NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1 DESCRIPTION OF THE BUSINESS
The accompanying consolidated financial statements include the accounts of QC Holdings, Inc. and its wholly-owned
subsidiaries, QC Financial Services, Inc., QC Auto Services, Inc., QC Loan Services, Inc., QC E-Services, Inc., QC Canada Holdings Inc. and QC Capital, Inc. (collectively, the Company). QC Financial Services, Inc. is the 100% owner of QC Financial
Services of California, Inc., Financial Services of North Carolina, Inc., QC Financial Services of Texas, Inc., Express Check Advance of South Carolina, LLC (ECA), QC Advance, Inc., Cash Title Loans, Inc. and QC Properties, LLC. QC Canada Holdings
Inc. is the 100% owner of Direct Credit Holdings Inc. and its wholly owned subsidiaries (collectively, Direct Credit). QC Holdings, Inc., incorporated in 1998 under the laws of the State of Kansas, was founded in 1984, and has provided various
retail consumer financial products and services throughout its 28-year history. The Companys common stock trades on the NASDAQ Global Market exchange under the symbol QCCO.
Since 1998, the Company has been primarily engaged in the business of providing short-term consumer loans, known as payday loans, with
principal values that typically range from $100 to $500. Payday loans provide customers with cash in exchange for a promissory note with a maturity of generally two to three weeks and supported by that customers personal check for the
aggregate amount of the cash advanced plus a fee. The fee varies from state to state, based on applicable regulations and generally ranges from $15 to $20 per $100 borrowed. To repay the cash advance, customers may redeem their check by paying cash
or they may allow the check to be presented to the bank for collection.
The Company also provides other consumer financial
products and services, such as installment loans, credit services, check cashing services, title loans, open-end credit, debit cards, money transfers and money orders. All of the Companys loans and other services are subject to state
regulation, which vary from state to state, as well as to federal and local regulation, where applicable. As of December 31, 2012, the Company operated 466 branches with locations in Alabama, Arizona, California, Colorado, Idaho, Illinois,
Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, Nevada, New Mexico, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Utah, Virginia, Washington and Wisconsin. In December 2012, the Company decided that it would close 38
underperforming branches (primarily located in South Carolina and Washington) during first half of 2013.
The Company began
offering branch-based installment loans to customers in its Illinois branches during second quarter 2006 and expanded that product offering to customers in additional states during 2009 and 2010. In 2012, the Company introduced new installment loan
products (signature loans and auto equity loans) to meet high customer demand for longer-term loan options. These new products are higher-dollar and longer-term installment loans that are centrally underwritten and distributed through the
Companys existing branch network. As of December 31, 2012, the Company offered the installment loan products to its customers in Arizona, California, Colorado, Idaho, Illinois, Missouri, New Mexico, South Carolina, Utah and Wisconsin. The
installment loans are payable in monthly installments (principal plus accrued interest) with terms typically ranging from four months to 48 months, and all loans are pre-payable at any time without penalty. The fee for the installment loan varies
based on the amount borrowed and the term of the loan. Generally, the amount that the Company advances under an installment loan ranges from $400 to $3,000. The average principal amount across all installment loan products originated during 2010,
2011 and 2012 was approximately $488, $518 and $624, respectively.
On September 30, 2011, QC Canada Holdings Inc., a
wholly-owned subsidiary of the Company, acquired 100% of the outstanding stock of Direct Credit Holdings Inc., a British Columbia company engaged in short-term, consumer Internet lending in certain Canadian provinces. Direct Credit was founded in
1999 and has developed and grown a proprietary Internet-based model into a leading platform in Canada. The acquisition of Direct Credit is part of the implementation of the Companys strategy to diversify by increasing its product offerings and
distribution, as well as by expanding its presence into international markets. See additional information in Note 4.
84
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In September 2007, the Company entered into the buy here, pay here segment of the used
automotive market in connection with ongoing efforts to evaluate alternative products that serve the Companys customer base. In January 2009, the Company purchased two buy here, pay here locations in Missouri for approximately $4.2 million. In
May 2009, the Company opened a service center to provide reconditioning services on its inventory of vehicles and repair services for its customers. As of December 31, 2012, the Company operated five buy here, pay here lots, which are located
in Missouri and Kansas. These locations sell used vehicles and earn finance charges from the related vehicle financing contracts. The average principal amount for buy here, pay here loans originated during the year ended December 31, 2012 was
approximately $10,245 and the average term of the loan was 33 months.
NOTE 2 SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Principles of Consolidation.
The accompanying consolidated financial statements include
the accounts of the Company. All significant intercompany balances and transactions have been eliminated in consolidation.
Accounting Reclassifications.
Certain reclassifications
have been made to prior period financial information to conform to the current presentation. On the Consolidated Balance Sheets and Statements of Cash Flows, amounts associated with inventory have been reclassified from prepaid expenses and other
current assets to be separately presented.
Use of Estimates.
In preparing financial statements in conformity with accounting principles
generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial
statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to allowance for losses on loans, fair value measurements used
in goodwill impairment tests, long-lived assets, income taxes, contingencies and litigation. Management bases its estimates on historical experience, empirical data and on various other assumptions that are believed to be reasonable under the
circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.
Revenue Recognition.
The Company records revenue from payday and title loans upon
issuance. The term of a loan is generally two to three weeks for a payday loan and 30 days for a title loan. At the end of each month, the Company records an estimate of the unearned revenue that results in revenues being recognized on a
constant-yield basis ratably over the term of each loan.
The Company records revenues from installment loans using the simple
interest method. With respect to the Companys credit service organization (CSO) in Texas, the Company earns a CSO fee for arranging for an unrelated third-party to make a loan to the consumer and for providing related services to the consumer,
including a guarantee of the consumers obligation to the third-party lender. The Company also services the loan for the lender. The CSO fee is recognized ratably over the term of the loan.
The Company recognizes revenue (net of sales tax) on the sale of automobiles at the time the vehicle is delivered to the customer and
title has passed. In cases where the Company finances the vehicles, the Company originates an installment sale contract and uses the simple interest method to recognize interest.
85
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
With respect to the open-end product, the Company earns interest on the outstanding
balance and the product also includes a monthly non-refundable membership fee. The open-end credit product is very similar to a credit card as the customer is granted a grace period of 25 days to repay the loan without incurring any interest.
The Company recognizes revenues for its other consumer financial products and services, which includes check cashing, money
transfers and money orders, at the time those services are rendered to the customer, which is generally at the point of sale.
The components of Other revenues as reported in the Consolidated Statements of Income are as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
Credit service fees
|
|
$
|
7,009
|
|
|
$
|
7,512
|
|
|
$
|
7,003
|
|
Check cashing fees
|
|
|
4,023
|
|
|
|
3,698
|
|
|
|
3,193
|
|
Title loan fees
|
|
|
3,893
|
|
|
|
5,214
|
|
|
|
2,693
|
|
Open-end credit fees
|
|
|
|
|
|
|
24
|
|
|
|
1,111
|
|
Other fees
|
|
|
2,338
|
|
|
|
2,356
|
|
|
|
2,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
17,263
|
|
|
$
|
18,804
|
|
|
$
|
16,450
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and Cash Equivalents.
Cash and cash equivalents include cash on hand
and short-term investments with original maturities of three months or less. The carrying amount of cash and cash equivalents approximates the estimated fair value at December 31, 2011 and 2012. Substantially all cash balances are in excess of
federal deposit insurance limits.
Restricted Cash
. Restricted cash
includes cash in certain money market accounts and certificates of deposit. The restricted cash balance at December 31, 2012 is restricted primarily due to licensing requirements in certain states. The restricted cash balance at
December 31, 2011 included funds of approximately $1.9 million set aside in a separate cash account for the settlement of a legal matter in Missouri.
Inventory
. Inventory primarily consists of vehicles acquired from auctions and trade-ins.
Vehicle transportation and reconditioning costs are capitalized as a component of inventory. The cost of vehicle inventory is determined on the specific identification method. Vehicle inventories are stated at the lower of cost or market. Valuation
allowances are established when the inventory carrying values are in excess of estimated selling prices, net of direct costs of disposal. As of December 31, 2011 and 2012, the Company had inventory of used vehicles and automotive parts totaling
$3.0 million and $1.3 million, respectively. Management has determined that a valuation allowance is not necessary as of December 31, 2011 and 2012.
Loans Receivable, Provision for Losses and Allowance
for Loan Losses.
When the Company enters into a payday loan with a customer, the Company records a loan receivable for the amount loaned to the customer plus the fee charged by the Company, which varies from state to state based on applicable
regulations.
86
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes certain data with respect to the Companys payday
loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
Average amount of cash provided to customer
|
|
$
|
315.78
|
|
|
$
|
317.50
|
|
|
$
|
322.86
|
|
Average fee received by the Company
|
|
$
|
56.41
|
|
|
$
|
56.80
|
|
|
$
|
57.76
|
|
Average term of loan (days)
|
|
|
17
|
|
|
|
17
|
|
|
|
18
|
|
When the Company enters into an installment loan with a customer, the Company records a loan receivable for the amount
loaned to the customer. At each period end, the Company records any accrued fees and interest as a receivable, which vary from state to state based on applicable regulations.
The Company records a receivable in connection with the sale of an automobile or other vehicle at the face amount of the loan. At each period end, the Company records any accrued fees and interest as a
receivable, which vary from state to state based on applicable regulations. In December 2012, the Company sold approximately $16.1 million principal amount of its automobile loans receivable to an unaffiliated company. The Company received
approximately $11.3 million in cash proceeds from the sale of automobile receivables and recognized a $2.6 million loss from the sale in the other income component of the Consolidated Statements of Income. In addition, the Company transferred
approximately $1.1 million in principal amount of automobile loans receivable to the unaffiliated company. In accordance with accounting guidance, these transferred assets have been classified as collateralized receivables and the cash proceeds
received (approximately $618,000) from the transfer of these automobile loans receivable have been classified as a secured borrowing in the Consolidated Balance Sheets. See additional information in Note 4.
When checks are presented to the bank for payment of payday loans and returned as uncollected, all accrued fees, interest and outstanding
principal are charged-off as uncollectible, generally within 14 days after the due date. Accordingly, payday loans included in the receivable balance at any given point in time are typically not older than 30 days. These charge-offs are recorded as
expense through the provision for losses. Any recoveries on losses previously charged to expense are recorded as a reduction to the provision for losses in the period recovered. With respect to title loans, no additional fees or interest are charged
after the loan has defaulted, which generally occurs after attempts to contact the customer have been unsuccessful. Based on state regulations and operating procedures, the Company stops accruing interest on installment loans between 60 to 90 days
after the last payment. On automotive loans, the Company stops accruing interest on 60 days after the last payment.
With
respect to the loans receivable at the end of each reporting period, the Company maintains an aggregate allowance for loan losses (including fees and interest) for payday loans, title loans, installment loans and auto loans at levels estimated to be
adequate to absorb estimated incurred losses in the respective outstanding loan portfolios. The Company does not specifically reserve for any individual loan.
The methodology for estimating the allowance for payday and title loan losses utilizes a four-step approach, which reflects the short-term nature of the loan portfolio at each period-end, the historical
collection experience in the month following each reporting period-end and any fluctuations in recent general economic conditions. First, the Company computes the loss/volume ratio for the last month of each reporting period. The loss/volume ratio
represents the percentage of aggregate net payday and title loan charge-offs to total payday and title loan volumes during a given period. Second, the Company computes an adjustment to this percentage to reflect the collections experience in the
month immediately following the reporting period-end. To estimate collections experience, the Company computes an average of the change in the loss/volume ratio from the last month of each reporting period to the immediate subsequent month-end for
each of the last three years (excluding
87
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the current year). This change is then added to, or subtracted from, the loss/volume ratio computed for the last month of the current reporting period to derive an experience-adjusted loss/volume
ratio. Third, the period-end gross payday and title loans receivable balance is multiplied by the experience-adjusted loss/volume ratio to determine the initial estimate of the allowance for loan losses. Fourth, the Company reviews and evaluates
various qualitative factors that may or may not affect the computed initial estimate of the allowance for loan losses, including, among others, known changes in state regulations or laws, changes to the Companys business and operating
structure, and geographic or demographic developments. As of December 31, 2011, the Company determined that no qualitative adjustment to the allowance for payday loan losses was necessary. In connection with the Companys decision in 2012
to close 38 branches during the first half of 2013, the Company recorded a $1.3 million qualitative adjustment to increase its allowance for loan losses as of December 31, 2012.
The Company maintains an allowance for installment loans at a level it considers sufficient to cover estimated losses in the collection
of its installment loans. The allowance calculation for installment loans is based upon historical charge-off experience (primarily a six-month trailing average of charge-offs to total volume) and qualitative factors, with consideration given to
recent credit loss trends and economic factors. As of December 31, 2011, the Company reviewed the qualitative factors and determined that no qualitative adjustment was needed. In connection with the Companys decision in 2012 to close 38
branches during the first half of 2013, the Company recorded a $344,000 qualitative adjustment to increase its allowance for loan losses as of December 31, 2012.
The allowance calculation for auto loans is determined on an aggregate basis and is based upon the Companys review of the loan portfolio by period of origination, industry loss experience and
qualitative factors, with consideration given to changes in loan characteristics, delinquency levels, collateral values and other general economic conditions. This estimate of probable losses is primarily determined using static pool analyses
prepared for various segments of the portfolio using estimated loss experience, adjusted for consideration of any current economic factors. As of December 31, 2011 and 2012, the Company reviewed various qualitative factors with respect to its
automotive loans receivable and determined that no qualitative adjustment was needed.
The Company records an allowance for
other receivables based upon an analysis that gives consideration to payment recency, delinquency levels and other general economic conditions.
Based on the information discussed above, the Company records an adjustment to the allowance for loan losses through the provision for losses. The overall allowance represents the Companys best
estimate of probable losses inherent in the outstanding loan portfolio at the end of each reporting period.
On occasion, the
Company will sell certain payday loan receivables that the Company had previously charged off to third parties for cash. The sales are recorded as a credit to the overall loss provision, which is consistent with the Companys policy for
recording recoveries noted above. The following table summarizes cash received from the sale of these payday loan receivables
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
Cash received from sale of payday loan receivables
|
|
$
|
494
|
|
|
$
|
472
|
|
|
$
|
685
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating Expenses.
The direct costs incurred in operating the Companys
business units have been classified as operating expenses. Operating expenses include salaries and benefits of employees (branch and automotive personnel as well as employees of Direct Credit), rent and other occupancy costs, depreciation and
amortization of branch property and equipment, armored car and security costs, automobile costs, marketing and other costs incurred by the business units. The provision for losses is also a component of operating expenses.
88
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Property and Equipment.
Property and equipment are recorded at cost.
Depreciation is charged to operations using the straight-line method over the estimated useful lives of the assets. Buildings are depreciated generally over 39 years. Leasehold improvements are amortized using the straight-line method over the
shorter of the lease term (including renewal options that are reasonably assured), which generally ranges from 1 to 15 years with an average of 7 years, or the estimated useful life of the related asset. Furniture and equipment, including data
processing equipment, data processing software, and other equipment are generally depreciated from 3 to 7 years. Company-owned vehicles are depreciated over four to five years. Repair and maintenance expenditures that do not significantly extend
asset lives are charged to expense as incurred. The cost and related accumulated depreciation and amortization of assets sold or disposed of are removed from the accounts, and the resulting gain or loss is included in income.
Software
. Purchased software is recorded at cost and is amortized on a
straight-line basis over the estimated useful life. The Company capitalizes costs for the development of internal use software, including coding and software configuration costs and costs of upgrades and enhancements. Computer software and
development costs incurred in the preliminary project stage, as well as training and maintenance costs are expensed as incurred. Direct and indirect costs associated with the application development stage of internal use software are capitalized
until such time that the software is substantially complete and ready for its intended use. Costs for the development of internal use software were immaterial for the years ending December 31, 2010 and 2011, and totaled $1.3 million for the
year ending December 31, 2012.
Advertising Costs.
Advertising costs, including related
printing, postage and search engine marketing, are charged to operations when incurred. Advertising expense was $2.3 million, $2.0 million and $3.5 million for the years ended December 31, 2010, 2011 and 2012, respectively.
Goodwill and Intangible Assets.
Goodwill represents the excess of
consideration over the fair value of net tangible and identified intangible assets and liabilities assumed of acquired businesses using the acquisition method of accounting. Intangible assets consist of customer relationships, non-compete
agreements, trade names, debt issuance costs, and other intangible assets.
Goodwill and other intangible assets having
indefinite useful lives are tested for impairment using a fair-value based approach on an annual basis, or more frequently if events or changes in circumstances indicate that the assets might be impaired. The test for goodwill impairment is a
two-step approach. The first step of the goodwill impairment test requires a determination of whether the fair value of a reporting unit is less than its carrying value. If so, the second step is required, which involves an analysis reflecting the
allocation of the fair value determined in the first step (as if it was the purchase price in a business combination). This process may result in the determination of a new amount of goodwill. If the calculated fair value of the goodwill resulting
from this allocation is lower than the carrying value of the goodwill in the reporting unit, the difference is reflected as a non-cash impairment loss. The purpose of the second step is only to determine the amount of goodwill that should be
recorded on the balance sheet. The recorded amounts of other items on the balance sheet are not adjusted.
The Company
evaluates the goodwill at the reporting unit level and performs its annual goodwill and indefinite life impairment test as of December 31 for all reporting units. The Company has determined that it has three reporting units, which are based on
its core lending operations, automotive operations and Internet lending operations. For testing purposes, the Company has elected to aggregate all components of its core lending operations in the United States into a single reporting unit, as the
Company believes all of its core lending branches have similar economic characteristics and are similar with respect to the nature of the products and services, type of customer and the methods used to provide its services. The Company hired an
independent appraiser to assist with the Companys impairment test as of December 31, 2012. The fair value of the Companys reporting units was based on a weighted average of valuations using methods that included discounted
89
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
cash flows and market multiples. The key assumptions used in the discounted cash flow valuations are discount rates and perpetual growth rates applied to cash flow projections. Also inherent in
the discounted cash flow valuation models are past performance, projections and assumptions in current operating plans and revenue growth. These assumptions contemplate business, market and overall economic conditions. In connection with this
process, the independent appraiser also provided a reconciliation of the estimated aggregate fair values of the Companys reporting units to its market capitalization, including consideration of a control premium that represents what an
investor would pay for the Companys equity securities to obtain a controlling interest. The Company believes that this reconciliation is consistent with a market participant perspective. The Company tests trade names with indefinite lives for
impairment by comparing the book value to a fair value calculated using a discounted cash flow approach on a presumed royalty rate derived from the revenues related to the trade name.
Other factors that are considered important in determining whether an impairment of goodwill or indefinite lived intangible assets might
exist include significant continued underperformance compared to peers, significant changes in the Companys business and products, material and ongoing negative industry or economic trends, or other factors specific to each asset being
evaluated. Any changes in key assumptions about the Companys business and its prospects, or changes in market conditions or other externalities, could result in an impairment charge and such a charge could have a material adverse effect on the
Companys financial condition and results of operations.
With respect to the impairment test performed as of
December 31, 2012, the Company determined that there was no impairment of goodwill for the core lending and automotive units as the fair value of each these reporting units were in excess of their carrying amount based on the tests results.
However, the test results showed that the fair value of the E-Lending unit did not exceed its carrying amount. Thus, the Company hired the independent appraiser to assist with the second step of the impairment test and as a result, the Company
recorded a $1.7 million non-cash impairment charge to goodwill for its E-Lending reporting unit. In addition, the Company performed an impairment test on its indefinite lived intangible assets and determined that the trade name associated with the
ECA acquisition was impaired and recorded an impairment charge of $600,000. No impairment of goodwill or indefinite lived intangible assets was recognized during 2010 and 2011. See additional information in Note 10.
Impairment of Long-Lived
Assets.
The Company evaluates all long-lived assets, including intangible assets that are subject to amortization, for impairment whenever events or changes in circumstances indicate that the carrying amounts may not be recoverable. When the
carrying amounts of these assets cannot be recovered by the undiscounted net cash flows they will generate, impairment is recognized in an amount by which the carrying amount of the assets exceeds the fair value.
Earnings per Share.
The Company computes basic and diluted earnings per share using
a two-class method because the Company has participating securities in the form of unvested share-based payment awards with rights to receive non-forfeitable dividends. Basic and diluted earnings per share are computed by dividing income available
to common stockholders by the weighted average number of common shares outstanding during the year. The computation of diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the year. The effect
of stock options and unvested restricted stock represent the only differences between the weighted average shares used for the basic earnings per share computation compared to the diluted earnings per share computation for each period presented. See
additional information in Note 16.
Stock-Based Compensation
. The Company recognizes
in its financial statements compensation cost relating to share-based payment transactions. The stock-based compensation expense is recognized as expense over the requisite service period, which is the vesting period. See additional information in
Note 17.
90
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Income Taxes.
Deferred income taxes are recorded to reflect the tax consequences in future
years of differences between the tax basis of assets and liabilities and their financial reporting amounts, based on enacted tax laws and statutory tax rates applicable to the periods in which the differences are expected to affect taxable income.
Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. Income tax expense represents the tax payable for the current period and the change during the period in deferred tax assets
and liabilities.
Tax guidance pertaining to uncertain tax positions issued by the Financial Accounting Standards Board (FASB)
clarifies what criteria must be met prior to recognition of the financial statement benefit of a position taken or one that is expected to be taken in a tax return. The provisions of this guidance apply broadly to all tax positions taken by a
company, including decisions to not report income in a tax return or to classify a transaction as tax exempt. The prescribed approach is determined through a two-step benefit recognition model. The amount of benefit to recognize is measured as the
largest amount of tax benefit that is greater than 50 percent likely of being ultimately realized upon settlement. The tax position must be derecognized when it is no longer more likely than not of being sustained. See additional information in Note
14.
Treasury Stock.
The Companys board of directors periodically authorizes
the repurchase of the Companys common stock. The Companys repurchases of common stock are recorded as treasury stock and result in a reduction of stockholders equity. The shares held in treasury stock may be used for corporate
purposes, including shares issued to employees as part of the Companys stock-based compensation programs. When treasury shares are reissued, the Company uses the average cost method. The Company had 3.7 million and 3.5 million shares
of common stock held in treasury at December 31, 2011 and 2012, respectively.
Fair Value of Financial Instruments.
The fair value of short-term
payday, title, installment loans and open-end credit receivables, borrowings under the credit facility, accounts payable and certain other current liabilities that are short-term in nature approximates carrying value.
The Company estimates the fair value of its automotive loan receivables at what a third party purchaser might be willing to pay. The
Company has had discussions with third parties and has sold a portfolio that indicates a 35% discount to face value would be a reasonable fair value for a negotiated third party transaction for an entire portfolio. As of December 31, 2011 and
December 31, 2012, the fair value of the automotive loan receivables was $11.7 million and $1.7 million, respectively.
The Company estimates the fair value of long-term debt based upon borrowing rates available at the reporting date for indebtedness with
similar terms and average maturities. As of December 31, 2011, the balance of the three-year term loan was $31.7 million and the fair value was estimated at $30.3 million. As of December 31, 2012, the term loan was paid in full. The fair
value of the subordinated notes as of December 31, 2011 and 2012 approximated the carrying value.
Derivative Instruments.
The Company does not engage in the trading of derivative financial
instruments except where the Companys objective is to manage the variability of forecasted interest payments attributable to changes in interest rates. In general, the Company enters into derivative transactions in limited situations based on
managements assessment of current market conditions and perceived risks.
91
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
On March 31, 2008, the Company entered into an interest rate swap agreement. The
swap agreement was designated as a cash flow hedge and changed the floating rate interest obligation associated with the Companys $50 million term loan into a fixed rate. Gains or losses on derivatives designated as cash flow hedges, to
the extent they are effective, are recorded in other comprehensive income, and subsequently reclassified to earnings as interest expense to offset the impact of the hedged items when they occur. If it becomes probable the forecasted transaction to
which a cash flow hedge relates will not occur, the derivative would be terminated and the amount in other comprehensive income would generally be recognized into earnings. The swap agreement had a maturity date of December 6, 2012. Under the
swap, the Company paid a fixed interest rate of 3.43% and received interest at a rate of LIBOR. On October 3, 2011, the Company terminated the swap agreement. Prior to refinancing the term debt on September 30, 2011 that was associated
with the swap, the swap was considered highly effective and therefore, the Company reported no net gain or loss during the year ended December 31, 2011. In connection with the termination of the swap agreement, the Company paid a net cash
settlement of approximately $343,000. The Companys remaining amounts deferred in accumulated other comprehensive loss were amortized into earnings as an increase to interest expense over the original term of the hedged transaction.
Foreign Currency Translations
. The functional currency
for the Companys subsidiaries that serve residents of Canada is the Canadian dollar. The assets and liabilities of these subsidiaries are translated into U.S. dollars at the exchange rates in effect at each balance sheet date, and the
resulting adjustments are recorded in Accumulated other comprehensive income (loss) as a separate component of equity. Revenue and expenses will be translated at the monthly average exchange rates occurring during each period.
NOTE 3 ACCOUNTING DEVELOPMENTS
In July 2012, the FASB issued an update to existing guidance on the impairment assessment of indefinite-lived
intangibles. This update simplifies the impairment assessment of indefinite-lived intangibles by allowing companies to consider qualitative factors to determine whether it is more likely than not that the fair value of an indefinite-lived intangible
asset is less than its carrying amount before performing the two step impairment review process. This guidance is effective for annual and interim impairment tests performed for fiscal years beginning after September 15, 2012. The Company
adopted this guidance on January 1, 2012. The adoption did not have a material effect on the Companys consolidated financial statements.
In September 2011, the FASB issued amendments to the goodwill impairment guidance, which provides an option for companies to use a qualitative approach to test goodwill for impairment if certain
conditions are met. These amendments give entities the option, under certain circumstances, to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount
as a basis for determining whether further impairment testing is necessary. The amendments are effective for annual and interim goodwill impairment tests performed for fiscal years beginning after December 15, 2011 (early adoption is
permitted). The Company adopted this standard during the year ended December 31, 2011. There was no material impact to the Companys financial position or results of operations as a result of the adoption of this standard.
In June 2011, the FASB issued guidance on the presentation of comprehensive income. The Company adopted this guidance effective
January 1, 2012. The adoption of this guidance did not have a material effect on the Companys consolidated financial statements.
In May 2011, the FASB issued an update to the authoritative guidance, which establishes common requirements for measuring fair value and for disclosing information about fair value measurements in
accordance with US GAAP. The Company adopted this guidance effective January 1, 2012. The adoption of this guidance did not have a material effect on the Companys consolidated financial statements.
92
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 4 SIGNIFICANT BUSINESS TRANSACTIONS
Sale of Automobile Receivables.
In December 2012, the Company completed two transactions involving $17.2 million
principal amount of its automobile loans receivable. The Company received approximately $11.9 million in cash proceeds in exchange for relinquishing its right, title and interest in the automobile loans receivable. The Company used the net proceeds
it received to make a prepayment of the term loan under its credit agreement. The Company is subject to recourse provisions, which requires it to re-purchase certain automobile loans receivable in the event of a default. As of December 31,
2012, the balance of the recourse liability was approximately $350,000.
With respect to the transfer of $17.2 million in
automobile loans receivable, the Company treated $16.1 million of this amount as a sale and recognized a $2.6 million loss from the sale in the other income component of the Consolidated Statements of Income. The Company was unable to satisfy
certain criteria for sale accounting treatment with respect to the transfer of $1.1 million in principal amount of automobile loans receivable. These transferred assets have been classified as collateralized receivables and the cash proceeds
received (approximately $618,000) from the transfer of these automobile loans receivable have been classified as a secured borrowing in the Consolidated Balance Sheets.
Direct Credit Holdings.
On September 30, 2011, QC Canada Holdings Inc., a wholly-owned subsidiary of the Company, acquired 100% of the outstanding stock of Direct Credit Holdings Inc. and its
wholly-owned subsidiaries (collectively, Direct Credit), a British Columbia company engaged in short-term, consumer Internet lending in certain Canadian provinces. The Company paid an aggregate initial consideration of $12.4 million. The Company
also agreed to pay a supplemental earn-out payment to the extent Direct Credits EBITDA as specifically defined in the stock purchase agreement (generally earnings before interest, income taxes, depreciation and amortization expenses) exceeded
a defined target for the twelve-month period ended September 30, 2012.
The Company hired an independent appraiser to
evaluate the fair value of the contingent consideration and the assets acquired and liabilities assumed. The contingent consideration and the estimated fair values of intangible assets acquired were fair value estimates obtained from an independent
appraiser and were based on the information that was available to the Company as of the acquisition date. The Company believed that the information provided a reasonable basis for estimating the fair values of contingent consideration and of assets
acquired and liabilities assumed, and the Company continued to monitor during the measurement period (one year from the acquisition date) any new information obtained about facts and circumstances that were present at the acquisition date (including
consideration of legal matters as discussed in Note 18). The Company has not provided pro forma information because the Company believes that the acquisition of Direct Credit is not material to the Companys consolidated financial statements.
The operating results of Direct Credit are included in the Companys Consolidated Statements of Income as of the date of acquisition. The costs incurred for the acquisition of Direct Credit were expensed as incurred and these costs were not
material to the Companys consolidated financial statements.
93
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the estimated fair values of the assets acquired at the
date of acquisition
(in thousands)
:
|
|
|
|
|
Fair value of consideration transferred:
|
|
|
|
|
Cash
|
|
$
|
12,401
|
|
Contingent consideration
|
|
|
1,100
|
|
|
|
|
|
|
Total
|
|
$
|
13,501
|
|
|
|
|
|
|
|
|
Recognized amounts of identifiable assets acquired and liabilities assumed:
|
|
|
|
|
Current assets (a)
|
|
$
|
3,021
|
|
Goodwill (b)
|
|
|
7,557
|
|
Customer relationships
|
|
|
2,562
|
|
Trade name
|
|
|
1,408
|
|
Software
|
|
|
455
|
|
|
|
|
|
|
Total identifiable assets acquired
|
|
|
15,003
|
|
Current liabilities assumed
|
|
|
(546
|
)
|
Deferred tax liability (c)
|
|
|
(956
|
)
|
|
|
|
|
|
Net assets acquired
|
|
$
|
13,501
|
|
|
|
|
|
|
(a)
|
Includes cash acquired of approximately $866,000.
|
(b)
|
The goodwill is currently assigned to a new reporting unit for goodwill testing purposes. The goodwill recognized is attributable primarily to the potential
additional applications for software, expected corporate synergies, the assembled workforce of Direct Credit and other factors. None of the goodwill is expected to be deductible for income tax purposes.
|
(c)
|
The deferred tax liability represents the net deferred income taxes recorded as an increase to goodwill primarily for the tax basis differences of intangible assets
acquired in connection with the acquisition of Direct Credit. To the extent of any change to the provisional fair values of the intangible assets or other items, the Company would also expect to change the related deferred tax assets and liabilities
that have been recorded at the acquisition date.
|
The Company believes the acquisition of Direct Credit broadens its product platform and distribution, as well as
expands its presence by entering into international markets. Prior to completion of the transaction the Company amended and restated its credit agreement. The acquisition was funded with borrowings from the amended and restated credit agreement. See
additional information in Note 11.
The fair value of the goodwill at the acquisition date was $7.6 million. As part of the
Companys annual impairment testing performed as of December 31, 2012, it was determined that the fair value of the E-Lending reporting unit did not exceed its carrying value. As a result, the Company recorded a $1.7 million non-cash
impairment charge to goodwill during the year ended December 31, 2012. See additional information in Note 10.
The fair
value of the contingent consideration arrangement at the acquisition date was $1.1 million, which was recorded in current liabilities. As of December 31, 2011, the fair value of the contingent consideration liability was $1.1 million. The fair
value estimate at December 31, 2011 was determined using a probability-weighted income approach. In accordance with the stock purchase agreement, a supplemental earn-out payment was not required as Direct Credits EBITDA for the 12 month
period ended September 30, 2012 did not exceed the defined target. During the year ended December 31, 2012, the Company recorded a reduction to the contingent consideration liability of approximately $1.1 million. This reduction is
included as a gain in the other income component of the Consolidated Statements of Income. See additional information in Note 5.
94
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Closure of Branches.
During the year ended December 31, 2012, the Company
closed 24 of its lower performing branches in various states (which included four branches that were consolidated into nearby branches). In addition, the Company decided it would close 38 underperforming branches during the first half of 2013. The
Company recorded approximately $699,000 in pre-tax charges during the year ended December 31, 2012 associated with branch closures. The charges included a $398,000 loss for the disposition of fixed assets, $263,000 for lease terminations and
other related occupancy costs and $38,000 for other costs. The charges recorded in 2012 do not include lease termination and severance costs associated with the 38 branches that are scheduled to close during first half of 2013 as notification to the
landlords and employees occurred in January 2013.
During the year ended December 31, 2011, the Company closed 24 of its
branches in various states (which included four branches that were consolidated into nearby branches). The Company recorded approximately $553,000 in pre-tax charges during the year ended December 31, 2011 associated with these closures. The
charges included a $283,000 loss for the disposition of fixed assets, $252,000 for lease terminations and other related occupancy costs and $18,000 for other costs.
During year ended December 31, 2010, the Company closed 34 of its branches in various states and, as a result of the negative impact from changes in payday lending laws, decided it would close 21
branches in Arizona, Washington and South Carolina during first half 2011. During 2011, the Company closed 18 of the 21 branches and decided that the other three branches would remain open. The Company recorded approximately $1.8 million in pre-tax
charges during the year ended December 31, 2010 associated with these closings. The charges included $916,000 representing the loss on the disposition of fixed assets, $671,000 for lease terminations and other related occupancy costs, $155,000
in severance and benefit costs and $33,000 for other costs.
With respect to the branch closings in each of 2010, 2011 and
2012, a significant portion of the operations and closing costs are included as discontinued operations (see Note 6). When ceasing operations in Company branches under operating leases, the Company incurs certain lease contract termination costs.
Accordingly, in cases where the lease contract specifies a termination fee due to the landlord, the Company records such expense at the time written notice is given to the landlord. In cases where terms, including termination fees, are yet to be
negotiated with the landlord or in cases where the landlord does not allow the Company to prematurely exit its lease, but allows for subleasing, the Company estimates the fair value of any assumed sublease income that can be generated from the
location and records as an expense the excess of remaining lease payments to the landlord over the projected sublease income at the cease-use date.
The following table summarizes the accrued costs associated with the closure of branches and the activity related to those charges as of December 31, 2012
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at
December 31,
2011
|
|
|
Additions
|
|
|
Reductions
|
|
|
Balance at
December 31,
2012
|
|
|
|
|
|
|
Lease and related occupancy costs
|
|
$
|
90
|
|
|
$
|
263
|
|
|
$
|
(299
|
)
|
|
$
|
54
|
|
Other
|
|
|
|
|
|
|
38
|
|
|
|
(38
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
90
|
|
|
$
|
301
|
|
|
$
|
(337
|
)
|
|
$
|
54
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2012, the balance of $54,000 for accrued costs associated with the closure of branches is
included as a current liability on the Consolidated Balance Sheets as the Company expects that the liabilities for these costs will be settled within one year.
95
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Sale of Branch.
In March 2011, the Company sold a branch located in California
for approximately $666,000. The carrying value of the payday loan receivables, fixed assets and other assets sold was approximately $137,000, $15,000 and $2,000, respectively. The Company also recorded a disposition of goodwill totaling $135,000 due
to the sale of this location. The gain from the sale of the branch, which was approximately $377,000, and its related operations are included in discontinued operations in the Consolidated Statements of Income.
NOTE 5 FAIR VALUE MEASUREMENTS
Fair Value Hierarchy Tables.
The fair value measurement accounting guidance establishes a three-tier fair value
hierarchy, which prioritizes the inputs used in measuring fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability
to access. 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. Level 3 inputs are unobservable inputs for the asset
or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the
level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Companys assessment of
the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability.
The following table presents fair value measurements for recurring financial assets as of December 31, 2011
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Liability
at fair
value
|
|
|
|
|
|
|
Acquisition-related contingent consideration
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,106
|
|
|
$
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
1,106
|
|
|
$
|
1,106
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As discussed in Note 4, a supplemental earn-out payment for the acquisition related contingent consideration was not
required as Direct Credits EBITDA for the 12 month period ended September 30, 2012 did not exceed the target as defined in the stock purchase agreement. The acquisition-related contingent consideration was initially measured and recorded
at fair value as an element of consideration paid in connection with an acquisition with subsequent adjustments recognized as a gain or loss in the other income component of the Consolidated Statements of Income. The liability for this contingent
consideration was classified as a Level 3 liability because the related fair value measurement, which is determined using a discounted probability-weighted approach, includes significant inputs not observable in the market. These unobservable inputs
included internally-developed assumptions of the probabilities of achieving specified targets, which are used to estimate the resulting EBITDA, and the applicable discount rate. When assessing the fair value of this contingent consideration on a
quarterly basis, the Company evaluated the performance of the business during the period compared to previous expectations, along with any changes to our future projections, and updated the estimated EBITDA accordingly. In addition, the Company
considered changes to its cost of capital and changes to the probability of achieving the earn-out payment targets when updating the discount rate on a quarterly basis. The analysis utilized weighted average inputs, including a risk-based discount
rate of 29.5%, determined using a mix of cost of debt and risk-adjusted cost of capital reasonable for the company, and EBITDA growth year-to-year ranging from 9% to 42%, determined using various scenarios for the business. The results for the year
ended December 31, 2012 include a $1.1 million gain in other income related to the reduction of the contingent consideration liability.
96
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents changes to the Companys financial liabilities
measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the year ended December 31, 2012
(in thousands)
:
|
|
|
|
|
|
|
Acquisition-
related
Contingent
Consideration
|
|
|
|
Balance at beginning of year
|
|
$
|
1,106
|
|
Adjustment
|
|
|
(1,106
|
)
|
|
|
|
|
|
Balance at end of year
|
|
$
|
|
|
|
|
|
|
|
Fair Value Measurements on a Non-Recurring Basis.
The Company also measures the fair value of certain assets on
a non-recurring basis when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Non-financial assets such as property, equipment, land, goodwill and intangible assets are also subject to
non-recurring fair value measurements if they are deemed to be impaired. The impairment models used for non-financial assets depend on the type of asset. When the carrying amount of these assets cannot be recovered by the undiscounted net cash flows
they will generate, impairment is recognized in an amount by which the carrying amount of the assets exceeds the fair value. There were no material impairments of non-financial assets for years ended December 31, 2010 and 2011. The Company
evaluated its indefinite life intangibles as part of its annual impairment testing as of December 31, 2012 and determined that the trade name intangible associated with the acquisition of ECA in December 2006 was impaired. For the year ended
December 31, 2012, the Company recorded an impairment charge of $600,000 to reduce the value of the trade name intangible asset. The decline in value was attributable to the prior closings of ECA branches in South Carolina and the decision to
close an additional 12 branches in South Carolina during the first half of 2013.
During the year ended December 31,
2012, the Company recorded an impairment of $257,000 on fixed assets in connection with the 38 branches the Company has scheduled to close during the first half of 2013.
During the year ended December 31, 2010, the Company recorded an
impairment of $330,000 on fixed assets in connection with the 21 branches the Company had scheduled to close during the first half of 2011. The fair value measurements used to determine the impairments were based on the market approach based on
liquidation prices of comparable assets.
The following table presents fair value measurements of certain assets on a
non-recurring basis as of December 31, 2012
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
gains
(losses)
|
|
|
|
|
|
|
Goodwill for E-Lending
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,107
|
|
|
$
|
(1,730
|
)
|
Trade Name ECA
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(600
|
)
|
Impaired fixed assets
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(257
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,107
|
|
|
$
|
(2,587
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
97
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table presents fair value measurements of certain assets on a
non-recurring basis as of December 31, 2010
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements
|
|
|
|
|
|
|
Level 1
|
|
|
Level 2
|
|
|
Level 3
|
|
|
Total
gains
(losses)
|
|
|
|
|
|
|
Impaired fixed assets
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
(330
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 6 DISCONTINUED OPERATIONS
The Company closed 34 branches during 2010 that were not consolidated into nearby branches and announced it would close
21 branches in Arizona, Washington and South Carolina in 2011. During 2011 the Company closed 18 of the 21 branches and decided that the remaining three branches would remain open and the results of these branches were reclassified into continuing
operations. In addition, the Company closed 20 branches during the year ended December 31, 2011 that were not consolidated into nearby branches and sold one branch. In 2012, the Company closed 20 branches that were not consolidated into nearby
branches and decided it would close 38 branches during the first half of 2013. These branches are reported as discontinued operations in the Consolidated Statements of Income and related disclosures in the accompanying notes for all periods
presented. With respect to the Consolidated Balance Sheets, the Consolidated Statements of Cash Flows and related disclosures in the accompanying notes, the items associated with the discontinued operations are included with the continuing
operations for all periods presented.
Summarized financial information for discontinued operations is presented below
(in
thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
Total revenues
|
|
$
|
18,699
|
|
|
$
|
12,882
|
|
|
$
|
9,034
|
|
Provision for losses
|
|
|
4,805
|
|
|
|
5,492
|
|
|
|
5,534
|
|
Other branch expenses
|
|
|
16,773
|
|
|
|
10,298
|
|
|
|
7,210
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch gross loss
|
|
|
(2,879
|
)
|
|
|
(2,908
|
)
|
|
|
(3,710
|
)
|
Other, net
|
|
|
(923
|
)
|
|
|
112
|
|
|
|
(385
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss before income taxes
|
|
|
(3,802
|
)
|
|
|
(2,796
|
)
|
|
|
(4,095
|
)
|
Income tax benefit
|
|
|
(1,502
|
)
|
|
|
(1,076
|
)
|
|
|
(1,577
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from discontinued operations
|
|
$
|
(2,300
|
)
|
|
$
|
(1,720
|
)
|
|
$
|
(2,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7 SEGMENT INFORMATION
The Companys operating business units offer various financial services and sell used vehicles and earn finance
charges from the related vehicle financing contracts. The Company has elected to organize and report on these business units as three operating segments (Financial Services, Automotive and E-Lending). The Financial Services segment includes branches
that offer payday loans, installment loans, credit services, check cashing services, title loans, open-end credit, debit cards, money transfers and money orders. The Automotive segment consists of the buy here, pay here operations. The E-Lending
segment includes the Internet lending operations in Canada. The Company evaluates the performance of its segments based on, among other things, gross profit, income from continuing operations before income taxes and return on invested capital.
98
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following tables present summarized financial information for the Companys
segments
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012
|
|
|
|
Financial
Services
|
|
|
Automotive
|
|
|
E-Lending
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
Total revenues
|
|
$
|
148,779
|
|
|
$
|
23,718
|
|
|
$
|
8,068
|
|
|
$
|
180,565
|
|
|
|
|
|
|
Provision for losses
|
|
|
32,121
|
|
|
|
5,749
|
|
|
|
2,804
|
|
|
|
40,674
|
|
Other expenses
|
|
|
64,801
|
|
|
|
15,850
|
|
|
|
3,420
|
|
|
|
84,071
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
51,857
|
|
|
|
2,119
|
|
|
|
1,844
|
|
|
|
55,820
|
|
Other, net (a)
|
|
|
(36,011
|
)
|
|
|
(4,214
|
)
|
|
|
(2,107
|
)
|
|
|
(42,332
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before taxes
|
|
$
|
15,846
|
|
|
$
|
(2,095
|
)
|
|
$
|
(263
|
)
|
|
$
|
13,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2011
|
|
|
|
Financial
Services
|
|
|
Automotive
|
|
|
E-Lending (b)
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
Total revenues
|
|
$
|
151,020
|
|
|
$
|
23,645
|
|
|
$
|
1,903
|
|
|
$
|
176,568
|
|
|
|
|
|
|
Provision for losses
|
|
|
29,254
|
|
|
|
5,963
|
|
|
|
565
|
|
|
|
35,782
|
|
Other expenses
|
|
|
62,769
|
|
|
|
15,513
|
|
|
|
644
|
|
|
|
78,926
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
58,997
|
|
|
|
2,169
|
|
|
|
694
|
|
|
|
61,860
|
|
Other, net (a)
|
|
|
(40,019
|
)
|
|
|
(2,292
|
)
|
|
|
(492
|
)
|
|
|
(42,803
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes
|
|
$
|
18,978
|
|
|
$
|
(123
|
)
|
|
$
|
202
|
|
|
$
|
19,057
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2010
|
|
|
|
Financial
Services
|
|
|
Automotive
|
|
|
E-Lending
|
|
|
Consolidated
Total
|
|
|
|
|
|
|
Total revenues
|
|
$
|
154,640
|
|
|
$
|
19,914
|
|
|
$
|
|
|
|
$
|
174,554
|
|
|
|
|
|
|
Provision for losses
|
|
|
30,187
|
|
|
|
4,337
|
|
|
|
|
|
|
|
34,524
|
|
Other expenses
|
|
|
63,697
|
|
|
|
12,672
|
|
|
|
|
|
|
|
76,369
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit
|
|
|
60,756
|
|
|
|
2,905
|
|
|
|
|
|
|
|
63,661
|
|
Other, net (a)
|
|
|
(39,357
|
)
|
|
|
(1,861
|
)
|
|
|
|
|
|
|
(41,218
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before taxes
|
|
$
|
21,399
|
|
|
$
|
1,044
|
|
|
$
|
|
|
|
$
|
22,443
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
Represents expenses not associated with operations, which includes regional expenses, corporate expenses, depreciation and amortization, interest, other income and
other expenses. For the year ended December 31, 2012, the E-Lending segment includes a $1.7 million impairment charge to goodwill partially offset by a gain of $1.1 million for the reduction in the contingent consideration liability.
|
(b)
|
E-Lending primarily includes the operations of Direct Credit since the acquisition date (September 30, 2011).
|
99
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Information concerning total assets by reporting segment is as follows
(in
thousands)
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
|
Financial Services
|
|
$
|
118,812
|
|
|
$
|
112,106
|
|
Automotive
|
|
|
19,791
|
|
|
|
6,177
|
|
E-Lending
|
|
|
14,626
|
|
|
|
13,417
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
153,229
|
|
|
$
|
131,700
|
|
|
|
|
|
|
|
|
|
|
The operations of the Financial Service and Automotive segments are all located in the United States. The operations of
the E-Lending segment are located in Canada.
NOTE 8 CUSTOMER RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES
Customer receivables consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2012:
|
|
Payday
and Title
Loans
|
|
|
Automotive
Loans
|
|
|
Installment
Loans
|
|
|
Other
|
|
|
Total
|
|
|
|
|
|
|
|
Current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, interest and fees receivable
|
|
$
|
50,772
|
|
|
$
|
1,386
|
|
|
$
|
14,642
|
|
|
$
|
1,656
|
|
|
$
|
68,456
|
|
Less: allowance for losses
|
|
|
(3,211
|
)
|
|
|
(629
|
)
|
|
|
(2,997
|
)
|
|
|
(400
|
)
|
|
|
(7,237
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, net
|
|
$
|
47,561
|
|
|
$
|
757
|
|
|
$
|
11,645
|
|
|
$
|
1,256
|
|
|
$
|
61,219
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, interest and fees receivable
|
|
$
|
|
|
|
$
|
1,305
|
|
|
$
|
2,114
|
|
|
$
|
|
|
|
$
|
3,419
|
|
Less: allowance for losses
|
|
|
|
|
|
|
(590
|
)
|
|
|
(437
|
)
|
|
|
|
|
|
|
(1,027
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, net
|
|
$
|
|
|
|
$
|
715
|
|
|
$
|
1,677
|
|
|
$
|
|
|
|
$
|
2,392
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
December 31, 2011:
|
|
Payday
and Title
Loans
|
|
|
Automotive
Loans
|
|
|
Installment
Loans
|
|
|
Open-end
Credit
|
|
|
Total
|
|
|
|
|
|
|
|
Current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, interest and fees receivable
|
|
$
|
55,706
|
|
|
$
|
9,037
|
|
|
$
|
8,426
|
|
|
$
|
196
|
|
|
$
|
73,365
|
|
Less: allowance for losses
|
|
|
(1,548
|
)
|
|
|
(2,100
|
)
|
|
|
(2,260
|
)
|
|
|
(100
|
)
|
|
|
(6,008
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, net
|
|
$
|
54,158
|
|
|
$
|
6,937
|
|
|
$
|
6,166
|
|
|
$
|
96
|
|
|
$
|
67,357
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-current portion:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total loans, interest and fees receivable
|
|
$
|
|
|
|
$
|
9,039
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
9,039
|
|
Less: allowance for losses
|
|
|
|
|
|
|
(2,100
|
)
|
|
|
|
|
|
|
|
|
|
|
(2,100
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, net
|
|
$
|
|
|
|
$
|
6,939
|
|
|
$
|
|
|
|
$
|
|
|
|
$
|
6,939
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
100
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Credit quality information.
In order to manage the portfolios of consumer loans
effectively, the Company utilizes a variety of proprietary underwriting criteria, monitors the performance of the portfolio and maintains either an allowance or accrual for losses on consumer loans (including fees and interest) at a level estimated
to be adequate to absorb credit losses inherent in the portfolio. The portfolio includes balances outstanding from all consumer loans, including short-term payday and title loans, automotive loans and installment loans. The allowance for losses on
consumer loans offsets the outstanding loan amounts in the consolidated balance sheets.
The Company has $2.0 million in
automotive loans receivable past due as of December 31, 2012 and approximately 28.6% of this amount was more than 60 days past due. In addition, the Company had automotive loans receivable totaling $571,000 on non-accrual status as of
December 31, 2012. With respect to installment loans, the Company has approximately $3.9 million in installment loans receivable past due as of December 31, 2012 and approximately 21.4% of this amount was more than 60 days past due.
The Company had $6.9 million in automotive loans receivable that were past due as of December 31, 2011 and approximately
12.0% of this amount was more than 60 days past due. In addition, the Company had automotive loans receivable totaling $824,000 that were on non-accrual status as of December 31, 2011. With respect to installment loans, the Company had
approximately $1.5 million in installment loans receivable that were past due as of December 31, 2011 and approximately 7.4% of this amount was more than 60 days past due.
Allowance for loan losses.
The following table summarizes the activity in the allowance for loan losses
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
Balance, beginning of year
|
|
$
|
10,803
|
|
|
$
|
7,150
|
|
|
$
|
8,108
|
|
Charge-offs
|
|
|
(77,102
|
)
|
|
|
(69,786
|
)
|
|
|
(71,513
|
)
|
Recoveries
|
|
|
36,128
|
|
|
|
32,092
|
|
|
|
30,398
|
|
Adjustment for auto receivables sold
|
|
|
|
|
|
|
|
|
|
|
(2,594
|
)
|
Effect of foreign currency translation
|
|
|
|
|
|
|
|
|
|
|
2
|
|
Provision for losses
|
|
|
37,321
|
|
|
|
38,652
|
|
|
|
43,863
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
7,150
|
|
|
$
|
8,108
|
|
|
$
|
8,264
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for losses in the Consolidated Statements of Income includes losses associated with the CSO (see note 13
for additional information) and excludes loss activity related to discontinued operations (see note 6 for additional information).
NOTE 9 PROPERTY AND EQUIPMENT
Property and equipment consisted of the following
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
|
Buildings
|
|
$
|
3,262
|
|
|
$
|
3,262
|
|
Leasehold improvements
|
|
|
19,635
|
|
|
|
18,400
|
|
Furniture and equipment
|
|
|
23,517
|
|
|
|
22,128
|
|
Land
|
|
|
512
|
|
|
|
512
|
|
Vehicles
|
|
|
1,031
|
|
|
|
1,047
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47,957
|
|
|
|
45,349
|
|
Less: Accumulated depreciation and amortization
|
|
|
(36,196
|
)
|
|
|
(33,943
|
)
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
11,761
|
|
|
$
|
11,406
|
|
|
|
|
|
|
|
|
|
|
101
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
In February 2005, the Company entered into a seven-year lease for a new corporate
headquarters in Overland Park, Kansas. In January 2011, the Company amended its lease agreement to extend the lease term and modify the lease payments. The lease was extended with a new landlord through October 31, 2017 and includes a renewal
option for an additional five years. As part of the original lease agreement and the amendment to the lease agreement, the Company received tenant allowances from the landlord for leasehold improvements totaling $1.4 million. The tenant allowances
are recorded by the Company as a deferred liability and are being amortized as a reduction of rent expense over the life of the lease. As of December 31, 2011, the balance of the deferred liability was approximately $325,000, of which $269,000
was classified as a non-current liability. As of December 31, 2012, the balance of the deferred liability was approximately $270,000, of which $214,000 is classified as a non-current liability.
Depreciation and amortization expense for property and equipment totaled $4.9 million, $3.8 million and $2.7 million for the years ended
December 31, 2010, 2011 and 2012, respectively.
NOTE 10 GOODWILL AND INTANGIBLE ASSETS
Goodwill.
The following table summarizes the changes in the carrying amount of goodwill for the years ended
December 31, 2011 and 2012
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
|
Balance at beginning of year:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
$
|
16,491
|
|
|
$
|
23,958
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
16,491
|
|
|
|
23,958
|
|
|
|
|
Changes:
|
|
|
|
|
|
|
|
|
Acquisition of Direct Credit
|
|
|
7,557
|
|
|
|
|
|
Impairment
|
|
|
|
|
|
|
(1,730
|
)
|
Effect of foreign currency translation
|
|
|
45
|
|
|
|
235
|
|
Sale of branch
|
|
|
(135
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year:
|
|
|
|
|
|
|
|
|
Goodwill
|
|
|
23,958
|
|
|
|
24,193
|
|
Accumulated impairment losses
|
|
|
|
|
|
|
(1,730
|
)
|
|
|
|
|
|
|
|
|
|
|
|
$
|
23,958
|
|
|
$
|
22,463
|
|
|
|
|
|
|
|
|
|
|
Information concerning goodwill by reporting segment is as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
|
Financial Services
|
|
$
|
15,684
|
|
|
$
|
15,684
|
|
Automotive
|
|
|
672
|
|
|
|
672
|
|
E-Lending
|
|
|
7,602
|
|
|
|
6,107
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
23,958
|
|
|
$
|
22,463
|
|
|
|
|
|
|
|
|
|
|
The Company hired an independent appraiser to perform its annual impairment test as of December 31, 2012. The
Company determined that there was no impairment of goodwill for the core lending and automotive
102
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
units as the fair value of each these reporting units were in excess of their carrying amount based on the results of the test. However, the test results showed that the fair value of the
E-Lending reporting unit did not exceed its carrying amount and a step two analysis was required to determine the amount of the impairment. For purposes of the step one analysis, the fair value of the E-Lending reporting unit was estimated using
both an income approach that analyzed projected discounted cash flows and a market approach that considered other comparable companies. The amount of the impairment is calculated in a step two analysis by comparing the implied fair value of the
goodwill to its carrying amount, which requires an allocation of the fair value determined in the step one analysis to the individual assets and liabilities of the reporting unit. Any remaining fair value would represent the implied fair value of
goodwill on the testing date. The Company hired the independent appraiser to assist with the step two analysis and the test results showed that the implied fair value of the goodwill was $6.1 million compared to the book value of $7.8 million. As a
result, the Company recorded a $1.7 million non-cash, non-tax deductible impairment charge to goodwill for its E-Lending reporting unit. The impairment of goodwill resulted from lower than expected earnings in 2012 due to lower revenues and slightly
higher losses and the Companys current expectations for future growth and profitability for the E-Lending reporting unit being lower than its previous estimates. The discount rates used for the reporting units range from 16.9% to 22.3%. A
simultaneous 10% decline in the cash flow projections for the E-Lending reporting unit combined with a 100 basis point increase in the discount rates used would result in an additional pre-tax $900,000 impairment to goodwill. In the future, our
estimated fair value could be negatively impacted by extended declines in our stock price, changes in macroeconomic indicators, sustained operating losses, and other factors which may affect our assessment of fair value. With respect to 2011, the
Company performed its annual impairment testing of goodwill and concluded that no impairment existed at December 31, 2011.
As noted above, the Company concluded that its goodwill for the core lending and automotive reporting units was not impaired as of
December 30, 2012, because the fair values of each of these reporting units were substantially in excess of their respective net book values.
Intangible Assets.
The following table summarizes intangible assets
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
Amortized intangible assets:
|
|
|
|
|
|
|
|
|
Customer relationships
|
|
$
|
3,173
|
|
|
$
|
3,173
|
|
Non-compete agreements
|
|
|
1,093
|
|
|
|
1,093
|
|
Debt issue costs
|
|
|
1,510
|
|
|
|
1,669
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,776
|
|
|
|
5,935
|
|
Non-amortized intangible assets:
|
|
|
|
|
|
|
|
|
Trade names
|
|
|
2,016
|
|
|
|
1,416
|
|
|
|
|
|
|
|
|
|
|
Gross carrying amount
|
|
|
7,792
|
|
|
|
7,351
|
|
Effect of foreign currency translation
|
|
|
|
|
|
|
102
|
|
Less: Accumulated amortization
|
|
|
(2,257
|
)
|
|
|
(3,797
|
)
|
|
|
|
|
|
|
|
|
|
Net intangible assets
|
|
$
|
5,535
|
|
|
$
|
3,656
|
|
|
|
|
|
|
|
|
|
|
Intangible assets at December 31, 2011 and December 31, 2012 include customer relationships, non-compete
agreements, trade names and debt issue costs. Customer relationships are amortized using the straight-line method over the weighted average useful lives ranging from three to five years. Non-compete agreements are currently amortized using the
straight-line method over the term of the agreements, ranging from three to five years. The amount recorded for trade names are considered an indefinite life intangible and not subject to amortization. Costs paid to obtain debt financing are
amortized to interest expense over the term of each related debt agreement using the effective interest method for term debt and the straight-line method for the revolving credit facility.
103
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company tests trade names with indefinite lives for impairment annually by comparing
the book value to a fair value calculated using a discounted cash flow approach on a presumed royalty rate derived from the revenues related to the trade name. In 2006, the Company acquired 51 branches in South Carolina from Express Check Advance,
LLC. The Company has closed the majority of these branches (31 branches as of December 31, 2012) and has decided to close 12 additional branches during first half 2013 due to a change in the payday loan law in South Carolina in 2009 that has
negatively impacted revenues and gross profits in those branches over the past few years. Based on the results from its 2012 impairment testing, the Company concluded that the trade name associated with the acquisition of ECA was impaired and
recorded an impairment charge of $600,000 to reduce the value of the trade name intangible asset.
Amortization expense for
the years ended December 31, 2010, 2011 and 2012 was $1.2 million, $861,000 and $955,000, respectively. Annual amortization for intangible assets recorded as of December 31, 2012 is estimated to be $1.2 million for 2013, $861,000 for 2014
and $5,000 for 2015.
NOTE 11 INDEBTEDNESS
Long-Term Debt.
The following table summarizes long-term debt at December 31, 2011 and 2012
(in
thousands)
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
|
Term loan
|
|
$
|
31,684
|
|
|
$
|
|
|
Revolving credit facility
|
|
|
14,500
|
|
|
|
25,000
|
|
|
|
|
|
|
|
|
|
|
Total debt
|
|
|
46,184
|
|
|
|
25,000
|
|
Less: debt due within one year
|
|
|
(34,990
|
)
|
|
|
(25,000
|
)
|
|
|
|
|
|
|
|
|
|
Total non-current debt
|
|
$
|
11,194
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
On September 30, 2011, the Company entered into an amended and restated credit agreement (current credit
agreement) with a syndicate of banks to replace its prior credit agreement, which was previously amended on December 7, 2007. The current credit agreement provides for a term loan of $32 million and a revolving line of credit (including
provisions permitting the issuance of letters of credit and swingline loans) in the aggregate principal amount of up to $27 million. In connection with amending the credit agreement, the Company capitalized approximately $1.0 million in debt issue
costs, which it is amortizing over three years, and recorded a loss on debt extinguishment totaling $462,000, which is included in the Consolidated Statements of Income as part of other expense, net. The weighted average interest rate for borrowings
under the revolving line of credit at December 31, 2011 and 2012 was 3.1% and 4.3%, respectively.
The current credit
agreement contains financial covenants related to EBITDA (earnings before interest, provision for income taxes, depreciation and amortization and non-cash charges related to equity-based compensation), fixed charge coverage, leverage, total
indebtedness, liquidity and maximum loss ratio. As of September 30, 2012, the Company was not in compliance with certain financial covenants (minimum consolidated EBITDA and fixed charge coverage ratio) as set forth in the current credit
agreement. On November 7, 2012, the Company entered into an amendment to the current credit agreement to (i) permanently reduce the minimum consolidated EBITDA requirement through the term of the facility; (ii) reduce the fixed charge
coverage ratio requirement for each of the quarters ended September 30, 2012, December 31, 2012 and March 31, 2013; and (iii) allow for the sale of automobile receivables of the company, subject to approval of terms by the
lenders, provided proceeds are used to reduce the outstanding balance of the term loan. As of December 31, 2012, the Company is in compliance with all of its debt covenants.
104
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The obligations of the Company under the current credit agreement are guaranteed by all
the operating subsidiaries of the Company (other than foreign subsidiaries), and are secured by liens on substantially all of the personal property of the Company and its operating subsidiaries. The Company pledged 65% of the stock of QC Canada
Holdings Inc. to secure the obligations of the Company under the current credit agreement. The lenders may accelerate the obligations of the Company under the current credit agreement if there is a change in control of the Company, including an
acquisition of 25% or more of the equity securities of the Company by any person or group. The current credit agreement matures on September 30, 2014.
Borrowings under the term loan and the facility are available based on two types of loans, Base Rate loans or LIBOR Rate loans. Base Rate term loans bear interest at a rate of 2.25% plus the higher of the
Prime Rate, the Federal Funds Rate plus 0.50% or the one-month LIBOR rate in effect plus 2.00%. Base Rate revolving loans bear interest at a rate ranging from 1.25% to 2.25% depending on the Companys leverage ratio (as defined in the
agreement), plus the higher of the Prime Rate, the Federal Funds Rate plus 0.50% or the one-month LIBOR rate in effect plus 2.00%. LIBOR Rate term loans bear interest at rates based on the LIBOR rate for the applicable loan period (unless the rate
is less than 1.50%, in which case the agreement established a LIBOR rate floor of 1.50%) with a maximum margin over LIBOR of 4.25%. LIBOR Rate revolving loans bear interest at rates based on the LIBOR rate for the applicable loan period with a
margin over LIBOR ranging from 3.25% to 4.25% depending on the Companys leverage ratio (as defined in the agreement). The loan period for a LIBOR Rate loan may be one month, two months, three months or six months and the loan may be renewed
upon notice to the agent provided that no default has occurred. As a result, the revolving credit facility is classified as debt due within one year, although the revolving credit facility, by its terms, does not mature until September 30,
2014. The credit facility also includes a non-use fee ranging from 0.375% to 0.625%, which is based upon the Companys leverage ratio.
In December 2012, the Company sold the majority of its automobile receivables and used the proceeds from the sale to pay down its term loan. In addition to scheduled repayments, the term loan contained
mandatory principal prepayment provisions whereby the Company was required to reduce the outstanding principal amount of the term loan based on the Companys excess cash flow (as defined in the agreement) and the Companys leverage ratio
as of the most recent completed fiscal year. To the extent that the Companys leverage ratio was greater than one, the Company was required to pay 75% of excess cash flow. If the leverage ratio fell below one, the mandatory payment was 50% of
excess cash flow. Under the previous credit agreement, the Company made a $7.1 million principal payment on the term loan in March 2011, which included $5.3 million required under the mandatory prepayment provisions and the $1.8 million scheduled
principal payment. In April 2012, the Company made a $10.7 million principal payment on the term loan, which was required under the mandatory prepayment provisions of the current credit agreement.
Subordinated Debt.
Under the current credit agreement, the lenders required that the Company issue $3.0 million of senior
subordinated notes. On September 30, 2011, the Company issued $2.5 million initial principal amount of senior subordinated notes to the Chairman of the Board of the Company. The remaining $500,000 principal amount of subordinated notes was
issued to another stockholder of the Company, who is not an officer or director of the Company. The subordinated notes bear interest at the rate of 16% per annum, payable quarterly, 75% of which is payable in cash and 25% of which is
payable-in-kind (PIK) through the issuance of additional senior subordinated PIK notes. The subordinated notes mature on September 30, 2015, are subject to prepayment at the option of the Company, without penalty or premium, on or after
September 30, 2014, and are subject to mandatory prepayment, without premium, upon a change of control. The subordinated notes contain events of default tied to the Companys total debt to total capitalization ratio and total debt to
EBITDA ratio. The subordinated notes further provide that upon occurrence of an event of default on the subordinated notes, the Company may not declare or pay any cash dividend or distribution of cash or other property (other than equity securities
of the Company) on its capital stock. As of December 31, 2011 and December 31, 2012, the balance of the subordinated notes was approximately $3.0 million and $3.2 million, respectively.
105
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes future principal payments of indebtedness at
December 31, 2012
(in thousands)
:
|
|
|
|
|
|
|
December 31,
2012
|
|
|
|
2013
|
|
$
|
25,000
|
|
2014
|
|
|
|
|
2015
|
|
|
3,154
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
28,154
|
|
|
|
|
|
|
NOTE 12 DERIVATIVES
Derivative instruments are accounted for at fair value. The accounting for changes in the fair value of a derivative
depends on the intended use and designation of the derivative instrument. For a derivative instrument designated as a fair value hedge, the gain or loss on the derivative is recognized in earnings in the period of change in fair value together with
the offsetting gain or loss on the hedged item. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivatives gain or loss is initially reported as a component of Other Comprehensive Income (OCI) and is
subsequently recognized in earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized in earnings. Gains or losses from changes in fair values of derivatives that are not designated as hedges for
accounting purposes are recognized currently in earnings.
Prior to amending and restating its credit agreement on
September 30, 2011, the Company was exposed to certain risks relating to adverse changes in interest rates on its long-term debt and managed that risk with the use of a derivative. The Company did not enter into the derivative instrument for
trading or speculative purposes.
Cash Flow Hedge.
The Company entered into an interest rate swap agreement during
first quarter 2008 for $49 million of its outstanding debt as a cash flow hedge to interest rate fluctuations under its prior credit facility. The swap agreement was designated as a cash flow hedge, and effectively changed the floating rate interest
obligation associated with the $50 million term loan into a fixed rate. Because the term debt associated with the swap was refinanced on September 30, 2011, the hedge no longer met the criteria for accounting of a cash flow hedge. On
October 3, 2011, the Company terminated the swap agreement. In connection with the termination of the swap agreement, the Company paid a net cash settlement of approximately $343,000. The Companys net loss on this transaction was deferred
in accumulated other comprehensive income and is amortized into earnings as an increase to interest expense over the original term of the hedged transaction, which was scheduled to terminate in December 2012. For the years ended December 31,
2011 and 2012, the Company has recorded interest expense totaling approximately $69,000 and $275,000, respectively related to the termination of the swap.
106
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table summarizes the gains (losses) recognized in Other Comprehensive
Income related to the interest rate swap agreement for the years ended December 31, 2011 and 2012
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
Gain (Loss) Recognized in OCI
|
|
|
|
Year Ended December 31,
|
|
Derivatives Designated as Hedging Instruments
|
|
2011
|
|
|
2012
|
|
|
|
|
Cash flow hedges:
|
|
|
|
|
|
|
|
|
Loss recognized in other comprehensive income
|
|
$
|
(59
|
)
|
|
$
|
|
|
Amount reclassified from accumulated other comprehensive income to interest expense
|
|
|
578
|
|
|
|
275
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
519
|
|
|
$
|
275
|
|
|
|
|
|
|
|
|
|
|
NOTE 13 CREDIT SERVICES ORGANIZATION
For the Companys locations in Texas, the Company began operating as a CSO, through one of its subsidiaries, in
September 2005. As a CSO, the Company acts as a credit services organization on behalf of consumers in accordance with Texas laws. The Company charges the consumer a fee for arranging for an unrelated third-party to make a loan to the consumer and
for providing related services to the consumer, including a guarantee of the consumers obligation to the third-party lender. The Company also services the loan for the lender. The CSO fee is recognized ratably over the term of the loan. The
Company is not involved in the loan approval process or in determining the loan approval procedures or criteria. As a result, loans made by the lender are not included in the Companys loans receivable balance and are not reflected in the
Consolidated Balance Sheets. As noted above, however, the Company absorbs all risk of loss through its guarantee of the consumers loan from the lender. As of December 31, 2011 and December 31, 2012, the consumers had total loans
outstanding with the lender of approximately $3.1 million and $2.6 million, respectively. Because of the economic exposure for potential losses related to the guarantee of these loans, the Company records a payable at fair value to reflect the
anticipated losses related to uncollected loans. The balance of the liability for estimated losses reported in accrued liabilities was approximately $90,000 as of December 31, 2011 and $100,000 as of December 31, 2012.
The following table summarizes the activity in the liability for CSO loan losses during the years ended December 31, 2010, 2011 and
2012
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
CSO liability:
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
Balance, beginning of year
|
|
$
|
100
|
|
|
$
|
100
|
|
|
$
|
90
|
|
Charge-offs
|
|
|
(2,798
|
)
|
|
|
(3,462
|
)
|
|
|
(3,224
|
)
|
Recoveries
|
|
|
790
|
|
|
|
830
|
|
|
|
889
|
|
Provision for losses
|
|
|
2,008
|
|
|
|
2,622
|
|
|
|
2,345
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year
|
|
$
|
100
|
|
|
$
|
90
|
|
|
$
|
100
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
107
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 14 INCOME TAXES
The Companys provision for income taxes from continuing operations is summarized as follows
(in
thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
Current:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
7,010
|
|
|
$
|
8,010
|
|
|
$
|
1,022
|
|
State
|
|
|
889
|
|
|
|
1,043
|
|
|
|
94
|
|
Foreign
|
|
|
|
|
|
|
150
|
|
|
|
196
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current
|
|
|
7,899
|
|
|
|
9,203
|
|
|
|
1,312
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
|
|
|
|
Federal
|
|
|
267
|
|
|
|
(1,722
|
)
|
|
|
3,882
|
|
State
|
|
|
34
|
|
|
|
(231
|
)
|
|
|
522
|
|
Foreign
|
|
|
|
|
|
|
(81
|
)
|
|
|
(119
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred
|
|
|
301
|
|
|
|
(2,034
|
)
|
|
|
4,285
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
8,200
|
|
|
$
|
7,169
|
|
|
$
|
5,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations:
|
|
|
|
|
|
|
|
|
|
|
|
|
Domestic
|
|
$
|
22,443
|
|
|
$
|
18,855
|
|
|
$
|
13,751
|
|
Foreign
|
|
|
|
|
|
|
202
|
|
|
|
(263
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income from continuing operations before income taxes
|
|
$
|
22,443
|
|
|
$
|
19,057
|
|
|
$
|
13,488
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The sources of deferred income tax assets (liabilities) are summarized as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
Deferred tax assets related to:
|
|
|
|
|
|
|
|
|
Allowance for loan losses
|
|
$
|
6,120
|
|
|
$
|
6,150
|
|
Accrued rent
|
|
|
942
|
|
|
|
892
|
|
Accrued vacation
|
|
|
421
|
|
|
|
456
|
|
Stock-based compensation
|
|
|
2,447
|
|
|
|
2,419
|
|
Unused state tax credits
|
|
|
532
|
|
|
|
618
|
|
Book reserves
|
|
|
535
|
|
|
|
935
|
|
Deferred compensation
|
|
|
1,010
|
|
|
|
1,309
|
|
Accrued legal
|
|
|
784
|
|
|
|
57
|
|
Foreign net operating loss carry-forwards
|
|
|
113
|
|
|
|
111
|
|
Other
|
|
|
318
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets
|
|
|
13,222
|
|
|
|
12,947
|
|
Less: valuation allowance
|
|
|
(532
|
)
|
|
|
(618
|
)
|
|
|
|
|
|
|
|
|
|
Net deferred tax assets
|
|
|
12,690
|
|
|
|
12,329
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities related to:
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
(379
|
)
|
|
|
(169
|
)
|
Loans receivable, tax value
|
|
|
(3,492
|
)
|
|
|
(6,069
|
)
|
Goodwill and intangibles
|
|
|
(2,846
|
)
|
|
|
(3,013
|
)
|
Prepaid assets
|
|
|
(375
|
)
|
|
|
(444
|
)
|
Other
|
|
|
|
|
|
|
(75
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities
|
|
|
(7,092
|
)
|
|
|
(9,770
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
Net deferred tax asset
|
|
$
|
5,598
|
|
|
$
|
2,559
|
|
|
|
|
|
|
|
|
|
|
108
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company has state tax credit carry-forwards of approximately $819,000 and $951,000
as of December 31, 2011 and December 31, 2012, respectively. The deferred tax asset, net of federal tax effect, relating to the carry-forwards is approximately $532,000 and $618,000 as of December 31, 2011 and December 31, 2012,
respectively. The Companys ability to utilize a significant portion of the state tax credit carry-forwards is dependent on its ability to meet certain criteria imposed by the state not only for the year in which the credit is generated, but
also for all subsequent years in which any portion of the credit is utilized. In addition, the credits can only be utilized against the tax liabilities of specific subsidiaries in those states. During 2012 the Company obtained certification for the
utilization of a portion of these credits carry forwards for the 2011 tax year in a particular jurisdiction. Also, additional credit carry forwards were generated for the 2012 tax year. Until certification to utilize these credits is received,
management believes that it is not more likely than not that the benefit of these credits will be realized and, accordingly, a valuation allowance in the amount of $532,000 and $618,000 has been established at December 31, 2011 and
December 31, 2012, respectively. The Company also has gross foreign net operating loss carry-forwards of approximately $445,000 that generally expire in 18 20 years. The Company believes it is more likely than not that these
carry-forwards will be utilized prior to their expiration. Accordingly, no valuation allowance for the related deferred tax asset has been recognized.
Differences between the Companys effective income tax rate computed for income from continuing operations and the statutory federal income tax rate are as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
Income tax expense using the statutory federal rate in effect
|
|
$
|
7,855
|
|
|
$
|
6,670
|
|
|
$
|
4,721
|
|
Tax effect of:
|
|
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes, net of federal benefit
|
|
|
600
|
|
|
|
528
|
|
|
|
401
|
|
Goodwill impairment
|
|
|
|
|
|
|
|
|
|
|
604
|
|
Contingent consideration
|
|
|
|
|
|
|
|
|
|
|
(395
|
)
|
Non-taxable insurance policy proceeds
|
|
|
|
|
|
|
|
|
|
|
(259
|
)
|
Section 162(m) limitation
|
|
|
|
|
|
|
|
|
|
|
142
|
|
Other
|
|
|
(255
|
)
|
|
|
(29
|
)
|
|
|
383
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision for income taxes
|
|
$
|
8,200
|
|
|
$
|
7,169
|
|
|
$
|
5,597
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate
|
|
|
36.5
|
%
|
|
|
37.6
|
%
|
|
|
41.5
|
%
|
Statutory federal tax rate
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
|
|
35.0
|
%
|
The effective income tax rate for the year ended December 31, 2012 was 41.5% compared to 37.6% in the prior year.
The increase is primarily related to the goodwill impairment charge as a percentage of reduced pre-tax income.
As of
December 31, 2012, the accumulated undistributed earnings of foreign affiliates were a deficit of $108,000. As of December 31, 2011, accumulated undistributed earnings of foreign affiliates were $133,000. As the Company intends to
indefinitely reinvest these earnings in the business of its foreign affiliates, no federal or state income taxes or foreign withholding taxes have been provided for amounts which would become payable, if any, on the distribution of such earnings
should they become positive in the future.
109
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Uncertain Tax Positions
. A summary of the total amount of unrecognized tax
benefits for the years ended December 31, 2011 and 2012 is as follows
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
December 31,
|
|
|
|
2011
|
|
|
2012
|
|
|
|
|
Balance at beginning of year
|
|
$
|
253
|
|
|
$
|
193
|
|
Increases:
|
|
|
|
|
|
|
|
|
Tax positions taken during a prior period
|
|
|
|
|
|
|
1
|
|
Tax positions taken during the current period
|
|
|
6
|
|
|
|
2
|
|
Decreases:
|
|
|
|
|
|
|
|
|
Tax positions taken during prior period
|
|
|
(58
|
)
|
|
|
(63
|
)
|
Lapse of statute of limitations
|
|
|
(8
|
)
|
|
|
(10
|
)
|
|
|
|
|
|
|
|
|
|
Balance at end of year
|
|
$
|
193
|
|
|
$
|
123
|
|
|
|
|
|
|
|
|
|
|
Approximately $28,000 of the total unrecognized tax benefits at December 31, 2012, will, if ultimately recognized,
impact the Companys annual effective tax rate.
The Company records accruals for interest and penalties related to
unrecognized tax benefits in interest expense and operating expense, respectively. Interest and penalties, and associated accruals, were not material in 2010, 2011 or 2012.
The Company does not anticipate any material changes in the amount of unrecognized tax benefits in the next twelve months.
The Company is subject to income taxes in the U.S. federal jurisdiction and various state and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the
related tax laws and regulations and require significant judgment to apply. In the ordinary course of business, transactions occur for which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit the
Companys income tax returns. These audits examine the Companys significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. The following table outlines the tax
years that generally remain subject to examination as of December 31, 2012:
|
|
|
|
|
|
|
Federal
|
|
State and
Foreign
|
|
|
|
Statute remains open
|
|
2009-2012
|
|
2008-2012
|
Tax years currently under examination
|
|
N/A
|
|
N/A
|
NOTE 15 EMPLOYEE BENEFIT PLANS
The Company has established a defined-contribution 401(k) benefit plan that covers substantially all its full-time
employees. Under the plan, the Company makes a matching contribution of 50% of each employees contribution, up to 6% of the employees compensation. The Companys matching contributions and administrative expenses relating to the
401(k) plan were $476,000, $473,000 and $436,000 during 2010, 2011 and 2012, respectively.
In June 2007, the Company
established a non-qualified deferred compensation plan for certain highly compensated employees, which permits participants to defer a portion of their compensation. Under the plan, the Company makes a matching contribution of 50% of each
employees contribution, up to 6% of the employees compensation. The Companys matching contributions and administrative expenses relating to the plan were
110
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
$201,000, $179,000, and $188,000 during 2010, 2011 and 2012, respectively. Deferred amounts are credited with deemed gains or losses of the underlying hypothetical investments. For the years
ended December 31, 2010 and 2012, the Company recognized compensation expense of approximately $280,000 and $354,000, respectively, as a result of deemed gains on the hypothetical investments. For the year ended December 31, 2011, the
Company recognized a reduction in compensation expense of approximately $60,000, as a result of deemed losses on the hypothetical investments. Included in Other Liabilities (non-current) are amounts deferred under this plan of approximately $2.7
million and $3.3 million at December 31, 2011 and 2012, respectively.
The Company purchases corporate-owned life
insurance policies on certain officers to informally fund the non-qualified deferred compensation plan. The cash surrender value of the life insurance policies is included in Other Assets (non-current) and totaled approximately $3.7 million and $3.4
million at December 31, 2011 and 2012, respectively. This asset is available to fund the deferred compensation liability; however, the asset is not protected from creditors of the Company. For the years ended December 31, 2010 and 2012,
the Company recognized gains totaling $340,000 and $351,000, respectively, on its investments associated with the life insurance policies, reflected in the cash surrender value. For the year ended December 31, 2011, the Company recognized a
loss totaling $161,000 on its investments associated with the life insurance policies, reflected in the cash surrender value.
NOTE 16 STOCKHOLDERS EQUITY
Earnings Per Share.
The following table presents the computations of basic and diluted earnings per share for
the periods presented
(in thousands, except per share data)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
|
|
|
|
Income from continuing operations
|
|
$
|
14,243
|
|
|
$
|
11,888
|
|
|
$
|
7,891
|
|
Loss from discontinued operations available to common stockholders
|
|
|
(2,300
|
)
|
|
|
(1,720
|
)
|
|
|
(2,518
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income available to common stockholders
|
|
$
|
11,943
|
|
|
$
|
10,168
|
|
|
$
|
5,373
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding
|
|
|
17,259
|
|
|
|
17,027
|
|
|
|
17,169
|
|
Incremental shares from assumed conversion of stock options, unvested restricted shares and unvested performance-based
shares
|
|
|
82
|
|
|
|
83
|
|
|
|
57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding
|
|
|
17,341
|
|
|
|
17,110
|
|
|
|
17,226
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.79
|
|
|
$
|
0.67
|
|
|
$
|
0.44
|
|
Discontinued operations
|
|
|
(0.13
|
)
|
|
|
(0.10
|
)
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.66
|
|
|
$
|
0.57
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.79
|
|
|
$
|
0.67
|
|
|
$
|
0.44
|
|
Discontinued operations
|
|
|
(0.13
|
)
|
|
|
(0.10
|
)
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.66
|
|
|
$
|
0.57
|
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has approximately 17.0 million and 17.2 million shares outstanding at December 31, 2011 and
2012, respectively. For financial reporting purposes, however, unvested restricted shares in the amount of approximately 661,000 shares, 928,000 shares and 604,000 shares are excluded from the determination of average common shares outstanding used
in the calculation of basic earnings per share in the above table for the years ended December 31, 2010, 2011 and 2012, respectively.
111
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Anti-dilutive securities.
Options to purchase approximately 2.7 million
shares, 2.6 million shares and 2.6 million shares of common stock were excluded from the diluted earnings per share calculation for the years ended December 31, 2010, 2011 and 2012, respectively because they were anti-dilutive.
Stock Repurchases.
The board of directors has authorized the Company to repurchase up to $60 million of its common
stock in the open market and through private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in stock-based compensation programs. Under the announced stock repurchase program, the Company
expended $2.6 million for approximately 606,000 shares, $1.1 million for approximately 273,000 shares, and $415,000 for approximately 105,000 shares during the years ended December 31, 2010, 2011, and 2012, respectively. As of December 31,
2012, the Company had approximately $4.0 million that may yet be utilized to repurchase shares under the current program. Under the current credit agreement (see Note 11), the Company may not modify the stock repurchase program to provide for
repurchases in excess of $60 million. Shares received in exchange for tax withholding obligations arising from the vesting of restricted stock are included in common stock repurchased in the Consolidated Statements of Cash Flows and the Statements
of Changes in Stockholders Equity.
Dividends.
In November 2008, the Companys board of directors
established a regular quarterly cash dividend of $0.05 per share of the Companys common stock. In addition to regular quarterly dividends, the Companys board of directors has also approved special cash dividends on the Companys
common stock from time to time. For the year ended December 31, 2010, the Company declared dividends on its common stock of $0.30 per share. For the years ended December 31, 2011 and 2012, the Company declared dividends on its common stock
of $0.20 per share, in each year.
NOTE 17 STOCK-BASED COMPENSATION
Long-Term Incentive Stock Plans
. As of December 31, 2012, the Companys stock-based compensation plans
include the 1999 Stock Option Plan and the 2004 Equity Incentive Plan (2004 Plan). Securities remaining available for future issuance under equity compensation plans approved by security holders consist solely of shares of common stock available
under the 2004 Plan. The maximum number of shares of common stock of the Company originally reserved and available for issuance under the 2004 Plan was three million shares. In June 2009, at the annual meeting of the Companys stockholders, the
stockholders approved an amendment to the 2004 Plan to increase the number of shares of common stock available for issuance under such plan from three million shares to five million shares. As of December 31, 2012, there are approximately
259,000 shares of common stock available for future issuance under the 2004 Plan, which may be issued, in any combination, as incentive stock options, non-qualified stock options, stock appreciation rights, performance-based share awards, restricted
stock or other incentive awards of, or based on, the Companys common stock. In previous years, the Company has issued a combination of stock options (non-qualified) and restricted stock to its employees as part of the Companys long-term
equity incentive compensation program.
In accordance with the Companys stock-based compensation plans, the exercise
price of a stock option is equal to the market price of the stock on the date of the grant and the option awards typically vest over four years in 25% increments on the first, second, third and fourth anniversaries of the grant date. Generally,
options granted will expire 10 years from the date of grant.
Restricted stock awards and performance-based share awards are
valued on the date of grant and have no purchase price. Restricted stock awards typically vest over four years in 25% increments on the first, second, third and fourth anniversaries of the grant date. The vesting period for performance-based share
awards is
112
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
implicitly stated as the time period it will take for the performance condition to be met. Under the 2004 Plan, unvested shares of restricted stock and unvested performance-based share awards may
be forfeited upon the termination of employment with the Company, dependent upon the circumstances of termination. Except for restrictions placed on the transferability of restricted stock, holders of unvested restricted stock and holders of
unvested performance-based share awards have full stockholders rights, including voting rights and the right to receive cash dividends.
Share-Based Compensation.
The following table summarizes the stock-based compensation expense reported in net income for the years ended December 31, 2010, 2011 and 2012
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
Employee stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Stock options
|
|
$
|
456
|
|
|
$
|
386
|
|
|
$
|
213
|
|
Restricted stock awards
|
|
|
1,489
|
|
|
|
1,609
|
|
|
|
1,355
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,945
|
|
|
|
1,995
|
|
|
|
1,568
|
|
Non-employee director stock-based compensation:
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards
|
|
|
225
|
|
|
|
183
|
|
|
|
181
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation
|
|
$
|
2,170
|
|
|
$
|
2,178
|
|
|
$
|
1,749
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The related income tax benefit was $790,000, $817,000 and $673,000 for the years ended December 31, 2010, 2011 and
2012, respectively.
Stock Options.
The fair value of option grants are determined on the grant date using a
Black-Scholes option-pricing model, which requires the Company to make several assumptions. The risk-free interest rate is based on the U.S. Treasury yield curve in effect for the expected term of the option at the time of the grant. The dividend
yield is calculated based on the current dividend and the market price of the Companys common stock on the grant date. The expected volatility factor used by the Company is based on the Companys historical stock trading history. The
Company computes the expected term of the option by using the simplified method, which is an average of the vesting term and original contractual term. The Company did not grant stock options during 2010, 2011 and 2012.
As of December 31, 2012, there was $16,700 of total unrecognized compensation costs related to outstanding stock options. The
Company expects that these costs will be amortized over a weighted average period of one month.
The total intrinsic value of
options exercised during the years ended December 31, 2011 and 2012 was $240,000 and $43,000, respectively. No options were exercised during the year ended December 31, 2010.
A summary of nonvested stock option activity and related information for the year ended December 31, 2012 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
|
|
|
Nonvested balance, January 1, 2012
|
|
|
318,871
|
|
|
$
|
2.09
|
|
Vested
|
|
|
(187,498
|
)
|
|
|
2.22
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance, December 31, 2012
|
|
|
131,373
|
|
|
$
|
1.53
|
|
|
|
|
|
|
|
|
|
|
The total fair value of options vested during 2012 was approximately $417,000.
113
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of all stock option activity under the equity compensation plans for the year
ended December 31, 2012 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options
|
|
|
Weighted
Average
Exercise Price
|
|
|
Weighted Average
Remaining
Contractual Term
(years)
|
|
|
Aggregate
Intrinsic Value
(in thousands)
|
|
|
|
|
|
|
Outstanding, January 1, 2012
|
|
|
2,667,189
|
|
|
$
|
9.83
|
|
|
|
|
|
|
|
|
|
Exercised
|
|
|
(26,397
|
)
|
|
|
1.95
|
|
|
|
|
|
|
|
|
|
Forfeited
|
|
|
(1,256
|
)
|
|
|
13.76
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2012
|
|
|
2,639,536
|
|
|
$
|
9.91
|
|
|
|
3.3
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2012
|
|
|
2,508,163
|
|
|
$
|
10.20
|
|
|
|
3.2
|
|
|
$
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes information about options outstanding and exercisable at December 31,
2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options Outstanding
|
|
|
Options Exercisable
|
|
Exercise Price
|
|
Number
Outstanding
|
|
|
Weighted Average
Remaining
Contractual Life of
Outstanding
(in years)
|
|
|
Weighted
Average
Exercise Price
|
|
|
Number
Exercisable
|
|
|
Weighted
Average
Exercise Price
|
|
|
|
|
|
|
|
$ 1 to $5
|
|
|
525,492
|
|
|
|
6.1
|
|
|
$
|
4.39
|
|
|
|
394,119
|
|
|
$
|
4.39
|
|
$ 5 to $10
|
|
|
780,902
|
|
|
|
3.0
|
|
|
|
9.47
|
|
|
|
780,902
|
|
|
|
9.47
|
|
$10 to $15
|
|
|
1,270,292
|
|
|
|
2.4
|
|
|
|
12.21
|
|
|
|
1,270,292
|
|
|
|
12.21
|
|
$15 to $20
|
|
|
62,850
|
|
|
|
2.0
|
|
|
|
15.07
|
|
|
|
62,850
|
|
|
|
15.07
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2,639,536
|
|
|
|
3.3
|
|
|
$
|
9.91
|
|
|
|
2,508,163
|
|
|
$
|
10.20
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants.
A summary of all restricted stock activity under the equity compensation plans for the
year ended December 31, 2012 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock
|
|
|
Weighted
Average Grant
Date Fair Value
|
|
|
|
|
Nonvested balance, January 1, 2012
|
|
|
928,061
|
|
|
$
|
4.76
|
|
Granted
|
|
|
52,500
|
|
|
|
3.45
|
|
Vested
|
|
|
(369,938
|
)
|
|
|
4.93
|
|
Forfeited
|
|
|
(6,632
|
)
|
|
|
4.44
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nonvested balance, December 31, 2012
|
|
|
603,991
|
|
|
$
|
4.55
|
|
|
|
|
|
|
|
|
|
|
During 2012, the Company granted 52,500 shares of restricted stock to non-employee directors under the 2004 Equity
Incentive Plan pursuant to restricted stock agreements. The shares granted to the non-employee directors vested immediately upon grant and are subject to an agreed-upon six-month holding period. The Company estimated that the fair market value of
these restricted stock grants was approximately $181,000, which the Company recognized as stock-based compensation expense in the first quarter 2012.
114
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
During 2011, the Company granted 532,040 shares of restricted stock to various employees
and non-employee directors under the 2004 Equity Incentive Plan pursuant to restricted stock agreements. The grants consisted of 487,200 shares granted to employees that vest equally over four years and 44,840 shares granted to non-employee
directors that vested immediately upon grant subject to an agreed-upon six-month holding period. The Company estimated that the fair market value of these restricted stock grants was approximately $2.2 million. As of December 31, 2012, the
total unrecognized compensation costs related to these restricted stock grants was $1.0 million. The Company expects that these costs will be amortized over a weighted average period of 2.1 years.
During 2010, the Company granted 375,840 shares of restricted stock to various employees and non-employee directors under the 2004 Equity
Incentive Plan pursuant to restricted stock agreements. The grants consisted of 335,600 shares granted to employees that vest equally over four years and 40,240 shares granted to non-employee directors that vested immediately upon grant subject to
an agreed-upon six-month holding period. The Company estimated that the fair market value of these restricted stock grants was approximately $2.1 million. As of December 31, 2012, there was approximately $498,000 of total unrecognized
compensation costs related to these restricted stock grants. The Company expects that these costs will be amortized over a weighted average period of 1.1 years.
In December 2009, it was determined that the Companys executive officers would receive a one-time bonus equal to 10% of their current base salary in lieu of an increase in the base salaries of
executive officers for the year ending December 31, 2010. In addition, it was determined that the majority of the executive officers would receive the one-time bonus in Company stock and two executive officers would receive the bonus in cash.
As of December 31, 2009, the balance of the liability for the one-time stock bonus in lieu of base salary increases was approximately $185,000. In January 2010, the Company granted 35,800 shares that vested immediately upon grant subject to an
agreed-upon six-month holding period.
As of December 31, 2012, there was $1.5 million of total unrecognized compensation
costs related to the nonvested restricted stock grants. The Company estimates that these costs will be amortized over a weighted average period of 1.7 years.
The total fair value of restricted stock vested (at vest date) during the years ended December 31, 2010, 2011 and 2012 was $1.1 million, $1.0 million and $1.3 million, respectively. The Company
requires employees to tender a portion of their vested shares to the Company to satisfy the minimum tax withholding obligations of the Company with respect to vesting of the shares. During 2010, 2011 and 2012, the Company repurchased shares from
employees totaling approximately 68,500, 73,100, and 108,270, respectively.
Other Long-Term Incentive Compensation.
In
2012, the Company adopted a new Long-Term Incentive Plan, which covers all executive officers, other than its Chairman of the Board and our Vice Chairman of the Board. The annual long-term incentive awards (LTI Awards) are made at targeted dollar
levels and consist of Performance Units comprising 75% of the target value and cash-based Restricted Stock Units (RSUs) comprising 25% of the target value. The ultimate value of the Performance Units and RSUs can only be settled in cash.
Effective as of January 1, 2012, the Company granted Performance Units to various officers under the new Long-Term Incentive Plan.
The value of the Performance Units will be based upon a performance measure established by our compensation committee. The performance measure for 2012 is the annual average return on assets for a three-year performance period (e.g., 2012
2014) at a targeted percentage return. Performance Units will be paid in cash at the end of the performance period subject to continued employment by the covered officer throughout the performance period and vest upon the occurrence of certain
change in control events. As of December 31, 2012, the balance of the non-current liability for the Performance Units was approximately $242,000. For the year ended December 31, 2012, the Company recognized compensation expense of $242,000
115
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
related to the Performance Units. Compensation expense is recognized over the performance period and is estimated based on the probability of achieving performance goals outlined in the plan. As
of December 31, 2012, the total unrecognized compensation costs related to the Performance Units was approximately $484,000. The Company expects that these costs will be amortized to compensation expense over a weighted average period of 2.0
years.
Effective as of January 1, 2012, the Company granted 92,452 cash-based RSUs to various officers under the new
Long-Term Incentive Plan. The RSUs vest at the end of the performance period subject to continued employment by the covered officer throughout the performance period (i.e., 3-year cliff vesting as of close of business on December 31 of the
third year of the performance period) and vest upon the occurrence of certain change in control events. The payout of the RSUs will be made in cash at the end of the performance period based on number of RSUs times the average weighted trailing
3-month stock price of the Company as of December 31 of the third year of the performance period. As of December 31, 2012, the balance of the non-current liability for RSUs was approximately $101,000. For the year ended December 31,
2012, the Company recognized $101,000 in compensation expense related to the RSUs. As of December 31, 2012, the total unrecognized compensation costs related to the RSUs was $203,000. The Company expects that these costs will be amortized to
compensation expense over a weighted average period of 2.0 years.
NOTE 18 COMMITMENTS AND CONTINGENCIES
Operating Leases.
The Company leases certain equipment and buildings under non-cancelable operating leases. The
future minimum lease payments include payments required for the initial non-cancelable term of the operating lease plus any payments for periods of expected renewals provided for in the lease that the Company considers to be reasonably assured of
exercising.
The following table summarizes the future minimum lease payments as of December 31, 2012
(in thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non-
Cancelable
|
|
|
Reasonably
Assured
Renewals
|
|
|
Total
|
|
|
|
|
|
2013
|
|
$
|
10,575
|
|
|
$
|
2,162
|
|
|
$
|
12,737
|
|
2014
|
|
|
7,024
|
|
|
|
4,486
|
|
|
|
11,510
|
|
2015
|
|
|
3,727
|
|
|
|
6,225
|
|
|
|
9,952
|
|
2016
|
|
|
1,703
|
|
|
|
6,718
|
|
|
|
8,421
|
|
2017
|
|
|
1,042
|
|
|
|
5,814
|
|
|
|
6,856
|
|
Thereafter
|
|
|
171
|
|
|
|
16,557
|
|
|
|
16,728
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total
|
|
$
|
24,242
|
|
|
$
|
41,962
|
|
|
$
|
66,204
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expense was $10.2 million, $10.8 million and $11.5 million during the years ended December 31, 2010, 2011
and 2012, respectively.
Other.
The Company is self-insured for certain elements of its employee benefits.
Self-insurance liabilities are based on claims filed and estimates of claims incurred but not reported.
Under the terms of
the Companys agreement with its third-party lender in Texas, the Company is contractually obligated to reimburse the lender for the full amount of the loans and certain related fees that are not collected from the customers. See additional
information in Note 13.
116
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Litigation
. The Company is subject to various asserted and unasserted claims
during the course of business. Due to the uncertainty surrounding the litigation process, except for those matters for which an accrual is described below, the Company is unable to reasonably estimate the range of loss, if any, in connection with
the asserted and unasserted legal actions against it. Although the outcome of many of these matters is currently not determinable, the Company believes that it has meritorious defenses and that the ultimate cost to resolve these matters will not
have a material adverse effect on the Companys consolidated financial statements. In addition to the legal proceedings discussed below, the Company is subject to various legal proceedings arising from normal business operations.
The Company assesses the materiality of litigation by reviewing a range of qualitative and quantitative factors. These factors include
the size of the potential claims, the merits of the Companys defenses and the likelihood of plaintiffs success on the merits, the regulatory environment that could impact such claims and the potential impact of the litigation on its
business. The Company evaluates the likelihood of an unfavorable outcome of the legal or regulatory proceedings to which it is a party in accordance with accounting guidance. This assessment is subjective based on the status of the legal proceedings
and is based on consultation with in-house and external legal counsel. The actual outcomes of these proceedings may differ from the Companys assessments.
North Carolina.
On February 8, 2005, the Company, two of its subsidiaries, including its subsidiary doing business in North Carolina, and Mr. Don Early, the Companys Chairman of the
Board and Chief Executive Officer, were sued in Superior Court of New Hanover County, North Carolina in a putative class action lawsuit filed by James B. Torrence, Sr. and Ben Hubert Cline, who were customers of a Delaware state-chartered bank for
whom the Company provided certain services in connection with the banks origination of payday loans in North Carolina, prior to the closing of the Companys North Carolina branches in fourth quarter 2005. The lawsuit alleges that the
Company violated various North Carolina laws, including the North Carolina Consumer Finance Act, the North Carolina Check Cashers Act, the North Carolina Loan Brokers Act, the state unfair trade practices statute and the state usury statute, in
connection with payday loans made by the bank to the two plaintiffs through the Companys retail locations in North Carolina. The lawsuit alleges that the Company made the payday loans to the plaintiffs in violation of various state statutes,
and that if the Company is not viewed as the actual lenders or makers of the payday loans, its services to the bank that made the loans violated various North Carolina statutes. Plaintiffs are seeking certification as a class,
unspecified monetary damages, and treble damages and attorney fees under specified North Carolina statutes. Plaintiffs have not sued the bank in this matter and have specifically stated in the complaint that plaintiffs do not challenge the right of
out-of-state banks to enter into loans with North Carolina residents at such rates as the banks home state may permit, all as authorized by North Carolina and federal law.
In July 2011, the parties completed a weeklong hearing on the Companys motion to enforce its class action waiver provision and its
arbitration provision. In January 2012, the trial court denied the Companys motion to enforce its class action and arbitration provisions. The Company has appealed that ruling to the North Carolina Court of Appeals. It is expected that the
court will issue a decision by April 2013.
There were three similar purported class action lawsuits filed in North Carolina
against three other companies unrelated to the Company. The plaintiffs in those three cases were represented by the same law firms as the plaintiffs in the case filed against the Company. Settlements in each of the three companion cases were reached
by the end of 2010; however the settlements do not provide reasonable guidance on settlements in the Companys case.
Canada.
On September 30, 2011, the Company acquired all the outstanding shares of Direct Credit, a British Columbia company
engaged in short-term, consumer Internet lending in certain Canadian provinces. On October 18, 2011, Matthew Lee, an alleged Alberta, Canada resident sued Direct Credit, all of its subsidiaries and
117
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
three former directors of those subsidiaries in the Supreme Court of British Columbia in a purported class action. The plaintiff alleges that Direct Credit and its subsidiaries violated
Canadas criminal usury laws by charging interest on its loans at rates higher than 60%. The plaintiff purports to represent all Canadian borrowers of the subsidiary who resided outside of British Columbia.
Plaintiff seeks (i) class certification for the class described above, (ii) a declaration that loan fees collected in excess of
the 60% limit in the cited usury statute are held by the defendants in constructive trust for the benefit of the class members, (iii) an accounting and restitution to plaintiff and class members of all loan fees received by the defendants,
(iv) a declaration that the collection of the loan fees in excess of 60% per annum constitutes an unconscionable trade act or practice under the Canadian Business Practices Consumer Protection Act, (v) an order to restore to the class
members the loan fees collected by defendants in excess of 60% per annum, and (vi) interest thereon. Direct Credit has not yet answered the civil claim of the plaintiff, but intends to defend itself, its subsidiaries and its former
directors vigorously.
California.
On August 13, 2012, the Company was sued in the United States District Court
for the South District of California in a putative class action lawsuit filed by Paul Stemple. Mr. Stemple alleges that the Company used an automatic telephone dialing system with an artificial or prerecorded voice in violation of
the Telephone Consumer Protection Act, 47 U.S.C. 227, et seq. The complaint does not identify any other members of the proposed class, nor how many members may be in the proposed class.
This matter is in the early stages of litigation. The Company has filed an answer denying all claims.
Other Matters.
The Company is also currently involved in ordinary, routine litigation and administrative proceedings incidental to
its business, including customer bankruptcies and employment-related matters from time to time. The Company believes the likely outcome of any other pending cases and proceedings will not be material to its business or its financial condition.
NOTE 19 CERTAIN CONCENTRATIONS OF RISK
The Company is subject to regulation by federal and state governments in the United States that affect the products and
services provided by the Company, particularly payday loans. The Company currently operates in 23 states throughout the United States and is engaged in consumer Internet lending in certain Canadian provinces. The level and type of regulation of
payday loans varies greatly from state to state, ranging from states with no regulations or legislation to other states with very strict guidelines and requirements. The Company is also subject to foreign regulation in Canada where certain provinces
have proposed substantive regulation of the payday loan industry.
Company short-term lending branches located in the states
of Missouri, California and Kansas represented approximately 22%, 15%, 5%, respectively, of total revenues for the year ended December 31, 2012. Company short-term lending branches located in the states of Missouri, California, Kansas and New
Mexico represented approximately 33%, 17%, 7% and 5%, respectively, of total gross profit for the year ended December 31, 2012. To the extent that laws and regulations are passed that affect the Companys ability to offer loans or the
manner in which the Company offers its loans in any one of those states, the Companys financial position, results of operations and cash flows could be adversely affected. In recent years, the Company has experienced several negative effects
resulting from law changes, for example:
|
|
|
The Arizona payday loan statutory authority expired by its terms on June 30, 2010, and the expiration of this law had a significant adverse effect
on the revenues and profitability of the Companys Arizona branches. For the year ended December 31, 2011, revenues and gross profit from the Arizona branches declined by $1.5 million and $1.4 million respectively, from the same period in
the prior year. Prior to the expiration of the Arizona payday loan law, branches in Arizona accounted for more than 5% of the Companys revenues and gross profits.
|
118
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
|
|
|
In March 2011, a new payday law became effective in Illinois that imposes customer usage restrictions that has negatively affected revenues and
profitability. This type of customer restriction, when passed in other states such as Washington, South Carolina and Kentucky, has resulted in a 30% to 60% decline in annual revenues and a more significant decline in gross profit, depending on the
types of alternative products that competitors may offer within the state. The Illinois law provides for an overlap of the previous lending approach with loans issued under the new law for a period of one year, which extended the time period over
which the negative effects of the new law occurred. During 2011, revenues from branches in Illinois declined by $2.4 million and gross profit declined by $2.2 million. In 2012, revenues and gross profit from Illinois declined by $2.0 million and
$1.8 million, respectively. Prior to the change in the Illinois payday loan law, branches in Illinois accounted for more than 5% of the Companys revenues and gross profits.
|
There was an effort in Missouri to place a voter initiative on the statewide ballot in November 2012, which was intended to preclude any
lending in the state with an annual rate over 36%. The supporters of the voter initiative did not submit a sufficient number of valid signatures to place the initiative on the ballot in November 2012. However, a similar initiative was submitted to
the Missouri Secretary of State in December 2012 for inclusion on the November 2014 ballot subject to the proponents submitting the required number of valid signatures in support of the initiative.
NOTE 20 SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following table sets forth certain cash activities for the years ended December 31, 2010, 2011 and 2012
(in
thousands)
:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31,
|
|
|
|
2010
|
|
|
2011
|
|
|
2012
|
|
Cash paid during the year for:
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes
|
|
$
|
5,781
|
|
|
$
|
5,531
|
|
|
$
|
4,715
|
|
Interest
|
|
|
2,397
|
|
|
|
2,036
|
|
|
|
2,220
|
|
119
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 21 SELECTED QUARTERLY INFORMATION (Unaudited)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
|
|
|
|
(in thousands, except per share data)
|
|
2012:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
44,234
|
|
|
$
|
42,153
|
|
|
$
|
47,008
|
|
|
$
|
47,170
|
|
|
$
|
180,565
|
|
Gross profit
|
|
|
17,463
|
|
|
|
12,012
|
|
|
|
12,937
|
|
|
|
13,408
|
|
|
|
55,820
|
|
Income (loss) from continuing operations before taxes
|
|
|
8,154
|
|
|
|
3,304
|
|
|
|
3,409
|
|
|
|
(1,379
|
)
|
|
|
13,488
|
|
Income (loss) from continuing operations, net of tax
|
|
|
5,032
|
|
|
|
2,187
|
|
|
|
2,019
|
|
|
|
(1,347
|
)
|
|
|
7,891
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
|
(103
|
)
|
|
|
(459
|
)
|
|
|
(362
|
)
|
|
|
(1,594
|
)
|
|
|
(2,518
|
)
|
Net income (loss)
|
|
|
4,929
|
|
|
|
1,728
|
|
|
|
1,657
|
|
|
|
(2,941
|
)
|
|
|
5,373
|
|
|
|
|
|
|
|
Earnings (loss) per share (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.28
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.44
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.09
|
)
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.28
|
|
|
$
|
0.10
|
|
|
$
|
0.09
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.28
|
|
|
$
|
0.12
|
|
|
$
|
0.11
|
|
|
$
|
(0.08
|
)
|
|
$
|
0.44
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.02
|
)
|
|
|
(0.02
|
)
|
|
|
(0.09
|
)
|
|
|
(0.14
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.28
|
|
|
$
|
0.10
|
|
|
$
|
0.09
|
|
|
$
|
(0.17
|
)
|
|
$
|
0.30
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The sum of the basic and diluted earnings per share for the four quarters does not equal the full year total for year ended 2012, as a result of issuances and
repurchases of common stock.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2011
|
|
|
|
First
Quarter
|
|
|
Second
Quarter
|
|
|
Third
Quarter
|
|
|
Fourth
Quarter
|
|
|
Total
|
|
|
|
(in thousands, except per share data)
|
|
2011:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues
|
|
$
|
43,602
|
|
|
$
|
41,108
|
|
|
$
|
45,181
|
|
|
$
|
46,677
|
|
|
$
|
176,568
|
|
Gross profit
|
|
|
18,518
|
|
|
|
12,838
|
|
|
|
15,010
|
|
|
|
15,494
|
|
|
|
61,860
|
|
Income from continuing operations before taxes
|
|
|
8,855
|
|
|
|
835
|
|
|
|
4,149
|
|
|
|
5,218
|
|
|
|
19,057
|
|
Income from continuing operations, net of tax
|
|
|
5,349
|
|
|
|
501
|
|
|
|
2,494
|
|
|
|
3,544
|
|
|
|
11,888
|
|
|
|
|
|
|
|
Loss from discontinued operations, net of tax
|
|
|
(59
|
)
|
|
|
(474
|
)
|
|
|
(712
|
)
|
|
|
(475
|
)
|
|
|
(1,720
|
)
|
Net income
|
|
|
5,290
|
|
|
|
27
|
|
|
|
1,782
|
|
|
|
3,069
|
|
|
|
10,168
|
|
|
|
|
|
|
|
Earnings (loss) per share (a):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.29
|
|
|
$
|
0.03
|
|
|
$
|
0.14
|
|
|
$
|
0.20
|
|
|
$
|
0.67
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
(0.04
|
)
|
|
|
(0.03
|
)
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.29
|
|
|
$
|
0.00
|
|
|
$
|
0.10
|
|
|
$
|
0.17
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations
|
|
$
|
0.29
|
|
|
$
|
0.03
|
|
|
$
|
0.14
|
|
|
$
|
0.20
|
|
|
$
|
0.67
|
|
Discontinued operations
|
|
|
|
|
|
|
(0.03
|
)
|
|
|
(0.04
|
)
|
|
|
(0.03
|
)
|
|
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income
|
|
$
|
0.29
|
|
|
$
|
0.00
|
|
|
$
|
0.10
|
|
|
$
|
0.17
|
|
|
$
|
0.57
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a)
|
The sum of the basic and diluted earnings per share for the four quarters does not equal the full year total for years ended 2011, as a result of issuances and
repurchases of common stock.
|
120
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
NOTE 22 SUBSEQUENT EVENTS
Restructuring.
In January 2013, the Company announced to its employees a restructuring plan for the organization
primarily due to a decline in loan volumes over the past few years as a result of shifting customer demand, the poor economy, regulatory changes and increasing competition in the short-term credit industry. The restructuring plan includes a 10%
workforce reduction in field and corporate employees primarily due to the decision in 2012 to close 38 underperforming branches during the first half of 2013. Excluding the effect of the closed branches, the workforce reduction and related cost
savings are expected to total approximately $3.0 to $3.5 million on an annual basis.
Equity Grant.
On February 5,
2013, the Company granted 55,020 restricted shares to its non-employee directors under the 2004 plan. The total fair market value of the grant was approximately $188,000. The shares granted to the directors vested immediately upon the date of grant
but may not be sold for six months after the date of grant.
Dividend.
On February 5, 2013, the Companys
board of directors declared a regular quarterly dividend of $0.05 per common share per common share. The dividend was paid on March 14, 2013 to stockholders of record as of February 28, 2013. The amount of the dividend paid was
approximately $900,000.
121
QC HOLDINGS, INC. AND SUBSIDIARIES