ incentive
program credits were weighted more toward principal credits (which is consistent
with the trending increases in our net charge-off ratios in the last three
quarters of 2009, notwithstanding trending decreases in our gross charge-off
ratios over this same period) than toward finance charge and late fee credits.
For the foreseeable future, we expect relative stability in our net interest
margin within a range that we saw in the second and third quarters of 2009
(i.e., 11.7% to 14.7%) and generally at the higher end of that
range.




Other income
ratio.We
generally expect our other income ratio to increase as our lower-tier
receivables become a larger percentage and to decrease as our lower-tier
receivables become a smaller percentage of our overall managed receivables. When
underlying open accounts, these receivables generate significantly higher annual
membership, over-limit, monthly maintenance and other fees than do our other
portfolios.




In
the first and second quarters of 2008, we experienced significant declines in
our other income ratio due primarily to higher charge offs in those quarters
resulting from the marketing volume-based volatility in our lower-tier credit
card receivables portfolios and from seasonal increases in charge offs that were
amplified somewhat by economic pressures felt by our cardholders. Our
aforementioned negative amortization-related finance charge and fee reversal
changes to our billing practices also negatively impacted our other income ratio
in these quarters and in the third and fourth quarters of 2008.




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In the
first two quarters of 2008, our lower-tier credit card receivables’ fee charge
offs within the other income ratio exceeded the fee income from these
receivables, resulting in a negative other income ratio for this portfolio. The
same lower-tier credit card receivables-related factors mentioned in our
discussion of our first and second quarter 2008 net interest margins are at play
in the determination of our first and second quarter 2008 other income
ratios—such factors including the effects of significantly higher late
stage delinquency levels for which we do not bill over-limit and other fees and
the large proportion of lower-tier credit card accounts that reached peak
charge-off vintage levels and charged off during the quarters, resulting in
higher fee charge offs netting against billed fees in the determination of our
other income ratio. The second quarter 2008
other income ratio remained flat relative to the first quarter of 2008 primarily
due to a $13.7 million gain on the repurchase of our convertible senior notes;
excluding this gain, the ratio declined to -2.5%, consistent with the trend from
the first quarter of 2008. Repurchases of our convertible senior notes also
served to positively impact our other income ratio in the fourth quarter of
2008. As computed without regard to a $48.0 million gain related to these fourth
quarter repurchases, our other income ratio would have been 3.2%, lower than the
7.7% experienced in the third quarter primarily due to the effects of account
closure actions and annual and other fee reversals associated therewith,
heightened levels of negative amortization-related fee reversals, and credits
provided within our originated portfolios under collection programs aimed at
stimulating cardholder payments.




Our
credit line reduction and account closure actions undertaken in the fall of 2008
also served to depress our other income ratio in the first and second quarters
of 2009 as our lower-tier credit card receivables’ fee charge offs within the
other income ratio exceeded the fee income from these receivables. These
actions, coupled with the aforementioned fee credits issued in the first and
second quarters of 2009 under incentive programs aimed at increasing payment
rates, resulted in a negative other income ratio in the first and second
quarters of 2009. Moreover, but for our recognition of a $114.0 million gain on
our purchase and subsequent cancellation of notes issued by our originated
portfolio master trust recognized in the third quarter of 2009, the same actions
and fee credits would have resulted in a -1.1% other income ratio in the third
quarter of 2009. Our other income ratio recovered somewhat in the fourth quarter
of 2009, and we expect a positive other income ratio for the foreseeable future,
although at a levels slightly lower than that experienced in the fourth quarter
of 2009. Any potential gains associated with future debt repurchases, however,
could cause a significant increase in our other income ratio.




Operating
ratio.We
experienced generally trending reductions in our operating ratio through the end
of 2008 as our receivables mix shifted from lower-tier credit card receivables
comprising a larger percentage of our managed receivables to lower-tier credit
card receivables comprising a smaller percentage of our managed receivables. Our
lower-tier credit card receivables are comprised of accounts with smaller
receivables balances than those accounts underlying our upper-tier originated
portfolio master trust and acquired portfolios. Smaller receivable balance
accounts require many more customer service interactions per average dollar of
outstanding balance (relative to our upper-tier originated portfolio and
acquired portfolios), and hence result in higher costs as a percentage of
average managed receivables than we historically have experienced with our
upper-tier originated portfolio master trust and acquired portfolios’
receivables.




The
elimination of our account origination activities also has favorably influenced
our quarterly operating ratio computations; as our originated accounts mature,
the level of interactions with the customer declines, contributing to lower
overall operating ratios.




In the
first, second and third quarters of 2008, we had lower operating expenses,
primarily due to our slow-down in originations (customer interactions and
related costs are higher in the first few months after card activation than they
are for more mature credit card accounts as noted above) and to the specific
expense reduction initiatives we undertook in the latter half of 2007 in
response to the tightened liquidity markets. But for a $5.5 million impairment
charge in the second quarter of 2008 associated with a sublease of 183,461
square feet of office space at our corporate headquarters, we would have
experienced a slight reduction in our second quarter 2008 operating ratio
relative to its first quarter 2008 level. The operating ratio in the third
quarter of 2008 was further reduced below that of the second quarter (as
adjusted for the lease impairment charge mentioned above) primarily due to our
continued expense reduction efforts. While expense reductions continued into the
fourth quarter of 2008 and in 2009, our managed receivables levels have been
dropping at faster rates than the rates at which we have been able thus far to
reduce our costs (particular when considering our fixed infrastructure costs).
As such, we recently have experienced a trending increase in our operating
ratio. The increase in our operating ratio in the fourth quarter of 2009,
however, is based on our determination that the residual interest associated
with our U.K. Portfolio is permanently impaired and our commensurate realization
within our consolidated statement of operations of a $26.1 million translation
loss associated with this portfolio in the fourth quarter of 2009 (such amount
which was previously included as an accumulated other comprehensive loss offset
to total equity). Absent this charge, our operating ratio would have fallen to
10.4% for the quarter, largely due to modest legal cost reductions. Reflecting
another round of significant additional cost-cutting efforts expected in 2010,
our operating ratios should fluctuate only slightly (either higher or lower,
depending upon the quarter) from the adjusted 10.4% fourth quarter 2009
level.




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Future
Expectations




Because
of our account closure actions and our expected liquidations within each of our
credit card receivables portfolios, we generally do not expect our
yield-oriented managed receivables statistics to return to higher pre-2008
levels for the foreseeable future. There are significant economic factors that
could continue to adversely affect our future Credit Cards segment performance,
including further potential slow-downs in the U.S. and U.K. economies and rising
unemployment rates within both countries as the ability of our customers to make
timely required payments on their credit cards is significantly affected by
their employment levels. Unemployment and underemployment rates in the U.S.
largely have continued to rise over the past several quarters, and we have seen
somewhat lower payment rates—the effects of which include yield compression,
higher charge offs, reductions in receivables levels and reductions in the cash
flows we receive from our portfolios. It is also possible that heightened levels
of litigation as noted throughout this Report may result in higher legal
expenses for us that could offset other cost-cutting measures that we currently
expect to experience within our operating ratios.




Definitions
of Financial, Operating and Statistical Measures




Combined gross
charge-off ratio.Represents an
annualized fraction the numerator of which is the aggregate amounts of finance
charge, fee and principal losses from customers unwilling or unable to pay their
receivables balances, as well as from bankrupt and deceased customers, less
current-period recoveries, and the denominator of which is average managed
receivables. Recoveries on managed receivables represent all amounts received
related to managed receivables that previously have been charged off, including
payments received directly from customers and proceeds received from the sale of
those charged off receivables. Recoveries typically have represented less than
2% of average managed receivables.




Net charge-off
ratio.Represents an
annualized fraction the numerator of which is the principal amount of losses,
net of recoveries, and the denominator of which is average managed receivables.
(The numerator excludes finance charge and fee charge offs, which are charged
against the related income item at the time of charge off, as well as losses
from fraudulent activity in accounts, which are included separately in other
operating expenses.)




Adjusted
charge-off ratio. Represents an annualized fraction the numerator of
which is principal net charge offs as adjusted to apply discount accretion
related to the credit quality of acquired portfolios to offset a portion of the
actual face amount of net charge offs, and the denominator of which is average
managed receivables. (Historically, upon our acquisitions of credit card
receivables, a portion of the discount reflected within our acquisition prices
has related to the credit quality of the acquired receivables—that portion
representing the excess of the face amount of the receivables acquired over the
future cash flows expected to be collected from the receivables. Because we
treat the credit quality discount component of our acquisition discount as
related exclusively to acquired principal balances, the difference between our
net charge offs and our adjusted charge offs for each respective reporting
period represents the total dollar amount of our charge offs that were charged
against our credit quality discount during each respective reporting
period.)




Total yield
ratio.Represents an
annualized fraction, the numerator of which includes all finance charge and late
fee income billed on all outstanding receivables, plus credit card fees
(including over-limit fees, cash advance fees, returned check fees and
interchange income), plus earned, amortized amounts of annual membership fees
and activation fees with respect to certain of our credit card products, plus
ancillary product income, plus amortization of the accretable yield component of
our acquisition discounts for portfolio purchases, plus gains on debt
repurchases, and the denominator of which is average managed
receivables.




Gross yield
ratio. Represents an annualized fraction, the numerator of which is
finance charges and late fees, and the denominator of which is average managed
receivables.




Net interest
margin. Represents an annualized fraction, the numerator of which
includes finance charge and late fee income billed on all outstanding
receivables, plus amortization of the accretable yield component of our
acquisition discounts for portfolio purchases, less interest expense associated
with portfolio-specific debt and securitization facilities and finance charge
and late fee charge offs, and the denominator of which is average managed
receivables. (Net interest margins are influenced by a number of factors,
including (1) the level of finance charges and late fees, (2) the
weighted average cost of funds underlying portfolio-specific debt or within our
securitization structures, (3) amortization of the accretable yield
component of our acquisition discounts for portfolio purchases and (4) the
level of our finance charge and late fee charge offs. On a routine basis,
generally no less frequently than quarterly, we re-underwrite our portfolio to
price our products to appropriately reflect the level of each customer’s credit
risk. As part of this underwriting process, existing customers may be offered
increased or decreased pricing depending on their credit risk, as well as their
supply of and demand for credit. Increases in pricing may increase our net
interest margin, while decreases in pricing may reduce our net interest
margin.)




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Other income
ratio. Represents an annualized fraction, the numerator of which includes
credit card fees (including over-limit fees, cash advance fees, returned check
fees and interchange income), plus earned, amortized amounts of annual
membership fees and activation fees with respect to certain of our credit card
products, plus ancillary product income, less all fee charge offs (with the
exception of late fee charge offs, which are netted against the net interest
margin), plus gains and losses on investments in securities and debt repurchase
gains, and the denominator of which is average managed receivables.




Operating
ratio. Represents an annualized fraction, the numerator of which includes
all expenses (other than marketing and solicitation and ancillary product
expenses) associated with our Credit Cards segment, net of any servicing income
we receive from third parties associated with their economic interests in the
credit card receivables that we service on their behalf, and the denominator of
which is average managed receivables.




Investments
in Previously Charged-Off Receivables Segment




For 2009
and 2008, the following table shows a roll-forward of our investments in
previously charged-off receivables activities (in thousands of
dollars):





2009
            
            
            2008Unrecovered
      balance at beginning of period
            
            $
            47,676
            
            
            $
            14,523Acquisitions
      of defaulted accounts
            
            
            45,889
            
            
            
            77,436Cash
      collections
            
            
            (94,910
            )
            
            
            (83,099
            )Cost-recovery
      method income recognized on defaulted accounts (included as a component of
      fees and related income on non-securitized earning assets on our
      consolidated statements of operations)(1)
            
            
            31,014
            
            
            
            38,816Unrecovered
      balance at December 31
            
            $
            29,669
            
            
            $
            47,676Estimated
      remaining collections (“ERC”)
            
            $
            90,705
            
            
            $
            104,761




(1)
Amount includes $21.2 million and $11.3 million in accretion in 2009 and 2008,
respectively, associated with the culmination of the Encore forward flow
agreement.




The above
table reflects our use of the cost recovery method of accounting for our
investments in previously charged-off receivables. Under this method, we
establish static pools consisting of homogenous accounts and receivables for
each portfolio acquisition. Once we establish a static pool, we do not change
the receivables within the pool. We record each static pool at cost and account
for it as a single unit for payment application and income recognition purposes.
Under the cost recovery method, we do not recognize income associated with a
particular portfolio until cash collections have exceeded the investment.
Additionally, until such time as cash collected for a particular portfolio
exceeds our investment in the portfolio, we will incur commission costs and
other internal and external servicing costs associated with the cash collections
on the portfolio investment that we will charge as an operating expense without
any offsetting income amounts.




Previously
charged-off receivables held as of December 31, 2009 principally are comprised
of:  normal delinquency charged-off accounts purchased from us, and
the securitization trusts we service, and outside third parties; accounts
associated with Chapter 13 Bankruptcies; and accounts acquired through this
segment’s balance transfer program prior to such time as credit cards are issued
relating to the program’s underlying accounts.




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We
generally estimate the life of each pool of charged-off receivables we typically
acquire to be between 24 and 36 months for normal delinquency charged-off
accounts (including balance transfer program accounts) and approximately 60
months for Chapter 13 Bankruptcies. We anticipate collecting 41.2% of the ERC of
the existing accounts over the next twelve months, with the balance to be
collected thereafter. Our acquisition of charged-off accounts through our
balance transfer program results in receivables with a higher than typical
expected collectible balance. At times when the composition of our defaulted
accounts includes more of this type of receivable, the resulting estimated
remaining collectible portion per dollar invested is expected to increase. We
saw this trend until our now-settled dispute with Encore arose in 2008; that
dispute caused a mix change toward our having to hold significant investments in
normal delinquency charged-off accounts purchased from the securitization trusts
we service—investments which prior to the dispute were purchased and sold
contemporaneously under the Encore forward flow contract. Compounding this trend
reversal was the fact that our Investments in Previously Charged-Off Receivables
segment’s balance transfer program had experienced lower overall placement
volumes primarily due to Encore’s decision to discontinue balance transfer
program placements to us during the term of the now-settled Encore
dispute.




With
settlement of the Encore dispute and its commitment under the settlement terms
to resume placements of balance transfer program volumes to us, we expect
improving trends and results associated with the balance transfer program within
our Investments in Previously Charged-Off Receivables segment. Beyond the
committed Encore placement volumes under the program, we also believe that the
current economic environment could lead to increased opportunities for growth in
the balance transfer program as consumers with less access to credit create
additional demand and can lead to increased placements from third parties. We
also note that we began exploring a balance transfer program in the U.K. in the
second quarter of 2008; this program has generated modest revenues thus far and
although it is expected to grow rapidly, its results are not anticipated to be
material in 2010.




A
significant portion of our Investments in Previously Charged-Off Receivables
segment’s acquisitions of normal delinquency charge offs recently have been
comprised of previously charged-off receivables from us and the securitization
trusts we service. Until the dispute arose with Encore in 2008, the segment had,
almost simultaneously with each of its purchases from our securitization trusts,
sold these charge offs for a fixed sales price under its five-year forward flow
contract with Encore rather than retained them on its balance sheet. With these
essentially simultaneous pass-through transactions, the segment had not
previously experienced any substantial mismatch between the timing of its
collections expenses and the production of revenues under its cost recovery
method of accounting. This changed in the third quarter of 2008, however, as a
result of Encore’s refusal to purchase receivables under the forward flow
contract. During the term of this now-settled dispute, our Investment in
Previously Charged-Off receivables segment retained its purchased charge offs on
its balance sheet and undertook collection activities to maximize its return on
these purchases. The retention of these receivables caused significant
reductions in its earnings given the mismatching of cost recovery method
collection expenses with their associated revenues (i.e., as collection expenses
were incurred up front, while revenue recognition was delayed until complete
recovery of each respective acquired portfolio’s investment).




Our third
quarter 2009 settlement with Encore, allowed our Investments in Previously
Charged-Off Receivables segment to dispose of volumes of previously charged off
receivables that had built up on its balance sheet during the term of the Encore
dispute. Under the settlement, Encore agreed to pay a negotiated price for these
previously charged off receivables, and its and our obligations to one another
for any potential futures sales of previously charged off receivables to them
under the forward flow contract were extinguished. The settlement resulted in
the recognition of the then-remaining $21.2 million in deferred revenue in the
third quarter of 2009 and a corresponding release of $8.7 million in restricted
cash; 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 which is reflected within our Investments in
Previously Charged-Off Receivables segment’s results for 2009.




With the
Encore settlement now behind us, we do not expect our Investments in Previously
Charged-Off Receivables segment to return immediately to pre-dispute
profitability levels. Encore will no longer be purchasing the portfolios of
previously charged-off receivables that this segment purchases from the
securitization trusts that we service.  As such, the segment will
likely hold such previously charged-off receivables on its balance sheet and
collect on them—thereby giving rise to the aforementioned cost-recovery-induced
expense and revenue timing mismatches. Additionally, even if our Investments in
Previously Charged-Off Receivables segment were to identify a buyer for its
holdings of these previously charged-off receivables, it is likely that such a
buyer would pay significantly less than Encore did. Under its fixed-price
commitment, Encore was paying a price that was reflective of the high valuations
being placed on charged-off paper in the market generally in 2005, rather than
in today’s environment in which the relative supply of charged-off paper is
significantly greater. Moreover, the volumes of previously charged off
receivables coming out of the securitizations trusts we service has fallen (and
will continue to fall further) significantly from the volumes that our
Investments in Previously Charged-Off Receivables segment purchased prior to the
beginning of the Encore dispute.


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Notwithstanding
the above-discussed factors surrounding our Investments in Previously
Charged-Off Receivables segment’s purchases of previously charged-off
receivables from the securitization trusts we service, an increase in the
availability of third-party charged-off paper has created several opportunities
for us since the fourth quarter of 2008. We have been able to complete several
large purchases of charged-off portfolios from third parties at attractive
pricing. The increasing supply of charged-off paper also is likely to result in
further opportunities to acquire third-party charged-off receivables portfolios
at prices under which we can generate significant returns, and subject to
liquidity constraints, we expect to increase our purchases of charged off
portfolios from third parties in the coming year.




Over the
past year or so, our Investments in Previously Charged-Off Receivables segment
has seen an improved environment for the purchase of Chapter 13 Bankruptcies. It
recently obtained financing for these purchases, as well as for normal
delinquency portfolios.  The pricing of Chapter 13 Bankruptcies has
been attractive enough to allow for our purchase of several sizable portfolios
of this type that are expected to produce attractive returns for us. With our
current credit facility available for Chapter 13 Bankruptcy and normal
delinquency purchases, we expect to expand our purchasing activity over the
coming months.




Micro-Loan
Businesses




Our
micro-loan businesses principally consist of marketing, servicing and/or
originating small-balance, short-term loans (generally less than $500 or the
equivalent thereof in the British pound for pound-denominated loans for less
than 30 days) through a network of 314 retail branch locations in the U.S. and
via the Internet in both the U.S. and the U.K.  Operations through our
retail branch locations are referred to as our “Retail Micro-Loans” segment,
while our micro-loans made through the Internet are referred to as our Internet
Micro-Loans” segment.




Retail
Micro-Loans Segment




In most
of the states in which our Retail Micro-Loans segment operates, we make loans
directly to customers against personal checks, which are held until the
customers repay the loan principal and fees or until the holding period has
expired (typically 14 days). This form of business is generally referred to as a
“deferred presentment” service. In exchange for this service, we receive an
earned check fee typically ranging from approximately 15% to 17% of the advance
amount. This deferred presentment model operates under the authority of
state-governed enabling statutes. The form and structure of these deferred
presentments may change in accordance with corresponding changes in state, local
and federal law.




We also
cash checks for our customers at a fee calculated as a percentage of the face of
the check in certain locations. We also may charge and collect additional fees
for loan originations, returned checks, late fees and other fees as allowed by
governing laws and statures. Currently, origination fees range from $15 to $30
dollars but are subject to change pursuant to changes in applicable laws. Fees
for returned items declined due to NSF and closed accounts are typically set by
state and range from $30 to $50, while late fees, which also vary by state, can
be as high as $50.




Customers
obtain micro-loans from us by visiting our retail storefronts and completing the
loan application process. Once the application is completed by the customer, the
store personnel review the documents to ensure that the information provided is
accurate and sufficient to make an informed underwriting
decision.  Once approved by our underwriting model, the customer signs
an agreement that outlines the micro-loan terms. The customer then provides a
check or ACH authorization to cover the amount of the micro-loan plus any fees
or interest associated with the micro-loan. By signing the micro-loan agreement,
the customer agrees to return on the date specified, typically his/her pay date
to “buy back” his/her check or revoke his/her ACH authorization, thus repaying
the micro-loan including any fees or interest outstanding. Should the customer
fail to return on the specified date, we may deposit his/her check or initiate
the ACH previously authorized by the customer. In addition to the balance of the
micro-loan and associated fees or interest, we may also seek to collect any
applicable NSF and/or late fees accrued.




In states
where permissible by law, we may offer alternative products to micro-loan
customers as well as to customers who do not obtain micro-loans from us. Product
and service offerings include check cashing, as well as services offered by
independent third parties through contractual agreements with us. These
third-party products and services include tax preparation services, money order
and wire transfer services and bill payment services.




Our
deferred presentment service businesses are regulated directly and indirectly
under various federal and state consumer protection and other laws, rules and
regulations, including the federal Truth-In-Lending Act, the federal Equal
Credit Opportunity Act, the federal Fair Credit Reporting Act, the federal Fair
Debt Collection Practices Act, the federal Gramm-Leach-Bliley Act and federal
Telemarketing and Consumer Fraud and Abuse Prevention Act. These statutes and
their enabling regulations, among other things, impose disclosure requirements
when a consumer loan or cash advance is advertised and when the account is
opened. In addition, various state statutes limit the rate and fees that may be
charged, prohibit discriminatory




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practices
in extending credit, impose limitations on the number and form of transactions
and restrict the use of consumer credit reports and other account-related
information. Many of the states in which these businesses operate have various
licensing requirements and impose certain financial or other conditions in
connection with their licensing requirements. Any adverse change in or
interpretation of existing laws or regulations or the failure to comply with any
such laws and regulations could result in fines, class-action litigation, or
interruption or cessation of certain business activities. Any of these events
could have a material adverse effect on our business. In addition, there can be
no assurance that amendments to such laws and regulations or new or more
restrictive laws or regulations, or interpretations thereof, will not be adopted
in the future which may make compliance more difficult or expensive, further
limit or restrict fees and other charges, curtail current operations, restrict
our ability to expand operations or otherwise materially adversely affect our
businesses or prospects.  For example in the state of South Carolina,
new laws have been enacted to require the use of a database to limit consumers
to one outstanding micro-loan.  The effects of this new regulation
could result in a loss of customers because many of our customers currently have
outstanding loans with our competitors in addition to us, and they will be
forced to choose and utilize the services of only one micro-loan provider. We
are active in FISCA and continually monitor federal, state and local regulatory
activity through FISCA, as well as state and local lobbyists.




From the
inception of our retail micro-loan operations through mid-2007, we embarked on a
strategy of converting our mono-line micro-loan storefronts into neighborhood
financial centers offering a wide array of financial products and services,
including auto insurance, stored-value cards, check cashing, money transfer,
money order, bill payment, auto title loans and tax preparation service
assistance. These new products had some success in improving foot traffic within
our storefronts and increasing our revenues on a per store basis. In certain
states, however, we saw increasingly stringent lending regulations (which in
many cases precluded the execution of our multi-product line strategy) and
possible evidence of market saturation, both of which resulted in revenue growth
that did not meet our expectations. At the same time, we saw rising
delinquencies and charge offs in almost all of the states where we had retail
micro-loan operations. After evaluating the operations of our Retail Micro-Loans
segment on a state-by-state basis, it became evident during 2007 that the
potential risk-adjusted returns expected in certain states did not justify the
ongoing required investment in the operations of those states. As a result,
during the fourth quarter of 2007, we decided to pursue a sale of our Retail
Micro-Loans segment’s operations in six states:  Florida; Oklahoma;
Colorado; Arizona; Louisiana; and Michigan. Through a series of staged closings
with a single buyer, the first of which was completed July 31, 2008,
we completed the sale of operations in three states (Florida, Louisiana, and
Arizona) in the third quarter of 2008. By September 30, 2008, we had closed all
remaining storefronts in Michigan and our unprofitable storefronts in Colorado
and Oklahoma. For a limited number of profitable storefronts in Colorado and
Oklahoma, however, we elected to continue operations, and we have removed these
storefronts from discontinued operations in our consolidated statements of
operations for all periods presented. Our various discontinued operations are
included in the discontinued operations category in our consolidated statements
of operations for all periods presented.




During
the first quarter of 2008, after reevaluating the capital required for
sustaining start-up losses associated with our eighty-one store locations in
Texas, we decided to pursue a sale of our Texas store locations—a sale that was
completed in April 2008. We have included our Texas results in the discontinued
operations category in our consolidated statements of operations for all periods
presented.




Additionally,
during the second quarter of 2009, we elected to close all the remaining
locations in Arkansas due to an increasingly negative regulatory
environment.  We have included our Arkansas results in the
discontinued operations category in our consolidated statements of operations
for all periods presented.




During
the first half of 2006, we began exploring potential international market
opportunities for our Retail Micro-Loans segment. As part of this effort, we
focused on potential opportunities in the U.K.  To test market
receptiveness for our products in the U.K. we opened a total of four locations
during 2006 and 2007.  Subsequently, capital requirements to continue
these exploratory operations became excessive and we decided to discontinue our
efforts and closed these locations during 2009.




During
2009 and 2008, we closed 9 and 10 locations, respectively (other than those
closed as part of our discontinued operations) and did not open any new
locations. Included in the 2009 store closures are all of our storefront
locations associated with our U.K. storefront operations. Currently, we are not
planning to expand the current number of locations in any new or existing
markets; instead, we likely will continue to look at closing individual
locations that do not meet our profitability thresholds. In addition, we will
continue to evaluate our risk-adjusted returns in the states comprising the
continuing operations of our Retail Micro-Loans segment.




A roll-forward of our Retail
Micro-Loans segment locations follows:




For
      the Year Ended December 31,2009
            
            
            2008Beginning
      number of locations included in continuing operations
            
            
            350
            
            
            
            410Locations
      reclassified from discontinued operations
            
            
            —
            
            
            
            31Closed
      locations
            
            
            (9
            )
            
            
            (10
            )Locations
      classified as discontinued operations (1)
            
            
            (27
            )
            
            
            —Locations
      sold
            
            
            —
            
            
            
            (81
            )Ending
      number of locations included in continuing operations
            
            
            314
            
            
            
            350




(1)
            Reflects
      stores located in the state of
Arkansas.




Our
Retail Micro-Loans segment marketed and originated $440.3 million and
$400.1 million in micro-loans during 2009 and 2008, respectively, which
resulted in revenue of $73.1 million and $69.8 million during 2009 and
2008, respectively. Summary financial data for this segment (dollars in
thousands) is as follows:




For
      the Year EndedDecember 31,2009
            
            
            2008Total
      revenues
            
            $
            73,075
            
            
            $
            69,790Income
      (loss) from continuing operations before income taxes
            
            $
            (7,899
            )
            
            $
            8,964Loss
      from discontinued operations before income taxes
            
            $
            (6,599
            )
            
            $
            (7,811
            )Period
      end loans and fees receivable, gross
            
            $
            41,011
            
            
            $
            40,099





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But for a
$20.0 million goodwill impairment charge associated with continuing operations
taken in the second quarter of 2009, we would have generated $12.1 million in
income from continuing operations before income taxes within the Retail
Micro-Loans segment in 2009. Based on these results, trending growth in revenues
that we have been experiencing for our continuing operations over the past
several months, the positive effects of our recent underwriting changes in
reducing our charge-off levels, and the fact that our results for 2009 included
$2.0 million of operational and closing costs associated with our now-closed
U.K. storefronts, we believe that we will continue to have profits at growing
levels within this segment during 2010.




The
above-disclosed losses from discontinued operations reflect:  (1)
second quarter 2009 losses (including a goodwill impairment charge of $3.5
million) associated with our Arkansas storefronts that we elected to discontinue
in the second quarter of 2009 due to an increasingly negative regulatory
environment within that state; (2) losses we incurred during the first two
quarters of 2008 associated with storefronts that we were holding for sale and
that we sold or closed during the second and third quarters of 2008; and (3)
first quarter 2008 losses (including a goodwill impairment charge of $1.1
million) associated with our Texas storefronts which we decided to exit in the
first quarter of 2008.




The
following tables present additional financial, operating and statistical metrics
(dollars per store in thousands) for the continuing operations of our Retail
Micro-Loans segment for 2009 and 2008.





For
      the Year Ended December 31,2009
            
            
            2008
            
            
            Income
              Increase
      (Decrease)Dollars
            
            
            %
      Revenue
            
            
            Dollars
            
            
            %
      Revenue
            
            
            Dollars
            %Revenue
            
            $
            230
            
            
            
            100.0
            %
            
            $
            217
            
            
            
            100.0
            %
            
            $
            13
            
            
            
            6.0
            %Direct
      expenseSalaries
      and benefits
            
            
            59
            
            
            
            25.7
            %
            
            
            59
            
            
            
            27.2
            %
            
            
            —
            
            
            
            —
            %Provision
      for loan losses
            
            
            30
            
            
            
            13.0
            %
            
            
            31
            
            
            
            14.2
            %
            
            
            1
            
            
            
            3.2
            %Occupancy
            
            
            30
            
            
            
            13.0
            %
            
            
            32
            
            
            
            14.7
            %
            
            
            2
            
            
            
            6.3
            %Depreciation
            
            
            5
            
            
            
            2.2
            %
            
            
            8
            
            
            
            3.7
            %
            
            
            3
            
            
            
            37.5
            %Advertising
            
            
            10
            
            
            
            4.3
            %
            
            
            4
            
            
            
            1.8
            %
            
            
            (6
            )
            
            
            (150.0
            )%Other
            
            
            15
            
            
            
            6.5
            %
            
            
            15
            
            
            
            6.9
            %
            
            
            —
            
            
            
            —
            %Total
      direct expense
            
            
            149
            
            
            
            64.7
            %
            
            
            149
            
            
            
            68.5
            %
            
            
            —
            
            
            
            —
            %Contribution
      margin
            
            $
            81
            
            
            
            35.3
            %
            
            $
            68
            
            
            
            31.5
            %
            
            $
            13
            
            
            
            19.1
            %




Revenue
per store and contribution margin per store location increased primarily due to
the improvements in the state of Ohio, which in 2008 was adversely affected by
legislation that effectively prohibited the issuance of traditional cash advance
micro-loans under a fee structure necessary to profitably continue operations.
Late in 2008 and throughout 2009, we re-established our footprint in the state
of Ohio by offering an alternative product under the Ohio Small Loan Act.
Offsetting this, however, was the implementation of our new underwriting
methodology which has reduced the gross number of loans that we issue per
store.




As the
Ohio storefront locations remained open during the transition to the new
alternative lending product, store costs were still incurred without
corresponding revenues.  As such, all expense categories are
consistent year over year as we did not open or close a significant number of
storefront locations (excluding those associated with discontinued
operations).  Absent aggressive store openings or closures, we expect
for costs to continue at current levels while revenues and contribution margin
per store are expected to climb modestly as we continue to revise and enhance
our underwriting methodology.




Internet
Micro-Loans Segment






We began
our Internet Micro-Loans segment operations in April 2007, when we acquired
95% of the outstanding shares of MEM (or “Month End Money”), a leading provider
in the U.K. of Internet-based, short-term, micro-loans, for £11.6 million
($22.9 million) in cash from which we recorded goodwill of £11.0 million
($21.7 million). Under the original MEM 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 December 31,
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 22.5%
continuing minority ownership interest in MEM.




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Using
proprietary analytics to market, underwrite and manage loans to consumers in
need of short-term financial assistance, MEM loans are made for a period of up
to 40 days and are repayable in full on the customer’s next payday.  A
typical customer is 22 to 35 years of age, has average net monthly income of
£1,300, works in an office or skilled environment and borrows £200. In exchange
for this service, we receive a fee, typically equal to 25% of the advance
amount.




Internet
micro-loans in our U.K. market are predominantly made by directing the customer
to the MEM website generally through direct marketing. Once at the website, the
customer completes an online application for a loan by providing his or her
name, address, employment information, desired loan amount and bank account
information.  This information is automatically screened for fraud and
other indicators and based on this information an application is immediately
approved or declined.  In some cases, additional information may be
required from the applicant prior to making a loan decision.  Once a
loan is approved, the customer agrees to the terms of the loan and the amount
borrowed is directly deposited into a customer’s bank account. At the agreed
upon repayment date, the customer’s debit card is automatically charged for the
full amount of the loan plus applicable fees. If repayment is not made at the
agreed upon repayment date, MEM will continually seek to contact the customer in
order to collect the amount due. We will either seek full repayment or by
agreement with the customer collect the amount under a repayment schedule of up
to six months (depending on the amount due). After 90 days of in-house
collection activity, the account will be transferred to a third-party collection
agency with an aim of maximizing recovery of the charged-off debt.




MEM is
subject to U.K. regulations that provide similar consumer protections to those
provided under the U.S. regulatory framework. MEM is directly licensed and
regulated by the OFT.  MEM is governed by an extensive regulatory
framework, including the following:  Consumer Credit Act, Data
Protection Act; Privacy and Electronic Communications Regulations; Consumer
Protection and Unfair Trading regulations; Financial Services (Distance
Marketing) Regulations; Enterprise Act; Money Laundering Regulations and ASA
adjudications. The aforementioned legislation imposes strict rules on the look
and content of consumer contracts, how interest rates are calculated and stated,
advertising in all forms, who we can contact and disclosures to consumers, among
others. The regulators such as the OFT provide guidance on consumer credit
practices including collections.  The regulators are constantly
reviewing legislation and guidance in many areas of consumer credit. MEM is
involved in discussions with the regulators via trade groups while keeping up to
date with any regulatory changes and implementing them where and when
required.




We have
historically funded the growth in MEM through additional capital investments;
however, in November 2007, MEM entered into a financing agreement, which allowed
it to borrow up to £6.5 million ($10.4 million at December 31, 2009 exchange
rates) to finance its operations. This financing arrangement was repaid in
December 2009, and the lender has cancelled the facility.




We
recently have expanded our MEM Internet micro-loan model to the U.S., although
our U.S. operations are start-up and limited in nature and are not yet material
to our consolidated results of operations. We intend to continue testing the
extension of our U.K. Internet micro-loan platform, underwriting techniques and
marketing approaches within the U.S. at a measured pace, and depending upon the
results of this testing, we may significantly grow Internet-based micro-loan
cash advance lending within the U.S.




Our
Internet Micro-Loans segment marketed and originated $264.2 million and
$180.2 million in micro-loans during 2009 and 2008, respectively, which
resulted in revenue of $65.3 million and $42.6 million during 2009 and
2008, respectively. Summary financial data (in thousands) for this segment is as
follows:




For
      the Year Ended
              December 31,2009
            
            
            2008Total
      revenues
            
            $
            65,275
            
            
            $
            42,623Income
      (loss) from continuing operations before income taxes
            
            $
            16,372
            
            
            $
            (375
            )Noncontrolling
      interests
            
            $
            (3,454
            )
            
            $
            (96
            )Period
      end loans and fees receivable, gross
            
            $
            34,027
            
            
            $
            20,771




We expect
continued growth in our Internet Micro-Loans segment’s revenues and income
throughout 2010.




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Combined Financial, OperatingandStatistical Data
for Micro-Loan Businesses




Financial,
operating and statistical metrics for our continuing combined micro-loan
operations are detailed in the following table for 2009 and 2008. As discussed
elsewhere in this information statement, continuing operations in these periods
included our Retail Micro-Loans segment’s operations in nine states (Alabama,
Colorado, Kentucky, Mississippi, Ohio, Oklahoma, South Carolina, Tennessee, and
Wisconsin).




For
      the Year Ended December 31,2009
            
            
            2008Number
      of customers served—all credit products
            
            
            280,303
            
            
            
            240,729Number
      of cash advances originated
            
            
            1,868,957
            
            
            
            1,570,305Aggregate
      principal amount of cash advances originated (in
thousands)
            
            $
            704,513
            
            
            $
            580,272Average
      amount of each cash advance originated
            
            $
            377
            
            
            $
            370Aggregate
      Fee Amount (in thousands)
            
            $
            128,916
            
            
            $
            111,677Average
      charge to customers for providing and processing a cash
      advance
            
            $
            69
            
            
            $
            71Average
      duration of a cash advance (days)
            
            
            21
            
            
            
            20Number
      of installment loans originated
            
            
            18,811
            
            
            
            14,419Aggregate
      principal amount of installment loans originated (in
      thousands)
            
            $
            8,586
            
            
            $
            6,626Average
      principal amount of each installment loan originated
            
            $
            456
            
            
            $
            460




The
increase incash
advances originated is due to the significant growth experienced in our MEM
operations, which increased cash advance originations by 51.9% period over
period.  This increase in our MEM originations also helped to increase
the average amount of each cash advance originated as our MEM operation
generally advance larger loans (measured in U.S. dollars) to its customer base
than our Retail Micro-Loans segment does. These MEM operation factors were
partially offset, however, by the effects of new Retail Micro-Loans segment
underwriting score tables and criteria implemented late in 2008. The
implementation of these new underwriting score tables and criteria has reduced
our credit losses, along with the desired reduction of cash advance sizes and
the elimination of loans to many high-risk customers to whom we would have lent
under prior criteria.




Auto
Finance Segment




Our Auto
Finance segment includes a variety of auto sales and lending
activities.




Our
original platform, CAR, acquired in April 2005, purchases auto loans at a
discount and services auto loans for a fee; its customer base includes a
nationwide network of pre-qualified auto dealers in the buy-here, pay-here used
car business.




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We also
own substantially all of JRAS, a buy-here, pay-here dealer we acquired in 2007.
As of December 31, 2008, JRAS had twelve retail lots in four states. In the
first quarter of 2009, we undertook steps to close four lots in two states, and
we closed an additional two lots in two states in the second quarter of 2009
leaving a remaining six lots as of December 31, 2009. The capital requirements
to bring JRAS’s sales for its twelve locations to a level necessary to
completely cover fixed overhead costs and consistently generate profits were
more than we are willing to undertake given the current liquidity environment.
We currently do not intend to expand JRAS’s operations, and we currently are
evaluating the closure of additional JRAS lots.




Lastly,
our ACC platform acquired during 2007 historically purchased retail installment
contracts from franchised car dealers. We ceased origination efforts within the
ACC platform during 2009 and outsourced the collection on its portfolio of auto
finance receivables.




During
the third quarter of 2009, we paid off our CAR debt facility and one of the debt
facilities underlying our ACC originated receivables as we were not able to
reach satisfactory terms to renew or replace these debt facilities at that time.
In the fourth quarter of 2009, however, we were able to obtain financing against
our ACC auto finance receivables, and in connection with that transaction, we
repaid a $23.3 million debt facility secured by certain ACC auto finance
receivables, combined those receivables with other ACC auto finance receivables
and pledged the aggregated liquidating pool of ACC receivables against a $103.5
million amortizing debt facility. The terms of this lending agreement provide
for the application of all excess cash flows (above and beyond interest costs
and contractual servicing compensation to our outsourced third-party servicer)
to reduce outstanding debt balances. After repayment of the debt facility, 37.5%
of the remaining excess cash flows will be allocated to the note holders as
additional compensation for the use of their capital. Reflecting this
arrangement, we have estimated all available cash flows to all parties and have
reflected the results of such estimates in our determination of a contingent
interest rate and contingent interest expense associated with this amortizing
debt facility. Because of the size of this new facility and the higher interest
rate on this facility relative to previous ACC borrowings that we repaid in the
third and fourth quarters of 2009, we expect higher 2010 interest expense than
in 2009. Additionally, reflecting the amortizing nature of the debt facility, we
expect this interest expense to decrease in each successive
quarter.




Collectively,
we currently serve 795 dealers through our Auto Finance segment in 46 states and
the District of Columbia.




We were
required to make a determination of the fair value of goodwill and intangible
assets within our Auto Finance segment in the third quarter of 2008 because our
refinancing of certain debt facilities in September 2008 under higher pricing
and reduced leverage (i.e., advance rates against underlying asset values) is
expected to cause both lower profit margins and higher capital requirements for
us (and hence diminished profit and growth potential relative to our acquisition
date expectations). In connection with this determination, we recorded a
non-cash goodwill impairment charge of $29.2 million in the third quarter of
2008. We also recorded a non-cash impairment charge of $1.7 million in the
fourth quarter of 2008 to write off our remaining Auto Finance segment goodwill
(associated with our JRAS reporting unit) pursuant to our annual goodwill
impairment testing. With these two impairment determinations and charges in
2008, we no longer have any recorded goodwill within our Auto Finance
segment.




Analysis
of statistical data




Financial,
operating and statistical metrics for our Auto Finance segment are detailed
(dollars and numbers of accounts in thousands; percentages of total) in the
following tables:




At or for the
      Three Months Ended2009
            
            
            2008Dec.
      31
            
            
            Sept.
      30
            
            
            Jun.
      30
            
            
            Mar.
      31
            
            
            Dec.
      31
            
            
            Sep.
      30
            
            
            Jun.
      30
            
            
            Mar.
      31Period-end managed
      receivables
            
            $
            262,775
            
            
            $
            283,640
            
            
            $
            307,978
            
            
            $
            327,038
            
            
            $
            349,212
            
            
            $
            372,313
            
            
            $
            382,168
            
            
            $
            367,228Period-end
      managed accounts
            
            
            40
            
            
            
            41
            
            
            
            42
            
            
            
            43
            
            
            
            45
            
            
            
            47
            
            
            
            49
            
            
            
            48Percent
      30 or more days past due
            
            
            24.6
            %
            
            
            19.8
            %
            
            
            19.3
            %
            
            
            18.1
            %
            
            
            21.4
            %
            
            
            19.5
            %
            
            
            17.0
            %
            
            
            14.7
            %Percent
      60 or more days past due
            
            
            11.1
            %
            
            
            9.0
            %
            
            
            7.8
            %
            
            
            8.
      0
            %
            
            
            10.4
            %
            
            
            8.9
            %
            
            
            8.0
            %
            
            
            6.6
            %Percent
      90 or more days past due
            
            
            6.1
            %
            
            
            4.7
            %
            
            
            3.7
            %
            
            
            4.6
            %
            
            
            5.4
            %
            
            
            4.4
            %
            
            
            3.7
            %
            
            
            3.5
            %Average
      managed receivables
            
            $
            272,664
            
            
            $
            296,247
            
            
            $
            318,961
            
            
            $
            338,340
            
            
            $
            361,696
            
            
            $
            378,178
            
            
            $
            376,767
            
            
            $
            358,823Gross
      yield ratio
            
            
            25.6
            %
            
            
            24.9
            %
            
            
            24.1
            %
            
            
            23.7
            %
            
            
            24.8
            %
            
            
            25.2
            %
            
            
            25.7
            %
            
            
            25.0
            %Adjusted
      charge-off ratio
            
            
            20.1
            %
            
            
            14.5
            %
            
            
            14.9
            %
            
            
            12.0
            %
            
            
            11.7
            %
            
            
            9.5
            %
            
            
            7.8
            %
            
            
            8.7
            %Recovery
      percentage
            
            
            1.4
            %
            
            
            1.0
            %
            
            
            1.4
            %
            
            
            1.5
            %
            
            
            1.6
            %
            
            
            1.3
            %
            
            
            1.4
            %
            
            
            1.2
            %Net
      interest margin
            
            
            10.5
            %
            
            
            17.7
            %
            
            
            16.8
            %
            
            
            16.9
            %
            
            
            17.5
            %
            
            
            19.3
            %
            
            
            20.3
            %
            
            
            18.9
            %Other
      income ratio
            
            
            4.7
            %
            
            
            5.0
            %
            
            
            5.6
            %
            
            
            9.7
            %
            
            
            6.8
            %
            
            
            7.5
            %
            
            
            9.2
            %
            
            
            10.0
            %Operating
      ratio
            
            
            21.0
            %
            
            
            16.2
            %
            
            
            18.3
            %
            
            
            18.5
            %
            
            
            21.4
            %
            
            
            50.2
            %
            
            
            20.4
            %
            
            
            20.6
            %Retail
      sales
            
            $
            5,921
            
            
            $
            9,300
            
            
            $
            11,322
            
            
            $
            18,299
            
            
            $
            15,505
            
            
            $
            15,930
            
            
            $
            19,333
            
            
            $
            19,577Gross
      profit
            
            $
            2,447
            
            
            $
            4,274
            
            
            $
            5,138
            
            
            $
            8,471
            
            
            $
            7,027
            
            
            $
            7,355
            
            
            $
            8,909
            
            
            $
            9,098Retail
      units sold
            
            
            564
            
            
            
            829
            
            
            
            993
            
            
            
            1,601
            
            
            
            1,312
            
            
            
            1,383
            
            
            
            1,908
            
            
            
            1,844Average
      stores in operation
            
            
            6
            
            
            
            6
            
            
            
            7
            
            
            
            10
            
            
            
            12
            
            
            
            12
            
            
            
            12
            
            
            
            12Period-end
      stores in operation
            
            
            6
            
            
            
            6
            
            
            
            6
            
            
            
            8
            
            
            
            12
            
            
            
            12
            
            
            
            12
            
            
            
            12




65
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Managed
receivables.  Period end managed receivables have gradually
declined since June 30, 2008 as we have curtailed purchasing and origination
activities. As of December 31, 2009, only CAR and JRAS continue to
purchase/originate loans—albeit at significantly reduced levels than those
experienced in prior periods.  While we believe that purchases within
the CAR platform will offset liquidations of previously existing receivables
within that platform, we expect that net liquidations at ACC will continue to
overshadow the CAR additions for the foreseeable future.




Delinquencies.Our 2009 quarter-end
delinquency rates generally are modestly above their prior year
levels.  While increases in delinquencies are primarily due to
generally worsening economic conditions, given the segment’s improved
underwriting, better use of technology and improved collections, management
believes that this relatively modest degradation in delinquencies is meaningful
when contrasted with a substantially weaker economy and significant
industry-wide delinquency increases.




Gross
yield ratio, net interest margin and other income ratio.The effects of higher delinquencies and
charge offs have served to depress our net interest margins in recent quarters
and are expected to continue to depress our net interest margins for the
foreseeable future. Moreover, the higher interest costs of the amortizing ACC
debt facility into which we entered the fourth quarter of 2009 has put
significant additional pressure on our net interest margin in that quarter and
is expected to continue to impact our net interest margin into the future, but
at diminishing levels as we pay off this facility. Also impacting our fourth
quarter 2009 net interest margin is the write off of the remaining deferred loan
costs associated with the $23.3 million facility within our ACC operations which
was repaid during November 2009.  Lastly, as our ACC and JRAS
receivables decline in relative significance as a percentage of our total
portfolio of auto finance receivables, the higher gross yields that we achieve
within our CAR operations are expected result in incrementally higher gross
yield ratios in future quarters.




The
principal component of our other income ratio is the gross income that our JRAS
buy-here, pay-here operations have generated from their auto sales. As such, the
other income ratio has moved in relative tandem with the volume of quarterly
auto sales as set forth in the above table. The spike in the other income ratio
in the first quarter of 2009 reflects higher seasonal purchases of used cars
during the tax refund season. Future growth in our Auto Finance segment’s other
income ratio will depend upon relative growth rates for JRAS versus CAR and ACC,
as well as demand for autos within JRAS. Recent lot closures within JRAS also
are expected to diminish its revenues and activities relative to those of CAR
and are expected to put continuing pressure on the other income
ratio.




Adjusted
charge-off ratio and recoveries.We generally charge off
auto receivables when they are between 120 and 180 days past due, unless the
collateral is repossessed and sold before that point, in which case we will
record a charge off when the proceeds are received. The adjusted charge-off
ratio reflects our net charge offs, less credit quality discount accretion with
respect to our acquired portfolios. The general trending increase in our
adjusted charge-off ratio, therefore, reflects (1) the passage of time since our
acquisition of the Patelco portfolio at a significant purchase price discount to
the face amount of the acquired receivables, (2) the adverse macro-economic
effects being seen throughout the auto finance industry, and (3) the adverse
effects, particularly in the fourth quarter of 2009, of the six 2009 JRAS lot
closures and the corresponding negative impact this had on collections within
our JRAS operations. We believe we are fortunate, however, as our underwriting
and pricing efforts have kept our increases in our charge offs lower than
throughout the industry generally. As our ACC and JRAS receivables decline in
relative significance as a percentage of our total portfolio of auto finance
receivables, the lower charge offs that we experience within our CAR operations
are expected to result in lower adjusted charge-off ratios in future
quarters.




Operating ratio.The large increase in the third quarter 2008 operating ratio resulted
from the CAR and ACC goodwill impairment charges during that quarter. Excluding
goodwill impairment charges, the operating ratio in the third quarter of 2008
would have been 19.4%.  Removing the additional $1.7 million of JRAS
goodwill impairment charges during the fourth quarter of 2008 would result in an
operating ratio of 19.5%, consistent with the adjusted rate for the third
quarter. The operating ratio in the Auto Finance segment generally has declined
throughout 2009 primarily due to continued cost-cutting initiatives to better
reflect existing portfolio balances primarily within our CAR operations.
However, because we expect our receivable levels to drop in 2010 at slightly
faster rates than the rates at which we can reduce our costs (particular when
considering our fixed infrastructure costs at the various divisions within this
segment), we expect some modest trending increases in our operating ratio
throughout 2010.




Future
Expectations




Given our expectation of contractions
in our auto finance receivables over the coming quarters, as well as an
anticipated mix change toward a greater percentage of our receivables being
comprised of CAR receivables for which loan losses are less significant than for
our other auto finance segment receivables (i.e., given CAR’s ability to put
loans back to its dealers), we expect both absolute reductions in our allowance
for uncollectible loans and fees receivable and reductions in the percentage of
our allowance for uncollectible loans and fees receivable to total loans and
fees receivable in 2010. This expectation, however, is highly dependent upon an
assumption that economic conditions do not worsen in 2010. Despite the improved
pricing power that we now possess within CAR as a result of the reduction in
lending by our auto finance competitors, which allows us to price all new
acquisitions for higher risks of defaults, we could experience further erosion
in our delinquencies and higher charge offs against earnings. Additionally,
given our decision to close six of JRAS’s sites in 2009, we expect unit sales
(and gross profit levels) to continue to be below levels seen in similar periods
for the prior year.  Considering these factors and the high costs of
our borrowings within ACC, we expect our Auto Finance segment to experience
further GAAP losses in 2010. The adverse effects on our Auto Finance segment
results of our decision to minimize the capital we are investing in ACC and JRAS
(e.g., by ceasing all ACC originations and closing JRAS lots as we did during
2009) are profound, and but for losses incurred within ACC and JRAS, we would
have experienced GAAP profits in 2009 and would expect further profits in 2010;
our CAR operations are performing well in the current environment (achieving
consistent profitability with very modest growth), and are expected to continue
doing so for the foreseeable future.




66
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Liquidity,
Funding and Capital Resources




We
continue to see dislocation in the availability of liquidity as a result of the
market disruptions that began in 2007.  This ongoing disruption has
resulted in a decline in liquidity available to sub-prime market participants,
including us, a widening of the spreads above the underlying interest indices
(typically LIBOR for our borrowings) for the loans that lenders are willing to
make, and a decrease in advance rates for those loans.




Although
we are hopeful that the liquidity markets ultimately will return to more
traditional levels, we are not able to predict when or if that will occur, and
we are managing our business with the assumption that the liquidity markets will
not return to more traditional levels in the near term. Specifically, we
have curtailed or limited growth in many parts of our business and have now
closed substantially all of our credit card accounts (other than those
associated with our Investment in Previously Charged-Off Receivables segment’s
balance transfer program). To the extent possible given constraints thus far on
our ability to reduce expenses at the same rate as our managed receivables are
liquidating, we are managing our receivables portfolios with a goal of
generating the necessary cash flows over the coming quarters for us to use in
de-leveraging our business, while maintaining shareholder value to the greatest
extent possible.




In
September 2009, we were required to repay $81.1 million of notes payable within
our Auto Finance segment as we were not able to reach satisfactory terms to
renew or replace those debt facilities. However, in November 2009, after the
repayment of a $23.3 million Auto Finance segment debt facility, we were
successful in pledging all of our ACC operation’s auto finance receivables in
exchange for a $103.5 million amortizing debt facility, the terms of which do
not require any accelerated or bullet repayment obligation by us. Moreover, all
of our Credit Card segment’s securitization facilities (as well as those of our
Credit Card segment’s equity method investees) are expected to amortize down
with collections on the receivables within their underlying securitization
trusts with no bullet repayment requirements. As such, our only significant
remaining asset-backed debt facilities that carry bullet repayment risks are a
$26.8 million debt facility secured by our JRAS subsidiaries’ auto finance
receivables and a $50.0 million revolving debt facility (against which $31.0
million was drawn and outstanding at December 31, 2009) secured by our CAR
operations’ auto finance receivables. Although the JRAS facility matured as
scheduled in January 2010 and although our JRAS subsidiary was in violation of
the covenants underlying this facility prior to its maturity, the lender has
elected not to pursue default remedies against JRAS at this time (although it
has preserved all of its rights to do so), and we are in active discussions with
the lender to provide for a modification of the covenants underlying the
facility and to extend the payment terms of the facility. At risk as a result of
the JRAS covenant violation is approximately $20.7 million of our consolidated
total equity at December 31, 2009 that is represented by our investment in JRAS.
The $50.0 million CAR facility does not require any repayments until a 6-month
level payment amortization requirement begins in June 2011.




Having
noted above that our risks of required bullet pay-off of asset-backed debt or
securitization facilities is substantially diminished, we also note, however,
that, given the prolonged period of weak and worsening payment rates on the
assets underlying our debt and securitization facilities, our incoming cash
flows will continue to diminish as our various securitization and debt
facilities are amortizing—particularly for those facilities that have entered
early amortization status and with respect to which we now receive only
servicing compensation that is not sufficient to cover our current overhead cost
infrastructure. Our continuing challenge within our Credit Cards segment in 2010
will be to reduce our overhead cost infrastructure to match our incoming
servicing compensation cash flows, while preserving the value of our residual
interests in our securitization trusts by not cutting costs too deeply. If we
cannot meet this challenge, the values of our retained interests in our
securitized credit card receivables could be further impaired and such
impairments could be material to our operating results and financial
position.  Similarly, liquidity challenges resulting from reduced
payment rates and amortizing debt requirements within our other business lines
could cause personnel and cost reduction efforts that likewise could materially
impair the values of assets within our other business lines.




Our
current focus on liquidity has resulted in and will continue to result in short
and long-term growth and profitability trade-offs. For example, as noted
throughout this report, we have closed substantially all of our credit card
accounts (other than those underlying our Investment in Previously Charged-Off
Receivables segment’s balance transfer program); consequently, each of our
managed credit card receivables portfolios is expected to show more rapid net
liquidations in balances than we have experienced in the past for the
foreseeable future. Similarly, the lack of available growth financing for our
Auto Finance segment has caused us to limit capital deployment to this business,
which will cause contraction in its receivables and revenues over the coming
months. Furthermore, in MEM, where we currently are continuing to selectively
deploy capital specifically aimed at growing the business, the levels of capital
that we plan to deploy are expected to allow for only modest
growth.




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 Table of Contents





At
December 31, 2009, we had $185.0 million in unrestricted cash. Because the
characteristics of our assets and liabilities change, liquidity management is a
dynamic process affected by the pricing and maturity of our assets and
liabilities. We finance our business through cash flows from operations,
asset-backed securitizations and the issuance of debt and equity. Details
concerning our cash flows follow:




·
            During
      2009, we generated $287.7 million in cash flows from operations, compared
      to $568.9 million of cash flows from operations generated during
      2008. The decrease principally reflects:  (1) lower
      collections of credit card finance charge receivables in 2009 relative to
      2008 given diminished originations, diminished receivables levels, the
      effects on our margins of changes we made in response to past discussions
      with regulators and generally lower payment rates across our credit card
      portfolios throughout 2009 reflecting the economic stress we believe many
      of our customers are experiencing; and (2) the receipt of $87.4 million in
      tax refunds during the first quarter of 2008 as contrasted with no tax
      refunds during 2009. These impacts were offset somewhat
      by:  (1) declines in deposits required to be maintained
      with our third-party issuing bank partners and retail electronic payment
      network providers associated with declining receivables balances in our
      portfolio of credit card receivables in the U.K.; (2) growth in 2008
      in inventory balances associated with our JRAS subsidiary which have now
      leveled off; (3) lower marketing expenses in 2009 than in 2008; and
      (4) a $114.0 million securitization gain recognized in
    2009.




·
            During
      2009, we used $128.6 million of cash in investing activities,
      compared to using $524.8 million of cash in investing activities in 2008.
      This decrease reflects the fact that we had significantly lower net
      investments in our securitized and non-securitized earning assets in 2009
      relative to 2008. This is consistent with liquidations of our originated
      purchased portfolios, account closure account actions taken by us and the
      fact that we experienced no meaningful originations in 2009 for which we
      had to fund new purchases. We expect further decreases in net cash used in
      investing activities as we currently do not anticipate any material
      originations of new credit card accounts or substantial growth in our
      other business lines or significant purchases of new equipment, thus
      reducing the amount of cash used to fund such investments. These decreases
      were offset slightly by our buy-out of all other members of our longest
      standing equity-method investee.




·
            During
      2009, our financing activities used $66.0 million of cash, compared to
      using $84.2 million of cash in 2008. These levels of usage are
      relatively comparable and principally reflect net repayments of debt
      facilities in both 2008 and 2009 corresponding with net declines in our
      receivables that serve as the underlying collateral for asset-backed debt
      facilities. Offsetting these repayments were draws associated with our new
      amortizing $103.5 million debt facility issued within our ACC operations
      and a $50.0 million revolving debt facility (against which $31.0 million
      was drawn and outstanding at December 31, 2009) secured by our CAR
      operations’ auto finance receivables. The proceeds from this higher level
      of borrowings in 2009 than in 2008 also offset our $23.9 million in cash
      dividend payments to shareholders in 2009. As in 2009, we expect to
      continue to evaluate and potentially pay additional cash dividends to
      shareholders if we are unable to find investment and growth opportunities
      that produce our desired returns.




We had no
material unused draw capacity under our debt and securitization facilities as of
December 31, 2009. As such, our $185.0 million of unrestricted cash on our
condensed consolidated balance sheet represents our maximum available liquidity
at December 31, 2009. We continue to pursue a number of new financing facilities
and liquidity sources. If such financing facilities and liquidity sources are
ultimately available to us at attractive pricing and terms, they could support
investment opportunities to include repurchases of our convertible senior
securities and stock, portfolio acquisitions, and marketing and originations
within our various businesses. However, the liquidity environment worsened in
2009 and continues to be particularly challenging in general and more
specifically for sub-prime asset classes such as ours. Moreover, the $185.0
million in aggregate December 31, 2009 unrestricted cash mentioned herein is
represented by summing up all unrestricted cash from among and within all of our
business segments, and the liquidity available to any one of our business
segments is appreciably below the $185.0 million in unrestricted cash
balance.




The
current global financial crisis differs in key respects from our experiences
during other down economic and financing cycles. First, while we had difficulty
obtaining asset-backed securitization financing for our originated portfolio
activities at attractive advance rates in the last down cycle, the credit
spreads (above base pricing indices like LIBOR) at that time were not as wide
(expensive) as they are currently. Additionally, while we were successful during
that down cycle in obtaining asset-backed securitization financing for portfolio
acquisitions at attractive advance rates, pricing and other terms, that
financing is currently not available from traditional market participants. Last
and most significant is the adverse impact that the current global liquidity
crisis is having on the U.S. and worldwide economies (including real estate and
other asset values and the labor markets). Unemployment is significantly higher
than during 2001 through 2003 and is forecasted by many economists to further
increase. Lower assets values and higher rates of job loss and levels of
unemployment have translated into reduced payment rates within the credit card
industry generally and for us specifically.




68
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Beyond
our immediate financing efforts discussed throughout this Report, shareholders
should expect us to evaluate debt and equity issuances as a means to fund our
investment opportunities. We expect to take advantage of any opportunities to
raise additional capital if terms and pricing are attractive to us. Any proceeds
raised under these efforts could be used to fund (1) further repurchases of our
convertible senior securities and common stock, (2) shareholder distributions
such as the proposed spin-off of our micro-loan businesses and the December 31,
2009 cash dividend, both of which are described in more detail in this Report,
and (3) potential portfolio acquisitions, which may represent attractive
opportunities for us in the current liquidity environment. As of December 31,
2009, we are authorized to repurchase 10,000,000 common shares under our share
repurchase program that our Board of Directors authorized in May 2008, and this
authorization extends through June 30, 2010.




Additionally,
given our current liquidity position and future liquidity prospects as noted
elsewhere throughout this Report, we may need to rely on debt or equity
issuances or possible exchange offerings, none of which are assured, in order to
meet our May 2012 obligation to satisfy, at the option of note holders,
potential conversions of our 3.625% convertible senior notes issued in May 2005,
of which $230.5 million in face amount were outstanding at December 31, 2009.
Moreover, as we noted previously, we continue to evaluate repurchases of this
particular series of our convertible senior notes and our 5.875% convertible
senior notes due in 2035 at prices that generate acceptable returns for our
shareholders relative to alternative uses of our capital. As an example, under
the terms of a tender offer for the repurchase of both series of our convertible
senior notes, in March 2010 we repurchased $24.7 million in face amount of our
3.625% notes and $15.6 million in face amount of our 5.875% notes for $12.6
million and $5.5 million, respectively, both amounts being inclusive of
transactions costs and accrued interest through the date of our repurchase of
the notes.




Securitization
Facilities




Our most
significant source of liquidity is the securitization of our credit card
receivables. The weighted-average borrowing rate on our securitization
facilities was 2.0% at December 31, 2009, and the maturity terms of our
securitizations vary. In the table below, we have noted the securitization
facilities (in millions) with respect to which certain of our managed credit
card receivables served as collateral as of December 31, 2009. Following the
table are further details concerning each of the facilities.





Maturity
      date
            
            Facility Limit(1)January 2010(2)
            
            $
            750.0January 2014(3)
            
            
            38.2September 2014(4)
            
            
            7.6April
      2014(5)
            
            
            247.7Total
            
            $
            1,043.5




(1)
            Excludes
      securitization facilities related to receivables managed by our
      equity-method investees because such receivables and their related
      securitization facilities are appropriately excluded from direct
      presentation in our consolidated statements of operations or consolidated
      balance sheet items included herein.




(2)
            As
      this facility entered into early amortization in January 2010 before its
      scheduled expiration, the terms of the facility do not allow for the
      funding of purchases. Under early amortization, all excess cash (i.e.,
      cash collected from cardholders, less servicing costs and debt service
      costs) is applied toward amortizing repayment of the outstanding note
      within the facility with the ultimate timing and amount of amortizing
      repayments limited to the available residual cash flows.




(3)
            Represents a ten-year amortizing
      term series issued out of a trust underlying one of our portfolio
      acquisitions.




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




(5)
            In
      April 2007, we completed an amortizing securitization facility in
      connection with our U.K. Portfolio acquisition; this facility is
      denominated in U.K. sterling.




Each of
our securitization facilities and structured financing facilities is recourse
only to the specific financial assets underlying each respective securitization
or structured financing trust. Covenants under our securitization and financing
facilities vary, but generally include asset performance covenants (such as
maximum permitted delinquency and charge-off rates, minimum excess spread
levels, etc.) and in some cases include corporate-level covenants (including
minimum equity levels, minimum tangible equity levels, maximum permitted
quarterly reductions in equity levels, and minimum  liquidity levels)
and cross-default covenants. Although we have closely monitored the covenants,
and we have exercised the discretion afforded to us under the facilities to
avoid to the greatest extent possible the triggering of these events, we
recently have violated various facility covenants as noted elsewhere within this
Report (including those associated with our most significant upper-tier
originated portfolio master trust securitization facility which entered early
amortization status in January 2010). As noted throughout this Report, early
amortization of our upper-tier originated portfolio master trust securitization
facility and other facilities will have adverse effects on our liquidity during
the early amortization period. Moreover, early amortization assumptions used in
our retained interest fair value computations have had adverse effects on our
2009 consolidated operating results and our consolidated financial position
December 31, 2009.





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Commitments
and Contingencies




We also
have certain contractual arrangements that would require us to make payments or
provide funding if certain circumstances occur (“contingent commitments”). We do
not currently expect that these contingent commitments will result in any
material amounts being paid by us. See Note 14, “Commitments and
Contingencies,” to our consolidated financial statements included herein for
further discussion of these matters.




Recent
Accounting Pronouncements




See
Note 2, “Significant Accounting Policies and Consolidated Financial
Statement Components,” to our consolidated financial statements included herein
for a discussion of recent accounting pronouncements.




Critical
Accounting Estimates




We have
prepared our financial statements in accordance with GAAP. These principles are
numerous and complex. We have summarized our significant accounting policies in
the notes to our consolidated financial statements. In many instances,
the application of GAAP requires management to make estimates or to apply
subjective principles to particular facts and circumstances. A variance in the
estimates used or a variance in the application or interpretation of GAAP could
yield a materially different accounting result. It is impracticable for us to
summarize every accounting principle that requires us to use judgment or
estimates in our application. Nevertheless, we described below the areas for
which we believe that the estimations, judgments or interpretations that we have
made, if different, would have yielded the most significant differences in our
consolidated financial statements.




Valuation
of Retained Interests




The most
significant aspect of our business is the credit card receivables we service for
off-balance-sheet securitization structures. As of December 31, 2009, there
were $1.3 billion of credit card receivables underlying our securitization
programs (excluding those receivables securitized under our equity-method
investees). We reflect our retained interests in these credit card receivables
as a component of our securitized earning assets balance on our consolidated
balance sheets. The value of these assets is critical to our financial
performance and condition. We account for the portfolios we have securitized in
accordance with applicable accounting literature. During 2009, we changed our
assumptions in computing the fair value of our retained interests in our
securitization trusts to reflect early amortization risks (which subsequently
were borne out) with respect to the last remaining securitization facility
within our upper-tier originated portfolio master trust; early amortization
status has the effect of materially delaying a hypothetical buyer’s receipt of
cash flows until the underlying securitization facility is completely
repaid.  See Note 2, “Significant Accounting Policies and
Consolidated Financial Statement Components,” and Note 10, “Securitizations
and Structured Financings,” to our consolidated financial statements included
herein for further discussion. In valuing our retained interests, we have to
estimate several key factors with respect to the underlying credit card
receivables, including yields, payment rates, credit loss rates and appropriate
discount rates. We present these components of our overall retained interest
valuation at fair value, which we estimate based principally upon estimated
future cash flows. To the extent that actual results differ from these
estimates, our results of operations and liquidity could be materially
affected.




The
valuation of our securitized earning assets is highly sensitive to changes in
the residual cash flows discount rate assumption used to value our I/O strips
and retained interests. Our fair value models recognize in computing the
residual cash flows discount rate that variations in collateral enhancement
levels affect the returns that investors require within securitization
structures. Our residual cash flows discount rates are highly sensitive to
changes in what is typically a LIBOR base rate underlying our securitization
facilities, as well as changes in the spreads above LIBOR that investors demand
on various tranches of bonds depending upon the level of collateral enhancement
that supports each such tranche.




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At
December 31, 2009, the following illustrates the hypothetical adverse
effect of a 20 percent adverse change in key economic assumptions on the
valuation of our retained interests in credit card receivables securitized (in
thousands):





Effects
      of
              Changes
      in
              AssumptionsNet
      collected yield (annualized)
            
            $
            (26,928
            )Payment
      rate (monthly)
            
            $
            (33,699
            )Expected
      principal credit loss rate (annualized)
            
            $
            (29,695
            )Residual
      cash flows discount rate
            
            $
            (9,349
            )Servicing
      discount rate
            
            $
            (1,171
            )




These
sensitivities are hypothetical and should be used with caution. For instance,
changes in fair value assumptions generally cannot be extrapolated because the
relationship of the change in assumption to the change in fair value may not be
linear. Further, in this table, the effect of a variation in a particular
assumption on the fair value of the retained interests is calculated without
changing any other assumptions; in reality, changes in one assumption may result
in changes in another. For example, increases in market interest rates may
result in lower prepayments and increased credit losses, which could magnify or
counteract the sensitivities.




Investments
in Previously Charged-Off Receivables




We
account for our investments in previously charged-off receivables using the
“cost recovery method” of accounting in accordance with applicable accounting
standards.  We establish static pools consisting of homogenous
accounts and receivables for each acquisition. Once we establish a static pool,
we do not change the receivables within the pool.




We record
each static pool at cost and account for it as a single unit for the economic
life of the pool (similar to one loan) for recovery of our basis, recognition of
revenue and impairment testing. We earn revenue from previously charged-off
receivables after we have recovered the original cost for each pool. Each
quarter, we perform an impairment test on each static pool. If the remaining
forecasted collections are less than our current carrying value, we record an
impairment charge.




Non-Consolidation
of Qualifying Special Purpose Entities




As
described above, we have securitized a substantial majority of the credit card
receivables we manage. In general, these securitizations involve our sale of
credit card receivables to “qualifying special purpose entities” (“QSPEs”).
QSPEs are governed by complex documentation, and we have filed the significant
documentation for the QSPEs that we have established as exhibits to our SEC
filings.  In general, the applicable accounting literature requires an
entity to recognize the financial and servicing assets it controls and the
liabilities it has incurred—that is, the entity is required to “consolidate”
those assets and liabilities and any related transactions and to derecognize
financial assets when control has been surrendered in accordance with the
criteria provided in the statement. Although guidance as to whether control has
been surrendered is provided, the ultimate determination is subjective in nature
and requires considerable judgment. Under applicable accounting guidance, a
transferor has surrendered control over transferred assets if, and only if, all
of the following conditions are met:




1.
            The
      transferred assets have been isolated from the transferor, put
      presumptively beyond the reach of the transferor and its
      creditors.




2.
            Each
      transferee has the right to pledge or exchange the assets it has received,
      and no condition both constrains the transferee from taking advantage of
      its right to pledge or exchange and provides more than a trivial benefit
      to the transferor.




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




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We treat
our transferred credit card receivables as having been sold. However, because
this determination requires subjective judgments, it is possible that someone
viewing our facts and circumstances might conclude that we had not surrendered
control and, as such, that our transfers do not qualify as sales of the
receivables. In that event, the credit card receivables that we have transferred
to QSPEs ($1.3 billion in face amount as of December 31, 2009) and any
cash balances within the QSPEs would be treated as assets on our consolidated
balance sheet, the securities issued (proceeds raised totaling $1.0 billion in
face amount as of December 31, 2009) would be treated as liabilities on our
consolidated balance sheet (as secured borrowings) and no gain or loss would
have been recognized on the sale of the receivables. In addition, our
securitized credit card receivables would be recorded on our consolidated
balance sheet at fair value based on our 2008 election with respect to such
receivables under applicable accounting literature surrounding fair value
determinations.  This would result in a different capital structure
for us, although we do not believe it would have a materially adverse effect on
our consolidated results of operations, financial position or cash flows. We
believe this in part because we have no debt covenants based on leverage ratios
or on-balance-sheet debt levels. Moreover, the cash flows used to determine the
fair value of our credit card receivables upon consolidation of our QSPEs would
not be offset by debt repayments and costs of funds as they are in determining
the fair value of our retained interests in our securitizations. As such,
assuming otherwise similar valuation assumptions, we believe that consolidation
of our QSPEs would be accretive to our shareholders’ equity.




As a
result of the accounting rules changes expected to be effective for us as of
January 1, 2010, cash and credit card receivables held by our securitization
trusts and debt issued from those entities will be presented as assets and
liabilities on our consolidated balance sheet effective on that date. Because we
expected to exercise the fair value option permitted under the new rules, we
expect favorable effects on our reported financial condition. Moreover, after
adoption of these new accounting rules, we will no longer reflect our
securitization trusts’ results of operations within losses on retained interests
in credit card receivables securitized, but will 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 will begin to 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
will account for our securitization transactions under the new rules as secured
borrowings rather than asset sales, we will begin to present the cash flows from
these transactions as cash flows from financing activities, rather than as cash
flows from investing activities.




Allowance
for Uncollectible Loans and Fees




Through
our analysis of loan performance, delinquency data, charge-off data, economic
trends and the potential effects of those economic trends on our customers, we
establish an allowance for uncollectible loans and fees receivable as an
estimate of the probable losses inherent within our portfolio of
on-balance-sheet loans and fees receivable. Given the addition of our micro-loan
operations during 2004, our auto-finance operations during 2005 and our MEM
operation in 2007, our allowance for uncollectible loans and fees receivable has
become much more material to our financial statements. To the extent that actual
results differ from our estimates of uncollectible loans and fees receivable,
our results of operations and liquidity could be materially
affected.




Goodwill
and Identifiable Intangible Assets and Impairment Analyses




Management
uses judgment in assessing goodwill and other long-lived assets for impairment.
Goodwill totaled $43.4 million at December 31, 2009 and represented 5.8% of
our total assets. In accordance with applicable accounting literature we
annually assess the recoverability of our goodwill. We review the recorded value
of our goodwill annually at the beginning of the fourth quarter of each year, or
sooner if events or changes in circumstances indicate that the carrying amount
may exceed fair value. We determine recoverability by comparing the estimated
fair value of the reporting unit to which the goodwill applies to the carrying
value, including goodwill, of that reporting unit. We use the present value of
expected net cash flows to determine the estimated fair value of our reporting
units. This present value model requires us to estimate future net cash flows,
the timing of these cash flows and a discount rate representing the time value
of money and the inherent risk and uncertainty of the future cash flows. The
discount rate applied is the estimated weighted average cost of capital based on
the reporting units’ current cost of debt and an estimated cost of equity
derived from market betas of the reporting units’ public market peers. The
assumptions used to estimate future cash flows are consistent with each
reporting unit’s internal planning. If the estimated fair value of the reporting
unit exceeds its carrying amount, goodwill of the reporting unit is not
impaired. If the carrying amount of the reporting unit exceeds its estimated
fair value, the implied fair value of the reporting unit’s goodwill is compared
to the carrying amount of that goodwill. If the carrying amount of the reporting
unit’s goodwill exceeds the implied fair value of that goodwill, an impairment
loss is recognized in an amount equal to that excess.




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We assess
our long-lived assets other than goodwill for impairment whenever facts and
circumstances indicate that the carrying amount may not be fully recoverable. To
analyze recoverability, we project undiscounted net future cash flows over the
remaining life of the assets. If these projected cash flows are less than the
carrying amount, we recognize an impairment, which results in a write-down of
assets with a corresponding charge to earnings. We measure the impairment loss
based upon the difference between the carrying amount and the fair value of the
assets.




On a
quarterly basis, we review our significant accounting policies and the related
assumptions, in particular, those mentioned above, with the audit committee of
the Board of Directors.




ITEM 7A.
            QUANTITATIVE
      AND QUALITATIVE DISCLOSURES ABOUT MARKET
RISK




As a
“smaller reporting company,” as defined by Item 10 of Regulation S-K, we are not
required to provide this information.




ITEM 8.
            FINANCIAL
      STATEMENTS AND SUPPLEMENTARY DATA




See the
Index to Financial Statements in Item 15, “Exhibits and Financial
Statements Schedules.”




Management’s
Report on Internal Control over Financial Reporting




Management
of CompuCredit Holdings Corporation is responsible for establishing and
maintaining adequate internal control over financial reporting (as such term is
defined in Exchange Act Rules 13a-15(f)) for CompuCredit Holdings
Corporation and our subsidiaries. Our internal control over financial reporting
is a process designed under the supervision of our principal executive and
financial officers to provide reasonable assurance regarding the reliability of
financial reporting and the preparation of our financial statements for external
reporting purposes in accordance with GAAP. Under the supervision and with the
participation of management, including our principal executive and financial
officers, we conducted an evaluation of the effectiveness of internal control
over financial reporting as of December 31, 2009, based on the framework in
Internal Control—Integrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (“COSO”).




Based on
our evaluation under the framework in Internal Control—Integrated Framework,
management has concluded that internal control over financial reporting was
effective as of December 31, 2009.




ITEM 9.
            CHANGES
      IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL
      DISCLOSURE 
 None.




ITEM 9A.
            CONTROLS
      AND PROCEDURES




As of
December 31, 2009, an evaluation of the effectiveness of our disclosure
controls and procedures (as defined in Rule 13a—15(e) under the Act) was
carried out on behalf of CompuCredit Holdings Corporation and our subsidiaries
by our management with the participation of our Chief Executive Officer and
Chief Financial Officer. Based upon the evaluation, management concluded that
these disclosure controls and procedures were effective as of December 31,
2009. During the fourth quarter of our year ended December 31, 2009, no
change in our internal control over financial reporting (as defined in
Rule 13a-15(f) under the Act) occurred that has materially affected,
or is reasonably likely to materially affect, our internal control over
financial reporting.




Management’s
Report on Internal Control over Financial Reporting is set forth in
Part II, Item 8 of this Annual Report on Form 10-K.




This
annual report does not include an attestation report of our registered public
accounting firm regarding internal control over financial reporting.
Management’s report was not subject to attestation by our registered public
accounting firm pursuant to temporary rules of the Securities and Exchange
Commission that permit us to provide only management’s report in this annual
report.




ITEM 9B.
            OTHER
      INFORMATION




None.





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 Table of Contents




PART
III




ITEM 10.
            DIRECTORS,
      EXECUTIVE OFFICERS AND CORPORATE
GOVERNANCE




The
information required by this Item will be set forth in our Proxy Statement for
the 2010 Annual Meeting of Shareholders in the sections entitled “Election of
Directors,” “Executive Officers of CompuCredit,” “Section 16(a) Beneficial
Ownership Reporting Compliance” and “Corporate Governance” and is incorporated
by reference.




ITEM 11.
            EXECUTIVE
      COMPENSATION




The
information required by this Item will be set forth in our Proxy Statement for
the 2010 Annual Meeting of Shareholders in the sections entitled “Executive and
Director Compensation,” and is incorporated by reference.




ITEM 12.
            SECURITY
      OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED
      STOCKHOLDER MATTERS




The
information required by this Item will be set forth in our Proxy Statement for
the 2010 Annual Meeting of Shareholders in the section entitled “Security
Ownership of Certain Beneficial Owners and Management” and is incorporated by
reference.




ITEM 13.
            CERTAIN
      RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR
      INDEPENDENCE




The
information required by this Item will be set forth in our Proxy Statement for
the 2010 Annual Meeting of Shareholders in the sections entitled “Related Party
Transactions” and “Corporate Governance” and is incorporated by
reference.




ITEM 14.
            PRINCIPAL
      ACCOUNTANT FEES AND SERVICES




The
information required by this Item will be set forth in our Proxy Statement for
the 2010 Annual Meeting of Shareholders in the section entitled “Auditor Fees”
and is incorporated by reference.







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PART
IV




ITEM 15.
            EXHIBITS
      AND FINANCIAL STATEMENT SCHEDULES




The
following documents are filed as part of this Report:




1.
      Financial
      Statements




INDEX
TO FINANCIAL STATEMENTS





PageReport of Independent Registered Public Accounting
      Firm
            
            
            F-1Consolidated Balance Sheets as of December 31, 2009 and
      2008
            
            
            F-2Consolidated Statements of Operations for the Years Ended
      December 31, 2009 and 2008
            
            
            F-3Consolidated Statements of Shareholders’ Equity for the Years
      Ended December 31, 2009 and 2008
            
            
            F-4Consolidated Statements of Comprehensive Loss for the Years
      Ended December 31, 2009 and 2008
            
            
            F-5Consolidated Statements of Cash Flows for the Years Ended
      December 31, 2009 and 2008
            
            
            F-6Notes to Consolidated Financial Statements as of
      December 31, 2009 and 2008
            
            
            F-7




2.
      Financial Statement
      Schedules




None.





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3.
      Exhibits





Exhibit
              Number
            
            Description
      of Exhibit
            
            Incorporated
      by Reference from
              CompuCredit’s
      SEC Filings Unless
              Otherwise
      Indicated(1)2.1
            
            Agreement
      and Plan of Merger dated June 2, 2009among
      CompuCredit Corporation, CompuCredit Holdings Corporation and CompuCredit
      MergerSub, Inc.
            
            June
      8, 2009, Proxy Statement/Prospectus, Annex A3.1
            
            Articles
      of Incorporation.
            
            June
      8, 2009, Proxy Statement/Prospectus, Annex B3.2
            
            Bylaws.
            
            August
      10, 2009, Form 10-Q, exhibit 3.14.1
            
            Form
      of common stock certificate.
            
            July
      7, 2009, Form 8-K, exhibit 3.34.2
            
            Indenture
      dated May 27, 2005 with U.S. Bank National Association, as successor to
      Wachovia Bank, National Association.
            
            May
      31, 2005, Form 8-K, exhibit 4.14.3
            
            Supplemental
      Indenture dated June 30, 2009 with U.S. Bank National Association, as
      successor to Wachovia Bank, National Association.
            
            July
      7, 2009, Form 8-K, exhibit 4.14.4
            
            Indenture
      dated November 23, 2005 with U.S. Bank National Association, as successor
      to Wachovia Bank, National Association.
            
            November
      28, 2005, Form 8-K, exhibit 4.14.5
            
            Supplemental
      Indenture dated June 30, 2009 with U.S. Bank National Association, as
      successor to Wachovia Bank, National Association.
            
            July
      7, 2009, Form 8-K, exhibit 4.210.1
            
            Stockholders
      Agreement dated as of April 28, 1999.
            
            January
      18, 2000, Form S-1, exhibit 10.110.2
            †
            2008
      Equity Incentive Plan
            
            April
      16, 2008, Schedule 14A, Appendix A10.2
            (a)†
            Form
      of Restricted Stock Agreement—Directors.
            
            May
      13, 2008, Form 8-K, exhibit 10.210.2
            (b)†
            Form
      of Restricted Stock Agreement—Employees.
            
            May
      13, 2008, Form 8-K, exhibit 10.310.2
            (c)†
            Form
      of Stock Option Agreement—Directors.
            
            May
      13, 2008, Form 8-K, exhibit 10.410.2
            (d)†
            Form
      of Stock Option Agreement—Employees.
            
            May
      13, 2008, Form 8-K, exhibit 10.510.2
            (e)†
            Form
      of Restricted Stock Unit Agreement—Directors.
            
            May
      13, 2008, Form 8-K, exhibit 10.610.2
            (f)†
            Form
      of Restricted Stock Unit Agreement—Employees.
            
            May
      13, 2008, Form 8-K, exhibit 10.710.3
            †
            Amended
      and Restated Employee Stock Purchase Plan.
            
            April
      16, 2008, Schedule 14A, Appendix B10.4
            †
            Amended
      and Restated Employment Agreement for Richard R. House,
Jr.
            
            December
      29, 2008, Form 8-K, exhibit 10.410.4
            (a)†
            Restricted
      Stock Agreement, dated May 9, 2006between
      CompuCredit Holdings Corporationand
      Richard R. House, Jr.
            
            May
      15, 2006, Form 8-K, exhibit 10.110.4
            (b)†
            Option
      Agreement, dated May 9, 2006 between CompuCredit Holdings Corporation and
      Richard R. House, Jr.
            
            May
      15, 2006, Form 8-K, exhibit 10.2





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Exhibit
              Number
            
            Description
      of Exhibit
            
            Incorporated
      by Reference from
              CompuCredit’s
      SEC Filings Unless
              Otherwise
      Indicated(1)10.5
            †
            Amended
      and Restated Employment Agreement for David G. Hanna.
            
            December
      29, 2008, Form 8-K, exhibit 10.110.6
            †
            Amended
      and Restated Employment Agreement for Richard W. Gilbert.
            
            December
      29, 2008, Form 8-K, exhibit 10.310.7
            †
            Amended
      and Restated Employment Agreement for J.Paul Whitehead,
    III.
            
            December
      29, 2008, Form 8-K, exhibit 10.210.8
            †
            Amended
      and Restated Employment Agreement for Krishnakumar
    Srinivasan.
            
            December
      29, 2008, Form 8-K, exhibit 10.510.9
            †
            Outside
      Director Compensation Package.
            
            Filed
      herewith10.10
            
            Amended
      and Restated Affinity Card Agreement,dated
      as of December 5, 2005, with Columbus Bankand
      Trust Company.
            
            December
      7, 2005, Form 8-K, exhibit 10.110.10
            (a)
            Pledge
      and Security Agreement, dated as of September 23, 2002, in favor of
      Columbus Bank and Trust Company.
            
            November
      14, 2002, Form 10-Q, exhibit 10.210.10
            (b)
            Receivables
      Purchase and Security Agreement, dated as of September 23, 2002, with
      Columbus Bank and Trust Company.
            
            November
      14, 2002, Form 10-Q, exhibit 10.310.10
            (c)
            Receivables
      Purchase and Security Agreement, dated as of September 23, 2002, with
      Columbus Bank and Trust Company.
            
            November
      14, 2002, Form 10-Q, exhibit 10.410.10
            (d)
            Shareholders
      Agreement, dated as of September 23, 2002, with Columbus Bank and
      Trust Company.
            
            November
      14, 2002, Form 10-Q, exhibit 10.510.11
            
            Master
      Indenture, dated as of July 14, 2000, among CompuCredit Credit Card Master
      Note Business Trust, The Bank of New York, and CompuCredit
      Corporation.
            
            November
      14, 2000, Form 10-Q, exhibit 10.110.11
            (a)
            First
      Amendment to Master Indenture dated as of September 7,
      2000.
            
            November
      14, 2000, Form 10-Q, exhibit 10.1(a)10.11
            (b)
            Second
      Amendment to Master Indenture dated as of April 1,
    2001.
            
            March
      1, 2004, Form 10-K, exhibit 10.9(b)10.11
            (c)
            Third
      Amendment to Master Indenture dated as ofMarch
      18, 2002.
            
            March
      1, 2004, Form 10-K, exhibit 10.9(c)10.11
            (d)
            Form
      of Indenture Supplement.
            
            November
      22, 2000, Form 10-Q/A, exhibit 10.1(b)10.11
            (e)
            Series
      2004-One Indenture Supplement, dated January 30, 2004, to the Master
      Indenture.
            
            March
      1, 2004, Form 10-K, exhibit 10.9(e)10.11
            (f)
            First
      Amendment to Series 2004-One Indenture Supplement, dated
      September 30, 2005.
            
            March 2,
      2006, Form 10-K, exhibit 10.10(f)





77
 Table of Contents





Exhibit
              Number
            
            Description
      of Exhibit
            
            Incorporated
      by Reference from
              CompuCredit’s
      SEC Filings Unless
              Otherwise
      Indicated(1)10.11
            (g)
            Transfer
      and Servicing Agreement, dated as of July 14, 2000, among CompuCredit
      Funding Corp.,
              CompuCredit
      Corporation, CompuCredit Credit Card Master Note Business Trust and The
      Bank of New York.
            
            March
      24, 2003, Form 10-K, exhibit 10.1110.11
            (h)
            First
      Amendment to Transfer and Servicing Agreement dated as of
      September 7, 2000.
            
            November
      14, 2000, Form 10-Q, exhibit 10.2(a)10.11
            (i)
            Second
      Amendment to Transfer and Servicing Agreement dated as of December 28,
      2000.
            
            March
      30, 2001, Form 10-K, exhibit 10.8(b)10.11
            (j)
            Third
      Amendment to Transfer and ServicingAgreement
      dated as of April 1, 2001.
            
            March
      1, 2004, Form 10-K, exhibit 10.10(c)10.11
            (k)
            Fourth
      Amendment to Transfer and ServicingAgreement
      dated as of August 3, 2001.
            
            March
      1, 2004, Form 10-K, exhibit 10.10(d)10.11
            (l)
            Fifth
      Amendment to Transfer and ServicingAgreement
      dated as of August 20, 2002.
            
            March
      1, 2004, Form 10-K, exhibit 10.10(e)10.11
            (m)
            Sixth
      Amendment to Transfer and ServicingAgreement
      dated as of April 1, 2003.
            
            March
      1, 2004, Form 10-K, exhibit 10.10(f)10.11
            (n)
            Seventh
      Amendment to Transfer and Servicing Agreement dated as of June 26,
      2003.
            
            March
      1, 2004, Form 10-K, exhibit 10.10(g)10.11
            (o)
            Eighth
      Amendment to Transfer and ServicingAgreement
      dated as of December 1, 2004.
            
            March
      2, 2006, Form 10-K, exhibit 10.10(o)10.11
            (p)
            Ninth
      Amendment to Transfer and ServicingAgreement
      dated as of June 10, 2005.
            
            March
      2, 2006, Form 10-K, exhibit 10.10(p)10.12
            
            Note
      Purchase Agreement, dated January 30, 2004, among Merrill Lynch Mortgage
      Capital Inc., CompuCredit Funding Corp., CompuCredit Corporation, and
      CompuCredit Credit Card Master Note Business Trust.
            
            March
      1, 2004, Form 10-K, exhibit 10.9(f)10.12
            (a)
            First
      Amendment to the Note Purchase Agreement,dated
      September 30, 2005.
            
            March
      2, 2006, Form 10-K, exhibit 10.11(a)10.12
            (b)
            Second
      Amendment to the Note Purchase Agreement, dated as of July 30, 2007, among
      CompuCredit Credit Card Master Note Business Trust, CompuCreditFunding
      Corp., CompuCredit Corporation and Merrill Lynch Mortgage Capital
      Inc.
            
            August
      1, 2007, Form 10-Q, exhibit 10.810.13
            
            Share
      Lending Agreement.
            
            November
      22, 2005, Form 8-K, exhibit
10.1


78
 Table of Contents





Exhibit
              Number
            
            Description
      of Exhibit
            
            Incorporated
      by Reference from
              CompuCredit’s
      SEC Filings Unless
              Otherwise
      Indicated(1)10.14
            
            Receivables
      Purchase Agreement for CompuCredit Credit Card Master Note Business Trust
      III, dated as of September 30, 2003, with Columbus Bank and Trust
      Company.
            
            August
      2, 2006, Form 10-Q, exhibit 10.310.14
            (a)
            First
      Amendment to the Receivables Purchase Agreement for CompuCredit Credit
      Card Master Note Business Trust III, dated as of March 10,
      2006.
            
            August
      2, 2006, Form 10-Q, exhibit 10.410.14
            (b)
            Amended
      and Restated Receivables PurchaseAgreement
      for CompuCredit Credit Card Master Note Business Trust III, dated as of
      January 3, 2005, as amended and restated as of March 10, 2006,
      with CompuCredit Funding Corp. III.
            
            August 2,
      2006, Form 10-Q, exhibit 10.510.14
            (c)
            First
      Amendment to Amended and RestatedReceivables
      Purchase Agreement dated as of December 12, 2007.
            
            February
      29, 2008, Form 10-K, exhibit 10.15(c)10.14
            (d)
            Master
      Indenture for CompuCredit Credit Card Master Note Business Trust III,
      dated as of March 10, 2006, among CompuCredit Credit Card Master Note
      Business Trust III, U.S. Bank National Association, and CompuCredit
      Corporation.
            
            August
      2, 2006, Form 10-Q, exhibit 10.610.14
            (e)
            Series
      2006-One Supplement to Master Indenture for CompuCredit Credit Card Master
      Note Business Trust III, dated as of March 10, 2006.
            
            August
      2, 2006, Form 10-Q, exhibit 10.710.14
            (f)
            Supplement
      No. 1 to Series 2006-One Supplement to Master Indenture dated as of
      September 29, 2006.
            
            February
      29, 2008, Form 10-K, exhibit 10.15(f)10.14
            (g)
            Supplement
      No. 2 to Series 2006-One Supplement to Master Indenture dated as of
      November 2, 2007.
            
            February
      29, 2008, Form 10-K, exhibit 10.15(g)10.14
            (h)
            Supplement
      No. 3 to Series 2006-One Supplement to Master Indenture dated as of
      December 31, 2007.
            
            February
      29, 2008, Form 10-K, exhibit 10.15(h)10.14
            (i)
            Supplement
      No. 4 to Series 2006-One Supplement to Master Indenture dated as of
      September 10, 2008.
            
            September
      16, 2008, Form 8-K, exhibit 10.110.14
            (j)
            Supplement
      No. 5 to Series 2006-One Supplement to Master Indenture dated as of
      September 10, 2008.
            
            November
      5, 2008, Form 10-Q, exhibit 10.210.14
            (k)
            Series
      2007-One Supplement to Master Indenture for CompuCredit Credit Card Master
      Note Business Trust III, dated as of August 9, 2007.
            
            August
      15, 2007, Form 8-K, exhibit 99.110.14
            (l)
            Transfer
      and Servicing Agreement for CompuCredit Credit Card Master Note Business
      Trust III, dated as March 10, 2006, among CompuCredit Funding Corp. III,
      CompuCredit Corporation, CompuCredit Credit Card Master Note Business
      Trust III and U.S. Bank National Association.
            
            August
      2, 2006, Form 10-Q,
exhibit 10.8





79
 Table of Contents





Exhibit
              Number
            
            Description
      of Exhibit
            
            Incorporated
      by Reference from
              CompuCredit’s
      SEC Filings Unless
              Otherwise
      Indicated(1)10.14
            (m)
            First
      Amendment to Transfer and Servicing Agreement dated as of December 12,
      2007.
            
            February
      29, 2008, Form 10-K, exhibit 10.15(k)10.14
            (n)
            Second
      Amendment to Transfer and Servicing Agreement dated as of December 31,
      2007.
            
            February
      29, 2008, Form 10-K, exhibit 10.15(l)10.14
            (o)
            Form
      of Note Purchase Agreement.
            
            August
      2, 2006, Form 10-Q, exhibit 10.910.15
            
            Affinity
      Card Agreement, dated as of September 15, 2006, with First Bank &
      Trust.
            
            November
      6, 2006, Form 10-Q, exhibit 10.110.16
            
            Affinity
      Card Agreement, dated as of February 16,2005,
      with First Bank of Delaware.
            
            November
      6, 2006, Form 10-Q, exhibit 10.210.17
            
            Agreement
      relating to the Sale and Purchase of Monument Business, dated April 4,
      2007.
            
            August
      1, 2007, Form 10-Q, exhibit 10.110.17
            (a)
            Account
      Ownership Agreement for Partridge Acquired Portfolio Business Trust, dated
      April 4, 2007, with R Raphael & Sons PLC.
            
            August
      1, 2007, Form 10-Q, exhibit 10.210.17
            (b)
            Receivables
      Purchase Agreement for PartridgeAcquired
      Portfolio Business Trust, dated April 4, 2007, with R Raphael &
      Sons PLC.
            
            August
      1, 2007, Form 10-Q, exhibit 10.310.17
            (c)
            Receivables
      Purchase Agreement for PartridgeAcquired
      Portfolio Business Trust, dated April 4, 2007, with Partridge Funding
      Corporation.
            
            August
      1, 2007, Form 10-Q, exhibit 10.410.17
            (d)
            Master
      Indenture for Partridge Acquired Portfolio Business Trust, dated April 4,
      2007, among Partridge Acquired Portfolio Business Trust, Deutsche BankTrust
      Company Americas, Deutsche Bank AG,London
      Branch and CompuCredit International Acquisition
    Corporation.
            
            August
      1, 2007, Form 10-Q, exhibit 10.510.17
            (e)
            Series
      2007-One Indenture Supplement for Partridge Acquired Portfolio Business
      Trust, dated April 4, 2007.
            
            August
      1, 2007, Form 10-Q, exhibit 10.610.17
            (f)
            Transfer
      and Servicing Agreement for Partridge Acquired Portfolio Business Trust,
      dated April 4, 2007, among Partridge Funding Corporation, CompuCredit
      International Acquisition Corporation, Partridge Acquired Portfolio
      Business Trust and Deutsche Bank Trust Company Americas.
            
            August 1,
      2007, Form 10-Q, exhibit 10.710.18
            
            Assumption
      Agreement dated June 30, 2009 between CompuCredit Holdings Corporation and
      CompuCredit Corporation
            
            July
      7, 2009, Form 8-K, exhibit 10.1





80
 Table of Contents





Exhibit
                Number
              
              Description
      of Exhibit
              
              Incorporated
      by Reference from
                CompuCredit’s
      SEC Filings unless
                Otherwise
      Indicated (1)10.19
              
              Amended
      and Restated Loan and Security Agreement, dated November 19, 2007 among
      JRAS, LLC and CapitalSource Finance.
              
              Filed
      herewith10.19
              (a)
              First
      Amendment to Amended and Restated Loan and Security Agreement dated April
      18, 2008.
              
              Filed
      herewith10.19
              (b)
              Second
      Amendment to Amended and Restated Loanand
      Security Agreement dated September 11, 2008.
              
              Filed
      herewith10.19
              (c)
              Third
      Amendment to Amended and Restated Loanand
      Security Agreement dated July 15, 2009.
              
              Filed
      herewith10.19
              (d)
              Fourth
      Amendment to Amended and Restated Loanand
      Security Agreement dated January 22, 2010.
              
              Filed
      herewith21.1
              
              Subsidiaries
      of the Registrant.
              
              Filed
      herewith23.1
              
              Consent
      of BDO Seidman, LLP.
              
              Filed
      herewith31.1
              
              Certification
      of Principal Executive Officer pursuantto
      Rule 13a-14(a).
              
              Filed
      herewith31.2
              
              Certification
      of Principal Financial Officer pursuantto
      Rule 13a-14(a).
              
              Filed
      herewith32.1
              
              Certification
      of Principal Executive Officer andPrincipal
      Financial Officer pursuant to 18 U.S.C.Section
      1350.
              
              Filed
      herewith99.1
              
              Charter
      of the Audit Committee of the Board ofDirectors.
              
              March
      1, 2004, Form 10-K, exhibit 99.199.2
              
              Charter
      of the Nominating and Corporate Governance Committee of the Board of
      Directors.
              
              March
      1, 2004, Form 10-K,
exhibit 99.2





†
            Management
      contract, compensatory plan or
arrangement.


(1)
            Documents
      incorporated by reference from SEC filings made prior to June 2009 were
      filed under CompuCredit Corporation (File No. 000-25751), our successor
      issuer.


81
 Table of Contents







Report of Independent Registered Public Accounting
Firm




The Board
of Directors




CompuCredit
Holdings Corporation




We have
audited the accompanying consolidated balance sheets of CompuCredit Holdings
Corporation as of December 31, 2009 and 2008 and the related consolidated
statements of operations, shareholders’ equity, and cash flows for the years
then ended. These financial statements are the responsibility of the Company’s
management. Our responsibility is to express an opinion on these financial
statements based on our audits.




We
conducted our audits in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. The
Company is not required to have, nor were we engaged to perform, an audit
of its internal control over financial reporting.  Our audits includedconsideration of internal control over financial reporting as a basis for
designing audit procedures that are appropriate in the circumstances, but not
for the purpose of expressing an opinion of the effectiveness of the Company’s
internal control over financial reporting.  Accordingly, we express no
such opinion.  An audit includes examining, on a test basis, evidence
supporting the amounts and disclosures in the financial statements, assessing
the accounting principles used and significant estimates made by management, as
well as evaluating the overall financial statement presentation. We believe that
our audits provide a reasonable basis for our opinion.




In our
opinion, the consolidated financial statements referred to above present fairly,
in all material respects, the financial position of CompuCredit Holdings
Corporation at December 31, 2009 and 2008, and the results of its
operations and its cash flows for the years then ended, in conformity with
accounting principles generally accepted in the United States of
America.




/s/
      BDO Seidman, LLP


Atlanta,
Georgia


March 5,
2010





F-1
 Table of Contents


CompuCredit Holdings Corporation and Subsidiaries
 Consolidated
Balance Sheets
 (Dollars
in thousands)
 
 As
      of December 31,2009
              
              
              2008(as
      adjusted)AssetsCash
      and cash equivalents (including restricted cash of $5,636 at December 31,
      2009 and $19,913 at December 31, 2008)
              
              $
              190,655
              
              
              $
              94,428Securitized
      earning assets
              
              
              36,514
              
              
              
              813,793Non-securitized
      earning assets, net:Loans
      and fees receivable, net (of $7,030 and $3,957 in deferred revenue and
      $15,030 and $8,451 in allowances for uncollectible loans and fees
      receivable at December 31, 2009 and December 31, 2008,
      respectively)
              
              
              70,928
              
              
              
              49,175Loans
      and fees receivable pledged as collateral under structured financings, net
      (of $15,471 and $20,800 in deferred revenue and $38,414 and $47,302 in
      allowances for uncollectible loans and fees receivable at December 31,
      2009 and December 31, 2008, respectively)
              
              
              214,439
              
              
              
              291,559Loans
      and fees receivable, at fair value
              
              
              42,299
              
              
              
              —Investments
      in previously charged-off receivables
              
              
              29,669
              
              
              
              47,676Investments
      in securities
              
              
              2,629
              
              
              
              4,678Deferred
      costs, net
              
              
              4,432
              
              
              
              6,161Property
      at cost, net of depreciation
              
              
              32,263
              
              
              
              48,297Investments
      in equity-method investees
              
              
              13,517
              
              
              
              53,093Intangibles,
      net
              
              
              2,816
              
              
              
              4,547Goodwill
              
              
              43,422
              
              
              
              59,129Income
      tax asset, net
              
              
              32,695
              
              
              
              —Prepaid
      expenses and other assets
              
              
              32,554
              
              
              
              52,575Total
      assets
              
              $
              748,832
              
              
              $
              1,525,111LiabilitiesAccounts
      payable and accrued expenses
              
              $
              67,295
              
              
              $
              120,235Notes
      payable and other borrowings
              
              
              164,368
              
              
              
              199,939Convertible
      senior notes (Note 13)
              
              
              307,573
              
              
              
              299,834Deferred
      revenue
              
              
              1,875
              
              
              
              23,492Income
      tax liability
              
              
              —
              
              
              
              134,754Total
      liabilities
              
              
              541,111
              
              
              
              778,254Commitments
      and contingencies (Note 14)EquityCommon
      stock, no par value, 150,000,000 shares authorized: 58,596,545 shares
      issued and 49,970,111 shares outstanding at December 31, 2009 (including
      2,252,388 loaned shares to be returned); and 59,947,301 shares issued and
      51,213,385 shares outstanding at December 31, 2008 (including
      3,651,069 loaned shares to be returned)
              
              
              —
              
              
              
              —Additional
      paid-in capital
              
              
              500,064
              
              
              
              522,571Treasury
      stock, at cost, 8,626,434 and 8,733,916 shares at December 31, 2009 and
      December 31, 2008,  respectively
              
              
              (219,714
              )
              
              
              (222,310
              )Accumulated
      other comprehensive loss
              
              
              (3,293
              )
              
              
              (31,431
              )Retained
      (deficit) earnings
              
              
              (87,740
              )
              
              
              453,149Total
      shareholders’ equity (Note 2)
              
              
              189,317
              
              
              
              721,979Noncontrolling
      interests (Note 2)
              
              
              18,404
              
              
              
              24,878Total
      equity
              
              
              207,721
              
              
              
              746,857Total
      liabilities and equity (Note 2)
              
              $
              748,832
              
              
              $
              1,525,111
  See
accompanying notes.
  F-2
 Table of Contents
   CompuCredit Holdings Corporation and Subsidiaries
 Consolidated
Statements of Operations
 (Dollars
in thousands, except per share data)
 
 For
      the Year Ended
                  December
      31,2009
              
              
              2008(as
      adjusted)Interest
      income:Consumer
      loans, including past due fees
              
              $
              75,563
              
              
              $
              92,918Other
              
              
              1,194
              
              
              
              5,071Total
      interest income
              
              
              76,757
              
              
              
              97,989Interest
      expense
              
              
              (42,066
              )
              
              
              (52,878
              )Net
      interest income before fees and related income on non-securitized earning
      assets and provision for loan losses
              
              
              34,691
              
              
              
              45,111Fees
      and related income on non-securitized earning assets
              
              
              191,319
              
              
              
              189,478Provision
      for loan losses
              
              
              (94,349
              )
              
              
              (70,611
              )Net
      interest income, fees and related income on non-securitized earning
      assets
              
              
              131,661
              
              
              
              163,978Other
      operating (loss) income:Loss
      on securitized earning assets
              
              
              (546,066
              )
              
              
              (107,034
              )Servicing
      income
              
              
              104,981
              
              
              
              181,883Ancillary
      and interchange revenues
              
              
              17,917
              
              
              
              55,283Gain
      on repurchase of convertible senior notes
              
              
              1,421
              
              
              
              61,671Gain
      on buy-out of equity-method investee members
              
              
              20,990
              
              
              
              —Equity
      in (loss) income of equity-method investees
              
              
              (16,881
              )
              
              
              22,319Total
      other operating (loss) income
              
              
              (417,638
              )
              
              
              214,122Other
      operating expense:Salaries
      and benefits
              
              
              51,885
              
              
              
              67,434Card
      and loan servicing
              
              
              207,466
              
              
              
              279,610Marketing
      and solicitation
              
              
              16,699
              
              
              
              46,255Depreciation
              
              
              20,099
              
              
              
              32,483Goodwill
      impairment
              
              
              20,000
              
              
              
              30,868Foreign
      currency transaction losses
              
              
              28,531
              
              
              
              1,559Other
              
              
              94,510
              
              
              
              121,443Total
      other operating expense
              
              
              439,190
              
              
              
              579,652Loss
      from continuing operations before income taxes
              
              
              (725,167
              )
              
              
              (201,552
              )Income
      tax benefit
              
              
              178,106
              
              
              
              65,820Loss
      from continuing operations
              
              
              (547,061
              )
              
              
              (135,732
              )Discontinued
      operations:Loss
      from discontinued operations before income taxes
              
              
              (6,599
              )
              
              
              (9,057
              )Income
      tax benefit
              
              
              2,310
              
              
              
              3,171Loss
      from discontinued operations
              
              
              (4,289
              )
              
              
              (5,886
              )Net
      loss
              
              
              (551,350
              )
              
              
              (141,618
              )Net
      loss attributable to noncontrolling interests
              
              
              10,461
              
              
              
              2,145Net
      loss attributable to controlling interests
              
              $
              (540,889
              )
              
              $
              (139,473
              )Loss
      from continuing operations attributable to controlling interests per
      common share—basic
              
              $
              (11.25
              )
              
              $
              (2.81
              )Loss
      from continuing operations attributable to controlling interests per
      common share—diluted
              
              $
              (11.25
              )
              
              $
              (2.81
              )Loss
      from discontinued operations attributable to controlling interests per
      common share—basic
              
              $
              (0.09
              )
              
              $
              (0.12
              )Loss
      from discontinued operations attributable to controlling interests per
      common share—diluted
              
              $
              (0.09
              )
              
              $
              (0.12
              )Net
      loss attributable to controlling interests per common
      share—basic
              
              $
              (11.34
              )
              
              $
              (2.93
              )Net
      loss attributable to controlling interests per common
      share—diluted
              
              $
              (11.34
              )
              
              $
              (2.93
              )
  See
accompanying notes.
   F-3
 Table of Contents
   CompuCredit Holdings Corporation and Subsidiaries
 Consolidated
Statements of Shareholders’ Equity
 For
the Years Ended December 31, 2009 and 2008
 (Dollars
in thousands)
 
 Common
      StockShares
      Issued
              
              
              Amount
              
              
              Additional
      Paid-In Capital
              
              
              Treasury
      Stock
              
              
              Accumulated
      Other Comprehensive Loss
              
              
              Retained
      Earnings
                  (Deficit)
              
              
              Noncontrolling
      Interests
              
              
              Comprehensive
      Loss
              
              
              Total
      EquityBalance
      at December 31, 2007 (as adjusted)
              
              
              61,938,533
              
              
              $
              —
              
              
              $
              518,678
              
              
              $
              (225,457
              )
              
              $
              1,637
              
              
              $
              591,747
              
              
              $
              32,732
              
              
              
              
              
              $
              919,337Stock
      options exercises and proceeds related thereto
              
              
              29,334
              
              
              
              —
              
              
              
              74
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              
              
              74Use
      of treasury stock for stock-based compensation plans
              
              
              (207,125
              )
              
              
              —
              
              
              
              (4,586
              )
              
              
              3,711
              
              
              
              —
              
              
              
              875
              
              
              
              —
              
              
              
              
              
              
              —Issuance
      of restricted stock
              
              
              213,440
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              
              
              —Amortization
      of deferred stock-based compensation costs
              
              
              —
              
              
              
              —
              
              
              
              9,839
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              
              
              9,839Purchase
      of treasury stock
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (564
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              
              
              (564
              )Tax
      effects of stock-based compensation plans
              
              
              —
              
              
              
              —
              
              
              
              (1,434
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              
              
              (1,434
              )Distributions
      to owners of noncontrolling interests
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (5,688
              )
              
              
              
              
              
              (5,688
              )Retired
      shares
              
              
              (2,026,881
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              
              
              —Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (139,473
              )
              
              
              (2,145
              )
              
              $
              (141,618
              )
              
              
              (141,618
              )Foreign
      currency translation adjustment, net of tax
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (33,068
              )
              
              
              —
              
              
              
              (21
              )
              
              
              (33,089
              )
              
              
              (33,089
              )Comprehensive
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              (174,707
              )
              
              
              —Balance
      at December 31, 2008 (as adjusted)
              
              
              59,947,301
              
              
              
              —
              
              
              
              522,571
              
              
              
              (222,310
              )
              
              
              (31,431
              )
              
              
              453,149
              
              
              
              24,878
              
              
              
              
              
              
              
              746,857Use
      of treasury stock for stock-based compensation plans
              
              
              (152,991
              )
              
              
              —
              
              
              
              (2,738
              )
              
              
              2,738
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              
              
              
              —Issuance
      of restricted stock
              
              
              200,916
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              
              
              
              —Amortization
      of deferred stock-based compensation costs
              
              
              —
              
              
              
              —
              
              
              
              8,978
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              
              
              
              8,978Purchase
      of treasury stock
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (142
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              
              
              
              (142
              )Tax
      effects of stock-based compensation plans
              
              
              —
              
              
              
              —
              
              
              
              (1,581
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              
              
              
              (1,581
              )Settlement
      of contingent earn-out as referenced in Note 7, “Goodwill and Intangible
      Assets”
              
              
              —
              
              
              
              —
              
              
              
              (1,596
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              5,431
              
              
              
              
              
              
              
              3,835Repurchase
      of noncontrolling interests
              
              
              —
              
              
              
              —
              
              
              
              (1,710
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (511
              )
              
              
              
              
              
              
              (2,221
              )Distributions
      to owners of noncontrolling interests
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (931
              )
              
              
              
              
              
              
              (931
              )Dividend
              
              
              —
              
              
              
              —
              
              
              
              (23,860
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              
              
              
              (23,860
              )Retired
      shares
              
              
              (1,398,681
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              
              
              
              
              —Net
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (540,889
              )
              
              
              (10,461
              )
              
              $
              (551,350
              )
              
              
              (551,350
              )Foreign
      currency translation adjustment, net of tax
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              28,138
              
              
              
              —
              
              
              
              (2
              )
              
              
              28,136
              
              
              
              28,136Comprehensive
      loss
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              $
              (523,214
              )
              
              
              —Balance
      at December 31, 2009
              
              
              58,596,545
              
              
              $
              —
              
              
              $
              500,064
              
              
              $
              (219,714
              )
              
              $
              (3,293
              )
              
              $
              (87,740
              )
              
              $
              18,404
              
              
              
              
              
              
              $
              207,721
  See
accompanying notes.
 F-4
 Table of Contents
  CompuCredit Holdings Corporation and Subsidiaries
 Consolidated
Statements of Comprehensive Loss
 (Dollars
in thousands)
 
 For
      the Year Ended December 31,2009
              
              
              2008(as
      adjusted)Net
      loss
              
              $
              (551,350
              )
              
              $
              (141,618
              )Other
      comprehensive loss:Foreign
      currency translation adjustment
              
              
              40,042
              
              
              
              (45,429
              )Income
      tax (expense) benefit related to other comprehensive
income
              
              
              (11,906
              )
              
              
              12,340Comprehensive
      loss
              
              
              (523,214
              )
              
              
              (174,707
              )Comprehensive
      loss attributable to noncontrolling interests
              
              
              10,463
              
              
              
              2,166Comprehensive
      loss attributable to controlling interests
              
              $
              (512,751
              )
              
              $
              (172,541
              )
  See
accompanying notes.
 
  F-5
 Table of Contents
  CompuCredit Holdings Corporation and Subsidiaries
 Consolidated
Statements of Cash Flows
 (Dollars
in thousands)
 For the Year Ended
      December 31,2009
              
              
              2008(as
      adjusted)Operating
      activitiesNet
      loss
              
              $
              (551,350
              )
              
              $
              (141,618
              )Adjustments
      to reconcile net loss to net cash provided by operating
      activities:Depreciation
      expense
              
              
              20,139
              
              
              
              32,667Impairment
      of goodwill
              
              
              23,483
              
              
              
              32,000Provision
      for loan losses
              
              
              95,041
              
              
              
              72,262Amortization
      of intangibles
              
              
              1,731
              
              
              
              3,701Accretion
      of deferred revenue
              
              
              (21,616
              )
              
              
              (11,699
              )Accretion
      of discount on convertible senior notes
              
              
              10,213
              
              
              
              10,106Stock-based
      compensation expense
              
              
              8,978
              
              
              
              9,839Retained
      interests adjustments, net
              
              
              937,880
              
              
              
              598,240Unrealized
      (gain) loss on trading securities
              
              
              (276
              )
              
              
              1,950Deferred
      tax benefit
              
              
              (71,137
              )
              
              
              (51,479
              )Gain
      on repurchase of convertible senior notes
              
              
              (1,421
              )
              
              
              (61,671
              )Gain
      on buy-out of equity-method investee members
              
              
              (20,990
              )
              
              
              —Income
      in excess of distributions from equity-method investments
              
              
              —
              
              
              
              (600
              )Changes
      in assets and liabilities, exclusive of business
    acquisitions:Net
      decrease in securities classified as trading securities
              
              
              —
              
              
              
              18,312(Increase)
      decrease in uncollected fees on non-securitized earning
    assets
              
              
              (12,382
              )
              
              
              6,767Decrease
      in deferred costs
              
              
              1,690
              
              
              
              1,725(Decrease)
      increase in current income tax liability
              
              
              (109,910
              )
              
              
              74,219Increase
      in deferred revenue
              
              
              —
              
              
              
              1,914Decrease
      (increase) in prepaid expenses
              
              
              14,574
              
              
              
              (11,942
              )Decrease
      in accounts payable and accrued expenses
              
              
              (53,825
              )
              
              
              (24,385
              )Other
              
              
              16,886
              
              
              
              8,571Net
      cash provided by operating activities
              
              
              287,708
              
              
              
              568,879Investing
      activitiesPurchase
      of third-party interest in equity-method investee
              
              
              (19,542
              )
              
              
              —Proceeds
      from equity-method investees
              
              
              59,117
              
              
              
              10,530Investments
      in securitized earning assets
              
              
              (492,126
              )
              
              
              (1,627,237
              )Proceeds
      from securitized earning assets
              
              
              300,523
              
              
              
              1,225,111Investments
      in non-securitized earning assets
              
              
              (958,176
              )
              
              
              (1,219,110
              )Proceeds
      from non-securitized earning assets
              
              
              985,819
              
              
              
              1,095,773Acquisitions
      of assets
              
              
              (621
              )
              
              
              —Purchases
      and development of property, net of disposals
              
              
              (3,591
              )
              
              
              (9,872
              )Net
      cash used in investing activities
              
              
              (128,597
              )
              
              
              (524,805
              )Financing
      activitiesNoncontrolling
      interests distribution, net
              
              
              (931
              )
              
              
              (5,688
              )Dividends
              
              
              (23,860
              )
              
              
              —Proceeds
      from exercise of stock options
              
              
              —
              
              
              
              74Purchase
      of treasury stock
              
              
              (142
              )
              
              
              (564
              )Purchase
      of noncontrolling interests
              
              
              (3,317
              )
              
              
              —Proceeds
      from borrowings
              
              
              193,500
              
              
              
              115,444Repayment
      of borrowings
              
              
              (231,226
              )
              
              
              (193,463
              )Net
      cash used in financing activities
              
              
              (65,976
              )
              
              
              (84,197
              )Effect
      of exchange rate changes on cash
              
              
              3,092
              
              
              
              (2,975
              )Net
      increase (decrease) in cash
              
              
              96,227
              
              
              
              (43,098
              )Cash
      and cash equivalents at beginning of year
              
              
              94,428
              
              
              
              137,526Cash
      and cash equivalents at end of year
              
              $
              190,655
              
              
              $
              94,428Supplemental
      cash flow informationCash
      paid for interest
              
              $
              32,756
              
              
              $
              45,163Net
      cash income tax payments (refunds)
              
              $
              632
              
              
              $
              (91,520
              )Supplemental
      non-cash informationSettlement
      of contingent earn-out
              
              $
              5,553
              
              
              $
              —Notes
      payable associated with capital leases
              
              $
              1,067
              
              
              $
              3,433Issuance
      of stock options and restricted stock
              
              $
              1,356
              
              
              $
              7,291
 See
accompanying notes.
  F-6
 Table of Contents
  CompuCredit Holdings
Corporation and Subsidiaries
 Notes
to Consolidated Financial Statements
 December 31,
2009 and 2008
  1.
              Description of Our
      Business
  Our
accompanying consolidated financial statements include the accounts of
CompuCredit Holdings Corporation and those entities we control, principally our
majority-owned subsidiaries. We are a provider of various credit and related
financial services and products to or associated with the financially
underserved consumer credit market—a market represented by credit risks that
regulators classify as “sub-prime.” We traditionally have served this market
principally through our marketing and solicitation of credit card accounts and
other credit products and our servicing of various receivables. We have
contracted with third-party financial institutions pursuant to which the
financial institutions have issued general purpose consumer credit cards, and we
have purchased the receivables relating to such accounts on a daily basis. Our
product and service offerings also include:  small-balance, short-term
cash advance loans—generally less than $500 (or the equivalent thereof in the
British pound for pound-denominated loans) for 30 days or less and to which
we refer as “micro-loans;” installment loan and other credit products; and money
transfer and other financial services.  We market these loans and
products through retail branch locations in Alabama, Colorado, Kentucky,
Mississippi, Ohio, Oklahoma, South Carolina, Tennessee, and Wisconsin and over
the Internet in the U.S. and U.K. We also are collecting a portfolio of auto
finance receivables that we previously originated through franchised and
independent auto dealers, purchasing and/or servicing auto loans from or for a
pre-qualified network of dealers in the “buy-here, pay-here” used car business
and selling used automobiles through our own buy-here, pay-here lots. Lastly,
our debt collections subsidiary purchases and collects previously charged-off
receivables from us, the trusts that we service and third parties.  We
reflect these business lines within five reportable segments by which we manage
our business:  Credit Cards; Investments in Previously Charged-Off
Receivables; Retail Micro-Loans; Auto Finance; and Internet Micro-Loans. See
Note 4 “Segment Reporting” for further details.
  On
June 30, 2009, we completed a reorganization through which CompuCredit
Corporation, our former parent company, became a wholly owned subsidiary of
CompuCredit Holdings Corporation. We effected this reorganization through a
merger pursuant to an Agreement and Plan of Merger, dated as of June 2,
2009, by and among CompuCredit Corporation, CompuCredit Holdings Corporation and
CompuCredit Merger Sub, Inc., and as a result of the reorganization, each
outstanding share of CompuCredit Corporation common stock was automatically
converted into one share of CompuCredit Holdings Corporation common
stock.
  As a
result of the reorganization, CompuCredit Corporation common stock is no longer
publicly traded, and CompuCredit Holdings Corporation common stock commenced
trading on the NASDAQ Global Select Market on July 1, 2009 under the symbol
“CCRT,” the same symbol under which CompuCredit Corporation common stock was
previously listed and traded.
  The
post-reorganization consolidated financial statements presented herein are
presented on the same basis as and can be compared to the consolidated financial
statements reported in CompuCredit Corporation’s prior quarterly and annual
reports filed with the Securities and Exchange Comission (the "SEC"), with
the exception of and as adjusted by the retrospective application of two new
accounting pronouncements discussed below.
  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.
  We
prepare our consolidated financial statements in accordance with accounting
principles generally accepted in the United States of America (“GAAP”), and
these principles require us 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 securitized receivables,
significantly affect (1) our loss on retained interests in credit card
receivables securitized (which is a component of loss on securitized earning
assets on our consolidated statements of operations) and the reported value of
securitized earning assets on our consolidated balance sheets, and (2) our
changes in the fair value of loans and fees receivable recorded at fair value
category (which is a component of fees and related income on non-securitized
earnings assets on our consolidated statements of operations) Additionally,
estimates of future credit losses on our loans and fees receivable recorded at
net realizable value have a significant effect on the provision for loan losses
within our consolidated
  F-7
 Table of Contents
  statements
of operations and loans and fees receivable, net, which is a component of
non-securitized earning assets, net on our consolidated balance
sheets.
  We have
reclassified certain amounts in our prior period consolidated financial
statements to conform to current period presentation, and we have eliminated all
significant intercompany balances and transactions for financial reporting
purposes.
  Our prior
year reclassifications include those required for the retrospective application
of two new accounting pronouncements that are first effective for us under GAAP
in our 2009 consolidated financial statements—specifically, a pronouncement that
resulted in the reclassification of our prior liability for minority interests
to a new noncontrolling interests component of total equity and a pronouncement
that resulted in reclassifications of consolidated balance sheet balances from
deferred loan costs and convertible senior notes to additional paid-in capital
and in associated reclassifications among retained earnings and deferred tax
liabilities. Retrospective application of this latter pronouncement also had the
effect of increasing interest expense and, accordingly, decreasing net income
within our consolidated statements of operations for the year ended December 31,
2008.
  Cash
and Cash Equivalents
  Cash and
cash equivalents consist of cash, money market investments and overnight
deposits. We consider all highly liquid cash investments with low interest rate
risk and original maturities of three months or less to be cash equivalents.
Cash equivalents are carried at cost, which approximates market.  We
maintain cash and cash equivalents for general operating purposes and to meet
our longer term debt obligations.  We continue to see dislocation in
the availability of liquidity as a result of the market disruptions that began
in 2007.  This ongoing disruption has resulted in a decline in
liquidity available to sub-prime market participants, including us, a widening
of the spreads above the underlying interest indices (typically LIBOR for our
borrowings) for the loans that lenders are willing to make, and a decrease in
advance rates for those loans.   Although we are hopeful that the
liquidity markets ultimately will return to more traditional levels, we are not
able to predict when or if that will occur, and we are managing our business
with the assumption that the liquidity markets will not return to more
traditional levels in the near term. Specifically, we have curtailed or
limited growth in many parts of our business and have now closed substantially
all of our credit card accounts (other than those associated with our Investment
in Previously Charged-Off Receivables segment’s balance transfer program). While
to date we have experienced some constraints on our ability to reduce expenses
at the same rate that our managed receivables have declined, the aforementioned
efforts are aimed at achieving better matching of our servicing and other cash
inflows with our expense base.
  Restricted
Cash
  Restricted
cash as of December 31, 2009 and 2008 includes (1) certain collections on
receivables within our Auto Finance segment, the cash balances of which are
required to be distributed to noteholders 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.
  Additionally,
restricted cash as of December 31, 2008 included $8.7 million of now-released
proceeds (including interest earned thereon) originally escrowed in connection
with a forward flow contract between one of our subsidiaries and a subsidiary of
Encore Capital Group, Inc (collectively with all other subsidiaries or
affiliates of Encore Capital Group, Inc. to which we refer, “Encore”). On
July 10, 2008, Encore did not purchase certain accounts as contemplated by
the forward flow contract, alleging that we breached certain representations and
warranties set forth in the contract (based upon then-outstanding allegations
made by the Federal Trade Commission (“FTC”) as discussed further in Note 14,
“Commitments and Contingencies”). Subsequently, both our subsidiary and Encore
advised one another that they were in default of various obligations under the
contract and various related agreements among them, and the parties proceeded to
arbitration in an effort to resolve their disputes. Immediately prior to the
arbitration panel hearing in the third quarter of 2009, we settled the
outstanding disputes with Encore, resulting, in part, in the release to us of
the $8.7 million in restricted cash held at December 31, 2008. Further details
concerning the Encore settlement are provided below.
  Asset
Securitization
  As of
December 31, 2009, most of our credit card receivables were held by
off-balance-sheet securitization trusts. Throughout our notes to our
consolidated financial statements, we refer to transfers to such
off-balance-sheet securitization trusts (qualifying special purposes entities,
or “QSPEs”) as “securitizations,” as contrasted with our use of the term
“structured financings,” which refers to non-recourse, asset-backed,
on-balance-sheet debt financings.
  When we
sell receivables in securitizations, we retain certain undivided ownership
interests, interest-only (“I/O”) strips and servicing rights. Although we
continue to service the underlying credit card accounts and the customer
relationships, we treat these securitizations as sales, and the securitized
receivables are not reflected on our consolidated balance sheets. The retained
ownership interests and I/O strips associated with receivables sold in our
securitizations are included in securitized earning assets on the face of our
consolidated balance sheets.
  Under
applicable accounting guidance, we recognize gains at the time of each
receivable (or “financial asset”) sale. These gains depend on the previous
carrying amount of the financial assets sold and the fair value of the assets
and cash proceeds received. The cash flows used to measure the gains represent
estimates of payment rates, collectible finance charges and fees, credit losses,
servicing fees and interest costs payable out of the securitization trusts and
any required amortizing principal payments to investors.
  F-8
 Table of Contents
   We
initially record a servicing asset or servicing liability within a
securitization structure when the servicing fees we expect to receive do not
represent adequate compensation for servicing the receivables. We record these
initial servicing assets and servicing liabilities at estimated fair market
value, and then we evaluate and update our estimates of the fair values at the
end of each financial reporting period. We include changes in these fair values
within fees and related income on securitized earning assets on our consolidated
statements of operations (and more specifically as a component of loss on
retained interests in credit card receivables securitized as scheduled in
Note 8, “Securitizations and Structured Financings”), with our recording of
our actual servicing expenses into operations as they are incurred. Because
quoted market prices generally are not available for our servicing assets and
servicing liabilities, we estimate fair values based on the estimated present
value of future cash flows using our best estimates of key assumptions as
outlined in Note 8, “Securitizations and Structured
Financings.”  We net our servicing assets and servicing liabilities
together in our determination of securitized earning assets on our consolidated
balance sheets. In accordance with applicable accounting literature we do not
consolidate any of the QSPEs that participate in our
securitizations.
  We
account for our retained interests in securitized credit card receivables as
trading securities and have elected to report them at estimated fair values
under applicable accounting literature, with changes in fair values included in
our consolidated statements of operations. The estimates we use to determine the
gains and losses and the related fair values of I/O strips and retained
interests are influenced by factors outside of our control, and such estimates
could materially change from period to period. We include the income effects of
I/O strip and retained interest valuations within fees and related income on
securitized earning assets on our consolidated statements of operations (and
more specifically as a component of loss on retained interests in credit card
receivables securitized as scheduled in Note 8, “Securitizations and
Structured Financings”).
  At each
reporting period end, we reflect “accrued interest and fees” on securitized
receivables at fair value within securitized earning assets on our consolidated
balance sheet; these accrued interest and fees represent the estimated
collectible portion of fees earned but not billed to the cardholders underlying
the credit card receivables portfolios we have securitized. We also include at
fair value within our securitized earning assets the estimated collectible
portion of finance charges and fees billed to cardholders within the securitized
portfolios but not yet collected (our “retained interests in finance charge
receivables”) at each reporting period end.
  Foreign
Currency Translation
  We
translate the financial statements of our foreign subsidiaries into U.S.
currency in accordance with applicable accounting literature.  We translate
assets and liabilities at period-end exchange rates and income and expense items
at average rates of exchange prevailing during each respective reporting
period. We include translation adjustments in accumulated other
comprehensive income within shareholders’ equity on our consolidated balance
sheets until such a time that the related asset is considered to sold or
liquidated at which point we reclassify accumulated translation gains or losses
from our consolidated balance sheet to our consolidated statement of operations;
we experienced such a reclassification in the fourth quarter of 2009 with
respect to our retained interests in our U.K. credit card receivables
securitization trust, and $26.1 million of accumulated translation losses
associated with this asset are reflected within our accompanying 2009
consolidated statement of operations. We also include current period gains
and losses resulting from foreign currency transactions in our accompanying
consolidated statements of operations.
  Non-Securitized
Earning Assets, Net
  We
include loans and fees receivable, net, investments in previously charged-off
receivables, and investments in securities and U.S. government securities resale
agreements within non-securitized earning assets, net, on our consolidated
balance sheets. Also included within non-securitized earning assets, net, as of
December 31, 2009 are our de-securitized and reconsolidated lower-tier credit
card receivables that are valued at fair value in our consolidated financial
statements; with investor consent, we repaid the securitization facility
underlying our lower-tier originated portfolio master trust in the fourth
quarter of 2009 and reconsolidated our lower-tier credit card receivables onto
our consolidated balance sheet at their fair value in accordance with an earlier
fair value option election that we made with respect to such receivables.
Further details concerning our lower-tier credit card receivables are presented
within Note 9, “Fair Value of Assets,” while details concerning other components
of non-securitized earnings assets, net, follow immediately below.
  Loans and Fees
Receivable, Net.  Loans and fees
receivable, net, currently consists 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 segment’s balance transfer
program.
  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
  F-9
 Table of Contents
   receivable,
net, into two separate categories on our 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.
  Until
they were substantially collected and/or charged off and thus became immaterial
in amount, we accounted for a $189.0 million auto loan portfolio that we
acquired from the Patelco Credit Union in 2007 under accounting rules that
limited the yield that could be accreted (accretable yield) to the excess of our
estimate of undiscounted expected principal, interest, and other cash flows
(including the effects of prepayments) expected to be collected on the date of
acquisition over our initial investment in the loan portfolio. The excess of
contractual cash flows over cash flows expected to be collected (nonaccretable
difference) was not recognized as an adjustment of yield, loss accrual or
valuation allowance. The following details are provided with respect to this
Patelco Credit Union auto loan portfolio as of and for the period ended December
31, 2008, which is the last annual accounting period for which the
above-described loan portfolio accounting rules were relevant to and reflected
within our audited consolidated financial statements:
 
 For
      the Year Ended December 31, 2008Roll-forward
      of Accretable Yield:Balance
      at beginning of
      period
              
              $
              (28,737
              )Accretable
      yield at acquisition
      date
              
              
              —(Recovery)
      impairment of
      accretable
              
              
              (2,199
              )Accretion
      of
      yield
              
              
              15,002Balance
      at end of
      period
              
              $
              (15,934
              )
  
 SOP
      03-3 loans and fees receivable:Carrying
      amount of loans and fees receivable at acquisition date
              
              $
              160,592Carrying
      amount of loans and fees receivable at December 31,
    2008
              
              $
              61,688Gross
      loans and fees receivable balance at acquisition date
              
              $
              191,976Gross
      loans and fees receivable balance at December 31,
2008
              
              $
              74,126
  Loans and
fees receivable associated with our micro-loan activities primarily include
principal balances and associated fees due from customers (such fees being
recognized as earned—generally over a two-week period in the case of our retail
and U.S. Internet operations and over a one-month period in the case of our U.K.
Internet operations). Loans and fees receivable associated with our auto finance
business include principal balances and associated fees and interest due from
customers, net of the unearned portion of loan discounts which we recognize over
the life of each loan.
  For our
loans and fees receivable carried at net realizable value (i.e., as opposed to
those carried at fair value), we provide an allowance for uncollectible loans
and fees receivable for loans and fees receivable we believe we ultimately will
not collect. We determine the necessary allowance for uncollectible loans and
fees receivable by analyzing some or all of the following:  historical
loss rates; current delinquency and roll-rate trends; vintage analyses based on
the number of months an account has been in existence; the effects of changes in
the economy on our customers; changes in underwriting criteria; and estimated
recoveries. A considerable amount of judgment is required to assess the ultimate
amount of uncollectible loans and fees receivable, and we continuously evaluate
and update our methodologies to determine the most appropriate allowance
necessary.
  The
components of our aggregated categories of loans and fees receivable carried at
net realizable value (in millions) as of the date of each of our consolidated
balance sheets are as follows:
 Balance
      at
                December 31,
                2008
              
              
              Additions
              
              
              Subtractions
              
              
              Balance
      at
                December 31,
                2009Loans and fees receivable, gross
              
              $
              421.3
              
              
              $
              1,047.7
              
              
              $
              (1,107.7
              )
              
              $
              361.3Deferred
      revenue
              
              
              (24.8
              )
              
              
              (73.7
              )
              
              
              76.0
              
              
              
              (22.5
              )Allowance
      for uncollectible loans and fees receivable
              
              
              (55.8
              )
              
              
              (78.9
              )
              
              
              81.3
              
              
              
              (53.4
              )Loans
      and fees receivable, net
              
              $
              340.7
              
              
              $
              895.1
              
              
              $
              (950.4
              )
              
              $
              285.4
 
  F-10
 Table of Contents
 Balance
      at
                  December 31,
                  2007
                
                
                Additions
                
                
                Subtractions
                
                
                Balance
      at
                  December 31,
                  2008Loans and fees receivable, gross
                
                $
                435.7
                
                
                $
                1,239.8
                
                
                $
                (1,254.2
                )
                
                $
                421.3Deferred
      revenue
                
                
                (27.2
                )
                
                
                (86.7
                )
                
                
                89.1
                
                
                
                (24.8
                )Allowance
      for uncollectible loans and fees receivable
                
                
                (51.5
                )
                
                
                (72.3
                )
                
                
                68.0
                
                
                
                (55.8
                )Loans
      and fees receivable, net
                
                $
                357.0
                
                
                $
                1,080.8
                
                
                $
                (1,097.1
                )
                
                $
                340.7
  As of
December 31, 2009 and 2008, the weighted average remaining accretion
periods for the $22.5 million and $24.8 million, respectively, of deferred
revenue reflected in the above tables were 17.7 and 30.5 months,
respectively.
  A
roll-forward of our allowance for uncollectible loans and fees receivable (in
millions) is as follows:
 
 For
      the Year Ended December 31,2009
              
              
              2008Balance
      at beginning of period
              
              $
              (55.8
              )
              
              $
              (51.5
              )Provision
      for loan losses
              
              
              (78.9
              )
              
              
              (72.3
              )Charge
      offs
              
              
              86.7
              
              
              
              76.3Recoveries
              
              
              (5.4
              )
              
              
              (8.3
              )Balance
      at end of period
              
              $
              (53.4
              )
              
              $
              (55.8
              )
  Investments in
Previously Charged-Off Receivables. Through Jefferson Capital, our debt
collections subsidiary, we pursue, competitively bid for and acquire previously
charged-off credit card receivables. A majority of our acquisitions of
previously charged-off credit card receivables historically have been from the
securitization trusts underlying our retained interest investments. As servicer
for the receivables within the securitization trusts underlying our retained
interest investments, we subject sales of previously charged-off receivables to
a competitive bid process involving other potential third-party portfolio
purchasers to ensure that sales are at fair market prices.
  We
establish static pools consisting of homogenous previously charged-off accounts
and receivables for each acquisition by our debt collections business. Once a
static pool is established, we do not change the receivables within the pool.
Further, we record each static pool at cost and account for each pool as a
single unit for payment application and income recognition purposes, thereby
applying the cost recovery method on a portfolio-by-portfolio basis. Under the
cost recovery method, we do not recognize income associated with a particular
portfolio until cash collections have exceeded the investment. Additionally,
until such time as cash collected for a particular portfolio exceeds our
investment in the portfolio, we incur commission costs and other internal and
external servicing costs associated with the cash collections on the portfolio
investment that are charged as operating expenses without any offsetting income
amounts. In addition, we perform an impairment test on each static pool each
quarter; if the remaining forecasted collections are less than our current
carrying value, we record an impairment charge.
  The
following table shows (in thousands) a roll-forward of our investments in
previously charged-off receivables activities:
 For
      the Year Ended December 31,2009
                
                
                2008Unrecovered
      balance at beginning of period
                
                $
                47,676
                
                
                $
                14,523Acquisitions
      of defaulted accounts
                
                
                45,889
                
                
                
                77,436Cash
      collections
                
                
                (94,910
                )
                
                
                (83,099
                )Cost-recovery
      method income recognized on defaulted accounts (included as a component of
      fees and related income on non-securitized earning assets on our
      consolidated statements of operations) (1)
                
                
                31,014
                
                
                
                38,816Unrecovered
      balance at end of period
                
                $
                29,669
                
                
                $
                47,676Estimated
      remaining collections (“ERC”)
                
                $
                90,705
                
                
                $
                104,761
 (1)
Amount includes $21.2 million and $11.3 million in accretion in 2009 and 2008,
respectively, associated with the culmination of the Encore forward flow
agreement.
  F-11
 Table of Contents
   Our
previously charged-off receivables consist of amounts associated with normal
delinquency charged-off accounts, accounts for which debtors have filed for
bankruptcy protection under Chapter 13 of the U.S. Bankruptcy Code (“Chapter 13
Bankruptcies”) and accounts participating in or acquired in connection with our
balance transfer program prior to such time as we issue credit cards relating to
the accounts.
  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 Bankruptcies. We anticipate
collecting 41.2% of the ERC of the existing accounts over the next 12 months,
with the balance to be collected thereafter.
  In 2005,
our Investment in Previously Charged-off Receivables segment entered into a
forward flow contract to sell previously charged-off receivables to Encore. On
July 10, 2008, Encore did not purchase certain accounts as contemplated by
the forward flow contract, alleging that we breached certain representations and
warranties set forth in the contract (based upon then-outstanding allegations
made by the Federal Trade Commission (“FTC”)). Subsequently, both our subsidiary
and Encore advised one another that they were in default of various obligations
under the contract and various related agreements among them, and the parties
proceeded to resolve these disputes through arbitration. Immediately prior to
the arbitration panel hearing in the third quarter of 2009, we settled our
outstanding disputes with Encore. The settlement resulted 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 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 which is reflected in our consolidated
statement of operations for the year ended December 31, 2009.
  Investments in
Securities. We periodically have invested in debt and equity securities.
We generally have classified our purchased debt and equity securities as trading
securities and included realized and unrealized gains and losses in
earnings.  Additionally, we occasionally have received distributions
of debt securities from our equity-method investees, and we have classified such
distributed debt securities as held to maturity. The carrying values (in
thousands) of our investments in debt and equity securities are as
follows:
 
 As of
      December 31,2009
              
              
              2008Held
      to maturity:Investments
      in debt securities of equity-method investees
              
              $
              2,060
              
              
              $
              4,385Trading:Investments
      in equity securities
              
              
              569
              
              
              
              293Total
      investments in debt and equity securities
              
              $
              2,629
              
              
              $
              4,678
  Prepaid
Expenses and Other Assets
  Prepaid
expenses and other assets include amounts paid to third parties for marketing
and other services. We expense these amounts once services have been performed
or marketing efforts have been undertaken. Also included are (1) various
deposits (totaling $16.2 million and $26.9 million as of December 31, 2009 and
2008, respectively) required to be maintained with our third-party issuing bank
partners and retail electronic payment network providers (including $4.9 million
and $6.3 million as of December 31, 2009 and 2008, respectively, associated with
our ongoing servicing efforts in the U.K.), (2) vehicle inventory held by
our buy-here, pay-here auto dealerships that we expense as cost of goods sold
(within fees and related income on non-securitized earning assets on our
consolidated statements of operations) as we earn associated sales revenues, and
(3) a $10.0 million deposit at a former third-party issuing bank partner
(Columbus Bank and Trust Company) which is the subject of broader outstanding
litigation between Columbus Bank and Trust Company and Synovus Financial
Corporation (collectively, “CB&T”) and us.  See Note 14,
“Commitments and Contingencies,” for additional information regarding this
outstanding litigation.
  Deferred
Costs
  The
principal components of our deferred costs have historically been unamortized
costs associated with our (1) issuances of convertible senior notes and other
debt and (2) receivables origination activities. We generally amortize
deferred
  F-12
 Table of Contents
   costs
associated with our convertible senior notes into interest expense over the
expected life of the instruments; however, we accelerate the recovery of an
appropriate pro-rata portion of these costs against gains on repurchases of our
convertible senior notes. 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, and as required, we have retrospectively applied this pronouncement
within prior period consolidated financial statements as if the accounting
pronouncement had applied in financial reporting periods prior to its January 1,
2009 effective date. See Note 13, “Convertible Senior Notes,” for additional
effects of our adoption of this pronouncement. While currently insignificant
since we have ceased substantially all credit card origination activities, we
defer direct receivables origination costs for our credit card receivables and
amortize them against credit card fee income on a straight-line basis over the
privilege period, which is typically one year.
  Property
at cost, net of depreciation
  We
capitalize costs related to internal development and implementation of software
used in our operating activities in accordance with applicable accounting
literature.  These capitalized costs consist almost exclusively of
fees paid to third-party consultants to develop code and install and test
software specific to our needs and to customize purchased software to maximize
its benefit to us. We have focused the majority of these efforts on our
proprietary information management system that supports our decision-making
function, including targeted marketing, solicitation, application processing,
account management and collection activities.
  We record
our property at cost less accumulated depreciation or amortization. We compute
depreciation expense using the straight-line method over the estimated useful
lives of our assets, which are approximately forty years for buildings,
five years for furniture, fixtures and equipment, and three years for
software. We amortize leasehold improvements over the shorter of their estimated
useful lives or the terms of their respective underlying leases.
  We
periodically review our property to determine if it is
impaired.  During 2008, we recorded $2.6 million of impairment charges
associated with our property, which we classified within depreciation expense on
our consolidated statement of operations. We experienced no such impairments in
2009.
  Investments
in Equity-Method Investees
  We
account for investments using the equity method of accounting if the investments
give us the ability to exercise significant influence, but not control, over the
investees. Significant influence is generally deemed to exist if we have an
ownership interest in the voting stock of an investee of between 20% and 50%,
although other factors, such as representation on an investee’s board of
managers, specific voting and veto rights held by each investor and the effects
of commercial arrangements, are considered in determining whether equity method
accounting is appropriate. We use the equity method for our investments in two
33.3%-owned limited liability companies made during the fourth quarter of 2004
and our 47.5% investment in a limited liability company made during the first
quarter of 2005. We record our respective interests in the losses or income of
such investees within the equity in (loss) income of equity-method investees
category on our consolidated statements of operations for each period. The
carrying amount of our equity-method investments is recorded on our consolidated
balance sheets as investments in equity-method investees.
  We
evaluate our investments in the equity-method investees for impairment each
quarter by comparing the carrying amount of each investment to its fair value.
Because no active market exists for the investees’ limited liability company
membership interests, we evaluate our investments in the equity-method investees
for impairment based on our evaluation of the fair value of the equity-method
investees’ net assets relative to their carrying values. If we ever were to
determine that the carrying values of our investments in equity-method investees
were greater than their fair values, we would write the investments down to
their fair values.
  During
2009, we acquired the remaining non-controlling interest in a limited liability
company in which we held a 61.25% interest at December 31, 2008 and which was
classified under applicable accounting requirements as an equity-method investee
at that date. Since our acquisition of this remaining non-controlling interest,
we have consolidated the assets and liabilities of this entity within our
consolidated balance sheets.
  Intangibles
  We
amortize identifiable intangible assets over their and in proportion to their
estimated periods of benefit. The estimated benefit periods range from three
years for customer and dealer relationships to three to five years for
non-compete agreements. For those intangible assets such as trademarks and trade
names that we determined have an indefinite benefit
  F-13
 Table of Contents
   period,
no amortization expense is recorded. We periodically (at least annually)
evaluate the recoverability of intangible assets and take into account events or
circumstances that warrant revised estimates of useful lives or that indicate
impairment.
  Intangibles
impairment charges are included within the card and loan servicing costs
category on our consolidated statements of operations.
  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. Goodwill is tested at least annually
for impairment. During 2009 and 2008, we recorded goodwill impairment charges of
$23.5 million (of which $3.5 million is included in our loss from discontinued
operations) and $32.0 million (of which $1.1 million is included in our loss
from discontinued operations), respectively, to report goodwill at its fair
value.
  Reportable
Segments
  Based on
applicable accounting requirements, we have identified five reportable
segments:  Credit Cards; Investments in Previously Charged-Off
Receivables; Retail Micro-Loans; Auto Finance and Internet Micro-Loans. See
Note 4, “Segment Reporting,” for further discussion of these
segments.
  Income
Taxes
  We
account for income taxes based on the liability method required by applicable
accounting rules. Under the liability method, deferred income taxes reflect the
net tax effects of temporary differences between the carrying amounts of assets
and liabilities for financial reporting purposes and the amounts used for income
tax purposes. Additionally, we assess the probability that a tax position we
have taken may not ultimately be sustained on audit, and we reevaluate our
uncertain tax positions on a quarterly basis. We base these reevaluations on
factors including, but not limited to, changes in facts and circumstances,
changes in tax law, effectively settled issues under audit, and new audit
activity.  A change in recognition or measurement would result in the
recognition of a tax benefit or an additional charge to tax expense. The
accounting rules also require that we assess the need to establish a valuation
allowance against deferred tax assets by evaluating available evidence to
determine whether it is more likely than not that some or all of the deferred
tax assets will be realized in the future.  To the extent there is
insufficient positive evidence to support the realization of the deferred tax
assets, we establish a valuation allowance.
   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
2006. Currently, we are under audit by various jurisdictions for various years,
including the Internal Revenue Service for the 2007 and 2008 tax year. Although
the audits have not been concluded, we do not expect any material changes to our
reported tax positions in those years.
  We
recognize potential accrued interest and penalties related to unrecognized tax
benefits in income tax expense.  We recognized $2.8 million and $2.5
million in potential interest and penalties associated with uncertain tax
positions during the years ended December 31, 2009 and 2008, 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 $2.5 million and $2.6 in the years ended December 31, 2009 and
2008, respectively, related to the closing of the statute of limitations for our
2005 and 2004 U.S. federal and certain U.S. state income tax returns,
respectively.
  Our
overall effective benefit rates (computed considering results for both
continuing and discontinued operations before income taxes in the aggregate)
were 24.7% and 32.8% for years ended December 31, 2009 and 2008, respectively.
We have experienced no material changes in effective tax benefit rates
associated with differences in filing jurisdictions between these periods, and
the variations in effective tax benefit rates between these periods are
substantially related to the effects of $70.6million in valuation allowances
provided against income statement-oriented U.S. federal, foreign and state
deferred tax assets during the year ended December 31, 2009. As computed without
regard to the effects of all U.S. federal, foreign, state, and local tax
valuation allowances taken against income statement-oriented deferred tax
assets, our effective tax benefit rates would more likely than not have been
34.3% and 33.7% for the years ended December 31, 2009 and 2008,
respectively.
  F-14
 Table of Contents
   Lease
Impairments
  During
the second quarter of 2008, we subleased 183,461 square feet of office space at
our corporate headquarters. As a result of inadequate rental payments associated
with these subleases as compared to our obligations, we recognized a second
quarter 2008 impairment charge of $5.5 million. The charge is included within
the other category as a component of other operating expense on our consolidated
statement of operations for the years ended December 31, 2008. We are
recognizing the rental income associated with this sublease on a straight-line
basis as an offset to rental expense also recorded within the other category of
expenses as a component of other operating expense.
  Fees
and Related Income on Non-Securitized Earning Assets
  Fees and
related income on non-securitized 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 have held them on balance sheet; (3)
changes in the fair value of loans and fees receivable recorded at fair value;
(4) income associated with our investments in previously charged-off
receivables; (5) gains and losses associated with our investments in
securities; and (6) gross profits from auto sales within our Auto Finance
segment.
  Fees associated with
our credit card offerings in periods we have held them on balance sheet are
similar in nature and in accounting treatment to those identified in Loss on
Securitized Earning Assets discussed below.
  The
components (in thousands) of our fees and related income on non-securitized
earning assets are as follows:
 
 For
      the Year Ended December 31,2009
              
              
              2008Retail
      micro-loan fees
              
              $
              73,075
              
              
              $
              69,790Internet
      micro-loan fees
              
              
              64,641
              
              
              
              42,623Fees
      on credit card receivables held on balance sheet
              
              
              101
              
              
              
              6,367Changes
      in fair value of loans and fees receivable recorded at fair
      value
              
              
              (1,096
              )
              
              
              —Income
      on investments in previously charged-off receivables
              
              
              31,014
              
              
              
              38,816Gross
      profit on auto sales
              
              
              20,329
              
              
              
              32,389Gains
      (losses) on investments in securities
              
              
              276
              
              
              
              (6,622
              )Other
              
              
              2,979
              
              
              
              6,115Total
      fees and related income on non-securitized earning assets
              
              $
              191,319
              
              
              $
              189,478
  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.
  F-15
 Table of Contents
  
 For
      the Year Ended December 31,2009
              
              
              2008Securitization
      gains
              
              $
              113,961
              
              
              $
              —Loss
      on retained interests in credit card receivables
    securitized
              
              
              (676,236
              )
              
              
              (135,561
              )Fees
      on securitized receivables
              
              
              16,209
              
              
              
              28,527Total
      loss on securitized earning assets
              
              $
              (546,066
              )
              
              $
              (107,034
              )
  We assess
fees on credit card accounts underlying our securitized receivables according to
the terms of the related cardholder agreements and, except for annual membership
fees, we recognize these fees as contributing to income from retained interests
in credit card receivables securitized or as fees on securitized receivables
when they are charged to the cardholders’ accounts. We accrete annual membership
fees associated with our securitized credit card receivables as a contribution
to our income from retained interests in credit card receivables securitized on
a straight-line basis over the cardholder privilege period. We amortize direct
receivables origination costs against fees on securitized receivables. See Asset
Securitizationabove and Note 8, “Securitizations and Structured
Financings,” for further discussion on securitization gains and income from
retained interests in credit card receivables (including the effects of changes
in retained interests’ valuations).
  Ancillary
and Interchange Revenues
  While not
offered currently, during periods in which credit card accounts are open to
cardholder purchases, we offer several ancillary products and services to our
cardholder customers, including memberships, insurance products, subscription
services and debt waiver. When we market our own products, we record the fees,
net of estimated cancellations, as deferred revenue upon the customer’s
acceptance of the product and we amortize them on a straight-line basis over the
life of the product (which ranges from one to twelve months). When we market
products for third parties under commission arrangements, we recognize the
revenue when we earn it, which is generally during the same month the product is
sold to the customer. We consider revenue to be earned once delivery has
occurred (i.e., when there is no further performance obligation), the commission
is fixed and collectibility is reasonably assured. Once these conditions are
satisfied, we recognize our commission as ancillary product revenue.
Additionally, we receive a portion of the merchant fee assessed by retail
electronic payment network providersbased on cardholder
purchase volumes underlying credit card receivables, and we recognize these
interchange fees as we receive them.
  Card
and Loan Servicing Expenses
  Card and
loan servicing costs primarily include collections and customer service
expenses. Within this category of expenses are personnel, service bureau,
cardholder correspondence and other direct costs associated with our collections
and customer service efforts. Card and loan servicing costs also include
outsourced collections and customer service expenses. We expense card and loan
servicing costs as we incur them, with the exception of prepaid costs, which we
expense over respective service periods.
  Marketing
and Solicitation Expenses
  We
expense credit card account and other product solicitation costs, including
printing, credit bureaus, list processing costs, telemarketing, postage and
Internet marketing fees, as we incur these costs or expend resources. See Deferred
Costs above for a discussion of the accounting for costs considered to be
direct receivables origination costs.
  Recent Accounting
Pronouncements
  In
January 2010, the Financial Accounting Standards Board (the “FASB”) issued new
rules concerning fair value measurement disclosures.  The new
disclosures will 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 will be reflected in our
accompanying notes to the consolidated financial statements as and when required
under the effective date provisions.
  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
  F-16
 Table of Contents
   fair
value and recognized as a debt issuance cost in the financial statements of the
entity. The debt issuance cost shall 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 unless default of the share-lending
arrangement occurs, at which time the loaned shares would be included in the
common and diluted earnings per share calculations.  These new rules
are effective for fiscal years, and interim periods within those years,
beginning after December 15, 2009 and are to be applied retrospectively to all
arrangements outstanding on the effective date and would apply to loaned shares
issued in connection with our November 2005 convertible senior
notes.  We do not believe that the new share-lending arrangement
accounting rules will have a material affect our consolidated financial
statements (unless, however, an unexpected third-party default of the
share-lending arrangement should occur in the future).
  In June
2009, the FASB issued new accounting rules that, in addition to requiring
certain new securitization and structured financing-related disclosures that
have been incorporated into our consolidated financial statements as of and for
the years ended December 31, 2009, are expected to result 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 will be presented as assets and liabilities on our consolidated balance
sheet effective on that date. Because we expected to exercise the fair value
option permitted under the new rules, we expect favorable effects on our
reported financial condition. Moreover, after adoption of these new accounting
rules, we will no longer reflect our securitization trusts’ results of
operations within losses on retained interests in credit card receivables
securitized, but will 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 will begin to 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 will account for our
securitization transactions under the new rules as secured borrowings rather
than asset sales, we will begin to present the cash flows from these
transactions as cash flows from financing activities, rather than as cash flows
from investing activities.
  In June
2009, the FASB issued new accounting rules that establish the FASB Accounting
Standards Codification (the “Codification”) as the single source of
authoritative GAAP. All previous GAAP standards have been superseded by the
Codification. The Codification neither replaces nor affects rules and
interpretive releases of the SEC under authority of federal securities laws.
These new rules are effective for interim and annual financial statements issued
for periods ending after September 15, 2009, and references to GAAP in this
report have been updated as a result.  The adoption of these new rules
did not impact our financial statements.
  
  F-17
 Table of Contents
   In April
2009, the FASB issued new other-than-temporary impairment accounting rules for
debt securities, indicating that a company should continue to assess its intent
and ability to hold a security to maturity and to assess whether the fair value
of a debt security is less than its amortized cost basis. If the fair value is
determined to be less than the amortized cost basis, the company should make the
determination of whether the impairment is other-than-temporary. The new rules
also call for additional disclosure and are effective for periods ending after
June 15, 2009. Our adoption of these rules did not have a material impact on our
consolidated financial statements.
 
 In June
2008, the FASB ratified a consensus reached by the EITF on the determination of
whether an equity-linked financial instrument (or embedded feature) is indexed
to an entity's own stock. After considering these new rules, we re-affirmed our
conclusion reached in 2005 that we are not required to bifurcate and separately
account for any of the embedded features within our convertible senior
notes.
  Also in
June 2008, the FASB issued new rules addressing whether unvested equity-based
awards are participating securities and, therefore, need to be included in the
earnings allocation in computing earnings per share under the two-class method
described in previously issued accounting rules.  These new rules were
effective for us January 1, 2009, and all prior period earnings per share data
presented in our consolidated financial statements and notes thereto have been
adjusted retrospectively to conform to the new rules.  See Note 16,
“Net Loss Attributable to Controlling Interests Per Common Share,” for further
information regarding the computation of earnings per share.
  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 shareholders’ equity of $56.1 million. See the
table below for a roll-forward of the impacts of our adoption of these
rules.
  In December 2007, the FASB
issued new accounting rules that significantly changed the accounting for
business combinations. Under these rules, an acquiring entity is required, with
limited exceptions, to recognize all the assets acquired and liabilities assumed
in a transaction at the acquisition-date fair value. The rules change the
accounting treatment for certain specific items, including:
  •
              Acquisition
      costs generally are expensed as
incurred;
  •
              Noncontrolling
      interests (formerly known as minority interests) are valued at fair value
      at the acquisition date;
  •
              Acquired
      contingent liabilities are recorded at fair value at the acquisition date
      and subsequently measured at either the higher of such amount or the
      amount determined under previously existing rules for non-acquired
      contingencies;
  •
              In-process
      research and development is recorded at fair value as an indefinite-lived
      intangible asset at the acquisition
date;
  •
              Restructuring
      costs associated with a business combination are generally expensed
      subsequent to the acquisition date;
and
  •
              Changes
      in deferred tax asset valuation allowances and income tax uncertainties
      after the acquisition date generally affect income tax
      expense.
  F-18
 Table of Contents
   The new
rules also include a substantial number of new disclosure requirements. They
apply prospectively to business combinations for which the acquisition date is
on or after the beginning of the first annual reporting period beginning on or
after December 15, 2008, and earlier adoption was prohibited. While the new
rules significantly affect the way that we will account for future acquisitions,
we adopted them on January 1, 2009 with no material effects on our
consolidated results of operations, financial position or cash
flows.
  Also in
December 2007, the FASB issued new accounting requirements that establish new
accounting and reporting standards for the noncontrolling interests in a
subsidiary and for the deconsolidation of a subsidiary. Specifically, these
rules require the recognition of any noncontrolling interests (minority
interests) as equity in the consolidated financial statements and separate from
the parent's equity. The amount of net income attributable to the noncontrolling
interests is included in consolidated net income on the face of the income
statement. The rules also clarify that changes in a parent's ownership interest
in a subsidiary that do not result in deconsolidation are equity transactions if
the parent retains its controlling financial interest. In addition, the rules
require that a parent recognize a gain or loss in net income when a subsidiary
is deconsolidated. Such gain or loss is measured using the fair value of the
noncontrolling equity investment on the deconsolidation date. The rules also
include expanded disclosure requirements regarding the interests of the parent
and its noncontrolling interests. These new rules are effective for fiscal
years, and interim periods within those fiscal years, beginning on or after
December 15, 2008, and earlier adoption was prohibited. Using retrospective
application as required, we adopted these rules on January 1, 2009 with no
material effects (other than the effects of reclassification of our
noncontrolling interests as a component of equity) on our consolidated results
of operations, financial position or cash flows.
  The
following details (in thousands, except for per share data) the effects of
retrospective application of the new accounting rules concerning Instrument C
convertible debt and noncontrolling interests:
 As
      Originally Reported
              
              
              Retrospective
      Application of Instrument C Convertible Debt Rules
              
              
              Retrospective
      Application of Noncontrolling Interests Rules
              
              
              As
      AdjustedAdditional
      paid-in capital (as of December 31, 2008)
              
              $
              413,857
              
              
              $
              108,714
              
              
              $
              —
              
              
              $
              522,571Retained
      earnings (as of December 31, 2008)
              
              $
              505,728
              
              
              $
              (52,579
              )
              
              $
              —
              
              
              $
              453,149Total
      equity (as of December 31,2008)
              
              $
              665,844
              
              
              $
              56,135
              
              
              $
              24,878
              
              
              $
              746,857Loss
      from continuing operations (for the year ended December 31, 2008)
      (1)
              
              $
              (95,696
              )
              
              $
              (37,891
              )
              
              $
              (2,145
              )
              
              $
              (135,732
              )Net
      loss (for the year ended December 31, 2008)
              
              $
              (101,582
              )
              
              $
              (37,891
              )
              
              $
              (2,145
              )
              
              $
              (141,618
              )Loss
      from continuing operations attributable to controlling interests per
      common share (for the year ended December 31, 2008)—basic
    (1)
              
              $
              (2.02
              )
              
              $
              (0.79
              )
              
              $
              —
              
              
              $
              (2.81
              )Loss
      from continuing operations attributable to controlling interests per
      common share (for the year ended December 31, 2008)—diluted
      (1)
              
              $
              (2.02
              )
              
              $
              (0.79
              )
              
              $
              —
              
              
              $
              (2.81
              )Net
      loss attributable to controlling interests per common share (for the year
      ended December 31, 2008)—basic
              
              $
              (2.14
              )
              
              $
              (0.79
              )
              
              $
              —
              
              
              $
              (2.93
              )Net
      loss attributable to controlling interests per common share (for the year
      ended December 31, 2008)—diluted
              
              $
              (2.14
              )
              
              $
              (0.79
              )
              
              $
              —
              
              
              $
              (2.93
              )
  (1) Prior
period “As originally reported” amounts have been restated to report the impact
of discontinued operations.
  Subsequent
Events
  We
evaluate subsequent events that have occurred 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
   F-19
 Table of Contents
   events,
and based on our evaluation, we did not identify any recognized or nonrecognized
subsequent events that would have required adjustments to our consolidated
financial statements.
 Nevertheless,
in connection with our review of a potential spin-off 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.  The spin-off
remains subject to a number of conditions, including, among others:
  ·
                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 all 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
      private letter ruling that we received from the Internal Revenue
      Service not being revoked or modified in any material
      respect;
  ·
                NASDAQ’s
      approval for listing of Purpose Financial’s common stock, subject to
      official notice of issuance; and
  ·
                the
      nonexistence of any order, injunction or decree issued by any court of
      competent jurisdiction or other legal restraint or prohibition that might
      prevent the 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.
  3.      Discontinued
Operations
  In the
fourth quarter of 2007, we adopted a formal plan to discontinue (through sale or
otherwise) 105 Retail Micro-Loans segment branches located within Florida,
Oklahoma, Colorado, Arizona, Louisiana and Michigan. Subsequently, in the third
quarter of 2008, we decided to retain a limited number of retail storefronts in
Oklahoma and Colorado for which we now expect to be able to earn our desired
returns. Our continuing operations and discontinued operations results within
our consolidated statements of operations for 2008 reflect our decision to
continue operating the limited number of storefronts in Oklahoma and Colorado.
All other discontinued storefronts within the affected states have either been
sold or closed as of December 31, 2008.
  In May
2009, we discontinued our Retail Micro-Loans segment’s Arkansas operations based
on regulatory opposition we faced within that state. Reflecting both our
discontinued Arkansas operations, as well as those of other Retail Micro-Loan
segment states that we discontinued in prior reporting periods, the components
(in thousands) of our discontinued operations are as follows:
 
 For
      the Year Ended December 31,2009
              
              
              2008Net
      interest income, fees and related income on non-securitized earning
      assets
              
              $
              1,684
              
              
              $
              11,223Other
      operating income
              
              
              —
              
              
              
              —Other
      operating expense
              
              
              2,021
              
              
              
              18,240Estimated
      loss upon sale
              
              
              2,779
              
              
              
              908Goodwill
      impairment
              
              
              3,483
              
              
              
              1,132Loss
      before income taxes
              
              
              (6,599
              )
              
              
              (9,057
              )Income
      tax benefit
              
              
              2,310
              
              
              
              3,171Net
      loss
              
              $
              (4,289
              )
              
              $
              (5,886
              )
  There
were no discontinued assets held for sale on our consolidated balance sheets as
of December 31, 2009 and 2008.
  4.
              Segment
      Reporting
  Our
segment accounting policies are the same as policies described in Note 2,
“Significant Accounting Policies and Consolidated Financial Statement
Components.”
  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.
  Our Credit Cards segment
consists of our credit card receivables origination, acquisition and servicing
activities (excluding those pre-card issuance activities associated with our
balance transfer program within our Investments in Previously Charged Off
Receivables segment), as well as our cash management and investments in debt and
equity securities activities. This segment represents aggregate activities
associated with substantially all of our credit card products, including our
lower-tier credit card offerings and our Monument-branded credit card
receivables in the U.K. (the “U.K. Portfolio”) that we acquired in 2007 from
Barclaycard, a division of Barclays Bank PLC.  Revenues associated
with our credit card receivables include interest income (along with late fees),
fees and related income during periods when we hold them on our consolidated
balance sheets, while revenues for our off-balance-sheet securitized credit card
receivables are included within our fees and related income on securitized
earning assets category within the Credit Cards segment and include
(1) securitization gains, (2) loss on retained interests in credit
card receivables securitized (including losses on retained interests in our
lower–tier credit card originated portfolio master trust prior to our
de-securitization and reconsolidation of the assets held by that trust upon our
repayment of investor interests in that trust in December 2009) and
(3) fees and related income. Revenue sources we also include within our
Credit Cards segment are servicing income and equity in income of equity-method
investees (related only to those equity-method investees that have purchased and
securitized credit card receivables portfolios). We earn servicing income from
the trusts underlying our credit card receivables securitizations and the credit
card receivables securitizations of our equity-method
investees.
  F-20
 Table of Contents
   The
Investments in Previously Charged-Off Receivables segment consists of our debt
collections subsidiary. Through this business, we pursue, competitively bid for
and acquire previously charged-off credit card receivables. A significant
majority of our acquisitions of previously charged-off credit card receivables
have been from the securitization trusts underlying our retained interest
investments. Revenues earned in this segment consist of those associated with
normal delinquency charged off receivables purchased and held for collection
(particularly since the contractual dispute arose with Encore under its forward
flow contract in July 2008),  those earned with respect to investments
in Chapter 13 Bankruptcies, and those associated with collections on accounts
acquired through a balance transfer program prior to such time as credit cards
are issued relating to the program’s underlying accounts. Prior to our
settlement with Encore in the third quarter of 2009, revenues of this segment
also included deferred revenue accretion associated with prepayments Encore made
to us under a forward flow contract; see further discussion of the forward flow
contract in Note 2, “Significant Accounting Policies and Consolidated Financial
Statement Components. All of this segment’s revenues are classified as fees and
related income on non-securitized earning assets in the accompanying
consolidated statements of operations.
  Our
Retail Micro-Loans segment consists of a network of storefront locations that,
depending on the location (and financial reporting period), provide (or have in
the past provided) some or all of the following products or services:
(a) small-denomination, short-term, unsecured cash advances that are
typically due on the customer’s next payday; (b) installment loans, title
loans, and other credit products; and (c) money transfer, bill payment and
other financial services. Revenues currently earned within this segment are
classified as fees and related income on non-securitized earning assets in the
accompanying consolidated statements of operations. Servicing fees associated
with this segment’s prior activities as a servicer and processor of
bank-originated micro-loans are classified within servicing income.
  For all
periods presented, our Auto Finance segment includes:  the activities
of our CAR operations, which are represented by nationwide network of
pre-qualified auto dealers in the buy-here, pay-here used car business from
which we purchase auto loans at a discount or for which we service auto loans
for a fee; the activities of our ACC operations, which currently is collecting
out and liquidating down a portfolio of auto loans that it originated through
relationships with franchised auto dealerships prior to our cessation of its
origination activities in early 2009; and the sales and financing activities of
our own JRAS buy-here, pay-here used car lots.
 
 Our Internet
Micro-Loan segment consists of both our U.S. and U.K. Internet Micro-Loans
operations.  Our U.K. internet micro-loan operation is comprised of
the operations of MEM Capital Limited and its subsidiaries (“MEM”), a
U.K.-based, Internet, micro-loans provider that we acquired in April 2007. Using
proprietary analytics to market, underwrite and manage loans over the Internet
to consumers in need of short-term financial assistance, MEM loans are made for
a period of up to 40 days and are repayable in full on the customer’s next
payday. A typical customer is 22 to 35 years of age, has average net monthly
income of £1,300, works in an office or skilled environment and borrows £200. In
exchange for this service, MEM receives a fee, typically 25% of the advance
amount. Our U.S. Internet micro-loan operations currently are comprised of
limited test offerings of short-term, cash advance micro-loans over the Internet
within the U.S. as we seek to replicate the marketing, underwriting and
management successes that we have had with such an offering in the U.K. through
our MEM operations.
  Our U.K.
operations (comprised of activities performed by MEM and with respect to our
U.K. Portfolio) represented $(25.1) million of our $391.0 million in 2009
revenue and $29.3 million of our $524.6 million in 2008 revenue. Also, as of
both December 31, 2009 and 2008, we did not have a material amount of
long-lived assets located outside of the U.S.
  We
measure the profitability of our reportable segments based on their income after
allocation of specific costs and corporate overhead. Overhead costs are
allocated based on headcounts and other applicable measures to better align
costs with the associated revenues. Summary operating segment information (in
thousands) is as follows:
  F-21
 Table of Contents
   
 Year
      Ended December 31, 2009
              
              Credit Cards
              
              
              Investments
                in
                Previously
                Charged-off
                Receivables
              
              
              Retail
                Micro-
                Loans
              
              
              Auto
                Finance
              
              
              Internet
      Micro-Loans
              
              
              TotalInterest
      income:Consumer
      loans, including past due fees
              
              $
              3,044
              
              
              $
              —
              
              
              $
              —
              
              
              $
              72,519
              
              
              $
              —
              
              
              $
              75,563Other
              
              
              1,085
              
              
              
              7
              
              
              
              4
              
              
              
              79
              
              
              
              19
              
              
              
              1,194Total
      interest income
              
              
              4,129
              
              
              
              7
              
              
              
              4
              
              
              
              72,598
              
              
              
              19
              
              
              
              76,757Interest
      expense
              
              
              (28,294
              )
              
              
              (491
              )
              
              
              (95
              )
              
              
              (12,993
              )
              
              
              (193
              )
              
              
              (42,066
              )Net
      interest income (expense) before fees and related income on
      non-securitized earning assets and provision for loan
    losses
              
              
              (24,165
              )
              
              
              (484
              )
              
              
              (91
              )
              
              
              59,605
              
              
              
              (174
              )
              
              
              34,691Fees
      and related income on non-securitized earning assets
              
              
              2,880
              
              
              
              31,115
              
              
              
              73,075
              
              
              
              18,974
              
              
              
              65,275
              
              
              
              191,319Provision
      for loan losses
              
              
              (18,542
              )
              
              
              —
              
              
              
              (9,687
              )
              
              
              (47,711
              )
              
              
              (18,409
              )
              
              
              (94,349
              )Net
      interest income (expense), fees and related income on non-securitized
      earning assets
              
              
              (39,827
              )
              
              
              30,631
              
              
              
              63,297
              
              
              
              30,868
              
              
              
              46,692
              
              
              
              131,661Other
      operating income:Fees
      and related income (loss) on securitized earning assets
              
              
              (546,066
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (546,066
              )Servicing
      income
              
              
              104,374
              
              
              
              —
              
              
              
              —
              
              
              
              607
              
              
              
              —
              
              
              
              104,981Ancillary
      and interchange revenues
              
              
              17,528
              
              
              
              389
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              17,917Gain
      on extinguishment of debt
              
              
              1,421
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              1,421Gain
      on buy-out of equity method investee members
              
              
              20,990
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              20,990Equity
      in loss of equity-method investees
              
              
              (16,881
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (16,881
              )Total
      other operating income
              
              
              (418,634
              )
              
              
              389
              
              
              
              —
              
              
              
              607
              
              
              
              —
              
              
              
              (417,638
              )Total
      other operating expense
              
              
              (247,612
              )
              
              
              (32,206
              )
              
              
              (71,196
              )
              
              
              (57,856
              )
              
              
              (30,320
              )
              
              
              (439,190
              )(Loss)
      income from continuing operations before income taxes
              
              $
              (706,073
              )
              
              $
              (1,186
              )
              
              $
              (7,899
              )
              
              $
              (26,381
              )
              
              $
              16,372
              
              
              $
              (725,167
              )Loss
      from discontinued operations before income taxes
              
              $
              —
              
              
              $
              —
              
              
              $
              (6,599
              )
              
              $
              —
              
              
              $
              —
              
              
              $
              (6,599
              )Noncontrolling
      interests
              
              $
              13,844
              
              
              $
              71
              
              
              $
              —
              
              
              $
              —
              
              
              $
              (3,454
              )
              
              $
              10,461Securitized
      earning assets
              
              $
              36,514
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              36,514Non-securitized
      earning assets, net
              
              $
              57,871
              
              
              $
              29,669
              
              
              $
              34,009
              
              
              $
              214,439
              
              
              $
              23,976
              
              
              $
              359,964Total
      loans and fees receivable carried at net realizable value,
      gross
              
              $
              17,948
              
              
              $
              —
              
              
              $
              41,011
              
              
              $
              268,326
              
              
              $
              34,027
              
              
              $
              361,312Total
      loans and fees receivable carried at net realizable value,
    net
              
              $
              12,943
              
              
              $
              —
              
              
              $
              34,009
              
              
              $
              214,439
              
              
              $
              23,976
              
              
              $
              285,367Total
      assets
              
              $
              336,245
              
              
              $
              30,634
              
              
              $
              76,099
              
              
              $
              248,943
              
              
              $
              56,911
              
              
              $
              748,832Notes
      payable
              
              $
              1,044
              
              
              $
              4,882
              
              
              $
              —
              
              
              $
              158,442
              
              
              $
              —
              
              
              $
              164,368
 
  F-22
 Table of Contents
  
 
 
 Year
      Ended December 31, 2008
              
              Credit Cards
              
              
              Investments
                in
                Previously
                Charged-off
                Receivables
              
              
              Retail
                Micro-
                Loans
              
              
              Auto
                Finance
              
              
              Internet
      Micro-Loans
              
              
              TotalInterest
      income:Consumer
      loans, including past due fees
              
              $
              3,823
              
              
              $
              —
              
              
              $
              —
              
              
              $
              89,095
              
              
              $
              —
              
              
              $
              92,918Other
              
              
              4,123
              
              
              
              259
              
              
              
              28
              
              
              
              659
              
              
              
              2
              
              
              
              5,071Total
      interest income
              
              
              7,946
              
              
              
              259
              
              
              
              28
              
              
              
              89,754
              
              
              
              2
              
              
              
              97,989Interest
      expense
              
              
              (35,128
              )
              
              
              (90
              )
              
              
              —
              
              
              
              (16,636
              )
              
              
              (1,024
              )
              
              
              (52,878
              )Net
      interest income (expense) before fees and related income on
      non-securitized earning assets and provision for loan
    losses
              
              
              (27,182
              )
              
              
              169
              
              
              
              28
              
              
              
              73,118
              
              
              
              (1,022
              )
              
              
              45,111Fees
      and related income on non-securitized earning assets
              
              
              5,066
              
              
              
              38,816
              
              
              
              69,790
              
              
              
              33,183
              
              
              
              42,623
              
              
              
              189,478Provision
      for loan losses
              
              
              (2,762
              )
              
              
              —
              
              
              
              (10,750
              )
              
              
              (41,480
              )
              
              
              (15,619
              )
              
              
              (70,611
              )Net
      interest income (expense), fees and related income on non-securitized
      earning assets
              
              
              (24,878
              )
              
              
              38,985
              
              
              
              59,068
              
              
              
              64,821
              
              
              
              25,982
              
              
              
              163,978Other
      operating income:Fees
      and related income (loss) on securitized earning assets
              
              
              (107,034
              )
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              (107,034
              )Servicing
      income
              
              
              181,502
              
              
              
              —
              
              
              
              —
              
              
              
              381
              
              
              
              —
              
              
              
              181,883Ancillary
      and interchange revenues
              
              
              54,652
              
              
              
              631
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              55,283Gain
      on extinguishment of debt
              
              
              61,671
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              61,671Equity
      in income of equity-method investees
              
              
              22,319
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              22,319Total
      other operating income
              
              
              213,110
              
              
              
              631
              
              
              
              —
              
              
              
              381
              
              
              
              —
              
              
              
              214,122Total
      other operating expense
              
              
              (365,976
              )
              
              
              (27,214
              )
              
              
              (50,104
              )
              
              
              (110,001
              )
              
              
              (26,357
              )
              
              
              (579,652
              )(Loss)
      income from continuing operations before income taxes
              
              $
              (177,744
              )
              
              $
              12,402
              
              
              $
              8,964
              
              
              $
              (44,799
              )
              
              $
              (375
              )
              
              $
              (201,552
              )Loss
      from discontinued operations before income taxes
              
              $
              —
              
              
              $
              —
              
              
              $
              (7,811
              )
              
              $
              —
              
              
              $
              (1,246
              )
              
              $
              (9,057
              )Noncontrolling
      interests
              
              $
              2,985
              
              
              $
              (744
              )
              
              $
              —
              
              
              $
              —
              
              
              $
              (96
              )
              
              $
              2,145Securitized
      earning assets
              
              $
              813,793
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              —
              
              
              $
              813,793Non-securitized
      earning assets, net
              
              $
              4,236
              
              
              $
              48,652
              
              
              $
              33,597
              
              
              $
              291,559
              
              
              $
              15,044
              
              
              $
              393,088Loans
      and fees receivable carried at net realizable value, gross
              
              $
              712
              
              
              $
              —
              
              
              $
              40,099
              
              
              $
              359,662
              
              
              $
              20,771
              
              
              $
              421,244Loans
      and fees receivable carried at net realizable value, net
              
              $
              534
              
              
              $
              —
              
              
              $
              33,597
              
              
              $
              291,559
              
              
              $
              15,044
              
              
              $
              340,734Total
      assets
              
              $
              961,428
              
              
              $
              59,850
              
              
              $
              99,175
              
              
              $
              342,465
              
              
              $
              62,193
              
              
              $
              1,525,111Notes
      payable
              
              $
              3,957
              
              
              $
              4,125
              
              
              $
              —
              
              
              $
              180,913
              
              
              $
              10,944
              
              
              $
              199,939
  
  F-23
 Table of Contents
   5.         Shareholders’
Equity
  Retired
Shares
  In 2008,
we received 2,026,881 of shares as a return to us of shares we had previously
lent. During 2009, an additional 1,398,681 shares were returned to
us.  All returned shares are excluded from our outstanding share
counts. As of December 31, 2009, we had 2,252,388 loaned shares
outstanding.
  Treasury
Stock
  During
2008, our Board of Directors authorized a program to repurchase up to an
additional 10 million shares of our outstanding common stock through June
2010; this program is a successor program to others that have been in place over
the past several years with similar authorizations for share repurchases. Under
the plan, we may repurchase shares of our common stock from time to time either
on the open market or through privately negotiated transactions in compliance
with SEC guidelines.
  At our
discretion, we use treasury shares to satisfy option exercises and restricted
stock vesting, and we use the cost approach when accounting for the repurchase
and reissuance of our treasury stock. We reissued treasury shares totaling
152,991 during 2009 and 207,125 during 2008 at gross costs of $2.7 million and
$3.7 million, respectively, in satisfaction of option exercises and share
vestings under our restricted stock plan. We also effectively purchased shares
totaling 45,509 during 2009 and 58,013 during 2008 at gross costs of $0.1
million and $0.6 million, respectively, 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 minimum tax withholdings.
  6.          Investments
in Equity-Method Investees
  We
(generally through one or more of our wholly owned subsidiaries) have made
several acquisitions for which we account using the equity-method of
accounting.  Our equity-method investments outstanding at December 31,
2009 were:
  ·
              Our
      January 2005 purchase of a 47.5% interest in a joint venture for
      $10.9 million, including transaction costs—such joint venture being
      formed to purchase $376.3 million (face amount) in credit card
      receivables; and
  ·
              Our
      fourth quarter 2004 purchase of a 33.3% interest in a joint venture
      (“Transistor”) for $48.3 million, including transaction costs—such
      joint venture being formed to purchase a portfolio of credit card
      receivables ($996.5 million face amount) from Fleet Bank (RI),
      National Association, a portfolio which Transistor subsequently
      securitized in exchange for a subordinated interest in a
      trust.
  Additionally,
in May 2009, we recognized a gain of $21.0 million that is separately classified
on our 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 items, 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 December 31, 2008
balance sheet data and results of operations data associated with CSG while we
held it in equity-method investee form prior to our buy-out of its other
members):
 
 As
      of December 31,2009
              
              
              2008Securitized
      earning assets
              
              $
              35,844
              
              
              $
              116,510Non-securitized
      earning assets, net
              
              $
              —
              
              
              $
              —Total
      assets
              
              $
              38,332
              
              
              $
              118,962Total
      liabilities
              
              $
              1,319
              
              
              $
              1,967Members’
      capital
              
              $
              37,013
              
              
              $
              116,995
 
  F-24
 Table of Contents
   For
      the Year Ended December 31,2009
              
              
              2008Net
      interest income, fees and related income on non-securitized earning
      assets
              
              $
              5
              
              
              $
              2Fees
      and related income on securitized earning assets
              
              $
              (50,839
              )
              
              $
              44,438Total
      other operating income
              
              $
              (46,670
              )
              
              $
              53,048Net
      income
              
              $
              (42,122
              )
              
              $
              49,464
  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
such as occurred in the second quarter of 2009, 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 from
discontinued operations in the third quarter of 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 current internal projections of residual cash flows and
existing market data supporting valuation prices of similar companies; this
analysis yielded an additional $20.0 million goodwill impairment charge
associated with these continuing operations that is reflected within our
consolidated statement of operations for the year ended December 31,
2009.
  In
April 2007, we acquired 95% of the outstanding shares of MEM, our
U.K.-based, Internet, micro-loan operations, for £11.6 million ($22.3
million) in cash. 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. The MEM
acquisition agreement was amended in the first quarter of 2009 to remove the
sellers’ earn-out rights and in exchange grant the sellers a 22.5% ownership
interest in the entity.  The settlement of the contingent earn-out
resulted in a re-measurement of the carrying value of our investment in MEM and
additional goodwill of $5.6 million.
  In
connection with our first quarter 2008 decision to sell our Texas retail
micro-loans operations and hold those operations for sale, we allocated goodwill
between our retained Retail Micro-Loans segment operations and our discontinued
Texas operations, thereby resulting in a $1.1 million impairment loss that is
reported within loss from discontinued operations in 2008. This valuation
analysis was based on then-current internal projections and then-existing market
data supporting valuation prices of similar companies.  Additionally,
based on September 2008 amendments to financing facilities within one of our
Auto Finance segment’s reporting units, we determined that the then-carrying
amount of this reporting unit more likely than not exceeded its fair value. We
reassessed the carrying value of the reporting unit’s goodwill, determined that
the current fair value would not support the stated goodwill balance and
recorded a third quarter 2008 goodwill impairment loss of $29.2 million. Lastly,
in our 2008 annual goodwill impairment testing for JRAS, we determined that the
total goodwill balance of $1.7 million was impaired, and we wrote it off in that
period. These valuation analyses were based on then current internal projections
and existing market data supporting valuation prices of similar
companies.
  F-25
 Table of Contents
   Changes
(in thousands) in the carrying amount of goodwill for the years ended December
31, 2009 and 2008, respectively, by reportable segment are as
follows:
 
 Retail Micro-
                Loans
              
              
              Auto
                Finance
              
              
              Internet
      Micro-Loans
              
              
              ConsolidatedBalance
      as of December 31, 2007
              
              $
              44,346
              
              
              $
              30,868
              
              
              $
              21,955
              
              
              $
              97,169Impairment
      loss
              
              
              (1,132
              )
              
              
              (30,868
              )
              
              
              —
              
              
              
              (32,000
              )Foreign
      currency translation
              
              
              —
              
              
              
              —
              
              
              
              (6,040
              )
              
              
              (6,040
              )Balance
      as of December 31, 2008
              
              
              43,214
              
              
              
              —
              
              
              
              15,915
              
              
              
              59,129Goodwill
      related to settlement of contingent performance-related
      earn-out
              
              
              —
              
              
              
              —
              
              
              
              5,553
              
              
              
              5,553Impairment
      loss
              
              
              (23,483
              )
              
              
              —
              
              
              
              —
              
              
              
              (23,483
              )Foreign
      currency translation
              
              
              —
              
              
              
              —
              
              
              
              2,223
              
              
              
              2,223Balance
      as of December 31, 2009
              
              $
              19,731
              
              
              $
              —
              
              
              $
              23,691
              
              
              $
              43,422
  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 from discontinued
operations in 2009. This valuation analysis was based on current internal
projections of residual cash flows and existing market data supporting valuation
prices of similar companies.  During 2008, we charged off $1.3 million
of dealer relationship intangibles, such amount representing a subset of our
larger dealer relationship intangibles asset that is being amortized over a
three-year period following our acquisition of this asset.
  We had
$2.1 million and $2.3 million of remaining intangible assets that we determined
had an indefinite benefit period as of December 31, 2009 and 2008, respectively.
The net unamortized carrying amount of intangible assets subject to amortization
was $0.7 million and $2.2 million as of December 31, 2009 and 2008,
respectively. Intangible asset-related amortization expense was $1.6 million and
$3.7 million for the years ended December 31, 2009 and 2008,
respectively.
  Estimated
future amortization expense (in thousands) associated with intangible assets is
as follows:
 
 2010
              
              $
              4152011
              
              
              265Total
              
              $
              680
 
 8.         Securitizations
and Structured Financings
  As of
both December 31, 2009 and 2008, most of our credit card receivables were
held by off-balance-sheet securitization trusts. As noted previously, we refer
in our notes to our consolidated financial statements to transfers of financial
assets to off-balance-sheet securitization trusts as “securitizations,” as
contrasted with our use of the term “structured financings” to refer to
non-recourse, on-balance-sheet asset-backed debt financings.
  Securitizations
  We have
securitized certain credit card receivables that we have purchased through both
our third-party financial institution relationships and our portfolio
acquisition activities. Our credit card receivables securitization transactions
do not affect the relationship we have with our customers, and we continue to
service the securitized credit card receivables. Our ownership of retained
interests in our securitized credit card receivables, the guarantee and note
purchase agreements with respect to securitizations of acquired credit card
receivables portfolios as described in Note 14, “Commitments and Contingencies,”
and our obligation to service securitized receivables represent our only
continuing involvement with our securitized credit card
receivables.
  Applicable
accounting literature has in the past required us to treat our credit card
receivables transfers to securitization trusts as sales and to remove the
receivables from our consolidated balance sheets. Under this guidance, an entity
recognizes the assets it controls and liabilities it has incurred, and
derecognizes the financial assets for which control has been surrendered and all
liabilities that have been extinguished. An entity is considered to have
surrendered control over the transferred assets and, therefore, to have sold the
assets if the following conditions are met:
  F-26
 Table of Contents
   1.
              The
      transferred assets have been isolated from the transferor and put
      presumptively beyond the reach of the transferor and its
      creditors.
  2.
              Each
      transferee has the right to pledge or exchange the assets it has received,
      and no condition both constrains the transferee from taking advantage of
      its right to pledge or exchange and provides more than a trivial benefit
      to the transferor.
  3.
              The
      transferor does not maintain effective control over the transferred assets
      through either (i) an agreement that both entitles and obligates the
      transferor to repurchase or redeem them before their maturity, or
      (ii) the ability to unilaterally cause the holder to return specific
      assets, other than through a clean-up
call.
  In
December 2009 and although not required to do so contractually, we received
investor consent to repay the only remaining investor with an outside
third-party interest in our lower-tier originated portfolio master trust.
According to applicable accounting guidance (including that concerning a fair
value option election we previously made with respect to the receivables
underlying this trust), we reconsolidated those receivables onto our
consolidated balance sheet and recorded them at fair value because we became the
sole beneficiary of the trust’s cash flows.  As such, subsequent to
their reconsolidation, the receivables and the related fees on the credit cards
are no longer included within the securitization data presented herein, but
instead are included respectively within loans and fees receivable, at fair
value, on our consolidated balance sheet and within consumer loans, including
past due fees and fees and related income on non-securitized earning assets on
our consolidated statement of operations.
  The table
below summarizes (in thousands) our securitization activities for the periods
presented. As with other tables included herein, it does not include the
securitization activities of our equity-method investees:
 
 For
      the Year Ended December 31,2009
              
              
              2008Gross
      amount of receivables securitized at year end
              
              $
              1,318,976
              
              
              $
              2,643,079Proceeds
      from new transfers of financial assets to securitization
      trusts
              
              $
              434,299
              
              
              $
              1,322,993Proceeds
      from collections reinvested in revolving-period
      securitizations
              
              $
              415,543
              
              
              $
              1,361,665Excess
      cash flows received on retained interests
              
              $
              88,655
              
              
              $
              163,446Securitization
      gains
              
              $
              113,961
              
              
              $
              —Loss
      on retained interests in credit card receivables
    securitized
              
              
              (676,236
              )
              
              
              (135,561
              )Fees
      on securitized receivables
              
              
              16,209
              
              
              
              28,527Total
      loss on securitized earning assets
              
              $
              (546,066
              )
              
              $
              (107,034
              )
  The
$114.0 million securitization gain in the above table results from our purchase
of $264.0 million of securitization facility notes for $150.0 million (including
associated transaction costs) and their subsequent cancellation.
  The
investors in our securitization transactions have no recourse against us for our
customers’ failure to pay their credit card receivables. However, most of our
retained interests are subordinated to the investors’ interests until the
investors have been fully paid.
  Generally, we include all
collections received from the cardholders underlying each securitization in our
securitization cash flows. This includes collections from the cardholders for
interest, fees and other charges on the accounts and collections from those
cardholders repaying the principal portion of their account
balances.
  In
general, absent an early amortization event, the cash flows are then distributed
to us as servicer in the amounts of our contractually negotiated servicing fees,
to the investors as interest on their outstanding notes, to the investors to
repay any portion of their outstanding notes that becomes due and payable, and
to us as the seller to fund new purchases. Any collections from cardholders
remaining each month after making the various payments noted above generally are
paid to us on our retained interests.
  In the
event of early amortization of the facilities within a securitization trust, the
cash flows generally are distributed to the servicer in the amounts of its
contractually negotiated servicing fees, to the investors as interest on their
outstanding notes and to the investors to repay their outstanding notes. As
such, upon early amortization of securitization facilities, a
  F-27
 Table of Contents
  holder of
residual interests in a securitization trust does not receive cash flows from
the securitization trust to fund new cardholder purchases or as payments on its
retained interests. In the third quarter of 2009, we concluded, based on
worsening collections on the receivables underlying our upper and lower-tier
originated portfolio master trusts, that a buyer of our residual interests in
the securitization trusts would likely discount the price that they would pay
for the residual interests to reflect the risk that the securitization
facilities could soon enter early amortization status. This risk ultimately was
borne out in January 2010 for the securitization facility underlying of our
upper-tier originated portfolio master trust, and our December 31, 2009
calculation of the fair value of our retained interests in this trust reflects
the securitization facility’s early amortization status (i.e., under which our
receipt of cash flows is delayed materially until the facility is completely
repaid). Our recognition of our upper-tier originated portfolio master trust’s
securitization facility’s early amortization potential and status, respectively,
in our September 30, 2009 and December 31, 2009 fair value computations
(especially when coupled with worsening cardholder payment performance
expectations) caused a material decline in the fair value of our retained
interests in credit card receivables securitized in the third and fourth
quarters of 2009. (With our previously mentioned repayment of the securitization
facility underlying our lower-tier originated portfolio master trust in December
2009, our September 30, 2009 early amortization assumption with respect to that
facility is no longer relevant as we no longer hold retained interests in that
trust at December 31, 2009.)
  As
suggested above, we carry the retained interests associated with the credit card
receivables we have securitized at estimated fair market value within the
securitized earning assets category on our consolidated balance sheets, and
because we classify them as trading securities and have made a fair value
election with respect to them, we include any changes in fair value in income.
Because quoted market prices for our retained interests generally are not
available, we estimate fair value based on the estimated present value of future
cash flows using our best estimates of key assumptions (including, for example,
the early amortization assumption mentioned above).
  The
measurements of retained interests associated with our securitizations are
dependent upon our estimate of future cash flows using the cash-out method.
Under the cash-out method, we record the future cash flows at a discounted
value. We discount the cash flows based on the timing of when we expect to
receive the cash flows. We base the discount rates on our estimates of returns
that would be required by investors in investments with similar terms and credit
quality. We estimate yields on the credit card receivables based on stated
annual percentage rates and applicable terms and conditions governing fees as
set forth in the credit card agreements, and we base estimated default and
payment rates on historical results, adjusted for expected changes based on our
credit risk models. We typically charge off credit card receivables when the
receivables become 180 days past due, although earlier charge offs may
occur specifically related to accounts of bankrupt or deceased customers. We
generally charge off bankrupt and deceased customers’ accounts within
30 days of verification.
  Our
retained interests in credit card receivables securitized (labeled as
securitized earning assets on our consolidated balance sheets) include the
following (in thousands):
 
 As of
      December 31,2009
              
              
              2008I/O
      strip
              
              $
              —
              
              
              $
              132,360Accrued
      interest and fees
              
              
              —
              
              
              
              22,723Net
      servicing liability
              
              
              (15,458
              )
              
              
              (10,670
              )Amounts
      due from securitization
              
              
              1,570
              
              
              
              12,369Fair
      value of retained interests
              
              
              52,396
              
              
              
              659,156Issuing
      bank partner continuing interests
              
              
              (1,994
              )
              
              
              (2,145
              )Securitized
      earning assets
              
              $
              36,514
              
              
              $
              813,793
  The I/O
strip reflects the fair value of our rights to future income from
securitizations arranged by us and includes certain credit enhancements. Accrued
interest and fees represent the estimated collectible portion of fees earned but
not billed to the cardholders underlying the credit card receivables portfolios
we have securitized. For those securitization trusts with securitization
facilities that have entered either early or planned amortization status (which
is now the case for all our securitization trusts), we include the total fair
value of our residual interests within the fair value of retained interest line
item as of December 31, 2009 (i.e., with no segregated break-out of I/O strip
fair value or accrued interest and fee balances). Amounts due from
securitization represent cash flows that are distributable to us from the prior
month’s cash flows within each securitization trust; we generally expect to
receive these amounts within 30 days from the close of each respective month.
Lastly, we measure retained interests at fair value as set forth within the fair
value of retained interests category in the above table.
  F-28
 Table of Contents
   The
net servicing liability in the above table reflects on a net basis, for those
securitization structures for which servicing compensation is not adequate, the
fair value of the net costs to service the receivables above and beyond the net
servicing income we expect to receive from the securitizations. We initially
record a servicing asset or a servicing liability associated with a
securitization structure when the servicing fees we expect to receive do not
represent adequate compensation for servicing the receivables. We record these
initial servicing assets and servicing liabilities at estimated fair market
value, and then we evaluate and update our servicing asset and servicing
liability fair value estimates at the end of each financial reporting period. We
present the net of our servicing assets and liabilities (i.e., a net servicing
liability) in the above table, and we include changes in net servicing liability
fair values within loss on securitized earning assets on our consolidated
statements of operations (and more specifically as a component of loss on
retained interests in credit card receivables securitized). Because quoted
market prices generally are not available for our servicing liabilities, we
estimate fair values based on the estimated present value of future cash
flows.
  The
primary risk inherent within the determination of our net servicing liability is
our ability to control our servicing costs relative to the servicing revenues we
receive from our securitization trusts. We do not consider our servicing revenue
stream to be a particularly significant risk because, with respect to a
substantial majority of the receivables we service, even in the event of early
amortization of our securitization facilities, we will continue to receive
servicing revenues through the securitization waterfalls in the same manner and
in no lower rate of compensation than we do currently. We have no instruments
that we use to mitigate the income statement effects of changes in the fair
value of our net servicing liability.
  Reflected
within servicing income on our consolidated statements of operations are
servicing income (fees) we have received from both our securitization trusts and
equity-method investees that have contracted with us to service their assets.
The servicing fees received exclusively from our securitization trusts were
$89.1 million and $154.8 million for the years ended December 31, 2009 and 2008,
respectively. Changes in our net servicing liability for each financial
reporting period presented are summarized (in millions) in the following
table:
 For
      the Year Ended December 31,2009
              
              
              2008Net
      servicing liability at beginning of period
              
              $
              10.7
              
              
              $
              22.8Changes 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
      (including an assumed 0.0% servicing compensation rate once debt holders
      have been repaid in an early amortization scenario that we first used in
      our retained interests fair value computations in the third quarter of
      2009)
              
              
              4.8
              
              
              
              (12.1
              )Balance
      at end of period
              
              $
              15.5
              
              
              $
              10.7
  Changes
in any of the assumptions used to value our retained interests in our
securitizations can materially affect our fair value estimates. Case in point is
our assumption change made in the third quarter of 2009, wherein we concluded
that a buyer of the residual interests in our upper and lower-tier originated
portfolio master trusts would likely discount its purchase price for such
residual interests to reflect the subsequently borne out risks that the
securitization facilities underlying such trusts could soon enter early
amortization status, thereby significantly delaying the buyer’s receipt of cash
upon a purchase of such residual interests until all underlying securitization
facilities were completely repaid. Other key assumptions we have used to
estimate the fair value of our retained interests in the credit card receivables
securitized are presented (as weighted averages) below:
 As
      of December 31,2009
              
              
              2008Net
      collected yield (annualized)
              
              
              31.3
              %
              
              
              38.7
              %Principal
      payment rate (monthly)
              
              
              2.2
              %
              
              
              4.2
              %Expected
      principal credit loss rate (annualized)
              
              
              27.2
              %
              
              
              20.8
              %Residual
      cash flows discount rate
              
              
              18.8
              %
              
              
              22.6
              %Servicing
      liability discount rate
              
              
              14.0
              %
              
              
              14.0
              %Life
      (in months) of securitized credit card receivables
              
              
              45.5
              
              
              
              23.8
  
  F-29
 Table of Contents
   All of
the above assumptions for the year ended December 31, 2009 are impacted to
varying degrees by the removal of our residual interests in the lower-tier
originated portfolio master trust from all of the weighted average computations
subsequent to our December 2009 repayment of the trust’s remaining outstanding
securitization facilities. The trending decrease in
our net collected yield and principal payment rates is a product of both (1) a
general decline in payments being made by consumers and the expectation that
this trend will continue and (2) the removal of our lower-tier originated
portfolio master trust residual interests from these weighted average
calculations. Also contributing to trending lower net collected yield
assumptions are (1) the adverse effects of recent account closure actions for
substantially all remaining credit card accounts on annual, monthly maintenance
and certain other recurring types of credit card fees associated with open
credit card accounts, (2) fee credit programs we have used at increasing levels
to encourage consumers to make payments at higher levels within a distressed
economy and (3) elevated late stage delinquencies and the expectation that these
delinquencies will continue (i.e., as we do not assess fees and finance charge
billings for credit card receivables in the later stages of
delinquency).  The increase in the expected principal credit loss rate
at December 31, 2009 relative to December 31, 2008 reflects increased expected
charge offs as a result of recent account closure actions and a significantly
worsening employment outlook, but also reflects the removal of our lower-tier
originated portfolio master trust residual interests from the weighted average
calculations. Because principal receivables comprise a smaller percentage of
total receivables for our lower-tier credit card accounts than for the other
credit card accounts that we manage, the removal of our lower-tier credit card
receivables from the calculations contributed to an increased weighted expected
principal credit loss rate assumption.
  Our
retained interests valuation models recognize in computing the residual cash
flows discount rate that variations in collateral enhancement levels affect the
returns that investors require on residual interests within securitization
structures; specifically, with lower levels of collateral enhancement (and hence
greater investment risk), investors in securitization structure residual
interests will require higher investment returns, and with higher levels of
collateral enhancement (and hence lower investment risk), investors in
securitization structure residual interests will require lower investment
returns. The decline in the December 31, 2009 residual cash flows discount rate
relative to December 31, 2008 reflects (1) a narrowing of market interest rate
spreads above the one-month LIBOR interest rate index applicable in most of our
securitizations between these two dates, (2) our recent experiences (as we have
collaborated with other market participants on potential portfolio purchase
opportunities) with respect to the levels of returns on equity that market
participants desire to achieve in transactions (which have dropped relative to
December 31, 2008 levels), and (3) excess levels of collateral enhancement that
build up fairly rapidly over the coming months given the early and planned
amortization status of our securitization facilities at December 31, 2009 (such
levels of excess collateral enhancement not being built up in December 31, 2008
residual cash flows discount rate computations as there was not an early
amortization scenario explicitly provided for in December 31, 2008 fair value
computations).
  The
following illustrates the hypothetical effect on the December 31, 2009 value of
our retained interests in credit card receivables securitized (dollars in
thousands) of an adverse 10 and 20 percent change in our key quantitative
valuation assumptions:
 Assumptionsand ValuationEffects
      of
                ChangesTheretoNet
      collected yield (annualized)
              
              
              31.3
              %Impact on fair value of 10%
      adverse change
              
              $
              (15,816
              )Impact
      on fair value of 20% adverse change
              
              $
              (26,928
              )Payment
      rate (monthly)
              
              
              2.2
              %Impact
      on fair value of 10% adverse change
              
              $
              (19,620
              )Impact
      on fair value of 20% adverse change
              
              $
              (33,699
              )Expected
      principal credit loss rate (annualized)
              
              
              27.2
              %Impact
      on fair value of 10% adverse change
              
              $
              (16,981
              )Impact
      on fair value of 20% adverse change
              
              $
              (29,695
              )Residual
      cash flows discount rate
              
              
              18.8
              %Impact
      on fair value of 10% adverse change
              
              $
              (4,942
              )Impact
      on fair value of 20% adverse change
              
              $
              (9,349
              )Servicing
      liability discount rate
              
              
              14.0
              %Impact
      on fair value of 10% adverse change
              
              $
              (602
              )Impact
      on fair value of 20% adverse change
              
              $
              (1,171
              )
 
  F-30
 Table of Contents
  These
sensitivities are hypothetical and should be used with caution. As the figures
indicate, changes in fair value based on a 10% and a 20% variation in
assumptions generally cannot be extrapolated because the relationship of a
change in assumption to the change in fair value of our retained interests in
credit card receivables securitized may not be linear. Also, in this table, the
effect of a variation in a particular assumption on the fair value of the
retained interests is calculated without changing any other assumptions; in
reality, changes in one assumption may result in changes in another. For
example, increases in market interest rates may result in lower prepayments and
increased credit losses, which could magnify or counteract the
sensitivities.
  Our
managed receivables portfolio underlying our securitizations (including only
those of our consolidated subsidiaries) is comprised of our retained interests
in the credit card receivables we have securitized and other investors’ shares
of these securitized receivables. The investors’ shares of securitized credit
card receivables are not our assets. 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.  These figures include the results of our lower-tier
credit cards prior to their re-consolidation in the fourth quarter of
2009.
 As
      of December 31,2009
              
              
              2008Total
      managed principal balance
              
              $
              1,194,946
              
              
              $
              2,157,626Total
      managed finance charge and fee balance
              
              
              124,030
              
              
              
              485,453Total
      managed receivables
              
              
              1,318,976
              
              
              
              2,643,079Cash
      collateral at trust and amounts due from QSPEs
              
              
              20,349
              
              
              
              125,051Total
      assets held by QSPEs
              
              
              1,339,325
              
              
              
              2,768,130QSPE-issued
      notes to which we are subordinated
              
              
              (1,043,476
              )
              
              
              (1,728,996
              )Face
      amount of residual interests in securitizations
              
              $
              295,849
              
              
              $
              1,039,134Receivables
      delinquent—60 or more days
              
              $
              187,610
              
              
              $
              458,795Net
      charge offs during each year
              
              $
              543,538
              
              
              $
              559,261
  Data in
the above table are aggregated from the various QSPEs that underlie our
securitizations. QSPE-issued notes (in millions) to which we are subordinated
within our various securitization structures historically have been our most
significant source of liquidity and include the following:
  As of
      December 31,2009
              
              
              2008Six-year
      term securitization facility (expiring October 2010) issued out of our
      upper-tier originated portfolio master trust (1)
              
              $
              —
              
              
              $
              264.0Two-year
      variable funding securitization facility with renewal options (expiring
      January 2010) issued out of our upper-tier originated portfolio master
      trust
              
              
              750.0
              
              
              
              370.0Five-year
      term securitization facility (which was repaid September 30, 2009) issued
      out of our upper-tier originated portfolio master trust
              
              
              —
              
              
              
              286.6Two-year
      variable funding securitization facility (which was repaid December 2009)
      issued out of our lower-tier originated portfolio master
    trust
              
              
              —
              
              
              
              260.5Two-year
      amortizing securitization facility (repaid upon expiration in December
      2009) issued out of our lower-tier originated portfolio master
      trust
              
              
              —
              
              
              
              137.5Multi-year
      variable funding securitization facility (expiring September 2014) issued
      out of the trust associated with our securitization of $92.0 million
      and $72.1 million (face amount) in credit card receivables acquired in
      2004 and 2005, respectively
              
              
              7.6
              
              
              
              16.4Amortizing
      term securitization facility (denominated and referenced in U.K. sterling
      and expiring April 2014) issued out of our U.K. Portfolio securitization
      trust
              
              
              247.7
              
              
              
              310.3Ten-year
      amortizing term securitization facility issued out of a trust underlying
      one of our portfolio acquisitions (expiring January 2014)
              
              
              38.2
              
              
              
              83.7Total
      QSPE-issued notes to which we are subordinated
              
              $
              1,043.5
              
              
              $
              1,729.0
 1)
      In the third quarter of 2009, we purchased all of the notes associated
      with our six-year term securitization facility that had been issued to a
      third party out of our upper-tier originated portfolio master trust, and
      these notes were subsequently
cancelled.
  F-31
 Table of Contents
  Because
we hold residual retained interests in our securitization trusts, we remain
subject to largely the same types and levels of risks to which we would be
subject if we did not transfer our credit card receivables to our securitization
trusts. These risks include:  interest rate risks; payment, default
and charge-off risks; regulatory risks related to the origination and servicing
of the receivables; credit card fraud risks; risks associated with employment
base and infrastructure that we maintain for servicing the receivables; and
risks associated with the availability of funding for and cost of funding the
securitizations. As securitization facility notes mature, there can be no
assurance that they will be renewed or replaced on terms as favorable as their
current terms or at all. Moreover, adverse developments in one or more of the
factors underlying these above-denoted risks can lead to (and has in fact led
to) early amortization of the outstanding series of notes issued by our
securitization trusts.
  Except as
described below or as set forth in Note 14, “Commitments and Contingencies,”
concerning guarantee agreements and note purchase agreements associated with our
securitization of certain acquired credit card receivables portfolios, we have
no explicit or implicit arrangements under which we have provided or could be
called upon to provide financial support to our securitization trusts or their
beneficiaries, and there are no events or circumstances that could expose us to
losses in excess of the carrying amounts of our retained interests. However, as
servicer for the receivables held in our securitization trusts, we have
significant continuing involvement in overseeing the receivables and their
collection, and we perform a variety of functions that benefit our
securitization trusts (and their beneficiaries, including our transferor
subsidiaries). We incur significant costs associated with this continuing
involvement (costs that are reflected in the determination of our net servicing
liability in cases where we do not receive adequate compensation for our
servicing obligations).
  As
servicer, we provide call center customer support and collections services on
behalf of the securitization trusts. The objective of the collections process is
to maximize the amount collected in the most cost effective and
customer-friendly manner possible. To fulfill this objective, on behalf of the
securitization trusts (and their beneficiaries, including our transferor
subsidiaries), we employ the traditional cross-section of letters and telephone
calls to encourage payment, and we exercise broad discretion under our credit
card servicing guidelines to apply customer payments to finance charges or
principal; to waive interest and fees or otherwise provide promotional or
matching payments and other credits (including principal credits) to avoid
negative amortization and to encourage prompter and larger payments; to send out
mailings for promotional marketing-oriented collection programs or to facilitate
balance transfer marketing programs on behalf of our bank partners; and to
re-age customer accounts that meet applicable regulatory qualifications for
re-aging or otherwise adjust billing cycles and practices to reflect operational
objectives. These and other collection-oriented techniques and practices have
varying effects on the statistical performance of the receivables held by our
securitization trusts and thereby have varying effects on the beneficiaries of
the securitization trusts, including our transferor subsidiaries.
  Structured
      Financings
  Beyond
the securitizations discussed above, we have entered into certain non-recourse,
asset-backed structured financing transactions within our Auto Finance and
Investments in Previously Charged-Off Receivables segments. We consolidate the
assets (auto finance receivables, which are presented as loans and fees
receivable pledged as collateral under structured financings, net, on our
consolidated balance sheets, and investments in previously charged-off
receivables) and debt (classified within notes payable and other borrowings on
our consolidated balance sheets) associated with these structured financings on
our balance sheet because the transactions do not meet the legal isolation and
other off-balance-sheet securitization criteria for de-recognition and because
we are the primary beneficiary of the structured financing transactions.
Structured financing notes outstanding, the carrying amount of the auto finance
receivables and investments in previously charged-off receivables that provide
the exclusive means of repayment for the notes (i.e., lenders have recourse only
to the specific auto finance receivables or investments in previously
charged-off receivables underlying each respective facility and cannot look to
our general credit for repayment), and the maximum exposure to loss (which
represents the carrying amount of the pledged auto finance receivables and
investments in previously charged-off receivables minus the non-recourse notes)
are scheduled (in millions) as follows:
   F-32
 Table of Contents
  As
      of December 31,2009
              
              
              2008Carrying
      amount of auto finance receivables and investments in previously
      charged-off receivables underlying structured financings
              
              $
              218.5
              
              
              $
              340.6Structured
      financing notes secured by $3.5 million and $5.4 million carrying amount
      of investments in previously charged-off receivables at December 31, 2009
      and 2008, respectively
              
              
              (4.9
              )
              
              
              (4.1
              )Structured
      financing notes secured by $51.4 million and $64.0 million carrying amount
      of CAR Financial Services (“CAR”) auto finance receivables at December 31,
      2009 and 2008, respectively
              
              
              (31.0
              )
              
              
              (37.0
              )Structured
      financing notes secured by $47.5 million and $56.4 million carrying amount
      of JRAS auto finance receivables at December 31, 2009 and 2008,
      respectively
              
              
              (26.8
              )
              
              
              (27.1
              )Structured
      financing notes secured by $116.0 million and $200.5 million carrying
      amount of ACC auto finance receivables at December 31, 2009 and 2008,
      respectively
              
              
              (99.2
              )
              
              
              (115.1
              )Maximum
      exposure to loss under structured financings
              
              $
              56.6
              
              
              $
              157.3
  Much like
with our credit card securitizations, there is a waterfall within these
structured financings that provides for a priority distribution of cash flows to
us to service the underlying auto finance receivables and investments in
previously charged-off receivables (cash flows that we consider adequate to meet
our costs of servicing these assets), a distribution of cash flows to pay
interest and principal due on the notes, and a distribution of all excess cash
flows to us. The $99.2 million facility in the above table is secured by auto
finance receivables with a carrying amount of $116.0 million at December 31,
2009; this particular facility is amortizing down along with collections of the
underlying auto finance receivables and there are no provisions within the debt
agreement that allow for acceleration or bullet repayment of the facility. As
such, for all intents and purposes, there is no practical risk of equity loss
associated with lender seizure of assets under this facility. For the other
facilities listed in the above table, however, our failure at any time to meet
the various covenants within the structured financings could cause early
repayment of the facilities.
  The $26.8
million JRAS facility matured as scheduled in January 2010 and although our JRAS
subsidiary was in violation of the covenants underlying this facility at
December 31, 2009, the lender has not pursued default remedies against JRAS at
this time (although it has preserved all of its rights to do so), and we are in
active discussions with the lender to provide for a modification of the
covenants underlying the facility and to extend the payment terms of the
facility. At risk as a result of the JRAS situation is approximately $20.7
million of our consolidated total equity at December 31, 2009 that is
represented by our investment in JRAS.
  Beyond
our role as servicer of the underlying assets within these structured
financings, we have provided no other financial or other support to the
structures, and we have no explicit or implicit arrangements that could require
us to provide financial support to the structures.
  See Note
12, “Notes Payable and Other Borrowings,” for a detail of all notes payable and
other borrowings, including these structured financings.
  9.         Fair
Values of Assets
  In
February 2007, the FASB issued new accounting guidance, which allows companies
to elect to carry the vast majority of financial assets and liabilities at fair
value, with changes in fair value recorded into earnings. The new accounting
guidance was effective for fiscal years beginning after November 15, 2007,
and we adopted this statement with respect to our securitized earning assets
(and their underlying credit card receivables) effective January 1,
2008.
  In
January 2008, we adopted accounting guidance that defines fair value,
establishes a framework for measuring fair value and expands disclosures about
fair value measurements. The guidance applies under other accounting
pronouncements that require or permit fair value measurements, except accounting
pronouncements that address share-based payment transactions and their related
interpretive accounting pronouncements, and does not eliminate the
practicability exceptions to fair value measurements in accounting
pronouncements within the scope of the Statement. 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
  F-33
 Table of Contents
   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 December 31,
2009 by fair value hierarchy:
 Assets
                
                Quoted Prices in Active
      Markets for IdenticalAssets
      (Level 1)
                
                
                Significant Other
                    Observable Inputs(Level 2)
                
                
                Significant
                    Unobservable
                  Inputs (Level 3)
                
                
                Total
      Assets
                    Measured at Fair
                  ValueInvestment
      securities—trading
                
                $
                569
                
                
                $
                —
                
                
                $
                —
                
                
                $
                569Loans
      and fees receivable, at fair value
                
                $
                —
                
                
                $
                —
                
                
                $
                42,299
                
                
                $
                42,299Securitized
      earning assets
                
                $
                —
                
                
                $
                —
                
                
                $
                36,514
                
                
                $
                36,514
 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 2009:
  2009Investment
                Securities—Trading
              
              
              Loans
      and Fees Receivable, at Fair Value
              
              
              Securitized
                Earning Assets
              
              
              TotalBeginning
      balance
              
              $
              —
              
              
              $
              —
              
              
              $
              813,793
              
              
              $
              813,793Total
      gains (losses)—realized/unrealized:Net
      revaluations of/additions to retained interests (reported within loss on
      securitized earning assets)
              
              
              —
              
              
              
              —
              
              
              
              (90,895
              )
              
              
              (90,895
              )Net
      revaluations of loans and fees receivable (reported within fees and
      related income on non-securitized earning assets)
              
              
              —
              
              
              
              (1,112
              )
              
              
              —
              
              
              
              (1,112
              )Purchases,
      issuances, and settlements, net
              
              
              —
              
              
              
              43,411
              
              
              
              (686,384
              )
              
              
              (642,973
              )Net
      transfers in and/or out of Level 3
              
              
              —
              
              
              
              —
              
              
              
              —
              
              
              
              —Ending
      balance
              
              $
              —
              
              
              $
              42,299
              
              
              $
              36,514
              
              
              $
              78,813
 
 2009Non-securitized
      Earning Assets, Net
              
              
              Securitized
                Earning Assets
              
              
              TotalTotal gains for the period
      included in earnings attributable to the change in unrealized gains or
      losses relating to assets still held at year end
              
              $
              (1,112
              )
              
              $
              (90,895
              )
              
              $
              (92,007
              )
  The
unrealized losses for assets and liabilities 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 and
liabilities.
  Net Revaluation
of Retained Interests. We record the net revaluation of retained
interests in the loss on securitized earning assets category in our consolidated
statements of operations, specifically as loss on retained interests in credit
card receivables securitized. The net revaluation of retained interests includes
revaluations of our I/O strip, accrued interest and fees, servicing liabilities
associated with our residual interests, amounts due from securitization,
residual interests and issuing bank partner continuing interests. We estimate
the present value of 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
and discount rates.
  F-34
 Table of Contents
   Net Revaluation
of Loans and Fees Receivable. We record the net revaluation of loans and
fees receivable in the changes in fair value of loans and fees receivable
recorded at fair value line item within the fees and related income on
non-securitized earning assets category of our consolidated statements of
operations. The net revaluation of loans and fees receivable is based on the
present value of 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, servicing costs
and discount rates.
  Total Realized
and Unrealized Losses. We record total realized and unrealized losses
within the fees and related income from non-securitized earning assets category
in our consolidated statements of operations. We formerly held certain
securities available for sale that we classified as Level 3, indicating that
significant valuation assumptions are not readily observable in the market due
to limited trading activity. For those securities, the last of which we disposed
of by June 30, 2008, we measured fair value using the best available data, in
the form of quotes provided directly by various dealers associated with the
securities and third-party valuations.
  Valuations and
Techniques for Assets Measured at Fair Value on a Non-Recurring
Basis
  We
also have assets that under certain conditions are subject to measurement at
fair value on a non-recurring basis. These assets include those associated with
acquired businesses, including goodwill and other intangible assets. For these
assets, measurement at fair value in periods subsequent to their initial
recognition is applicable if one or more of these assets is determined to be
impaired.
  We were
required to make such a determination of the fair value of goodwill and
intangible assets associated with our Retail Micro-Loans segment in the second
quarter of 2009 and in first quarter of 2008 with our decisions to discontinue
that segment’s Arkansas and Texas operations, respectively.  We
estimated the fair value of those assets using Level 3 inputs, specifically
discounted cash flow projections reflecting our best estimate of what
third-party market participants would use in determining fair value, including
estimates of yield, default rates, same-store growth (or liquidation) rates and
payment rates. We recorded within loss from discontinued operations a non-cash
goodwill impairment charge of $3.5 million and $1.1 million in second quarter of
2009 and the first quarter of 2008, respectively. We also recorded a $20.0
million goodwill impairment charge associated with our continuing Retail
Micro-Loans segment operations in the second quarter of 2009.
  For
our assets measured on a non-recurring basis at fair value, the table below
summarizes (in thousands) fair values as of December 31, 2009 by fair value
hierarchy:
 
 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
                ValueAssets:Goodwill
              
              $
              —
              
              
              $
              —
              
              
              $
              43,422
              
              
              $
              43,422Intangibles,
      net
              
              $
              —
              
              
              $
              —
              
              
              $
              2,816
              
              
              $
              2,816
  10.
              Property
  Details
(in thousands) of our property on our consolidated balance sheets are as
follows:
 As of
      December 31,2009
              
              
              2008Software
              
              $
              92,326
              
              
              $
              87,020Furniture
      and fixtures
              
              
              18,558
              
              
              
              20,415Data
      processing and telephone equipment
              
              
              85,145
              
              
              
              84,574Leasehold
      improvements
              
              
              34,681
              
              
              
              35,226Vehicles
              
              
              960
              
              
              
              1,167Buildings
              
              
              1,008
              
              
              
              1,008Land
              
              
              2,456
              
              
              
              2,456Other
              
              
              381
              
              
              
              649Total
      cost
              
              
              235,515
              
              
              
              232,515Less
      accumulated depreciation
              
              
              (203,252
              )
              
              
              (184,218
              )Property,
      net
              
              $
              32,263
              
              
              $
              48,297
 
  F-35
 Table of Contents
  As of
December 31, 2009, the weighted-average remaining depreciable life of our
depreciable property was 6.3 years.
  11.
              Leases
  We lease
premises and certain equipment under cancelable and non-cancelable leases, some
of which contain renewal options under various terms. Total rental expense
associated with these operating leases was $20.4 million (including $0.0 million
of lease termination and impairment expense) and $31.7 million (including $5.5
million of lease termination and impairment expense) for 2009 and 2008,
respectively. During the fourth quarter of 2006, we entered into a 15-year lease
for 411,125 square feet, 183,461 square feet of which we subleased in the second
quarter of 2008 and the remainder of which houses our corporate offices and
certain Atlanta-based call center operations. The 2008 sublease resulted in an
impairment charge of $5.5 million. Construction of this new space began in
January 2007, and we moved into the new building in June 2007. In connection
with this lease, we received a $21.2 million construction allowance for the
build-out of our new corporate offices. We are amortizing the construction
allowance as a reduction of rent expense over the term of the lease. Upon the
expiration of a lease facility in Peachtree City, Georgia during the third
quarter of 2009, the operations associated with our Retail Micro-Loans segment
were relocated to our Atlanta corporate offices.  As of
December 31, 2009, the future minimum rental commitments (in thousands) for
all non-cancelable operating leases with initial or remaining terms of more than
one year (both gross and net of any sublease income) are as
follows:
 
 Gross
              
              
              Sublease
                Income
              
              
              Net2010
              
              $
              25,542
              
              
              $
              (6,172
              )
              
              $
              19,3702011
              
              
              19,521
              
              
              
              (6,219
              )
              
              
              13,3022012
              
              
              14,645
              
              
              
              (4,569
              )
              
              
              10,0762013
              
              
              13,138
              
              
              
              (4,595
              )
              
              
              8,5432014
              
              
              12,238
              
              
              
              (4,622
              )
              
              
              7,616Thereafter
              
              
              84,889
              
              
              
              (38,630
              )
              
              
              46,259Total
              
              $
              169,973
              
              
              $
              (64,807
              )
              
              $
              105,166
  In
addition, we lease certain equipment under cancelable and non-cancelable leases,
which are accounted for as capital leases in our consolidated financial
statements. As of December 31, 2009, the future minimum commitments (in
thousands) for all non-cancelable capital leases with initial or remaining terms
of more than one year are as follows:
 
 Note
              
              
              Interest
              
              
              Gross2010
              
              $
              873
              
              
              $
              50
              
              
              $
              9232011
              
              
              170
              
              
              
              5
              
              
              
              1752012
              
              
              16
              
              
              
              1
              
              
              
              172013
              
              
              8
              
              
              
              —
              
              
              
              8$
              1,067
              
              
              $
              56
              
              
              $
              1,123
 
  F-36
 Table of Contents
  12.
              Notes
      Payable and Other Borrowings
  Notes
payable consists of the following (in millions) as of December 31, 2009 and
2008:
 
 As of
      December 31,2009
              
              
              2008Structured
      financings within our Auto Finance segment, average rate of 6.8% at
      December 31, 2008 (repaid in September 2009)
              
              $
              —
              
              
              $
              152.1Third-party
      amortizing debt facility of ACC Auto Finance segment receivables, stated
      rate of 15.0% (effective rate of 20.6%) at December 31,
    2009
              
              
              99.2
              
              
              
              —Third-party
      revolving line of credit of CAR Auto Finance segment receivables, rate of
      4.7%, payable in six straight-line monthly level payments from June 2011
      to November 2011
              
              
              31.0
              
              
              
              —Third-party
      financing of JRAS Auto Finance segment receivables, rate of 9.5%,
      due January 2010
              
              
              26.8
              
              
              
              27.1Third-party
      financing of JRAS Auto Finance segment inventory, average rate of 24.0%,
      due January 2010
              
              
              1.4
              
              
              
              1.8Vendor-financed
      software and equipment acquisitions, average rate of 5.5% at December 31,
      2009, payable to 2010 through 2013
              
              
              1.1
              
              
              
              3.9MEM
      secured debt, average rate of 4.1% at December 31, 2008, payable upon
      demand (repaid in December 2009)
              
              
              —
              
              
              
              7.2MEM
      secured debt, average rate of 3.1% at December 31, 2008, payable through
      2009 (repaid in December 2009)
              
              
              —
              
              
              
              3.3MEM
      subordinated debt, rate of 9% at December 31, 2008, payable through
      2009
              
              
              —
              
              
              
              0.4Investment
      in Previously Charged-Off Receivables segment’s
      asset-backed  financing, rate of 12%, payable through
      2011
              
              
              4.9
              
              
              
              4.1Total
      notes payable
              
              $
              164.4
              
              
              $
              199.9
  The
scheduled maturities of our notes payable are $28.2 million in 2010, $37.0
million in 2011 and $99.2 million thereafter.
  During
the third quarter of 2009, we repaid $81.1 million of CAR and ACC notes payable
within our Auto Finance segment as we were not able to reach satisfactory terms
to renew or replace these debt facilities. In November 2009, an additional ACC
Auto Finance segment debt facility scheduled above was repaid, and the
collateral underlying that facility was then combined with other ACC Auto
Finance segment collateral and pledged against a new amortizing $103.5 million
debt facility, the terms of which do not require any accelerated or bullet
repayment obligation by us. This facility includes a stated interest rate of
15.0% and provides for the sharing of residual cash flows subsequent to the debt
repayment. Under applicable accounting guidance, we estimated the timing and
extent of these future cash flows and we will accrete the additional payment as
a charge to interest expense over the anticipated payment period. We currently
estimate that this additional payment will total $5.8 million resulting in an
effective interest rate paid under the facility of 20.6%.
  In
December 2009, our CAR auto finance operations entered into a $50 million
revolving line of credit.  This facility includes a stated interest
rate of 4.7% and is secured by the receivables associated by our CAR auto
finance operations; it amortizes down in six level monthly required payments
beginning in June 2011.
  The
$26.8 million JRAS facility matured as scheduled in January 2010 and although
our JRAS subsidiary was in violation of the covenants underlying this facility
at December 31, 2009, the lender has not pursued default remedies against JRAS
at this time (although it has preserved all of its rights to do so), and we are
in active discussions with the lender to provide for a modification of the
covenants underlying the facility and to extend the payment terms of the
facility. Notwithstanding these efforts, the loan is currently callable and
there can be no assurance that we will not be required to repay the facility in
the near term; if the lender decides to subject this loan to immediate
repayment, we would be required to repay the outstanding loan balance in full or
could be forced to surrender the loan and fee receivables serving as collateral
for the loan. As of December 31, 2009 the maximum exposure to loss under this
structured financing was $20.7 million.
  With the
exception of our JRAS facility mentioned above, we are in compliance with the
covenants underlying our various notes payable.
  
  F-37
 Table of Contents
   13.           Convertible Senior
Notes
  3.625%
Convertible Senior Notes Due 2025
  In
May 2005, we issued $250.0 million aggregate principal amount of 3.625%
convertible senior notes due 2025 to qualified institutional buyers in a private
placement, and we subsequently registered the notes for resale with the SEC. The
outstanding balances of these notes (net of repurchases since the issuance
dates) are reflected within our convertible senior notes balance on our
consolidated balance sheets. In 2009 and 2008, we repurchased $1.3 million and
$18.2 million, respectively, in face amount of these notes. The purchase price
for these notes totaled $0.5 million and $7.6 million (including accrued
interest) and resulted in an aggregate gain of $0.7 million and $7.1 million
(net of the notes’ applicable share of deferred costs, which were written off in
connection with the purchases) in 2009 and 2008, respectively.
  During
certain periods and subject to certain conditions (and as adjusted based on our
December 31, 2009 dividend payment), the remaining $230.5 million of outstanding
notes as of December 31, 2009 will be convertible by holders into cash and, if
applicable, shares of our common stock at an adjusted effective conversion rate
of 26.9108 shares of common stock per $1,000 principal amount of notes, subject
to further adjustment; the conversion rate is based on an adjusted conversion
price of $37.16 per share of common stock. Upon conversion of the notes, we will
deliver to holders of the notes cash of up to $1,000 per $1,000 aggregate
principal amount of notes and, at our option, either cash or shares of our
common stock in respect of the remainder of the conversion obligation, if any.
The maximum number of common shares that any note holder may receive upon
conversion is fixed at 26.9108 shares per $1,000 aggregate principal amount of
notes, and we have a sufficient number of authorized shares of our common stock
to satisfy this conversion obligation should it arise. We may redeem the notes
at our election commencing May 30, 2009 if certain conditions are met. In
addition, holders of the notes may require us to repurchase the notes on each of
May 30, 2012, 2015, and 2020 and upon certain specified events. Beginning
with the six-month period commencing on May 30, 2012, we will pay
contingent interest on the notes during a six-month period if the average
trading price of the notes is above a specified level.
  5.875%
Convertible Senior Notes Due 2035
  In
November 2005, we issued $300.0 million aggregate principal amount of
5.875% convertible senior notes due 2035 to qualified institutional buyers in a
private placement, and we subsequently registered the notes for resale with the
SEC. These notes are reflected within our convertible senior notes balance on
our consolidated balance sheets. In 2009 and 2008, we repurchased $2.0
million and $141.9 million, respectively, in face amount of these notes. The
purchase price for these notes totaled $0.6 million and $39.6 million (including
accrued interest) and resulted in an aggregate gain of $0.7 million and $54.6
million (net of the notes’ applicable share of deferred costs, which were
written off in connection with the purchases) in 2009 and 2008,
respectively.
  During
certain periods and subject to certain conditions  (and as adjusted
based on our December 31, 2009 dividend payment), the remaining $156.0 million
of outstanding notes as of December 31, 2009 will be convertible by holders into
cash and, if applicable, shares of our common stock at an adjusted effective
conversion rate of 22.1149 shares of common stock per $1,000 principal amount of
notes, subject to further adjustment; the conversion rate is based on an
adjusted conversion price of $45.22 per share of common stock. Upon conversion
of the notes, we will deliver to holders of the notes cash of up to $1,000 per
$1,000 aggregate principal amount of notes and, at our option, either cash or
shares of our common stock in respect of the remainder of the conversion
obligation, if any. The maximum number of common shares that any note holder may
receive upon conversion is fixed at 22.1149 shares per $1,000 aggregate
principal amount of notes, and we have a sufficient number of authorized shares
of our common stock to satisfy both this conversion obligation and the
conversion obligation under the 3.625% convertible senior notes should they
arise. Beginning with the six-month period commencing on January 30, 2009,
we could pay contingent interest on the notes during a six-month period if the
average trading price of the notes is above a specified level. Thus far we have
not paid any contingent interest on these notes.  In addition, holders
of the notes may require us to repurchase the notes upon certain specified
events.
  In
conjunction with the 2035 convertible senior notes offering, we entered into a
thirty-year share lending agreement with Bear, Stearns International Limited
(“BSIL”) and Bear, Stearns & Co. Inc, as agent for BSIL, pursuant to
which we lent BSIL 5,677,950 shares of our common stock in exchange for a loan
fee of $0.001 per share. BSIL is required to return the loaned shares to us at
the end of the thirty-year term of the share lending agreement or earlier upon
the occurrence of specified events. BSIL has agreed to use the loaned shares for
the purpose of directly or indirectly facilitating the hedging of our
convertible senior notes by the holders thereof or for such other purpose as
reasonably determined by us.  In 2009 and 2008, 1,398,681 and
2,026,881, respectively of these lent shares were returned to us and
retired.
  We
analogize the share lending agreement to a prepaid forward contract, which we
have evaluated under applicable accounting guidance. We determined that the
instrument was not a derivative in its entirety and that the embedded
derivative
  F-38
 Table of Contents
   would not
require separate accounting. The net effect on shareholders’ equity of the
shares lent pursuant to the share lending agreement, which includes our
requirement to lend the shares and the counterparties’ requirement to return the
shares, is the fee received upon our lending of the shares. As mentioned in the
Recent Accounting Pronouncements section above, in June 2008, the FASB ratified
a consensus reached by the EITF on the determination of whether an equity-linked
financial instrument (or embedded feature) is indexed to an entity's own stock.
After considering these new rules, we re-affirmed our conclusion reached in 2005
that we are not required to bifurcate and separately account for any of the
embedded features within our convertible senior notes. We have also considered
new rules (also addressed in the above Recent Accounting Pronouncements
discussion) that are effective for us in 2010 with respect to our share lending
agreement, and we do not believe that these new rules will result in any
material change to our consolidated financial position, consolidated results of
operations, or earnings per share measurements. Moreover, these new rules
validate our prior accounting conclusions that the shares of common stock
subject to the share lending agreement are excluded from our earnings per share
calculations.
  Accounting
Change
  Upon our
January 1, 2009 required adoption of new accounting rules for Instrument C
convertible notes (a classification applicable to our convertible senior notes),
we (1) reclassified a portion of our outstanding convertible senior notes to
additional paid-in capital, (2) established a discount to the face amount of the
notes as previously reflected on our consolidated balance sheets, (3) created a
deferred tax liability related to the discount on the notes, and (4)
reclassified out of our originally reported deferred loan costs and into
additional paid-in capital the portion of those costs considered under the new
rules to have been associated with the equity component of the convertible
senior notes issuances. We are amortizing the discount to the face amount of the
notes to interest expense over the expected life of the notes, and this will
result in a corresponding release of our associated deferred tax liability.
Total amortization for the years ended December 31, 2009 and 2008 (under
retrospective application) totaled $10.2 million and $10.1 million,
respectively. We will amortize the remaining discount at December 31, 2009 to
interest expense over the expected term of the convertible senior notes
(currently expected to be May 2012 and October 2035 for the 3.625% and 5.875%
notes, respectively). The weighted average effective interest rate for the
3.625% and 5.875% notes was 9.2% for all periods presented.
  The
following summarizes (in thousands) components of our consolidated balance
sheets associated with our convertible senior notes after giving effect to both
our required adoption of the new Instrument C rules upon their January 1, 2009
effective date and our retrospective application of the rules to prior presented
financial reporting periods:
 As
      of December 31,2009
              
              
              2008Face
      amount of outstanding convertible senior notes
              
              $
              386,551
              
              
              $
              389,851Discount
              
              
              (78,978
              )
              
              
              (90,017
              )Net
      carrying value
              
              $
              307,573
              
              
              $
              299,834Carrying
      amount of equity component included in additional paid-in
      capital
              
              $
              108,714
              
              
              $
              108,714Excess
      of instruments’ if-converted values over face principal
      amounts
              
              $
              —
              
              
              $
              —
  2010
Repurchase Activity
  Under the
terms of a tender offer for the repurchase of both series of our convertible
senior notes, in March 2010 we repurchased $24.7 million in face amount of our
3.625% notes and $15.6 million in face amount of our 5.875% notes for $12.6
million and $5.5 million, respectively, both amounts being inclusive of
transactions costs and accrued interest through the date of our repurchase of
the notes.
  14.         Commitments and
Contingencies
  General
  In the
normal course of business through the origination of unsecured credit card
receivables, we incur off-balance-sheet risks. These risks include one of our
subsidiary’s (i.e., CompuCredit Corporation’s) commitments of $78.6 million at
December 31, 2009 to purchase receivables associated with cardholders who have
the right to borrow in excess of their current balances up to the maximum credit
limit on their credit card accounts. These commitments involve, to
varying
  F-39
 Table of Contents
   degrees,
elements of credit risks in excess of amounts we can fund through our
securitization facilities. We have not experienced a situation in which all of
our customers have exercised their entire available line of credit at any given
point in time, nor do we anticipate this will ever occur in the future. We also
have the effective right to reduce or cancel these available lines of credit at
any time, which we have now done with respect to substantially all of our
outstanding cardholder accounts.
  For
various receivables portfolio investments we have made through our subsidiaries
and equity-method investees, CompuCredit Corporation has entered into guarantee
agreements and/or note purchase agreements whereby CompuCredit Corporation has
agreed to guarantee the purchase of or purchase directly additional interests in
portfolios of credit card receivables owned by trusts, the retained interests in
which are owned by its subsidiaries and equity-method investees, should there be
net new growth in the receivables or should collections not be available to fund
new cardholder purchases. As of December 31, 2009, neither CompuCredit
Corporation nor any of its subsidiaries or equity-method investees had purchased
or been required to purchase any additional notes under the note purchase
agreements. CompuCredit Corporation’s guarantee is limited to its respective
ownership percentages in the various subsidiaries and equity-method investees
multiplied by the total amount of the notes that each of the subsidiaries and
equity-method investees could be required to purchase. As of December 31, 2009,
the maximum aggregate amount of CompuCredit Corporation’s collective guarantees
and direct purchase obligations related to all of its subsidiaries and
equity-method investees was $72.0 million—a decrease from $152.0 million at
December 31, 2008 as a result of further account actions and declines in
our liquidating credit card receivables portfolios. In general, this aggregate
contingency amount will decline in the absence of portfolio acquisitions as the
aggregate amounts of credit available to cardholders for future purchases
decline along with our liquidation of the purchased portfolios and a
corresponding reduction in the number of open cardholder accounts. The acquired
credit card receivables portfolios of all of CompuCredit Corporation’s affected
subsidiaries and equity-method investees have declined with each passing quarter
since acquisition and we expect them to continue to decline because we expect
combined payments and charge offs to exceed new purchases each month. We
currently do not have any liability recorded with respect to these guarantees or
direct purchase obligations, but we will record one if events occur that make
payment probable under the guarantees or direct purchase obligations. The fair
value of these guarantees and direct purchase obligations is not
material.
  CompuCredit
Corporation’s third-party originating financial institution relationships
require security for its purchases of their credit card receivables, and
CompuCredit Corporation has pledged $2.2 million in collateral as such security
as of December 31, 2009. In addition, in connection with our U.K. Portfolio
acquisition, CompuCredit Corporation guarantees certain obligations of its
subsidiaries and its third-party originating financial institution to one of the
European payment systems ($4.0 million as of December 31, 2009). Those
obligations include, among other things, compliance with one of the European
payment system’s operating regulations and by-laws. CompuCredit Corporation also
guarantees certain performance obligations of its servicer subsidiary to the
indenture trustee and the trust created under the securitization relating to our
U.K. Portfolio.
  Also,
under the agreements with third-party originating financial institutions,
CompuCredit Corporation has agreed to indemnify the financial institutions for
certain costs associated with the financial institutions’ card issuance and
other lending activities on our behalf. Indemnification obligations generally
are limited to instances in which we either (1) have been afforded the
opportunity to defend against any potentially indemnifiable claims or
(2) have reached agreement with the financial institutions regarding
settlement of potentially indemnifiable claims.
  Total
System Services, Inc. provides certain services to CompuCredit Corporation as a
system of record provider under an agreement that extends through May 2015. Were
CompuCredit Corporation to terminate its U.S. relationship with Total System
Services, Inc. prior to the contractual termination period, it would incur
significant penalties ($20.8 million as of December 31, 2009).
  Litigation
  We are
involved in various legal proceedings that are incidental to the conduct of our
business. The most significant of these are described
below.  CompuCredit Corporation and five other subsidiaries are
defendants in a purported class action lawsuit entitledKnox, et al., vs. First Southern
Cash Advance, et al., No. 5 CV 0445, filed in the Superior
Court of New Hanover County, North Carolina, on February 8, 2005. The
plaintiffs allege that in conducting a so-called “payday lending” business,
certain of our Retail Micro-Loans segment subsidiaries violated various laws
governing consumer finance, lending, check cashing, trade practices and loan
brokering. The plaintiffs further allege that CompuCredit Corporation is the
alter ego of our subsidiaries and is liable for their actions. The plaintiffs
are seeking damages of up to $75,000 per class member, and attorney’s fees. We
are vigorously defending this lawsuit. These claims are similar to those that
have been asserted against several other market participants in transactions
involving small balance, short-term loans made to consumers in North
Carolina.
  F-40
 Table of Contents
   On
May 23, 2008, CompuCredit Corporation and one of our other subsidiaries
filed a complaint against CB&T in the Georgia State Court, Fulton County,
(subsequently transferred to the Georgia Superior Court, Fulton County) in
an action entitledCompuCredit
Corporation et al. vs. CB&T et al., Civil Action
No. 08-EV-004730-F. Among other things, the complaint as now amended
alleges that CB&T, in violation of its contractual obligations, failed to
provide us rebates, marketing fees, revenues or other fees or discounts that
were paid or granted by Visa®,
MasterCard®, or
other card associations with respect to or apportionable to accounts covered by
CB&T’s agreements with us and other consideration due to us. The complaint
also alleges that CB&T refused to approve changes requested by us to the
terms of the credit card accounts and refused to permit certain marketing, all
in violation of the agreements among the parties. Also in this litigation,
CB&T has asserted claims against CompuCredit Corporation for alleged failure
to follow certain account management guidelines and for reimbursement of certain
legal fees that it has incurred associated with CompuCredit Corporation’s
contractual relationship with CB&T.  Settlement discussions are at
an advanced stage, but CompuCredit cannot provide any assurances regarding their
outcome.
  On
July 14, 2008, CompuCredit Corporation and four of our officers, David G.
Hanna, Richard R. House, Jr., Richard W. Gilbert and J. Paul Whitehead III, were
named as defendants in a purported class action securities case filed in the
U.S. District Court for the Northern District of Georgia entitledWaterford Township General
Employees Retirement System vs. CompuCredit Corporation, et al., Civil
Action No. 08-CV-2270. On August 22, 2008, a virtually identical case was
filed entitledSteinke vs.
CompuCredit Corporation et al., Civil Action No. 08-CV-2687.
In general, the complaints alleged that we made false and misleading statements
(or concealed information) regarding the nature of our assets, accounting for
loan losses, marketing and collection practices, exposure to sub-prime losses,
ability to lend funds, and expected future performance. The complaints were
consolidated, and a consolidated complaint was filed. We filed a motion to
dismiss, which the court granted on December 4, 2009.  In its order, the court
allowed the plaintiff to amend its complaint, but the plaintiff failed to do so
timely.On January 13,
2010, the court entered final judgment, with prejudice, in favor of all
defendants. The appeal period for the court’s final judgment expired on February
12, 2010.
  CompuCredit
Corporation received a demand dated August 25, 2008, from a shareholder, Ms. Sue
An, that CompuCredit Corporation take action against all of its directors and
two of its officers for alleged breaches of fiduciary duty. In general, the
alleged breaches are the same as the actions that were the subject of the class
action securities case prior to its dismissal. Our Board of Directors appointed
a special litigation committee to investigate the allegations; that
investigation has now been concluded; and we have communicated that conclusion
to Ms. Sue An’s legal counsel. Ms. An has filed suit, which is in the early
stages.  We will vigorously contest the allegations in that
complaint.
  Our debt
collections subsidiary, Jefferson Capital, was a party to a series of agreements
with Encore. In general, Encore was obligated to purchase from Jefferson Capital
certain defaulted credit card receivables. The agreements also required Encore
to sell certain charged-off receivables to Jefferson Capital under its balance
transfer program and chapter 13 bankruptcy agreements. On July 10, 2008,
Encore did not purchase certain accounts as contemplated by the agreements,
alleging that we breached certain representations and warranties set forth in
the agreements, generally as a result of the allegations made by the FTC and
settled by us in December 2008. This dispute was submitted to the American
Arbitration Association for resolution.  Immediately prior to the
arbitration panel hearing in the third quarter of 2009, we settled our
outstanding disputes with Encore. The settlement resulted in the recognition of
the remaining $21.2 million in deferred revenue in the third quarter of 2009 and
a corresponding release of $8.7 million in 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 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
gain of $11.0 million which is reflected in our consolidated statements of
operations for the year ended December 31, 2009.
  On
December 21, 2009, certain holders of our 3.625% Convertible Senior Notes Due
2025 and 5.875% Convertible Senior Notes Due 2035 filed a lawsuit in the U.S.
District Court for the District of Minnesota seeking, among other things, to
enjoin our December 31, 2009 cash distribution to shareholders and a potential
future spin-off of our micro-loan businesses. We prevailed in court at a
December 29, 2009 hearing concerning the plaintiffs’ motion for a temporary
restraining order against our December 31, 2009 cash distribution to
shareholders, and that distribution was made as originally contemplated on that
date. On January 26, 2010, we filed a motion to dismiss all
claims.  Subsequently, on February 22, 2010, the plaintiffs purported
to file an amended complaint, seeking, among other things damages in connection
with our December 31, 2009 cash dividend and an injunction preventing future
distributions to shareholders, including the proposed spin-off of our micro-loan
businesses.  The litigation remains pending and we do not know when
the court will rule on our motion to dismiss.   Consequently,
should our Board of Directors ultimately approve a spin-off of our micro-loan
businesses, it is possible that the spin-off ultimately might be delayed or
enjoined by court order.
  F-41
 Table of Contents
   15.             Income Taxes
  Deferred
tax assets and liabilities reflect the effects of tax losses, credits, and the
future income tax effects of temporary differences between the consolidated
financial statement carrying amounts of existing assets and liabilities and
their respective tax bases and are measured using enacted tax rates that apply
to taxable income in the years in which those temporary differences are expected
to be recovered or settled.
  The
current and deferred portions (in thousands) of federal and state income tax
benefit or expense as the case may be are as follows:
 
 For the Year Ended
      December 31,2009
              
              
              2008Federal
      income tax (benefit) expense:Current
      tax (benefit) expense
              
              $
              (112,255
              )
              
              $
              (18,943
              )Deferred
      tax (benefit) expense
              
              
              (70,499
              )
              
              
              (50,753
              )Total
      federal income tax (benefit) expense
              
              
              (182,754
              )
              
              
              (69,696
              )Foreign
      income tax (benefit) expense:Current
      tax (benefit) expense
              
              
              2,984
              
              
              
              1,067Deferred
      tax (benefit) expense
              
              
              369
              
              
              
              691Total
      foreign income tax (benefit) expense
              
              
              3,353
              
              
              
              1,758State
      and other income tax (benefit) expense:Current
      tax (benefit) expense
              
              
              (8
              )
              
              
              364Deferred
      tax (benefit) expense
              
              
              (1,007
              )
              
              
              (1,417
              )Total
      state and other income tax (benefit) expense
              
              
              (1,015
              )
              
              
              (1,053
              )Total
      income tax (benefit) expense
              
              $
              (180,416
              )
              
              $
              (68,991
              )
  Income
tax (benefit) expense in 2009 and 2008 differed from amounts computed by
applying the statutory U.S. federal income tax rate to pretax income from
consolidated operations principally as a result of the impact of the
establishment in 2009 of valuation allowances on certain federal deferred tax
assets, foreign tax expense including the establishment of valuation allowances
on certain foreign deferred tax assets, unfavorable state income tax effects in
certain jurisdictions and unfavorable permanent differences, including the
effects of accruals for uncertain tax positions. The following table reconciles
our effective tax benefit rates to the federal statutory rate:
 
 For the Year Ended
      December 31,2009
              
              
              2008Statutory
      rate
              
              
              35.0
              %
              
              
              35.0
              %(Decrease
      in income tax benefit) increase in income tax expense resulting
      from:Change
      in valuation allowances
              
              
              (9.6
              )
              
              
              (1.0
              )Interest
      and penalties related to uncertain tax positions
              
              
              (0.1
              )
              
              
              (0.6
              )Foreign
      income taxes , including indefinitely invested earnings of foreign
      subsidiaries
              
              
              0.4
              
              
              
              (1.2
              )State
      and other income taxes and other differences, net
              
              
              (1.0
              )
              
              
              0.6Effective
      tax benefit rate
              
              
              24.7
              %
              
              
              32.8
              %
 
  F-42
 Table of Contents
    As of
      December 31,2009
              
              
              2008Deferred
      tax assets:Software
      development costs/fixed assets
              
              $
              6,015
              
              
              $
              2,797Equity
      in income of equity-method investees
              
              
              2,321
              
              
              
              4,791Goodwill
      and intangible assets
              
              
              30,594
              
              
              
              25,890Deferred
      costs
              
              
              2,366
              
              
              
              2,724Provision
      for loan loss
              
              
              15,566
              
              
              
              20,138Equity
      based compensation
              
              
              8,263
              
              
              
              6,813Charitable
      contributions
              
              
              5,300
              
              
              
              5,119Other
              
              
              3,035
              
              
              
              7,703Federal
      net operating loss carryforward
              
              
              158,458
              
              
              
              46,122Federal
      credit carryforward
              
              
              214
              
              
              
              —Foreign
      net operating loss carryforward
              
              
              2,299
              
              
              
              —AMT
      credit carryforward
              
              
              —
              
              
              
              3,931State
      tax benefits
              
              
              32,444
              
              
              
              32,694266,875
              
              
              
              158,722Valuation
      allowance
              
              
              (102,729
              )
              
              
              (34,750
              )164,146
              
              
              
              123,972Deferred
      tax liabilities:Prepaid
      expenses
              
              
              (1,901
              )
              
              
              (2,391
              )Mark-to-market
              
              
              (17,119
              )
              
              
              2,803Securitization-related
      income
              
              
              (41,910
              )
              
              
              (136,445
              )Interest
      on debentures
              
              
              (33,098
              )
              
              
              (35,556
              )Convertible
      senior notes
              
              
              (27,750
              )
              
              
              (31,576
              )Cancellation
      of indebtedness income
              
              
              (50,315
              )
              
              
              —(172,093
              )
              
              
              (203,165
              )Net
      deferred tax liability
              
              $
              (7,947
              )
              
              $
              (79,193
              )
  The
amounts reported for both 2009 and 2008 have been adjusted to account for the
reclassification of unrecognized tax benefits as required by applicable
accounting literature.
  We
incurred federal, foreign and state net operating losses during 2009 and 2008,
certain amounts that we will carry forward to future tax years to reduce future
federal, foreign and state tax due. New U.S. federal legislation was passed in
November, 2009 that allows for an extended carryback period (up to five years)
for net operating losses incurred in 2008 or 2009.  As a result of the
legislation, we recorded a current benefit related to this available carry
back.   The remaining net operating loss carryforwards after
giving effect to the available carryback are included as deferred tax assets in
the table above. Certain of the deferred tax assets related to federal, foreign
and state net operating losses have been offset by valuation allowances as
discussed below.
  Our
deferred tax asset valuation allowances are primarily the result of
uncertainties regarding the future realization of recorded tax benefits on tax
loss or credit carry-forwards from operations in the U.S. (both federal and
state) and foreign jurisdictions. Approximately $47.8 million of our valuation
allowances relate to entities that are not expected for the foreseeable future
to generate a taxable profit in these federal, foreign and state jurisdictions.
Therefore, it is more likely than not that these net operating losses or credits
will not be utilized to reduce future federal, foreign and state tax liabilities
in these jurisdictions.  There are no other net operating losses or
credit carry-forwards other than those described herein.
  We
generally do not provide income taxes on the undistributed earnings of non-U.S.
subsidiaries because such earnings are intended to be reinvested indefinitely to
finance foreign activities.  Because this determination involves our
future plans and expectations of future events, the possibility exists that
amounts declared 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 we determined that amounts were no longer
indefinitely reinvested offshore; however, it is not practicable to estimate the
additional amount, if any, of taxes payable.
  F-43
 Table of Contents
   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.,
the Netherlands and India. With a few exceptions, we are no longer subject to
U.S. federal, state, local, or foreign income tax examinations for years prior
to 2005. Currently, we are under audit by various jurisdictions for various
years. Although the audits have not been concluded, we do not expect any
material changes to our reported tax positions.
  We
recognize potential accrued interest and penalties related to unrecognized tax
benefits in income tax expense. During 2009 and 2008, we recognized $2.8 million
and $2.5 million, respectively, in potential interest and penalties associated
with uncertain tax positions, and 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 $2.5 and $2.6 million related to
the closing of the statute of limitations for the 2005 and 2004 tax year,
respectively.
  Reconciliation
(in thousands) of unrecognized tax benefits from the beginning to the end of
2009 is as follows:
 
 2009Balance
      at January 1, 2009
              
              $
              (67,262
              )Additions
      based on tax positions related to the prior year
              
              
              (28,099
              )Reductions
      based on tax positions related to the prior year
              
              
              8,147Additions
      based on tax positions related to the current year
              
              
              (607
              )Reductions
      based on tax positions related to the current year
              
              
              34,918Interest
      and penalties accrued
              
              
              (2,805
              )Reductions
      for tax positions of prior years for lapses of applicable statute of
      limitations
              
              
              2,498Balance
      at December 31, 2009
              
              $
              (53,210
              )
  Unrecognized
tax benefits that, if recognized, would affect the effective tax rate totaled
$14.4 million and $13.6 million at December 31, 2009 and 2008,
respectively.
  The total
amount of unrecognized tax benefits with respect to certain of our unrecognized
tax positions will significantly change as a result of the lapse of applicable
state and federal limitations periods in the next 12 months. However, it is not
reasonably possible to determine which (if any) limitations periods will lapse
in the next 12 months due to the effect of existing and new tax audits and tax
agency determinations.  Moreover, the net amount of such change cannot
be reasonably estimated because our operations over the next 12 months may cause
other changes to the total amount of unrecognized tax benefits. Due to the
complexity of the tax rules underlying our uncertain tax position liabilities,
and the unclear timing of tax audits, tax agency determinations, and other
events (such as the outcomes of tax controversies involving related issues with
unrelated taxpayers), we cannot establish reasonably reliable estimates for the
periods in which the cash settlement of our uncertain tax position liabilities
will occur.
  16.         Net
Loss Attributable to Controlling Interests Per Common Share
  We
compute earnings per share (“EPS”) attributable to our common shareholders by
dividing income or loss attributable to controlling interests by the
weighted-average common shares outstanding including participating securities
outstanding during the period, as discussed below.  Diluted EPS
reflects the potential dilution beyond shares for basic EPS that could occur if
securities or other contracts to issue common stock were exercised, were
converted into common stock or were to result in the issuance of common stock
that would share in our earnings.
  On
January 1, 2009, we adopted new accounting rules that require us to include all
unvested stock awards that contain non-forfeitable rights to dividends or
dividend equivalents, whether paid or unpaid, in the number of shares
outstanding in our basic and diluted EPS calculations.  Common stock
and unvested share-based payment awards earn dividends equally, and we have
included all outstanding restricted stock awards in our calculation of basic and
diluted EPS for current and prior periods.
  F-44
 Table of Contents
   The
following table sets forth the computation of net income per common share (in
thousands, except per share data):
 For the Year
      Ended December 31,2009
                
                
                2008Numerator:Loss
      from continuing operations attributable to controlling
      interests
                
                $
                (536,600
                )
                
                $
                (133,587
                )Loss
      from discontinued operations attributable to controlling
      interests
                
                $
                (4,289
                )
                
                $
                (5,886
                )Loss
      attributable to controlling interests
                
                $
                (540,889
                )
                
                $
                (139,473
                )Denominator:Basic
      (including unvested share-based payment awards) (1)
                
                
                47,683
                
                
                
                47,586Effect
      of dilutive stock options and warrants (2)
                
                
                47
                
                
                
                48Diluted
      (including unvested share-based payment awards) (1)
                
                
                47,730
                
                
                
                47,634Loss
      from continuing operations attributable to controlling interests per
      common share—basic
                
                $
                (11.25
                )
                
                $
                (2.81
                )Loss
      from continuing operations attributable to controlling interests per
      common share—diluted
                
                $
                (11.25
                )
                
                $
                (2.81
                )Loss
      from discontinued operations attributable to controlling interests per
      common share—basic
                
                $
                (0.09
                )
                
                $
                (0.12
                )Loss
      from discontinued operations attributable to controlling interests per
      common share—diluted
                
                $
                (0.09
                )
                
                $
                (0.12
                )Net
      loss attributable to controlling interests per common
      share—basic
                
                $
                (11.34
                )
                
                $
                (2.93
                )
  (1)
              Shares
      related to unvested share-based payment awards that we included in our
      basic and diluted share counts are as follows:  796,455 and
      803,873 shares for the years ended December 31, 2009 and 2008,
      respectively.
  (2)
              The
      effect of dilutive options is shown for informational purposes
      only.  As we were in a net loss position for all periods
      presented, the effect of including outstanding options and restricted
      stock would be anti-dilutive, and they are thus excluded from all
      calculations.
  As their
effects were anti-dilutive due to our net losses, we excluded all of our stock
options and 367,412 and 321,376 of unvested restricted share units,
respectively, from our net loss attributable to controlling interests per common
share calculations for the years ended December 31, 2009 and 2008,
respectively.
  For the
years ended December 31, 2009 and 2008, there were no shares potentially
issuable and thus includible in the diluted net income per common share
calculation under our 3.625% convertible senior notes due 2025 issued in May
2005 and 5.875% convertible senior notes due 2035 issued in November 2005.
However, in future reporting periods during which our closing stock price is
above the respective $37.16 and $45.22 conversion prices for the May 2005 and
November 2005 convertible senior notes, and depending on the closing stock price
at conversion, the maximum potential dilution under the conversion provisions of
the May 2005 and November 2005 convertible senior notes is approximately
6.2 million and 3.5 million shares, respectively, which could be
included in diluted share counts in net income per common share calculations.
See Note 13, “Convertible Senior Notes,” for a further discussion of these
convertible securities.
 
 17.
              Stock-Based
      Compensation
  In connection with our holding company
reorganization and pursuant to an Assumption Agreement dated as of June 30,
2009, we assumed CompuCredit Corporation’s equity incentive plans and Employee
Stock Purchase Plan (the “ESPP”).  This allows us to grant equity
awards under the CompuCredit Corporation 2008 Equity Incentive Plan (the “2008
Plan”) and will permit our eligible employees to participate in the ESPP. The
number of shares authorized for issuance under the 2008 Plan and the ESPP was
not increased as a result of the reorganization. Outstanding awards under all of
CompuCredit Corporation’s equity incentive plans will continue in effect in
accordance with the terms and conditions of the applicable plan and award,
except that CompuCredit Holdings Corporation common stock has been substituted
for CompuCredit Corporation common stock.
  The 2008
Plan provides for grants of stock options, stock appreciation rights,
restricted stock awards, restricted stock units and incentive
awards. The maximum aggregate number of shares of common stock that may be
issued under this plan and to
which awards may relate is 2,000,000 shares, and 1,366,165 shares remained
available for grant under this plan as of December 31, 2009. Upon shareholder
approval of the 2008 Plan in May 2008, all remaining shares available for grant
under our previous stock option and restricted stock plans were terminated.
Exercises and vestings under our stock-based employee compensation plans
resulted in our recognition of an income tax-related charge to additional
paid-in capital of $1.6 million and $1.4 million, respectively, for the years
ended December 31, 2009 and 2008, respectively.
 
 F-45
 Table of Contents
 
 Stock
Options
  Our 2008
Plan and its predecessor plans provide that we may grant options on or shares of
our common stock to members of the Board of Directors, employees, consultants
and advisors. The exercise price per share of the options may be less than,
equal to or greater than the market price on the date the option is granted. The
option period may not exceed 10 years from the date of grant. The vesting
requirements for options granted by us range from immediate to
5 years.  During the years ended December 31, 2009 and 2008, we
expensed stock-option-related compensation costs of $2.1 million and $2.0
million, respectively. We recognize stock-option-related compensation expense
for any awards with graded vesting on a straight-line basis over the vesting
period for the entire award.Information related to
options outstanding is as follows:
 
 For the Year
      Ended December 31, 2009Number of
                Shares
              
              
              Weighted-
                Average
                Exercise Price
              
              
              Weighted-
                Average of Remaining
                Contractual
      Life
              
              
              Aggregate
                Intrinsic
                ValueOutstanding
      at January 1, 2009
              
              
              840,664
              
              
              $
              31.04Cancelled/Forfeited
              
              
              (50,664
              )
              
              
              19.97Outstanding
      at December 31, 2009
              
              
              790,000
              
              
              $
              31.75
              
              
              
              3.2
              
              
              $
              —Exercisable
      at December 31, 2009
              
              
              40,000
              
              
              $
              27.90
              
              
              
              1.5
              
              
              $
              —
 
 
 For the Year
      Ended December 31, 2008Number of
                Shares
              
              
              Weighted-
                Average
                Exercise Price
              
              
              Weighted-
                Average of Remaining
                Contractual
      Life
              
              
              Aggregate
                Intrinsic
                ValueOutstanding
      at January 1, 2008
              
              
              666,264
              
              
              $
              36.99Granted
              
              
              200,000
              
              
              
              8.66Exercised
              
              
              (11,000
              )
              
              
              6.72Cancelled/Forfeited
              
              
              (14,600
              )
              
              
              14.67Outstanding
      at December 31, 2008
              
              
              840,664
              
              
              $
              31.04
              
              
              
              3.9
              
              
              $
              —Exercisable
      at December 31, 2008
              
              
              90,664
              
              
              $
              23.47
              
              
              
              1.2
              
              
              $
              —
  The
following table summarizes information about stock options outstanding as of
December 31, 2009:
 
 Options
      Outstanding
              
              
              Options
      ExercisableExercise
      price
              
              
              Number
      Outstanding
              
              
              Weighted
      Remaining Average Contractual
                  Life
      (in Years)
              
              
              Weighted
      Average Exercise Price
              
              
              Number
      Exercisable
              
              
              Weighted
      Remaining Average Contractual Life
                  (in
      Years)
              
              
              Weighted
      Average Exercise Price$
              0.00
      – $12.00
              
              
              
              220,000
              
              
              
              3.2
              
              
              $
              8.49
              
              
              
              20,000
              
              
              
              2.3
              
              
              $
              6.79$
              25.01
      – $50.00
              
              
              
              570,000
              
              
              
              3.2
              
              
              $
              40.72
              
              
              
              20,000
              
              
              
              0.7
              
              
              $
              49.00790,000
              
              
              
              3.2
              
              
              $
              31.75
              
              
              
              40,000
              
              
              
              1.5
              
              
              $
              27.90
  As of
December 31, 2009, our unamortized deferred compensation costs associated
with non-vested stock options were $2.2 million. There were no stock option
exercises during 2009.
  We have
estimated the fair value of options granted in 2008 at the date of grant using a
Black-Scholes option-pricing model with the assumptions described below. No
options were granted during 2009.
 
 Assumptions
      (1)
              
              2008Fair
      value per share
              
              $
              2.16Dividend
      yield
              
              
              —Volatility
      factors of expected market price of stock(2)
              
              
              30.00
              %Risk-free
      interest rate
              
              
              2.00
              %Expected
      option term (in years)
              
              
              3.50
 
 (1)
              No
      options were issued during 2009.
 (2)
                We
      use the implied volatility evidenced within our publicly traded
      convertible bonds, warrants and over-the-counter stock options as a basis
      for the expected volatility
assumption.
  F-46
 Table of Contents
  Restricted
Stock and Restricted Stock Unit Awards
  During
the years ended December 31, 2009 and 2008, we granted 211,454 and 712,545
shares of aggregate restricted stock and restricted stock units, respectively,
with aggregate grant date fair values of $1.1 million and $6.9 million,
respectively. When we grant restricted shares, we defer the grant date value of
the restricted shares and amortize the grant date values of these shares (net of
anticipated forfeitures) as compensation expense with an offsetting entry to the
additional paid-in capital component of our consolidated shareholders’ equity.
Our issued restricted shares generally vest over a range of twenty-four to sixty
months and are being amortized to salaries and benefits expense ratably over the
respective vesting periods. As of December 31, 2009, our unamortized deferred
compensation costs associated with non-vested restricted stock awards were $5.7
million with a weighted-average remaining amortization period of 1.5
years.
  Occasionally,
we issue or sell stock in our subsidiaries to certain members of the
subsidiaries’ management teams. The terms of these awards vary but generally
include vesting periods comparable to those of stock issued under our restricted
stock plan. Generally, these shares can be converted to cash or our stock (or in
one case the stock of one of our subsidiaries) at our discretion after the
specified vesting period or the occurrence of other contractual events.
Ownership in these shares constitutes noncontrolling interests in the
subsidiaries. We are amortizing these compensation costs commensurate with the
applicable vesting period. The weighted-average remaining vesting period for
stock still subject to restrictions was 1.2 years as of December 31,
2009.
  18.
              Employee Benefit
      Plans
  We
maintain a defined contribution retirement plan (“401(k) plan”) for our U.S.
employees that provides for a matching contribution by us. All full time U.S.
employees are eligible to participate in the 401(k) plan. Our U.K. credit card
subsidiary offers eligible employees membership in a Group Personal Pension Plan
which is set up with Friend’s Provident. This plan is a defined contribution
plan in which all permanent employees who have completed three months of
continuous service are eligible to join the plan. Company matching contributions
are available to U.K. employees who contribute a minimum of 3%. We contributed
matching contributions under our U.S. and U.K. plans of $0.8 million and $1.1
million in 2009 and 2008, respectively.
  Also, all
employees, excluding executive officers, are eligible to participate in the ESPP
to which we referred above. Under the ESPP, employees can elect to have up to
10% of their annual wages withheld to purchase common stock in CompuCredit up to
a fair market value of $10,000. The amounts deducted and accumulated by each
participant are used to purchase shares of common stock at the end of each
one-month offering period. The price of stock purchased under the ESPP is
approximately 85% of the fair market value per share of our common stock on the
last day of the offering period. Employees contributed $0.2 million to purchase
60,772 shares of common stock in 2009 and $0.4 million to purchase 65,054 shares
of common stock in 2008 under the ESPP. The ESPP covers up to 150,000 shares of
common stock. Our charge to expense associated with the ESPP was $52,000 and
$84,000 in 2009 and 2008, respectively.
  19.
              Related Party
      Transactions
  During
2008, two of our executive officers and a member of our Board of Directors
separately purchased an aggregate $3.4 million (face amount) of our outstanding
convertible senior notes.  The purchases were made at prevailing
market prices from unrelated third parties.  In 2009 we repurchased
$1.0 million and $2.0 million in face amount of the 3.625% Convertible Senior
Notes Due 2025 and the 5.875% Convertible Senior Notes Due 2035, respectively,
from Krishnakumar Srinivasan (President of our Credit Cards segment). The
purchase price of the notes totaled $1.0 million (including accrued interest)
and resulted in an aggregate gain to us of $2.0 million (net of the notes’
applicable share of deferred costs, which were written off in connection with
the purchases).
  Under a
shareholders’ agreement into which we entered with David G. Hanna, Frank J.
Hanna, III, Richard R. House, Jr. (our President), Richard W. Gilbert (our Chief
Operating Officer and Vice Chairman) and certain trusts that were or are
affiliates of the Hanna’s following our initial public offering (1) if one
or more of the shareholders accepts a bona fide offer from a third party to
purchase more than 50% of the outstanding common stock, each of the other
shareholders that are a party to the agreement may elect to sell their shares to
the purchaser on the same terms and conditions, and (2) if shareholders
that are a party to the agreement owning more than 50% of the common stock
propose to transfer all of their shares to a third party, then such transferring
shareholders may require the other shareholders that are a party to the
agreement to sell all of the shares owned by them to the proposed transferee on
the same terms and conditions.
  F-47
 Table of Contents
   In June 2007, we entered
into a sublease for 1,000 square feet of excess office space at our new Atlanta
headquarters office location, to HBR Capital, Ltd., a corporation co-owned by
David G. Hanna and Frank J. Hanna, III. The sublease rate of $22.44 per square
foot is the same as the rate that we pay on the prime lease. This sublease
expires in May of 2022.
  In June,
2007, a partnership formed by Richard W. Gilbert (our Chief Operating Officer
and Vice Chairman of our Board of Directors), Richard R. House, Jr. (our
President and a member of our Board of Directors), J. Paul Whitehead III (our
Chief Financial Officer), Krishnakumar Srinivasan (President of our Credit Cards
segment), and other individual investors (including an unrelated third-party
individual investor), acquired £4.7 million ($9.2 million) of class “B”
notes originally issued to another investor out of our U.K. Portfolio
securitization trust. This acquisition price of the notes was the same price at
which the original investor had sold $60 million of notes to another unrelated
third party. As of December 31, 2009, the outstanding balance of the notes
held by the partnership was £1.1 million ($1.7 million). The notes held by
the partnership comprise 0.7% of the $247.7 million in total notes within the
trust on that date and are subordinate to the senior tranches within the
trust. The “B” tranche bears interest at LIBOR plus 9%.
  In
December 2006, we established a contractual relationship with Urban Trust
Bank, a federally chartered savings bank (“Urban Trust”), pursuant to which we
purchase credit card receivables underlying specified Urban Trust credit card
accounts. Under this arrangement, in general Urban Trust was entitled to receive
5% of all payments received from cardholders and was obligated to pay 5% of all
net costs incurred by us in connection with managing the program, including the
costs of purchasing, marketing, servicing and collecting the receivables. In
April 2009, however, we amended our contractual relationship with Urban Trust
such that, in exchange for a payment by us of $300,000, Urban Trust would sell
back its ownership interest in the economics underlying cards issued through
Urban Trust Bank. The purchase of this interest resulted in a net gain of $1.1
million which we recorded in our second quarter 2009 results of
operations.  Frank J. Hanna, Jr., owns a substantial noncontrolling
interest in Urban Trust and serves on its Board of Directors. In December 2006,
we deposited $0.3 million with Urban Trust to cover purchases by Urban Trust
cardholders.  As of December 31, 2009, our deposit with Urban Trust
decreased to only $11,200, corresponding to account closures and reduced credit
lines impacting Urban Trust cardholders.
  F-48
 Table of Contents
  SIGNATURES




Pursuant
to the requirements of Section 13 or 15(d) of the Securities Exchange Act
of 1934, as amended, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized, in the City of
Atlanta, State of Georgia, on March 5, 2010.








CompuCredit
      Holdings CorporationBy:
            /s/
      David G. HannaDavid
      G. Hanna
              Chief
      Executive Officer and Chairman of the
Board










Pursuant
to the requirements of the Securities Exchange Act of 1934, as amended, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.





Signature
            Title
            Date/s/    DAVID G. HANNA
                David
      G. Hanna
            Chief
      Executive Officer and Chairman of the Board (Principal Executive
      Officer)
            March
      5, 2010/s/    J.
      PAUL WHITEHEAD,
      III
              J.
      Paul Whitehead, III
            Chief
      Financial Officer (Principal Financial & Accounting
      Officer)
            March
      5, 2010/s/    GREGORY J. CORONA
              Gregory
      J. Corona
            Director
            March
      5, 2010/s/    RICHARD W. GILBERT
              Richard
      W. Gilbert
            Director
            March
      5, 2010/s/    FRANK J. HANNA,
      III
              Frank
      J. Hanna, III
            Director
            March
      5, 2010/s/    RICHARD R. HOUSE, JR.
              Richard
      R. House, Jr.
            Director
            March
      5, 2010/s/    DEAL W. HUDSON
              Deal
      W. Hudson
            Director
            March
      5, 2010/s/    MACK F. MATTINGLY
              Mack
      F. Mattingly
            Director
            March
      5, 2010/s/    NICHOLAS B. PAUMGARTEN
              Nicholas
      B. Paumgarten
            Director
            March
      5, 2010/s/    THOMAS G. ROSENCRANTS
              Thomas
      G. Rosencrants
            Director
            March
      5, 2010