UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-K
x |
ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 |
For the fiscal year ended December 31, 2014
Commission file number 000-50840
QC HOLDINGS, INC.
(Exact name of registrant as specified in its
charter)
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Kansas |
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48-1209939 |
(State or other jurisdiction of incorporation or organization) |
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(I.R.S. Employer Identification No.) |
9401 Indian Creek Parkway, Suite 1500
Overland Park, Kansas 66210
913-234-5000
(Address, including zip code, and telephone number of
registrants principal executive offices)
SECURITIES
REGISTERED PURSUANT TO SECTION 12(b) OF THE ACT:
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Title of each class |
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Name of each exchange on which registered |
Common Stock, par value $0.01 per share |
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NASDAQ Global Market |
SECURITIES REGISTERED PURSUANT TO SECTION 12(g) OF THE ACT:
None
Indicate by check
mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. Yes ¨ No x
Indicate by check mark if the registrant is not required to file reports pursuant to
Section 13 or Section 15(d) of the Act. Yes ¨ No x
Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange
Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past
90 days. Yes x No ¨
Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule
405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such
files). Yes x No ¨
Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405) is not contained herein, and will not be contained, to the best of
registrants knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendments to this Form 10-K. ¨
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer or a smaller
reporting company (as defined in Rule 12b-2 of the Exchange Act).
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Large accelerated filer |
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Accelerated filer |
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Non-accelerated filer |
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Smaller reporting company |
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x |
Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange
Act). Yes ¨ No x
The aggregate market value of the voting and non-voting common equity held by non-affiliates based on the closing sale price on June 30, 2014 was $12.8 million.
Shares outstanding of the registrants common stock as of February 28, 2015: 17,388,681
DOCUMENTS INCORPORATED BY REFERENCE: The information required by Part III of Form 10-K is incorporated herein by reference to the registrants definitive proxy statement to be filed with the
Securities and Exchange Commission pursuant to Regulation 14A not later than 120 days after the end of the fiscal year covered by this report.
QC HOLDINGS, INC.
INDEX TO ANNUAL REPORT ON FORM 10-K
For the fiscal year ended December 31, 2014
FORWARD-LOOKING STATEMENTS
In this report, in other filings with the Securities and Exchange Commission and in press releases and other public statements by our officers throughout the year, QC Holdings, Inc. makes or will make
statements that plan for or anticipate the future. These forward-looking statements include statements about our future business plans and strategies, and other statements that are not historical in nature. These forward-looking statements are based
on our current expectations and assumptions. Many of these statements are found in the Business and Managements Discussion and Analysis of Financial Condition and Results of
Operations sections of this report.
Forward-looking statements may be identified by words or phrases
such as believe, expect, anticipate, should, planned, may, intend, estimated, potential, goal, and objective.
Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, provide a safe harbor for forward-looking statements. In order to comply with the terms of the safe
harbor, and because forward-looking statements involve future risks and uncertainties, listed herein are a variety of factors that could cause actual results and experience to differ materially from the anticipated results or other expectations
expressed in our forward-looking statements. These factors include the risks discussed in Item 1A. Risk Factors of this report. We undertake no obligation to update any forward-looking statements contained herein or in future
communications to reflect future events or developments.
PART I
Overview
QC Holdings, Inc. and its subsidiaries provide various financial services (primarily payday loans and installment loans) through its
retail branches and Internet lending operations. References below to we, us and our may refer to QC Holdings, Inc. exclusively or to one or more of our subsidiaries. Originally formed in 1984, we were incorporated
in the state of Kansas in 1998 and have provided various retail consumer products and services during our 30-year history.
We
operate primarily through our wholly-owned subsidiaries, QC Financial Services, Inc., QC Loan Services, Inc., QC E-Services, Inc., QC Canada Holdings Inc. and QC Capital, Inc. 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, 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). All of our loans and other services are subject to state regulation, which vary from state to state, as well as to the Consumer Financial
Protection Bureau (CFPB) and other federal and local regulation, where applicable.
We organize and report on our business
units as three reportable segments (Branch Lending, Centralized Lending and E-Lending). The Branch Lending segment includes our retail branches that offer payday loans, installment loans, credit services, open-end credit, check cashing services,
title loans, debit cards, money transfers and money orders. The Centralized Lending segment includes long-term installment loans (Signature Loans and Auto Equity Loans) that are centrally underwritten. The E-Lending segment includes the Internet
lending operations in the United States and Canada. We evaluate the performance of our reportable segments based on, among other things, gross profit, income from continuing operations before income taxes and return on invested capital.
1
The following table sets forth the revenue and percentage of total revenue for each
reportable segment.
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Year Ended December 31, |
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Year Ended December 31, |
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2012 |
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2013 |
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2014 |
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2012 |
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2013 |
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2014 |
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(in thousands) |
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(percentage of revenues) |
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Revenues: |
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Branch Lending |
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$ |
140,873 |
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$ |
137,352 |
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$ |
126,525 |
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92.7 |
% |
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88.0 |
% |
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82.7 |
% |
Centralized Lending |
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3,075 |
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11,552 |
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19,418 |
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2.0 |
% |
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7.4 |
% |
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12.7 |
% |
E-Lending |
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8,068 |
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7,228 |
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7,122 |
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5.3 |
% |
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4.6 |
% |
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4.6 |
% |
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Total |
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$ |
152,016 |
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$ |
156,132 |
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$ |
153,065 |
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100.0 |
% |
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100.0 |
% |
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100.0 |
% |
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The following table summarizes our gross profit, gross margin (gross profit as a percentage of revenues)
and loss ratio (losses as a percentage of revenues) of each reportable segment for the years ended December 31, 2013 and 2014.
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Gross Profit |
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Gross Margin % |
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Loss Ratio |
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Reportable Segment |
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Branches |
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2013 |
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2014 |
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2013 |
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2014 |
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2013 |
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2014 |
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(in thousands) |
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Branch Lending |
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409 |
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$ |
41,159 |
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$ |
36,464 |
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30.0 |
% |
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28.8 |
% |
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25.2 |
% |
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22.6 |
% |
Centralized Lending |
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1,534 |
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3,117 |
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13.3 |
% |
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16.0 |
% |
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75.8 |
% |
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73.6 |
% |
E-Lending |
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571 |
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931 |
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7.9 |
% |
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13.1 |
% |
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45.3 |
% |
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28.7 |
% |
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Total |
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$ |
43,264 |
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$ |
40,512 |
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27.7 |
% |
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26.5 |
% |
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29.9 |
% |
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29.3 |
% |
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In December 2013, we sold our automotive business to an unaffiliated buyer for approximately $6.0
million. The purchase agreement provided for the sale of certain assets of the automotive business, primarily consisting of loans receivable, automobile inventory, fixed assets and other assets. The Buyer also hired a significant number of our
automotive business personnel. The Buyer assumed no liabilities in conjunction with the purchase of those assets, other than lease obligations for the four buy-here, pay-here locations previously leased by us. We also entered into a lease agreement
with Buyer for the one location that we own. All revenue, expenses and income reported herein have been adjusted to reflect reclassification of the discontinued automotive business unit. The automotive business was previously accounted for as a
reportable segment.
Branch Lending
Revenues from our Branch Lending segment are primarily derived by providing short-term consumer loans, known as payday loans. We also earn fees for various other financial services, such as installment
loans, credit services, open-end credit, check cashing services, title loans, prepaid debit cards, money transfers and money orders. We operated 409 short-term lending branches in 23 states as of December 31, 2014. In all states in which we
offer payday loans, we fund our payday loans directly to the customer and receive a fee. For our locations in Texas, we began operating as a Credit Service Organization (CSO) in September 2005 on behalf of consumers in accordance with Texas laws. As
a CSO, we charge 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.
We entered the payday loan industry in 1992, and believe that we were one of the first companies to offer the payday loan product in the
United States. We have served the same customer base since 1984, beginning with a rent-to-own business and continuing with check cashing services in 1988. We sold our rent-to-own branches in 1994.
Since 1998, we have been primarily engaged in the business of providing payday loans through our branch network in the United States,
with principal values that typically range from $100 to $500. Payday loans provide
2
customers with cash in exchange for a promissory note with a maturity of generally two to three weeks. The payday loans are collateralized either by a check from the customer (for the principal
amount of the loan plus a specified fee), ACH authorization or a debit card. To repay the cash advance, customers may redeem their check by paying cash or they may allow the check, ACH or debit card to be presented to the bank for collection. The
fee for payday loans in the United States varies from state to state, based on applicable regulations, and generally ranges from $15 to $20 per $100 borrowed, although recent legislation in a few states has capped the fee below $2 per $100 borrowed.
Based on the cost structure required to operate a storefront location, we spend approximately $10 to $11 per $100 borrowed, exclusive of loan losses. As a result, in states where a fee cap below that cost level is mandated, without additional fees,
we are unable to operate at a profit.
In response to changes in the overall market and unfavorable legislation in several
states, we have closed a significant number of branches over the last five years. During this period, we opened 17 de novo branches and closed 164 branches. The following table sets forth our de novo branch openings and branch closings since
January 1, 2010.
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2010 |
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2011 |
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2012 |
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2013 |
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2014 |
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Beginning branch locations |
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556 |
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523 |
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482 |
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466 |
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432 |
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De novo branches opened during year |
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1 |
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2 |
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8 |
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6 |
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Branches closed/sold during year |
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(34 |
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(43 |
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(24 |
) |
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(40 |
) |
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(23 |
) |
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Ending branch locations |
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523 |
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482 |
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466 |
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432 |
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409 |
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We evaluate opportunities for product and geographic diversification and for new branch development to
complement existing branches within a given state or market. Additionally, we utilize a disciplined acquisition strategy when evaluating possible businesses. During 2015, we do not expect to open any de novo branches.
Generally, branch closings have been associated with (i) negative changes in the legislative or regulatory environment in a state,
(ii) overlapping branch locations (as a result of acquisitions), or (iii) markets where we believed long-term growth potential was minimal. We review the financial metrics of each branch to determine if trends exist with respect to
declining loan volumes and revenues that might require the closing of the branch. In those instances, we evaluate the need to close the branch based on several factors, including the length of time the branch has been open, geographic location,
competitive environment, proximity to another one of our branches and long-term market potential.
During 2010, we closed 34
branches in various states and decided that we would close 21 branches primarily in Arizona, Washington and South Carolina during first half 2011 due to unfavorable changes to the payday loan laws in each of those states during 2010. As a result, we
recorded approximately $1.8 million in pre-tax charges during 2010 associated with branch closures. 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.
During 2011, we closed 18 of the 21 branches
discussed above and decided that the remaining three branches would remain open. In addition, we closed 24 branches in various states (which included four branches that were consolidated into nearby branches) and sold one branch. We recorded
approximately $553,000 in pre-tax charges during 2011 associated with branch 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 2012, we closed 24 branches in various states (which included four branches that were consolidated into nearby
branches). In addition, we decided to close 38 underperforming branches during first half of 2013, the majority of which were located in South Carolina, Washington and Colorado. We recorded approximately $699,000 in pre-tax charges during 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.
3
During 2013, we closed the 38 branches discussed above and we also closed two of our lower
performing branches by consolidating each of those branches into a nearby branch. In addition, we approved the closure or sale of 35 underperforming branches during first half of 2014, the majority of which are located in Arizona, Colorado, South
Carolina, Virginia and Washington, where we have been subject to unfavorable changes to payday loan laws in recent years. We recorded approximately $364,000 in pre-tax charges during 2013 associated with branch closures. The charges included a
$247,000 loss for the disposition of fixed assets, $74,000 for lease terminations and other related occupancy costs, $32,000 in severance and benefit costs and $11,000 for other costs. The charges recorded in 2013 do not include lease termination
and severance costs associated with the 35 branches that were scheduled to close during first half of 2014 as notification to the landlords and employees occurred in first quarter 2014.
During 2014, we closed 21 of the 35 branches discussed above and decided not to sell any branches, thereby keeping 14 of the branches
open and fully operational. In addition, we closed two branches that were not consolidated into nearby branches. We recorded approximately $280,000 in pre-tax charges during 2014 associated with branch closures. The charges included $166,000 for
lease terminations and other related occupancy costs, $109,000 in severance and benefit costs and $5,000 for the loss on the disposition of fixed assets.
We will continue to evaluate our branch network to determine the ongoing viability of each branch, particularly in states where legislative and regulatory changes have occurred. To the extent that we
close branches during 2015, we would incur certain closing costs, which would include non-cash charges for the write-off of fixed assets and cash charges for the settlement of lease obligations.
Centralized Lending
In 2012, we 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 (ranging from $500 to $15,000 over terms up to 48 months) that are centrally underwritten and distributed through our existing branch network. We adhere to more stringent underwriting criteria for installment loans than for
short-term consumer loans, running credit reports for all centrally approved installment loan customers. The process for obtaining an installment loan is similar to that of obtaining a payday loan. Our customers submit applications in person at one
of our branches along with photo identification, bank account information, personal references, and proof of income. The application and customer information are forwarded to our central underwriting department for approval. As of December 31,
2014, we offered signature loans and/or auto equity loans to customers in Arizona, California, Idaho, Missouri, New Mexico and Utah.
In Kansas, we currently offer an open-end credit product which is very similar to a line of credit in that the customer can borrow up to their approved maximum level at any time as long as the customer
does not exceed the maximum set forth in their open-end credit agreement. Our customers submit applications in person at one of our branches along with photo identification, bank account information, personal references, and proof of income. The
application and customer information are forwarded to our central underwriting department for approval. Furthermore, we are responsible for providing the borrower with a monthly statement and we require the borrower to make a monthly payment based
on the outstanding balance. We earn interest on the outstanding balance.
E-Lending
The E-Lending segment includes our Internet lending operations in the United States and Canada. On September 30, 2011, through a
wholly-owned subsidiary, QC Canada Holdings Inc., we acquired 100% of the outstanding stock of Direct Credit, 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 lending platform in Canada. The acquisition of Direct Credit is part of the
4
implementation of our strategy to diversify by increasing product offerings and distribution, as well as expanding our presence into international markets. As of December 31, 2014, we also
offer short-term loans via the Internet to customers in Missouri and Texas. The short-term loan products offered online in Canada and the United States are similar to the payday loan products described more fully in the Branch Lending discussion
above.
Industry Background
We operate in the consumer finance industry serving a large population of consumers who have limited access to credit from banks, thrifts, credit card companies, and other traditional lenders.
Furthermore, difficult economic conditions in recent years have resulted in an increase in the number of under-banked consumers in the United States.
Our customers typically are middle-income, middle-educated individuals who are a part of a young family. Research studies by the industry and academic economists, as well as information from our
customer database, have confirmed the following about our customers:
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more than half earn between $25,000 and $50,000 annually; |
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the majority are under 45 years old; |
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more than half have attended college, and one in five has a bachelors degree or higher; |
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more than 40% are homeowners, and about half have children in the household; and |
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all have steady incomes and all have checking accounts. |
Payday Loan Industry
The payday loan industry began its rapid
growth in 1996, when there were an estimated 2,000 payday loan branches in the United States. According to Community Financial Services Association (CFSA), industry analysts estimate that the industry has approximately 17,800 payday loan branches in
the United States and approximately 1,400 payday loan and check cashing retail locations in Canada. During 2014, the branches in the United States extended approximately $28 billion in short-term credit to millions of middle-class households that
experienced cash-flow shortfalls between paydays. As the branch count grew over the last decade, a greater number of Internet-based payday loan providers emerged. Industry analysts estimated that Internet-based payday loan providers extended
approximately $17 billion to their customers during 2014. In the last few years, the rate of growth for these Internet providers has exceeded that of the branch-based lenders. We believe this trend will continue into the foreseeable future as
consumers become more comfortable transacting electronically. Industry analysts have suggested that the volume of short-term loans transacted over the Internet will exceed the volume through bricks-and-mortar locations within the next three to five
years. To the extent, however, there are significant changes to the rules, regulations and key fund transmission requirements related to online lending, this growth could be negatively affected.
We believe the payday loan industry is highly fragmented, with the larger companies operating approximately 50% of the total industry
branches. After a number of years of growth, the industry has contracted slightly in the past few years, primarily due to changes in laws that govern the payday product. Absent changes in regulations and laws, we do not expect significant
fluctuations in the industrys number of branches in the foreseeable future.
We believe that our customers choose the
payday loan product because it is quick, convenient and, in many instances, a lower-cost or more suitable alternative for the customer than the other available alternatives such as overdraft protection, credit cards, credit union loans or savings
accounts.
5
Installment Loan Industry
Installment lending to under-banked and other non-prime consumers is also a highly fragmented sector of the consumer finance industry. We
believe that installment loans are provided through more than 5,000 individually-licensed finance company branches in the United States. Providers of installment loans generally offer loans with longer terms and lower interest rates than other
alternatives available to under-banked consumers, such as payday, title, and pawn loans.
Consumer finance companies that
provide installment loans generally make loans to individuals of up to $10,000 with maturities of one to five years. These companies approve loans on the basis of the personal creditworthiness of their customers and maintain close contact with
borrowers to meet their financial needs. As a result of their higher credit standards and specific collateral requirements, commercial banks and savings and loans institutions typically charge lower interest rates and fees and experience lower
delinquency and charge-off rates than do small-loan consumer finance companies. Consumer finance companies generally charge higher interest rates and fees to compensate for the greater credit risk of delinquencies and charge-offs, as well as for the
increased loan administration and collection costs.
Our Services
Our primary business is offering payday loans through our network of branches in the United States and over the Internet in the United
States and in Canada through our subsidiary Direct Credit. In addition, we offer other financial services, such as installment loans, credit services, open-end credit, check cashing services, title loans, debit cards, money transfers, money orders
and business invoice factoring.
The following table sets forth the percentage of total revenue for the services we provide.
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Year Ended December 31, |
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Year Ended December 31, |
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2012 |
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2013 |
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2014 |
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2012 |
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2013 |
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2014 |
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(in thousands) |
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(percentage of revenues) |
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Revenues |
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Payday loan fees |
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$ |
116,809 |
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$ |
110,239 |
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$ |
99,379 |
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76.8 |
% |
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70.6 |
% |
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64.9 |
% |
Installment loan fees |
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19,678 |
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31,655 |
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38,488 |
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12.9 |
% |
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20.3 |
% |
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25.1 |
% |
Credit service fees |
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6,731 |
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6,192 |
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5,097 |
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4.4 |
% |
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4.0 |
% |
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3.3 |
% |
Open-end credit fees |
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|
675 |
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2,092 |
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4,733 |
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0.4 |
% |
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1.3 |
% |
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3.1 |
% |
Check cashing fees |
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3,063 |
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2,750 |
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2,560 |
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|
|
2.0 |
% |
|
|
1.8 |
% |
|
|
1.7 |
% |
Title loan fees |
|
|
2,677 |
|
|
|
789 |
|
|
|
310 |
|
|
|
1.8 |
% |
|
|
0.5 |
% |
|
|
0.2 |
% |
Other fees |
|
|
2,383 |
|
|
|
2,415 |
|
|
|
2,498 |
|
|
|
1.7 |
% |
|
|
1.5 |
% |
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
152,016 |
|
|
$ |
156,132 |
|
|
$ |
153,065 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday Loans
To obtain a payday loan from one of our branch locations, a customer must complete a loan application, provide a valid identification, maintain a personal checking account, have a source of income
sufficient to loan some amount to the customer, and not otherwise be in default on a loan from us. Upon completion of a loan application, the customer signs a promissory note with a maturity of generally two to three weeks. The loan is
collateralized by a check (for the principal amount of the loan plus a specified fee), ACH authorization or a debit card. The fees we charge on payday loans vary by state but typically range 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, ACH or debit card to be presented to the bank for collection.
We offer renewals only in states that allow them, and, subject to more restrictive requirements under state law, we comply with the recommended best practices set forth by the CFSA and offer no more than
four
6
consecutive renewals per customer after the initial loan. We also require that the customer sign a new promissory note and provide new collateral for each payday loan renewal. If a customer is
unable to meet his or her current repayment for a payday loan, the customer may qualify for an extended payment plan (EPP). In most states, the terms of our EPP conform to the CFSA best practices and guidelines. Certain states have specified their
own terms and eligibility requirements for an EPP. Generally, a customer may enter into an EPP once every 12 months, and the EPP will call for scheduled payments (without any additional interest or fees) that coincide with the customers next
four paydays. In some states, a customer may enter into an EPP more frequently. We will not engage in collection efforts while a customer is enrolled in an EPP. If a customer misses a scheduled payment under the EPP, our personnel may resume normal
collection procedures. We do not offer an EPP for our installment loans or to open-end credit customers, nor does the third party lender in Texas offer an EPP to its customers.
To obtain a payday loan from us via the Internet, our customers fill out and digitally sign an online application and submit various
types of information required for underwriting the loan. The online credit application gives the customer a pre-approval decision and conditional credit limit. Upon final approval, loan initiation can be completed in as little as 15 minutes. With
respect to the underwriting process, we maintain a set of criteria that all applicants must meet and we use internal screening tools during the account origination process to evaluate an applicants credit worthiness.
Once the application information has been verified and approved, we will fund the customer in one of two ways: email money transfer or
ACH payment. Most customers in Canada receive their funds via email money transfer. Our subsidiary in Canada is the only large-scale lender with an enterprise-level system to distribute funds automatically through the Canadian email money transfer
network, which deposit funds into a customers account in under 30 minutes. For customers who cannot receive an email money transfer, we fund their loans through the ACH networks and the funds are available in customers bank accounts in
approximately one banking day.
During 2014, approximately 91.5% of our U.S. payday loan volume was repaid by the customer
returning to the branch and settling their obligation by either payment in cash of the full amount owed or by renewal of the payday loan through payment of the original loan fee and signing a new promissory note accompanied by a new check, ACH or
debit card. With respect to the remaining 8.5% of U.S. payday loan volume, we presented the customers check, ACH or debit card to the bank for payment of the payday loan. Approximately 21.5% of items presented to the bank were collected and
approximately 78.5% were returned to us due to insufficient funds in the customers account, which equates to gross losses of approximately 6.7% of total loan volume. If a customers collateral is returned to us for insufficient funds or
any other reason, we initiate collection efforts. During 2014, our efforts resulted in approximately 58.4% collection of the returned items, which includes cash received totaling $772,000 for the sale of older debt. As a result, our overall
provision for payday loan losses during 2014 was approximately 2.8% of total payday loan volume (including Internet lending). On average, our overall provision for payday loan losses has historically ranged from 2% to 5% of total payday loan volume
based on market factors, average age of our branch base, rate of unit branch growth and effectiveness of our collection efforts.
In 2014, our customers averaged approximately six two-week payday loans (out of a possible 26 two-week loans). The average term of a loan to our customers was 18 days for each of the years ended
December 31, 2012, 2013 and 2014.
Our business is seasonal due to the fluctuating demand for payday loans during the
year. Historically, we have experienced our highest demand for payday loans in January and in the fourth calendar quarter. As a result of the receipt by customers of their income tax refunds, demand for payday loans has historically declined in the
balance of the first calendar quarter and the first month of the second quarter. Our loss ratio historically fluctuates with these changes in payday loan demand, with a higher loss ratio in the second and third calendar quarters and a lower loss
ratio in the first and fourth calendar quarters.
7
Installment Loans
We began offering branch-based installment loans to customers in our Illinois branches during second quarter 2006 and expanded that product offering to customers in additional states during 2009 and 2010.
In 2012, we introduced new installment loan products (signature loans and auto equity loans) to meet customer demand for loan options with longer terms. These new products are higher-dollar and longer-term installment loans that are centrally
underwritten and distributed through our existing branch network. The installment loans are payable in monthly installments (principal plus accrued interest) with terms ranging from four to 48 months, and all loans are pre-payable at any time
without penalty. The fee for an installment loan varies based on the amount borrowed, term, underlying collateral, if any, and various underwriting criteria. As of December 31, 2014, we offered our installment loan products to customers in 275
of our branches in 11 of the 23 states in which we operate.
The following table summarizes our revenue from each type of
installment loan product originated during 2012, 2013 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
|
(in thousands) |
|
Branch-Based |
|
$ |
16,620 |
|
|
$ |
20,629 |
|
|
$ |
20,994 |
|
Signature |
|
|
2,865 |
|
|
|
10,092 |
|
|
|
16,219 |
|
Auto Equity |
|
|
193 |
|
|
|
934 |
|
|
|
1,275 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,678 |
|
|
$ |
31,655 |
|
|
$ |
38,488 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
We offer branch-based installment loans to customers in eight states across our branch network.
Branch-based installment loans are very similar to payday loans in principal amount, fees and interest, but allow the customer to repay the loan in bi-weekly installments. The loans are not centrally underwritten and have much smaller balances and
higher interest rates than our signature and auto equity installment loans. In 2014, branch-based installment loans were offered in 194 locations and accounted for 13.7% of total revenues.
Signature loans are unsecured installment loans with a typical term of 6 to 36 months and a principal balance of up to $3,000. Fees and
interest vary based on the size and term of the loan and whether the customer pays with cash/check or uses recurring ACH payments. During 2014, the average principal amount of a signature loan was $1,845 and the average term was 20 months. In 2014,
our signature loans accounted for 10.6% of revenue and were offered in over 200 locations in Arizona, California, Idaho, Missouri, New Mexico and Utah.
Auto equity loans are higher-dollar installment loans secured by the borrowers auto title with a typical term of 12 to 48 months and a principal balance of up to $15,000. Fees and interest vary
based on the size and term of the loan. During 2014, the average principal amount of an auto equity loan was $3,421 and the average term was 32 months. As of December 31, 2014, we offered auto equity loans to customers at 134 branches in
Arizona, California, Idaho, New Mexico and Utah.
The process for obtaining a signature or auto equity installment loan is
similar to that of obtaining a payday loan. Our customers submit applications in-person at one of our branches along with photo identification, bank account information, personal references, and proof of income. The application and customer
information is forwarded to our central underwriting department for review. We adhere to more stringent underwriting criteria for our longer-term, higher-dollar installment loans than for our payday or branch-based installment loans.
Other Financial Services
We also offer other consumer and business financial services, such as credit services, open-end credit, check cashing services, title loans, money transfers, money orders and business invoice factoring.
Together, these other financial services constituted 10.3%, 9.1% and 10.0% of our revenues for the years ended December 31, 2012, 2013 and 2014, respectively.
8
In Texas, through one of our subsidiaries, we operate as a CSO on behalf of consumers in
accordance with Texas laws. We charge the consumer 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. We also service the loan for the lender. The CSO fee is recognized ratably over the term of the loan. We are 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 our loan receivable balance and are not reflected in the consolidated balance sheet. We absorb all risk of loss, however, through our guarantee of the consumers loan from the lender.
In Virginia and Kansas, we currently offer an open-end credit product through a limited number of branches. The open-end credit product
is very similar to a line-of-credit in that the customer can borrow up to their approved maximum level at any time as long as the customer does not exceed the maximum set forth in their open-end credit agreement. Furthermore, we are responsible for
providing the borrower with a monthly statement and we require the borrower to make a monthly payment based on the outstanding balance. We earn interest on the outstanding balance. In addition, the open-end credit product in Virginia includes a
monthly membership fee and the customer is granted a grace period of 25 days to repay the loan without incurring any interest.
We offered check cashing services in 346 of our 409 branches as of December 31, 2014. We primarily cash payroll, government
assistance, tax refund, insurance and personal checks. Before cashing a check, we verify the customers identification and the validity of the check. Our fees for this service averaged 2.7%, 2.7% and 2.6% of the face amount of the check in
2012, 2013 and 2014, respectively. If a check cashed by us is not paid for any reason, we record the full face value of the check as a loss in the period when the check was returned unpaid. We then contact the customer to initiate the collection
process. Check cashing revenues are typically higher in the first quarter due primarily to customers receipt of income tax refund checks.
We also offer title loans, which are short-term consumer loans. Typically, we advance or will loan up to 25% of the estimated value of the underlying vehicle for a term of 30 days, secured by the
customers vehicle. Generally, if a customer has not repaid a loan after 30 days, we charge the receivable to expense and we initiate collection efforts. Occasionally, we hire an agent to initiate repossession. We offered title loans in 86
branches as of December 31, 2014.
We are also an agent for the transmission and receipt of wire transfers for MoneyGram.
Through this network, our customers can transfer funds electronically to more than 337,000 locations in more than 200 countries and territories throughout the world. Additionally, our branches offer MoneyGram money orders.
In December 2011, we began offering invoice factoring to small and medium sized business clients. As a factoring company, we provide our
business clients with working capital by purchasing their accounts receivable invoices at a discount. The factoring process begins when our business clients submit an accounts receivable invoice to us. We verify the creditworthiness of our
clients customer and we confirm the invoice. We then purchase the invoice and advance a percentage of the face value of the invoice (usually 80% to 90%) to the client. The remaining amount is held as a reserve. We become the legal owner of the
invoice and we collect on it. Once the invoice is paid in full, we keep our fee, fund a small amount to escrow to cover charges and underpayments and release the remaining amount to the client. As of December 31, 2013 and 2014, the balance of
our factoring receivables was $1.3 million and $2.9 million, respectively. Revenues from our factoring business were approximately $305,000 and $855,000 in 2013 and 2014, respectively.
Business Strategy
We historically have expanded our business by opening de
novo branches and through acquisitions. De novo growth allows us to leverage our regional, area and branch managers knowledge of their local markets to identify strong prospective branch locations and to train managers and employees at the
outset on our strategy
9
and procedures. From 1999 through 2014, we acquired 241 short-term lending branches. We review and evaluate acquisitions as they are presented to us. Potential sellers have offered to sell to us
from as few as one branch to groups of 100 branches or more.
In recent years, we have reversed the growth of our branch
network and closed stores that were unprofitable. We have focused on growing revenue by introducing new products that serve our existing loyal customer base and on increasing profitability through streamlined operations. In 2015, we expect to
continue the growth of our longer-term, centrally underwritten installment loan products by introducing them to additional branches within our branch network, where possible, and by actively marketing them to existing and potential customers. In
addition, we continually evaluate opportunities for product and geographic expansion and for new branch development to complement existing branches within a given state or market.
We believe the acquisition of Direct Credit broadens our product platform and distribution, as well as expands our presence by entering
into international markets. Although the Canadian market is much smaller than the U.S. market, there is still room for organic growth, and Direct Credit is a scalable platform with a competitive method for funding loans in Canada.
In December 2013, we began piloting short-term loans via the Internet to customers in Missouri and Texas. During 2015, we expect to
continue to develop an online capability that will complement our branch network by providing our customers an alternative method for accessing our products.
Locations
The following table shows the number of short-term lending
branches by state that were open as of December 31 from 2010 to 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Alabama |
|
|
12 |
|
|
|
12 |
|
|
|
13 |
|
|
|
13 |
|
|
|
13 |
|
Arizona |
|
|
25 |
|
|
|
12 |
|
|
|
11 |
|
|
|
9 |
|
|
|
6 |
|
California |
|
|
76 |
|
|
|
75 |
|
|
|
74 |
|
|
|
74 |
|
|
|
73 |
|
Colorado |
|
|
11 |
|
|
|
11 |
|
|
|
10 |
|
|
|
6 |
|
|
|
6 |
|
Idaho |
|
|
16 |
|
|
|
16 |
|
|
|
16 |
|
|
|
20 |
|
|
|
20 |
|
Illinois |
|
|
24 |
|
|
|
22 |
|
|
|
21 |
|
|
|
19 |
|
|
|
19 |
|
Indiana |
|
|
1 |
|
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Kansas |
|
|
21 |
|
|
|
21 |
|
|
|
22 |
|
|
|
22 |
|
|
|
22 |
|
Kentucky |
|
|
11 |
|
|
|
11 |
|
|
|
11 |
|
|
|
11 |
|
|
|
11 |
|
Louisiana |
|
|
4 |
|
|
|
4 |
|
|
|
5 |
|
|
|
6 |
|
|
|
6 |
|
Mississippi |
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
Missouri |
|
|
103 |
|
|
|
101 |
|
|
|
101 |
|
|
|
100 |
|
|
|
99 |
|
Montana |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Nebraska |
|
|
8 |
|
|
|
8 |
|
|
|
8 |
|
|
|
7 |
|
|
|
7 |
|
Nevada |
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
New Mexico |
|
|
18 |
|
|
|
18 |
|
|
|
18 |
|
|
|
18 |
|
|
|
18 |
|
Ohio |
|
|
17 |
|
|
|
17 |
|
|
|
16 |
|
|
|
16 |
|
|
|
14 |
|
Oklahoma |
|
|
19 |
|
|
|
19 |
|
|
|
18 |
|
|
|
14 |
|
|
|
13 |
|
South Carolina |
|
|
56 |
|
|
|
46 |
|
|
|
33 |
|
|
|
19 |
|
|
|
13 |
|
Tennessee |
|
|
|
|
|
|
|
|
|
|
1 |
|
|
|
1 |
|
|
|
1 |
|
Texas |
|
|
16 |
|
|
|
16 |
|
|
|
16 |
|
|
|
16 |
|
|
|
15 |
|
Utah |
|
|
19 |
|
|
|
18 |
|
|
|
18 |
|
|
|
18 |
|
|
|
17 |
|
Virginia |
|
|
18 |
|
|
|
17 |
|
|
|
17 |
|
|
|
16 |
|
|
|
9 |
|
Washington |
|
|
26 |
|
|
|
16 |
|
|
|
16 |
|
|
|
6 |
|
|
|
6 |
|
Wisconsin |
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
523 |
|
|
|
482 |
|
|
|
466 |
|
|
|
432 |
|
|
|
409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
10
We generally choose branch locations in high traffic areas providing visible signage and
easy access for customers. Branches are generally in small strip-malls or stand-alone buildings. We identify de novo branch locations using a combination of market analysis, field surveys and our own site-selection experience.
Our branch interiors are designed to provide a pleasant, friendly environment for customers and employees. Branch hours vary by market
based on customer demand, but generally branches are open from 9:00 a.m. to 7:00 p.m., Monday through Friday, with shorter hours on Saturdays. Branches are generally closed on Sundays.
Our short-term lending branches located in the states of Missouri, California, Kansas and Illinois represented approximately 22%, 15%, 5%
and 5%, respectively, of total revenues for the year ended December 31, 2014. Our short-term lending branches located in the states of Missouri, California, Kansas and Illinois represented approximately 31%, 14%, 7% and 6%, respectively, of
total gross profit for the year ended December 31, 2014. To the extent that laws and regulations are passed that affect our ability to offer loans or the manner in which we offer loans in any one of those states, our financial position, results
of operations and cash flows could be adversely affected. In recent years, we have experienced several negative effects resulting from law changes that impact the relative significance of a given state from year to year. For example, historically
when customer usage restrictions have been introduced with new legislation, such as in Washington, South Carolina and Kentucky, we have experienced a 30% to 60% decline in annual revenues in that state and a more significant decline in gross profit
for the state, depending on the types of alternative products that competitors offered within the state.
There have been
efforts in Missouri to place a voter initiative on the statewide ballot in each of the November 2012 and November 2014 elections. The initiative 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 either of the elections. The loss of Missouri revenues and gross profit as a result of passage of a voter initiative precluding payday
lending would have a material adverse effect on our results of operations and financial condition.
Advertising and Marketing
Our advertising and marketing efforts are designed to build customer loyalty and introduce new customers to our services.
Our corporate marketing function is focused on strategically positioning us as a leader in the consumer lending marketplace as well as creating awareness of our Internet lending operations.
Our marketing department oversees digital advertising, email and direct mail offerings to former, current and prospective customers, as well as engages in building and supervising branch-level marketing programs.
Branch-level efforts include flyers, coupons, special offers, local direct mail, radio, television or outdoor advertising.
In
Canada, our advertising and marketing strategy is designed to produce substantial lead generation through both direct and indirect channels. Direct channels include our websites and through our proprietary database. Our advertising efforts through
indirect channels include placing ads on search engines (such as Google and Bing), digital display campaigns and search engine optimization.
Technology
We maintain
an integrated system of applications and platforms for transaction processing. The systems provide customer service, internal control mechanisms, compliance monitoring, record keeping and reporting. We have one primary point-of-sale system utilized
by the majority of our branches in the United States as of December 31, 2014. We work closely with our point-of-sale software vendor to enhance and continually update the application. In our Virginia and Kansas branches, we utilize a second
point-of-sale system that can accommodate the open-end credit product.
Our systems provide our branches with customer
information and history to enable our customer service representatives to perform transactions in an efficient manner. The integration of our systems allows for the
11
accurate and timely reporting of information for corporate and field administrative staff. Information is distributed from our point-of-sale system to our corporate accounting systems to provide
for daily reconciliation and exception alerts.
On a daily basis, transaction data is collected at our corporate headquarters
and integrated into our management information systems. These systems are designed to provide summary, detailed and exception information to regional, area and branch managers as well as corporate staff. Reporting is separated by areas of
operational responsibility and accessible through Internet connectivity.
Direct Credit developed a proprietary loan
processing and management system through which all transactions are being processed. The system incorporates customary internal control mechanisms, contract and loan lifecycle management, disbursement and payment handling, record keeping and
reporting capabilities. The integrated system provides our customer service personnel with customer information, including a history of loan activity, as well as accurate and timely reporting of loan activity for management.
We also maintain and test a comprehensive disaster recovery plan for all critical host systems. The disaster recovery plan is routinely
updated to reflect new requirements and business systems. As part of the plan, we have a contract with a third-party to replicate all essential host data changes to the off-site location in Dallas, Texas, which provides immediate access to needed
technologies, if necessary.
Security
The principal security risks to our operations are theft or improper use of personal consumer data, robbery and employee theft. We have put in place extensive branch security systems, technology security
measures, dedicated security personnel and management information systems to address these areas of potential loss.
We store
and process large amounts of personally identifiable information, including customer financial information. We utilize a range of technology solutions and internal controls and procedures, including data encryption, two-factor authentication, secure
tunneling and intrusion prevention systems, to protect and restrict access to and use of personal consumer data.
To protect
against robbery, the majority of employees in our branches work behind bullet-resistant glass and steel partitions, and the back office, safe and computer areas are locked and closed to customers. Our security measures in each branch include safes,
electronic alarm systems monitored by third parties, control over entry to customer service representative areas, detection of entry through perimeter openings, walls and ceilings and the tracking of all employee movement in and out of secured
areas. Employees use cellular phones to ensure safety and security whenever they are outside the secure customer service representative area. Additional security measures include remote control over alarm systems, arming/disarming and changing user
codes and mechanically and electronically controlled time-delay safes.
Because we have high volumes of cash and negotiable
instruments at our locations, daily monitoring, unannounced audits and immediate response to irregularities are critical. We have an internal auditing department that, among other things, performs periodic unannounced branch audits and cash counts
at randomly selected locations. We self-insure for employee theft and dishonesty at the branch level.
Competition
Payday Loan Industry
We offer payday loans through our retail branches in the United States and over the Internet in the United States and Canada. We believe that the primary competitive factors for retail branches in the
payday loan industry are location, customer service and mix of products. With respect to Internet lending, the primary competitive factors are advertising to develop leads and customer service (which includes timely distribution of
12
funds after a loan is approved and professional collection efforts). For each distribution type (branches and Internet), the other distribution method is also a competitive factor. Branch-based
lending is faced with a growing number of customers migrating to the ease of the online transaction. From an online lending perspective, customers remain rooted to the immediacy of cash-in-hand when the transaction is completed in a branch.
In addition to storefront payday loan locations and Internet lending, we also currently compete with services such as
overdraft protection offered by traditional financial institutions, payday loan-type products offered by some banks and credit unions, and other financial service entities and retail businesses that offer payday loans or other similar financial
services, as well as a growing Internet-based payday loan segment. Some of our competitors have larger and more established customer bases and substantially greater financial, marketing and other resources than we have.
Installment Loan Industry
We offer installment loans through certain retail branches in the United States and through our centralized underwriting unit. We believe that competition between installment consumer loan companies
occurs primarily on the basis of breadth of loan product offerings, competitive pricing, flexibility of loan terms offered and the quality of customer service provided.
The installment loan industry is highly competitive and fragmented. We compete with both large installment loan companies that have in excess of 1,000 branches and several independent operators with
generally less than 100 branches. In addition, we also compete with payday and title loan companies that may offer installment loan products similar to the products we offer.
Regulations
We are subject to regulation by federal, state, local and
foreign governments, which affects the products and services we provide. In general, these regulations are designed to protect consumers and not to protect our stockholders.
Regulation of Short-term Lending
Our United States payday and other
consumer lending activities are subject to regulation and supervision primarily at the state level. In those jurisdictions where we make consumer loans directly to consumers (currently all states in which we operate other than Texas), we are
licensed as a payday, title or installment lender or open-end credit provider where required and are subject to various state regulations regarding the terms of our consumer loans and our policies, procedures and operations relating to those loans
or products. In some states, payday lending is referred to as deferred presentment, deferred deposit or consumer installment loans. Typically, state regulations limit the amount that we may lend to any consumer and, in some cases, the number of
loans or transactions that we may make to any consumer at one time or in the course of a year. These state regulations also typically restrict the amount of finance or service charges or fees that we may assess in connection with any loan or
transaction and may limit a customers ability to renew a loan. We must also comply with the disclosure requirements of the Federal Truth-In-Lending Act and Regulation Z promulgated by the Board of Governors of the Federal Reserve System
pursuant to that Act, as well as the disclosure requirements of state statutes (which are usually similar or more extensive then federal disclosure requirements). These state statutes also often specify minimum and maximum maturity dates for loans
and, in some cases, specify mandatory cooling-off periods between transactions. Our collection activities regarding past due loans may also be subject to consumer protection laws and regulations relating to debt collection practices adopted by the
various states, and some states restrict the content of advertising regarding our payday loan activities. Additionally, we are subject to the Equal Credit Opportunity Act, the Gramm-Leach-Bliley Act, and with respect to our credit services agreement
with a third-party lender, the Fair Debt Collection Practices Act.
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During the last few years, legislation has been introduced in the U.S. Congress and in
certain state legislatures that would prohibit or severely restrict consumer loans. In July 2010, the U.S. Congress enacted the Dodd-Frank Wall Street Reform and Consumer Protection Act. Among other things, this legislation established the Consumer
Financial Protection Bureau (CFPB), which has broad supervisory powers over providers of consumer credit products in the United States such as those offered by us. The CFPB now has the power to create rules and regulations that specifically apply to
short-term lending. Although it is expected the CFPB will announce proposed rules in 2015, as of March 12, 2015, it had not announced any rules. The CFPB also has the power to examine consumer lending organizations and has begun an active
examination process of payday lenders, including us. The CFPB is changing payday and other consumer lending practices through the examination process and is likely to continue to effect informal rulemaking through examination and enforcement
efforts.
In the past five years, new payday loan laws or substantial amendments to existing payday loan laws have been passed
in a number of states that have effectively banned payday lending in that state, have substantially restricted lending in that state or otherwise restricted customer access to payday loans in that state. In October 2007, a new federal law prohibited
short-term loans of any type to members of the military and their family with charges in excess of 36% per annum. This federal legislation effectively bans payday lending to the military. The Department of Defense is expected to expand this
legislation in 2015 to prohibit all payday, installment, title and open-end lending to the military at rates above 36% per annum.
We continue, with others in the payday loan industry, to inform and educate legislators and to oppose legislative or regulatory action that would prohibit or severely restrict payday loans. For example,
it requires an approximate cost of $10 to $11 per $100 borrowed to operate a storefront location, exclusive of loan losses. As a result, in states where a 36% or lower cap is mandated (which is equivalent to a fee of approximately $1.38 per $100
borrowed), without additional fees, we are unable to operate at a profit. These types of legislative or regulatory actions have had and in the future could have a material adverse effect on our loan-related activities and revenues. Moreover, similar
action by states where we are not currently conducting business could result in us having fewer opportunities to expand.
Regulation of
Credit Services Organization
We are subject to regulation and licensing in Texas with respect to our CSO under Chapter
393 of the Texas Finance Code, which requires the annual registration of our CSO with the secretary of state and annual licensing with the Office of Consumer Credit Commissioner. We must also comply with various disclosure requirements, which
include providing the consumer with a disclosure statement and contract that detail the services to be performed by the CSO and the total cost of those services along with various other items. In addition, our CSO is required to obtain a credit
service organization bond and a third-party collector bond for each branch in Texas in the amount of $10,000 each from a surety company authorized to do business in Texas.
Regulation of Check Cashing
We are subject to regulation in several
jurisdictions in which we operate that require the registration or licensing of check cashing companies or regulate the fees that check cashing companies may impose. Some states require fee schedules to be filed with the state, while others require
a conspicuous posting of the fees charged for cashing checks at each branch. In other states, check cashing companies are required to meet minimum bonding or capital requirements and are subject to record-keeping requirements. We are licensed in
each state or jurisdiction in which a license is currently required for us to operate as a check cashing company and have filed our schedule of fees with each state or other jurisdiction in which such a filing is required. To the extent those states
have adopted ceilings on check cashing fees, the fees we currently charge are at or below the maximum ceiling.
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Regulation of Money Transmission and Sale of Money Orders
We are subject to regulation in several jurisdictions in which we operate that (1) require the registration or licensing of money
transmission companies or companies that sell money orders and (2) regulate the fees that such companies may impose. In some states, companies engaged in the money transmission business are required to meet minimum bonding or capital
requirements, are prohibited from commingling the proceeds from the sale of money orders with other funds and are subject to various record-keeping requirements. We are licensed in each of the states or jurisdictions in which a license is currently
required for us to operate as a money transmitter. We act as agent for MoneyGram in the sale of money orders. Certain states, including California where we operate 73 branches, have enacted so-called prompt remittance statutes, which
specify the maximum time for payment of proceeds from the sale of money orders to the recipient of the money orders. These statutes limit the number of days, known as the float, that we have use of the money from the sale of a money
order. Recently, the CFPB has enacted rules regarding the international transmission of funds which, in turn, affected our disclosure and documentation requirements.
Foreign Regulation
In Canada, we currently offer online payday
loans to customers in the provinces of Alberta, British Columbia, Manitoba, Newfoundland and Labrador, New Brunswick, Nova Scotia, Nunavut, Ontario, Prince Edward Island, and Saskatchewan. The Canadian federal legislation falls under
Section 347 of the Canadian Criminal Code and defines the criminal rate of interest as an effective annual rate of 60%. On May 3, 2007, the Canadian Federal Government enacted Bill C-26, providing an exemption to Section 347 for loans
with a term of 62 days or less and for an amount of $1,500 or less. The exemption is applied on a Province-by-Province basis and is available where a Province has enacted legislation that restricts the amount that can be charged for a payday loan.
The following provinces have enacted payday loan legislation and established payday loan regulations:
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Alberta, in effect since September 1, 2009 |
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British Columbia, in effect since November 1, 2009 |
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Manitoba, in effect since October 18, 2010 |
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Nova Scotia, in effect since August 1, 2009 |
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Ontario, in effect since December 15, 2009 |
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Saskatchewan, in effect since January 1, 2012 |
Currency Reporting Regulation
Regulations promulgated by the United
States Department of the Treasury under the Bank Secrecy Act require reporting of transactions involving currency in an amount greater than $10,000. In general, every financial institution must report each deposit, withdrawal, exchange of currency
or other payment or transfer that involves currency in an amount greater than $10,000. In addition, multiple currency transactions must be treated as a single transaction if the transactions are by, or on behalf of, any one person and result in
either cash in or cash out totaling more than $10,000 during any one business day. In addition, the regulations require institutions to maintain information concerning sales of monetary instruments for cash amounts between $3,000 and $10,000. The
records maintained must contain certain identifying information about the purchaser. The rule states that no sale may be completed unless the required information is obtained. We believe that our point-of-sale system, employee training programs and
internal control processes support our compliance with these regulatory requirements.
Also, money services businesses are
required by the Money Laundering Act of 1994 to register with the United States Department of the Treasury. Money services business transactions include check cashing, wire
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transfers and money orders. Money services businesses must renew their registrations every two years, maintain a list of their agents, update the agent list annually and make the agent list
available for examination. In addition, the Bank Secrecy Act requires money services businesses to file a Suspicious Activity Report for any transaction conducted or attempted involving amounts individually or in total equaling $2,000 or greater,
when the money services business knows or suspects that the transaction involves funds derived from an illegal activity, the transaction is designed to evade the requirements of the Bank Secrecy Act or the transaction is considered so unusual that
there appears to be no reasonable explanation for the transaction.
The USA PATRIOT Act includes a number of anti-money
laundering measures designed to prevent the banking system from being used to launder money and to assist in the identification and seizure of funds that may be used to support terrorist activities. The USA PATRIOT Act includes provisions that
directly impact check cashers and other money services businesses. Specifically, the USA PATRIOT Act requires all check cashers to establish certain programs to identify accurately the individual conducting the transaction and to detect and report
money-laundering activities to law enforcement. We have established various procedures and continue to monitor and evaluate any such transactions and believe we are in compliance with the USA PATRIOT Act.
The U.S. Treasury, through the Internal Revenue Service, regularly conducts audits of our operations for compliance with the Bank Secrecy
Act and the USA PATRIOT ACT.
Privacy Regulation
We are subject to a variety of federal and state laws and regulations that seek to protect the confidentiality of a customers identity by restricting the use of personal information obtained from a
customer. We have identified our systems that capture and maintain non-public personal information, as that term is used in the privacy provisions of the Gramm-Leach-Bliley Act and its implementing federal regulations. We disclose our privacy
information policies and our policies relating to destruction of certain information to our customers as required by that law. We have systems in place intended to safeguard this information as required by the Gramm-Leach-Bliley Act.
We are also subject to the Federal Trade Commissions Identify Theft and Red Flag Rules. These rules require us to implement a
written program designed to detect the red flags of identity theft in our operations. Additionally, our Customer Information Safety and Security Policy and our Know Your Customer policy have been adopted to assist us in addressing the
protection of private customer information.
Zoning and Other Local Regulation
We are also subject to increasing levels of zoning and other local regulations, such as regulations affecting the granting of business
licenses. Certain municipalities have used or are attempting to use these types of regulatory authority to restrict the growth of the payday loan industry. These zoning and similar local regulatory actions can affect our ability to expand in that
municipality and may affect a sellers ability to transfer licenses or leases to us in conjunction with an acquisition. For example, several cities in Texas have passed local ordinances governing certain loan provisions including refinancing
and extensions.
Employees
On December 31, 2014, we had 1,244 U.S. employees, consisting of 1,055 branch personnel, 75 field managers and 114 corporate office employees. In addition, Direct Credit had 26 employees as of
December 31, 2014.
We believe our relationship with our employees is good, and we have not suffered any labor disputes.
We do not have any employees that operate under a collective bargaining agreement.
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Available Information
We file annual and quarterly reports, proxy statements, and other information with the United States Securities and Exchange Commission, copies of which can be obtained from the SECs Public
Reference Room at 100 F Street, N.E., Washington, D.C. 20549. Information on the operation of the Public Reference Room can be obtained by calling the SEC at 1-800-SEC-0330.
Reports we file electronically with the SEC via the SECs Electronic Data Gathering, Analysis and Retrieval system (EDGAR) may be accessed through the Internet. The SEC maintains an Internet site
that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC, at www.sec.gov. We make available free of charge our annual reports on Form 10-K, quarterly reports
on Form 10-Q, current reports on Form 8-K, amendments to those reports and our proxy statement on our website at www.qcholdings.com as soon as reasonably practical after each filing has been made with, or furnished to, the SEC. The
SEC filings and additional information about QC Holdings, Inc. can be obtained under the Investment Center section of our website. The contents of these websites are not incorporated into this report. Further, our references to the
URLs for these websites are intended to be inactive textual references only.
Changes in federal
laws and regulations governing lending practices, and interpretations of these federal laws and regulations, have negatively affected our business and are likely to do so in the future.
Historically, states provide the primary regulatory framework under which we offer payday loans. Certain federal laws (in addition to the
Dodd-Frank Act discussed immediately below) have always applied to our business. For example, because payday loans are viewed as extensions of credit, we must comply with the federal Truth-in-Lending Act and Regulation Z adopted under that Act.
Additionally, we are subject to the Equal Credit Opportunity Act, the Gramm-Leach-Bliley Act, and where applicable, the Fair Debt Collection Practices Act. These regulations also apply to any lender with which we do business in Texas through our
credit services organization business. A failure to comply with any of these federal laws and regulations could have a material adverse effect on our business, results of operations and financial condition.
In recent years, consumer loans, in particular payday loans, have come under increased federal regulatory scrutiny that has resulted in
increasingly restrictive regulations and legislation that makes offering these loans less profitable or unattractive. For example, federal legislation limits the interest rate and fees that may be charged on any short-term loans, including payday
loans, to any person in the military to 36% per annum, and effectively bans payday lending to members of the military or their families.
Certain federal legislators and regulators have advocated that laws and regulations should be tightened so as to severely limit, if not eliminate, the type of loan products and services we offer. The U.S.
Congress, as well as other federal governmental authorities, have debated, and may in the future adopt, legislation or regulations that could, among other things, place a cap on the interest or fees that we can charge or a cap on the effective
annual percentage rate that limits the amount of interest or fees that may be charged, ban or limit loan renewals or extensions (where the customer agrees to pay the current finance charge on a loan for the right to make payment of the outstanding
principal balance of such loan at a later date plus an additional finance charge), including the rates to be charged for loan renewals or extensions, require us to offer an extended payment plan, allow for only minimal origination fees for loans,
require changes to our underwriting or collections practices, require short-term lenders to be bonded or require lenders to report consumer loan activity to databases designed to monitor or restrict consumer borrowing activity, impose cooling
off periods between the time a loan is paid off and another loan is obtained or prohibit us from providing any of our consumer loan products in the United States to active duty military personnel, active members of the National Guard or
members on active reserve duty and their immediate dependents. To the extent one, or some combination, of these types of restrictions and limitations were required due to new legislation or regulation, it could have a material adverse effect on our
business, results of operations and financial condition.
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The level and intensity of federal regulation of the payday loan industry is increasing significantly.
The CFPB is authorized to adopt rules that could potentially have a serious impact on our ability to offer short-term consumer loans.
The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act, created the Consumer Financial Protection Bureau, or CFPB. The CFPB has regulatory, supervisory and
enforcement powers over providers of consumer financial products and services, including explicit supervisory authority to examine and require registration of payday lenders. Included in the powers afforded the CFPB is the authority to adopt rules
describing specified acts and practices as being unfair, deceptive or abusive, and hence unlawful. The CFPB has made numerous public statements that certain short-term consumer loans are a regulatory priority, and
the CFPB has already conducted public hearings and numerous examinations of payday and other short-term consumer lenders to obtain information regarding the short-term consumer loan industry.
The CFPB announced that it is in the late stages of considering the formulation of rules regarding short-term consumer loans, including
some or all of the short-term loan products we offer. We do not know the nature and extent of the rules that the CFPB will adopt, but those rules are expected to be proposed during 2015 and could become effective for calendar year 2016. If the CFPB
adopts any rules or regulations that significantly restrict the conduct of our business, such rules or regulations could have a material adverse effect on our business, prospects, results of operations, financial condition and cash flow or could
make the continuance of all or part of our U.S. business impractical or unprofitable. Any new rules or regulations adopted by the CFPB could also result in significant additional compliance costs.
The CFPB can effect changes to consumer lending practices informally through the examination process, which can have an adverse effect on our
operations. The CFPB has also brought highly-publicized enforcement actions against companies that violate federal consumer financial laws.
In addition to Dodd-Franks grant of regulatory and supervisory powers to the CFPB, Dodd-Frank gives the CFPB authority to pursue administrative proceedings or litigation for violations of federal
consumer financial laws (including the CFPBs own rules). In these proceedings, the CFPB can obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief) and
monetary penalties ranging from $5,000 per day for violations of federal consumer financial laws to $25,000 per day for reckless violations and $1.0 million per day for knowing violations. Also, where a company has violated Title X of Dodd-Frank or
CFPB regulations under Title X, Dodd-Frank empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB (but not for civil penalties). If the CFPB or a state attorney
general believes we have violated the foregoing laws or regulations, they could exercise their enforcement powers in ways that would have a material adverse effect on us. There have been two highly-publicized settled enforcement actions against
short-term consumer lending companies that have resulted in millions of dollars of fines and penalties.
The CFPB can effect
changes to short-term consumer lending practices through the examination process, and has already done so with us as a result of the CFPBs 2012 and 2014 examinations of our short-term consumer lending compliance programs. We are expending
substantial amounts of management time and cash resources to comply with the requirements of the CFPB that came out of those initial examinations, primarily with respect to monitoring compliance with federal consumer lending laws. We anticipate that
we will continue to expend substantial amounts of time and money to monitor compliance with federal consumer lending laws. There is also the risk that the CFPB could make substantive changes to short-term consumer lending businesses through the
examination process under its broad mandate to regulate consumer financial lending.
We believe that other short-term consumer
lenders are experiencing similar compliance costs and changes to lending practices as a result of CFPB examinations, and the industry faces the risk of informal regulation through the examination process, in addition to regulation through formal
CFPB rulemaking.
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The payday loan industry is highly regulated under state laws. Changes in state laws governing lending
practices could negatively affect our business revenues and earnings.
Our business is regulated under numerous state
laws and regulations, which are subject to change and which may impose significant costs or limitations on the way we conduct or expand our business. As of December 31, 2014, 33 states and the District of Columbia had legislation permitting or
not prohibiting payday loans. The remaining 17 states did not have laws specifically authorizing the payday loan business or have laws that effectively preclude us from offering the payday loan product by capping the interest fee we can earn at an
annual percentage rate of 36% or lower, which makes offering the payday product in those states unprofitable. An annual percentage rate of 36% is equivalent to a fee of approximately $1.38 per $100 borrowed. During 2014, we made payday loans
directly in 20 of these 33 states. In addition, in Texas we operate as a credit services organization, assisting our customers in Texas in obtaining loans from an unrelated third-party lender.
In the past, legislation has been adopted in some states in which we operate or operated that prohibits or severely restricts payday
loans. Additionally, laws or regulations adopted in some states require that all borrowers of certain short-term loan products be reported to a centralized database and limit the number of loans a borrower may receive or have outstanding. For
example, legislation that prohibits or severely restricts (or has the effect of restricting) payday loans has been adopted in Montana (2010 via a ballot initiative) South Carolina (2009), Washington (2009), Kentucky (2009), Ohio (2008), Virginia
(2008), New Mexico (2007), Oregon (2006) and Illinois (2005 and 2011). In the past, some states have included sunset provisions in their payday loan laws that require renewal of the laws by the state legislatures at periodic intervals. The
Arizona payday loan statutory authority expired by its terms on June 30, 2010 and the termination of this law had a significant adverse effect on our revenues and profitability for the years ended December 31, 2010 and 2011.
In recent years, in excess of 100 bills have been introduced each year in state legislatures nationwide, including bills in virtually
every state in which we are doing business, to revise the current law governing payday loans in that state. In certain instances, the bills, if adopted, would effectively prohibit payday loans in that state. In other instances, the bills, if
adopted, would amend the payday loan laws in ways that would adversely affect our revenues and earnings in that state. Any of these bills, or future proposed legislation or regulations prohibiting payday loans or making them less profitable or
unprofitable, could be passed in any of these states at any time, or existing payday loan laws could expire or be amended. Legislative changes (or failures to extend payday lending laws) have had a significant adverse effect on our business,
revenues and earnings in New Mexico, Arizona, Washington, South Carolina, Illinois, Virginia and certain other states in recent years.
Voter initiatives to limit or prohibit payday lending can result in expensive ballot campaigns and changes to state laws, both of which can
adversely affect our results of operations.
State laws can be changed by ballot initiative or referendum in certain
states. A 2010 ballot initiative in Montana precluded payday lending on profitable terms, thus effectively prohibiting payday lending in Montana. Similarly, the prospect of a ballot initiative in Oregon during 2006 led to legislation that
effectively prohibits payday lending in that state. After those measures were passed, we closed all our branches in Montana and Oregon. Ballot initiatives can also be expensive to oppose and are more susceptible to emotion than deliberations in the
normal legislative process. We have spent substantial amounts in the past related to ballot initiatives and would expect to do so in the future if another ballot initiative is proposed.
There was an effort in Missouri to place a voter initiative on the statewide ballot in November 2012 that 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. 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, which did not occur. We cannot predict the likelihood
of future efforts to place a voter initiative on the Missouri ballot or the likely success of those efforts, but any such efforts would likely cause us to spend substantial resources, including management time, opposing the initiative.
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In 2014, our Missouri branches accounted for approximately 22% and 31% of our total revenues
and gross profits, respectively. The loss of Missouri revenues and gross profit as a result of passage of a voter initiative precluding payday lending would have a material adverse effect on our results of operations and financial condition.
Changes in state regulations or interpretations of state laws and regulations governing lending practices could negatively affect our
business, revenues and earnings, and the costs of regulatory compliance are increasing.
Statutes authorizing payday
loans typically provide state agencies that regulate banks and financial institutions with significant regulatory powers to administer and enforce the law. Under statutory authority, state regulators have broad discretionary power and may impose new
licensing requirements, interpret or enforce existing regulatory requirements in different ways or issue new administrative rules, even if not contained in state statutes, that affect the way we do business and may force us to terminate or modify
our operations in particular states. They may also impose rules that are generally adverse to our industry. Furthermore, to the extent that a state determined that our lack of compliance warranted termination of our license, we would be precluded
from operating in that state and may be required to report that license termination to other states pursuant to notification requirements or upon the licensing renewal process in those other states.
States have generally increased their regulatory and compliance requirements for payday loans in recent years, and our branches are
subject to examination by state regulators in most states. We have taken or been required to take certain corrective actions as a result of self-audits or state audits of our branches and the level of regulation and compliance costs have increased
and we anticipate that they will continue to increase.
In the past, in certain states, the attorney general has scrutinized
the payday loan statutes and the interpretations of those statutes. For instance, in September 2005, the New Mexico Attorney General promulgated regulations (later withdrawn) that would have had the practical effect of limiting the fees and interest
on payday loans to 54% per annum, thus effectively prohibiting payday lending in New Mexico. Similarly, in December 2009, the Arizona Attorney General filed a lawsuit against us (since dismissed) in Arizona state court alleging that we violated
various state consumer protection statutes.
Future interpretations of state law in other jurisdictions by state attorneys
general or promulgation of regulations or new interpretations by attorneys general or similar state regulators could have an adverse impact on our ability to offer payday loans in those states and an adverse impact on our earnings.
We depend on loans and cash management services from banks to operate our business. If banks decide to stop making loans or providing cash
management services to us, it could have a material adverse effect on our business, results of operations and financial condition.
We depend on borrowings under our revolving credit facility to fund loans, capital expenditures, smaller acquisitions, cash dividends and other needs. If consumer banks decide not to lend money to
companies in our industry or to us, our ability to borrow at competitive interest rates (or at all), our ability to operate our business and our cash availability would likely be adversely affected.
Certain banks have notified us and other companies in the payday loan and check cashing industries that they will no longer maintain bank
accounts for these companies due to reputation risks and increased compliance costs of servicing money services businesses and other cash intensive industries. While none of our primary depository banks has requested that we close our bank accounts
or placed other restrictions on how we use their services, if any of our larger current or future depository banks were to take such actions, we could face higher costs of managing our cash and limitations on our ability to grow our business, both
of which could have a material adverse effect on our business, results of operations and financial condition.
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Regulators and payment processors are taking actions relating to access to banking services and the
Automated Clearing House system to disburse and collect loan proceeds and repayments, which could materially adversely affect our business.
Recent actions by the U.S. Department of Justice (the Justice Department), the Federal Deposit Insurance Corporation, (FDIC), and certain state regulators, referred to as Operation Chokepoint,
appear to be intended to discourage banks and Automated Clearing House (ACH) payment processors from providing access to the ACH system for certain short-term consumer loan providers, cutting off their access to the ACH system to either
debit or credit customer accounts (or both).
We use the ACH to process loan payments in several states. Banks process our ACH
transactions, and if these banks cease to provide ACH processing services, we would have to materially alter, or possibly discontinue, some of our products if alternative ACH processors, or other alternatives to ACH processing, are not available.
This heightened regulatory scrutiny by the Justice Department, the FDIC and other regulators has caused various banks and ACH payment processors to cease doing business with certain consumer lenders who are reportedly operating legally, without
consideration of the actual risk to the banks or processors, simply to avoid heightened federal and state regulatory scrutiny.
In addition to Operation Chokepoint concerns, NACHA has certain operating rules that govern the use of the ACH system. In November 2013,
NACHA proposed amendments to these rules. NACHAs members adopted these amendments in August 2014, and the amendments will become effective in 2015 and 2016. These amendments will, among other things (1) establish certain ACH return rate
levels, including an overall ACH return rate level of 15% of the originators debit entries, and, if a company exceeds any of the specified return rate levels, the origination practices and activities of the originator would be subject to a new
preliminary inquiry process by NACHA, (2) limit certain ACH re-initiation activities, (3) impose fees on certain unauthorized ACH returns and (4) allow for increased flexibility in how an initial NACHA rules violation investigation
can be initiated. As a result of these amendments, our access to the ACH system will be restricted (and potentially eliminated) as it relates to utilizing ACH as collateral for a loan, the costs to administer an ACH program will increase and we will
need to make changes to our business practices.
Our ability to fully utilize the ACH system will be restricted as a result of
Operation Chokepoint or the NACHA rule amendments. With restricted access to the ACH system, we may find it difficult or impossible to continue offering some products, which could have a material adverse effect on our business, prospects,
operations, financial condition and cash flows.
Litigation and regulatory actions directed toward our industry or us could adversely
affect our operating results.
Our industry has been subject to regulatory proceedings, class action lawsuits and other
litigation regarding the offering of payday loans, and we could suffer losses from interpretations of state laws in those lawsuits or regulatory proceedings, even if we are not a party to those proceedings. We presently have pending against us class
action lawsuits in California and Canada as described under Item 3, Legal Proceedings. We previously have had other class action lawsuits against us, including one in North Carolina that was pending for over 10 years. Even when we
prevail or settle on terms we consider favorable, the costs of defending class action suits are substantial. In addition, suits distract management from the operations of our business. The consequences of an adverse ruling or settlement in any of
the current cases or future litigation or proceedings could cause us to have to refund fees or interest collected on payday loans, to refund the principal amount of payday loans, to pay treble or other multiple damages, to pay monetary penalties or
to modify or terminate our operations in particular states. We may also be subject to adverse publicity arising out of current or future litigation. Defense of these pending lawsuits is time consuming and expensive, and the defense of these or
future lawsuits or proceedings, even if we are successful, could require substantial time and attention of our senior officers and other management personnel that would otherwise be spent on other aspects of our business and could require the
expenditure of significant amounts for legal fees and other related costs. Any of these events could have a material adverse effect on our business, results of operations and financial condition.
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Additionally, regulatory actions taken with respect to one financial service that we offer
could negatively affect our ability to offer other financial services. For example, if we were the subject of regulatory action related to our check cashing, title loans or other products, such regulatory action could adversely affect our ability to
maintain our licenses for payday lending. Moreover, the suspension or revocation of our license or other authorization in one state could adversely affect our ability to maintain licenses in other states. Accordingly, a violation of a law or
regulation in otherwise unrelated products or jurisdictions could affect other parts of our business and adversely affect our business and operations as a whole.
Judicial decisions, CFPB rule-making or amendments to the Federal Arbitration Act could render the arbitration agreements we use illegal or unenforceable.
We include pre-dispute arbitration provisions in our loan agreements. These provisions are designed to allow us to resolve customer
disputes through individual arbitration rather than in court. Our arbitration agreements contain certain consumer-friendly features, including terms that require in-person arbitration to take place in locations convenient for the consumer and
provide consumers the option to pursue a claim in small claims court. Our arbitration provisions, however, explicitly provide that all arbitrations will be conducted on an individual and not on a class basis. They do not generally have any impact on
regulatory enforcement proceedings.
While many courts, particularly federal courts, have concluded that the Federal
Arbitration Act requires the enforcement of arbitration agreements containing class action waivers of the type we use, in cases involving other parties, some state courts have concluded that arbitration agreements with class action waivers are
unconscionable and hence unenforceable, particularly where a small dollar amount is in controversy on an individual basis. While the U.S. Supreme Court has continued to hand down opinions validating the Federal Arbitration Act and its
purposes, state trial courts and appellate courts continue to ignore the mandates of the Supreme Court and invalidate or limit arbitration clauses in many reported consumer cases. As a result, we continue to expend substantial legal resources in
certain jurisdictions defending our arbitration provisions in lending contracts.
Congress has considered legislation that
would generally limit or prohibit mandatory pre-dispute arbitration in consumer contracts and has adopted such a prohibition with respect to certain mortgage loans and also certain consumer loans to members of the military on active duty and their
dependents. Furthermore, Dodd-Frank directs the CFPB to study consumer arbitration and report to Congress, and it authorizes the CFPB to adopt rules limiting or prohibiting consumer arbitration, consistent with the results of its study. Any such
rule would apply to arbitration agreements entered into more than six months after the final rule becomes effective (and not to prior arbitration agreements).
Any judicial decisions, legislation or other rules or regulations that impair our ability to enter into and enforce pre-dispute consumer arbitration agreements could significantly increase our exposure to
class action litigation. Such litigation could have a material adverse effect on our business, results of operations and financial condition.
The concentration of our revenues and gross profits in Missouri and other certain states could adversely affect us.
Our branches operate in 23 states. For the year ended December 31, 2014, branches located in Missouri, California and Kansas
represented approximately 42% of our total revenues and 52% of our total gross profit. Revenues from branches located in Missouri and California represented 22% and 15%, respectively, of our total revenues for the year ended December 31, 2014.
Gross profit from branches in Missouri and California represented 31% and 14%, respectively, of our total gross profit for the year ended December 31, 2014. While we believe we have a diverse geographic presence, for the near term we expect
that significant revenues and gross profit will continue to be generated by certain states, largely due to the currently prevailing economic, demographic, regulatory, competitive and other conditions in those states.
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The realization of the legislative, regulatory, ballot initiative or litigation risks
discussed above in any of these four states would have a significantly bigger impact on us than actions in other states. Any such developments in these states could have a material adverse effect on our results of operation and financial condition.
For example, amendments to the South Carolina law and Washington law became effective January 1, 2010. Prior to these
new laws in South Carolina and Washington, revenues from each state were approximately 7% and 5%, respectively, of our total revenues. In South Carolina, the maximum loan size was raised, but the new law also created a database to enforce a one loan
per customer limit. In Washington, amendments to its law created a database to enforce a one loan per customer limit and to place a usage limit on customers at eight loans per year. Similarly, the Arizona payday loan statutory authority expired by
its terms on June 30, 2010 and prior to that event, Arizona represented approximately 8% of total revenues. The changes in the payday lending laws in each of these states had a significant adverse effect on our revenues and profitability.
In March 2011, a new payday law became effective in Illinois that imposes customer usage restrictions that negatively affects
revenues and profitability. Previously, Illinois had contributed greater than 5% of our total revenues and gross profits in certain years. 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 in that state and a more significant decline in gross profit for the state, depending on the types of alternative products that competitors offered within the state.
We lack product and business diversification. Accordingly, our future revenues and earnings are more susceptible to fluctuations than a more
diversified company.
Our primary business activity is offering and servicing short-term consumer loans. We also
provide certain related services, such as credit services, open-end credit, check cashing, title loans, debit cards, money transfers, money orders and business invoice factoring, which accounted for approximately 10% of our revenues in 2014. In
2011, we entered the Canadian Internet payday lending market with our acquisition of Direct Credit. That acquisition provides geographic diversification and product distribution diversification; however it does not provide core business
diversification. As noted above, with unfavorable legislative and regulatory changes, the revenues in our payday loan business are declining, which has adversely affected our overall revenues and earnings. Our lack of product and business
diversification has and is likely to continue to inhibit the opportunities for growth of our business, revenues and profits.
Our
business in Canada exposes us to different risks, including risks associated with monitoring and complying with Canadian laws and regulations, foreign currency fluctuation risks, and tax risks, all of which could adversely affect our results of
operations.
In 2011, we completed our acquisition of a Canadian Internet payday lending company. In Canada, the
Canadian Parliament amended the federal usury law in 2007 to permit each province to assume jurisdiction over and the development of laws and regulations regarding our industry. To date, Ontario, British Columbia, Alberta, Manitoba, Saskatchewan and
Nova Scotia have passed legislation regulating short-term consumer lenders and each has, or is in the process of adopting, regulations and rates consistent with those laws. In general, these regulations require lenders to be licensed, set maximum
fees and regulate collection practices. Our Canadian subsidiaries currently offer payday loans through the Internet to residents of each of these provinces, as well as in other provinces that have not yet established laws or rules specific to payday
lending. There may be future changes to or interpretations of the Canadian federal law or the provincial laws and regulations that could have a detrimental effect on our consumer lending business in Canada. Additionally, there are increased risks to
us associated with monitoring and complying with Canadian laws, including the risk that we may overlook laws or regulations with which we are less familiar.
Additionally, while the full-year 2014 revenue of our Canadian subsidiaries was not material to our overall U.S. revenues, we expect our Canadian business to grow, which could expose us to greater risk
associated with foreign currency fluctuations and changes in foreign tax rates, both of which could adversely affect our results of
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operations. We do not presently plan to hedge our exposure to the Canadian dollar. Furthermore, our financial results may be negatively affected to the extent tax rates in Canada increase or
exceed those in the United States or as a result of the imposition of withholding requirements on foreign earnings.
Finally,
our Canadian operations have contributed to increased costs, including increased accounting, legal and tax reporting costs, plus increased corporate management time. Because international operations increase the complexity of an organization, we
anticipate we will continue to face additional administrative costs in managing our business, including particularly technology-related costs, than we would if we only conducted operations domestically. In addition, most countries typically impose
additional burdens on non-domestic companies through the use of local regulations, tariffs and labor controls. Unexpected changes to the foregoing could negatively affect our results of operations.
Our inability to introduce or manage new products efficiently and profitably could have a material adverse effect on our business, results of
operations and financial condition.
We continue to explore potential new products and businesses to serve our
customers and to diversify our business. For example, in response to changes in state laws or regulations, we have introduced new consumer lending products, such as installment loans in a number of jurisdictions. There have been increased losses
associated with the introduction of new consumer loan products in each jurisdiction as we have learned how to adapt our processes to the market demands and challenges of that product. We anticipate the introduction of new products and services in
the future will continue to present significant risk management challenges, including the likelihood of significantly higher loan losses than we have historically experienced for payday or title loans.
In 2012, we introduced new installment loan products (signature loans and auto equity loans) to meet high customer demand for longer-term
loan options. In December 2013 we began piloting Internet lending in a limited number (currently two) states. We have experienced significantly higher loan losses with each of these initiatives and a significantly higher number of apparently
fraudulent Internet loan applications and loans during this initial rollout of Internet lending. We anticipate that we will continue to encounter new risks associated with the rollout of Internet lending in the United States. While in the past loan
losses for new products have generally declined over time as we have adjusted to those new products, there is the risk that loan losses will not decline in the future for Internet lending or other new products.
We also intend to introduce additional services and products in the future in order to diversify our business. In order to offer new
products and to enter into new businesses, we normally will need to comply with additional regulatory and licensing requirements. Each of these new products and businesses is subject to risk and uncertainty and requires significant investment of
time and capital, including additional marketing expenses, legal costs, acquisition costs and other incremental start-up costs. Due to our lack of experience in offering certain new products and businesses, we may not be successful in identifying or
introducing any new product or business in a timely or profitable manner. Additionally, loan losses for new products may be higher than we initially expected. Furthermore, we cannot predict the demand for any new product or service. Our failure to
introduce a new product or service efficiently and profitably or low customer demand for any of these new products or services, could have a material adverse effect on our business, results of operations and financial condition.
General economic conditions affect our revenues, loan losses and profitability.
While it is difficult to gauge the impact the 2008-2009 economic recession had on our business in those years and following, we believe it
had a substantial impact on our revenues and loan losses and thus our overall profitability. We believe our customers are more sophisticated than portrayed in the media by certain consumer groups and that our customers restrict borrowings in
circumstances when risk of non-repayment is increased.
We believe our customers are particularly vulnerable to periods of
high unemployment and economic malaise, and that they continue to suffer from limited employment opportunities, stagnant wages, and less than
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full-time employment, when employed. Similarly, we believe that increases in basic living expenses, such as gasoline, food and utilities, over a sustained period have, in the past and are
continuing to have, an adverse impact on our customers ability to repay loans, and thus on our loan losses. We have experienced fluctuations in our loan losses and revenues in the past that appear to correspond to broader economic events and
trends and anticipate that we are and will continue to be similarly adversely affected by unfavorable economic events and trends in the future.
Disruptions in the credit markets from the national credit crisis negatively affected the availability and cost of commercial credit, which
adversely affected our borrowing ability and costs.
We believe that disruptions in the capital and credit markets in
2008 and 2009 adversely affected the availability and cost of commercial credit for our business. In addition, uncertainty as to the economic recovery and changing and increased regulation coming out of the recession, including the Dodd-Frank Act,
have been additional disruptions to the capital and credit markets for our industry. We believe that these factors directly and adversely affected the terms of our credit agreement between 2008 and 2014. We believe that future disruptions to the
national credit markets could adversely affect our ability to refinance our revolving credit facility or to obtain additional loans to finance our business operations or acquisitions.
Our financial performance and negative perception of the regulatory landscape by lenders has resulted in less favorable borrowing terms and may adversely affect our ability to extend our revolving
credit facility or to obtain additional loans to finance our business operations or acquisition opportunities.
We have
generally experienced declining financial results in recent years, which have resulted in our failure to meet various financial covenants in our prior credit agreement. While our bank lending group waived or amended those financial covenants in the
past, each waiver or amendment resulted in less availability under our revolving credit agreement, stricter repayment requirements on our term loans and generally higher loan costs and tighter loan covenants (including restrictions on payment of
dividends). We also believe that banks and other commercial lenders are affected by negative perceptions regarding the regulatory landscape for the short-term consumer loan industry, including uncertainty regarding the timing, and ultimate business
impact, of the pending short-term lending rules to be issued by the CFPB.
While we negotiated a new revolving credit facility
in July 2014, the terms were generally more restrictive than prior credit agreements. Our current revolving credit facility matures on July 23, 2016. At maturity, we may not be able to extend our current credit facility at all or on terms that
are attractive to us. The reduced availability under our current revolving credit facility, or the inability to refinance our current credit facility, could require us to take measures to conserve cash until alternative credit arrangements or other
funding for our business needs can be arranged. Such measures could include deferring capital expenditures, including acquisitions, restricting growth of the long-term installment loan product, reducing operating expenses, terminating any cash
dividends, pursuing the sale of certain assets or considering other alternatives designed to enhance liquidity.
Our revolving credit
facility contains restrictions and limitations that could significantly affect our ability to operate our business.
Our revolving credit facility contains a number of significant covenants that could adversely affect our business. These covenants
restrict our ability, and the ability of our subsidiaries to, among other things:
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effect mergers or consolidations; |
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make investments, acquisitions or dispositions; |
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enter into certain sale and leaseback transactions. |
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As a result, our ability to respond to changing business and economic conditions and to
secure additional financing, if needed, may be significantly restricted, and we may be prevented from engaging in transactions that might further our corporate strategies. Our obligations under the credit facility are guaranteed by each of our
existing and future domestic subsidiaries. The borrowings under the revolving credit facility are guaranteed by all of our operating subsidiaries (other than the foreign subsidiaries) and are secured by liens on substantially all of our personal
property including the personal property of our U.S. subsidiaries. In the event of our insolvency, liquidation, dissolution or reorganization, the lenders under our credit facility and any other then existing debt of ours would be entitled to
payment in full from our assets before distributions, if any, were made to our stockholders.
The breach of any covenant or
obligation in our credit facility will result in a default. If there is an event of default under our credit facility, the lenders could cause all amounts outstanding thereunder to be due and payable. If we are unable to repay, refinance or
restructure our indebtedness under our credit facility when it comes due, at maturity or upon acceleration, the lenders could proceed against the collateral securing that indebtedness.
Media reports and public perception of payday loans as being predatory or abusive could adversely affect our business.
Consumer advocacy groups and certain media reports advocate governmental action to prohibit or severely restrict payday loans. The
consumer groups and media reports typically focus on the cost to a consumer for this type of loan, which is higher than the interest typically charged by credit card issuers. This difference in credit cost is more significant if a consumer does not
promptly repay the loan, but renews, or rolls over, that loan for one or more additional short-term periods. The consumer groups and media reports typically characterize these payday loans as predatory or abusive toward consumers. If this negative
characterization of our payday loans becomes widely accepted by consumers, demand for our payday loans could significantly decrease, which could adversely affect our results of operations and financial condition. Negative perception of our payday
loans or other activities could also result in our industry being subject to more restrictive laws and regulations and greater exposure to litigation.
If estimates of our loan losses are not adequate to absorb actual losses, our financial condition and results of operations may be adversely affected.
We maintain an allowance for loan losses at levels to cover the estimated incurred losses in the collection of our loan portfolio
outstanding at the end of each applicable period. Our methodology for estimating the allowance for payday loan loses 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. We also maintain allowances for loan losses with respect to our installment loans, which are computed using separate
methodologies based on historical data, as well as industry and economic factors. Our allowance for loan losses was $8.9 million on December 31, 2014. Our allowance for loan losses is an estimate, and if actual loan losses are materially
greater than our allowance for losses, our financial condition and results of operations could be adversely affected.
The payday loan
industry is subject to various local rules and regulations. Changes in these local regulations could have a material adverse effect on our business, results of operations and financial condition.
In addition to state and federal laws and regulations, our business is subject to various local rules and regulations such as local zoning
regulations and permit licensing. Any actions taken in the future by local zoning boards or other governing bodies to require special use permits for, or impose other restrictions on, payday lenders could impact our growth strategy and have a
material adverse effect on our business, results of operations and financial condition. For example, several cities in Texas have passed local ordinances governing certain loan provisions including refinancing and extensions.
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Any disruption in the availability of our information systems could adversely affect operations at our
branches.
We rely upon our information systems to manage and operate our branches and business. Each branch is part of
an information network that permits us to maintain adequate cash inventory, reconcile cash balances daily, report revenues and loan losses timely and, in Texas, to access the third-party lenders loan approval system. Our security measures
could fail to prevent a disruption in the availability of our information systems and/or our back-up systems could fail to operate properly. Any disruption in the availability of our information systems could adversely affect our operations and our
results of operations.
Our headquarters is currently located at a single location in Overland Park, Kansas. Our information
systems and administrative and management processes are primarily provided to our regions and branches from this location, which could be disrupted if a catastrophic event, such as a tornado, power outage or act of terror, destroyed or severely
damaged the headquarters. While we maintain redundant facilities in Texas with a third-party vendor, any catastrophic event could nonetheless adversely affect our operations and our results of operations.
Improper disclosure of personal data could result in liability and harm our reputation.
We store and process large amounts of personally identifiable information, that consists primarily of customer information. There have
been widespread reports recently of hackers penetrating the firewalls of major financial institutions and retail companies for the apparent purpose of obtaining personally identifiable information and to disrupt the technologies and operations of
those global companies. While we may not be as visible of a target to foreign or domestic hackers, our resources available to protect our systems and our customer information are substantially less than the resources of the national and global
companies that are reporting they have been hacked. It is possible that our security controls over personal data, our training of employees, and other practices we follow may not prevent the improper disclosure of personally identifiable
information. Such disclosure could harm our reputation and subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue.
Our regulatory compliance programs and other enterprise risk management efforts cannot eliminate all systemic risk.
We have devoted significant time and energy to develop our enterprise risk management program, including substantially expanded regulatory compliance policies and procedures. We expect to continue to do
so in the future. The goal of enterprise risk management is not to eliminate all risk, but rather to identify, assess and rank risk. The goal of regulatory compliance policies is to have formal written procedures in place that are intended to reduce
the risk of inadvertent regulatory violations. Nonetheless, our efforts to identify, monitor and manage risks may not be fully effective. Many of our methods of managing risk and exposures depend upon the implementation of federal and state
regulations and other policies or procedures affecting our customers or employees. Management of operational, legal and regulatory risks requires, among other things, policies and procedures, and these policies and procedures may not be fully
effective in managing these risks.
While many of the risks that we monitor and manage are described in this Risk Factors
section of this report, our business operations could also be affected by additional factors that are not presently described in this section or known to us or that we currently consider immaterial to our operations.
Our quarterly results have fluctuated in the past and may fluctuate in the future. If they fluctuate in the future, the market price of our common
stock could also fluctuate significantly.
Our quarterly results have fluctuated in the past and are likely to continue
to fluctuate in the future. If they do so, our quarterly revenues and operating results may be difficult to forecast. It is possible that our future quarterly results of operations will not meet the expectations of securities analysts or investors.
This could cause a material drop in the market price of our common stock.
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Our business will continue to be affected by a number of factors, including the various risk
factors set forth in this section, any one of which could substantially affect our results of operations for a particular fiscal quarter. Our quarterly results of operations can vary due to:
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fluctuations in payday and installment loan demand; |
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fluctuations in our loan loss experience; |
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regulatory and legislative activity restricting our business; |
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perceptions regarding possible future regulatory or legislative changes to our business; |
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the initiation, management and/or resolution of significant legal actions; and |
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changes in broad economic factors, such as energy prices, average hourly wage rates, inflation or bankruptcy. |
The market price of our common stock may be volatile even if our quarterly results do not fluctuate significantly.
Even if we report stable or increased earnings, the market price of our common stock may be volatile. There are a number of factors,
beyond earnings fluctuations, that can affect the market price of our common stock, including the following:
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the introduction, passage or adoption of state or federal legislation or regulation that could adversely affect our business;
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the announcement of court decisions adverse to us or our industry; |
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a decrease in market demand for our stock; |
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downward revisions in securities analysts estimates of our future earnings; |
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announcements of new products or services developed or offered by us; |
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the degree of customer acceptance of new products or services offered by us; and |
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general market conditions and other economic factors. |
The market price of our common stock has been volatile in the past and is likely to be volatile in the future.
When our common stock is a penny stock, you may have difficulty selling our common stock in the secondary trading market.
The SEC has adopted regulations that generally define a penny stock to be any equity security that has a market price of less
than $5.00 per share or with an exercise price of less than $5.00 per share. Additionally, if the equity security is not registered or authorized on a national securities exchange or NASDAQ, the equity security also would constitute a penny
stock. These regulations require the delivery, prior to certain transactions involving a penny stock, of a risk disclosure schedule explaining the penny stock market and the risks associated with it. Disclosure is also required in certain
circumstances regarding compensation payable to both the broker-dealer and the registered representative and current quotations for the securities. In addition, monthly statements are required to be sent disclosing recent price information for the
penny stocks. Since December 2008, our common stock has frequently traded below $5.00 per share and has, from time to time, fallen within the definition of penny stock. Any time that our common stock is classified as a penny stock for
purposes of these regulations, the ability of broker-dealers to sell our common stock and the ability of stockholders to sell our common stock in the secondary market will be limited. As a result, the market liquidity for our common stock may be
adversely affected by the application of these penny stock rules.
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Competition in the retail financial services industry is intense and could cause us to lose market
share and revenues.
We believe that the primary competitive factors in the payday and installment loan industry are
branch location, mix of products and services, customer service and availability to transact through online or mobile applications. In addition to storefront payday loan locations, we also currently compete with services, such as overdraft
protection offered by traditional financial institutions, payday loan-type products offered by some banks and credit unions, and other financial service entities and retail businesses that offer payday loans or other similar financial services, as
well as a growing Internet-based payday loan segment. Some of our competitors have larger and more established customer bases and substantially greater financial, marketing and other resources than we have. As a result of competition from our direct
competitors and competing products and services, we could lose market share and our revenues could decline, thereby affecting our earnings and potential for growth.
If we lose key managers or are unable to attract and retain the talent required for our business, our operating results could suffer.
Our future success depends to a significant degree upon the members of our senior management, particularly Darrin J. Andersen, our
President and Chief Executive Officer. We believe that the loss of the services of Mr. Andersen or any of our other senior officers could adversely affect our business. Our efforts to expand into other businesses and product lines also depend
upon our ability to attract and retain additional skilled management personnel for those businesses or product lines. We do not have employment agreements with any of our executive officers. To the extent that we are unable to attract and retain the
talent required for our business, our operating results could suffer.
Regular turnover among our branch managers and branch-level
employees makes it more difficult for us to operate our branches and increases our costs of operation.
We experience
high turnover among our branch managers and our branch-level employees. In 2014, we sustained approximately 23% turnover among our branch managers and approximately 65% turnover among our branch-level employees. Turnover interferes with
implementation of branch operating strategies. High turnover in the future would perpetuate these operating pressures and increase our operating costs.
Additionally, high turnover creates challenges for us in maintaining high levels of employee awareness of and compliance with our internal procedures and external regulatory compliance requirements.
Our executive officers, directors and principal stockholders may be able to exert significant control over our strategic direction.
Our directors and executive officers own or have the power to vote approximately 56% of our outstanding common stock
as of December 31, 2014. Don Early, our Chairman of the Board, and Mary Lou Early, our Vice Chairman of the Board, owned approximately 48.3% directly and 1.4% indirectly of our outstanding common stock as of December 31, 2014. The election
of each director requires a plurality of the shares voting for directors at a meeting of stockholders at which a quorum is present. Approval of a significant corporate transaction, such as a merger or consolidation of the company, a sale of all or
substantially all of its assets or a dissolution of the company, requires the affirmative vote of a majority of the outstanding shares of our common stock. Other actions requiring stockholder approval require the affirmative vote of a majority of
the shares of common stock voting on the matter, provided that a quorum is present. A quorum requires the presence of a majority of the shares outstanding. As a result, one or more stockholders owning a relatively low percentage of the outstanding
shares of our common stock could, acting together with Mr. and Mrs. Early, control all matters requiring our stockholders approval, including the election of directors and approval of significant corporate transactions. As a result,
this concentration of ownership may delay, prevent or deter a change in control or change in board composition, could deprive our stockholders of an opportunity to receive a premium for their common stock as part of a sale of the company or its
assets and might reduce the market price of our common stock.
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Future sales of shares of our common stock in the public market could depress our stock price.
As of December 31, 2014, our officers and directors held approximately 9.7 million shares of common stock, a
substantial majority of which are restricted securities under the Securities Act and are eligible for future sale in the public market at prescribed times pursuant to Rule 144 under the Securities Act, or otherwise. In addition,
Mr. Early, who directly owns approximately 44.3% of our outstanding shares, has demand registration rights, which permit him to require the company to register all or any part of those shares for resale by Mr. Early. Sales of a significant
number of these shares of common stock in the public market could reduce the market price of our common stock. The daily trading volume in our stock, since our initial public offering in July 2004, has been low, and is frequently under 10,000 shares
traded in a day. Accordingly, the sale of even a relatively small number of shares by our officers or directors could reduce the market price of our common stock.
In addition, Mr. Earlys heirs or his estate may be required to sell a significant portion of that stock upon his death. We do not maintain key man life insurance on the life of Mr. Early.
If a substantial block of our common stock were sold by Mr. Earlys heirs or estate, it would likely significantly reduce the market price of our common stock.
Our anti-takeover provisions could prevent or delay a change in control of our company even if the change of control would be beneficial to our stockholders.
Provisions of our articles of incorporation and bylaws as well as provisions of Kansas law could discourage, delay or prevent a merger,
acquisition or other change in control of our company, even if the change in control would be beneficial to our stockholders. These provisions include:
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authorizing the issuance of blank check preferred stock that could be issued by our board of directors without a stockholder vote to
increase the number of outstanding shares and thwart a takeover attempt; |
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limitations on the ability of stockholders to call special meetings of stockholders; and |
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establishing advance notice requirements for nominations for election to the board of directors or for proposing matters that can be acted upon by
stockholders at stockholder meetings. |
We can redeem common stock from a stockholder who is or becomes a disqualified
person.
Federal and state laws and regulations applicable to providers of payday loans may now, or in the future,
restrict direct or indirect ownership or control of providers of payday loan services by disqualified persons (such as convicted felons). Our articles of incorporation provide that we may redeem shares of our common stock to the extent deemed
necessary or advisable, in the judgment of our board of directors, to prevent the loss, or to secure the reinstatement or renewal, of any license or permit from any governmental agency that is conditioned upon some or all of the holders of our
common stock possessing prescribed qualifications or not possessing prescribed disqualifications. The redemption price will be the average of the daily closing sale prices per share of our common stock for the 30 consecutive trading days immediately
prior to the redemption date fixed by our board of directors. At the discretion of our board of directors, the redemption price may be paid in cash, debt or equity securities or a combination of cash and debt or equity securities.
ITEM 1B. |
Unresolved Staff Comments |
None.
In February
2005, we entered into a seven-year lease for new corporate headquarters in Overland Park, Kansas, where we lease approximately 39,000 square feet. In January 2011, we amended this lease agreement to extend the lease term and modify the lease
payments. The lease was extended through October 31, 2017 and includes a renewal option for an additional five years. In the opinion of management, the corporate office space
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leased is adequate for existing and foreseeable future operating needs. As of December 31, 2014, we lease all of our branch locations. Our average branch size is approximately 1,600 square
feet with average rent of approximately $2,100 per month. Leases are generally executed with a minimum initial term of between three to five years with multiple renewal options. We complete all necessary leasehold improvements and required
maintenance.
In third quarter 2014, we committed to a plan to sell our company-owned properties. These properties included
(i) a building located in Kansas City, Kansas which is presently leased to an unrelated tenant, (ii) three branch buildings located in St. Louis, Missouri, Grandview, Missouri and Jackson, Mississippi and (iii) an auto sales facility
in Overland Park, Kansas which includes three buildings and parking spaces on approximately 1.6 acres of land.
In fourth
quarter 2014, we completed the sale-leaseback of the three branch buildings. Pursuant to the agreements, we sold the three properties for an aggregate purchase price of $1.1 million, net of fees, and leased each building back over an initial lease
term of 10 years. The net book value of the properties sold was approximately $1.0 million and we recorded a gain of approximately $32,000. Under the terms of the lease agreements, we are classifying the leases as operating leases.
As of December 31, 2014, the building located in Kansas City, Kansas and the auto sales facility located in Overland Park, Kansas
are classified as assets held for sale in our Consolidated Balance Sheets. The auto sales facility was sold in February 2015 for approximately $1.2 million. The building located in Kansas City, Kansas is currently listed for sale with a commercial
broker and we anticipate that this property will be sold within the next 12 months.
ITEM 3. |
Legal Proceedings |
Canada. On September 30, 2011, we 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 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.
The parties have
executed a written settlement of this matter, subject to an audit verification of proposed settlement amounts and receipt of required court approval of the settlement terms. Our share of the settlement amount and ancillary expenses, net of
indemnification from the prior owners of Direct Credit, is $500,000 (Canadian). In June 2014, our share of the settlement and the indemnification amount due from the prior owners of Direct Credit, were funded into a settlement trust held by an
independent third party trustee. It is expected that the settlement will be finalized by the end of first quarter 2015, with execution of its requirements to continue throughout the remainder of 2015.
California. On August 13, 2012, we were 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 we 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 class.
On September 5, 2014, the district court granted Plaintiffs Motion for Class Certification. The certified class consists of
persons and/or entities who were never our customers, but whose 10-digit California area code cell phone numbers were listed by our customers in the Employment and/or Contacts fields of their loan applications, and who we
allegedly called using an Automatic Telephone Dialing System for the purpose of
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collecting or attempting to collect an alleged debt from the account holder, between August 13, 2008 and August 13, 2012. We have asked the court to reconsider its ruling, and we expect
a decision on this motion by the end of first quarter 2015.
While that reconsideration is pending, the case has moved to the
discovery phase with a trial tentatively scheduled for early 2016.
Other Matters. We are also currently involved in
ordinary, routine litigation and administrative proceedings incidental to our business, including customer bankruptcies and employment-related matters from time to time. We believe the likely outcome of any other pending cases and proceedings will
not be material to our business or our financial condition.
ITEM 4. |
Mine Safety Disclosures |
Not applicable.
32
PART II
ITEM 5. |
Market for Registrants Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |
Market Information
We
completed the public offering of our common stock on July 21, 2004 at an initial offering price of $14.00 per share. Our common stock is traded on the NASDAQ Global Market under the ticker symbol QCCO. The following table sets forth
the high and low closing prices for each of the completed quarters since January 1, 2013:
|
|
|
|
|
|
|
|
|
2014 |
|
High |
|
|
Low |
|
First quarter |
|
$ |
2.82 |
|
|
$ |
1.71 |
|
Second quarter |
|
|
2.73 |
|
|
|
2.03 |
|
Third quarter |
|
|
2.72 |
|
|
|
1.80 |
|
Fourth quarter |
|
|
2.13 |
|
|
|
1.57 |
|
|
|
|
|
|
|
|
|
|
2013 |
|
High |
|
|
Low |
|
First quarter |
|
$ |
3.56 |
|
|
$ |
3.17 |
|
Second quarter |
|
|
3.27 |
|
|
|
2.79 |
|
Third quarter |
|
|
2.83 |
|
|
|
2.25 |
|
Fourth quarter |
|
|
2.49 |
|
|
|
1.62 |
|
The year-end closing prices of our common stock for 2014 and 2013 were $1.64 and $1.79, respectively.
Holders
As
of March 5, 2015 there were approximately 102 holders of record and approximately 1,300 beneficial owners of our common stock.
Dividends
In November
2008, our board of directors established a regular quarterly dividend of $0.05 per share of our common stock. In addition to regular quarterly dividends, our board of directors has also approved special cash dividends on our common stock from time
to time. For the years ended December 31, 2013 and 2014, we paid cash dividends to our stockholders totaling $2.7 million and $881,000, respectively.
From November 12, 2013 (the date on which we entered into an amendment to our prior credit agreement) until July 23, 2014 (the date on which we entered into our Current Credit Agreement), we
were precluded from paying dividends, resulting in the suspension of the regular quarterly dividend. Our Current Credit Agreement does not directly restrict the payment of dividends other than through compliance with various financial covenants.
The declaration of dividends is subject to the discretion of our board of directors. The future determination as to the
payment of cash dividends will depend on our operating results, financial condition, cash and capital requirements and other factors as the board of directors deems relevant.
33
The following table summarizes our cash dividends paid during 2013 and 2014.
|
|
|
|
|
Payment Date |
|
Amount of Cash per Share |
|
2014: |
|
|
|
|
December 15, 2014 |
|
$ |
0.05 |
|
|
|
|
|
|
Total dividend per share of common stock |
|
$ |
0.05 |
|
|
|
|
|
|
|
|
2013: |
|
|
|
|
March 14, 2013 |
|
$ |
0.05 |
|
June 4, 2013 |
|
|
0.05 |
|
September 5, 2013 |
|
|
0.05 |
|
|
|
|
|
|
Total dividend per share of common stock |
|
$ |
0.15 |
|
|
|
|
|
|
Securities Authorized For Issuance Under Equity Compensation Plans
As of December 31, 2014, equity compensation plans approved by security holders include our 1999 Stock Option Plan and our 2004
Equity Incentive Plan.
In June 2009, at our annual meeting of stockholders, our stockholders approved an amendment to the
2004 Equity Incentive Plan to increase the number of shares of common stock available for issuance under such plan from three million shares to five million shares. The following table sets forth certain information about our securities authorized
for issuance under our equity compensation plans as of December 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
Plan Category |
|
Number of securities to be issued upon exercise of outstanding options, warrants and
rights |
|
|
Weighted average exercise price of outstanding options, warrants and
rights |
|
|
Number of securities remaining available for future issuance under
equity compensation plans (a) |
|
|
|
|
|
Equity compensation plans approved by security holders |
|
|
1,603,171 |
|
|
$ |
8.16 |
|
|
|
179,311 |
|
|
|
|
|
Equity compensation plans not approved by security holders |
|
|
N/A |
|
|
|
N/A |
|
|
|
N/A |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
1,603,171 |
|
|
$ |
8.16 |
|
|
|
179,311 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Excludes securities to be issued upon exercise of outstanding options. |
Securities remaining available for future issuance under equity compensation plans approved by security holders consist solely of shares available under the 2004 Equity Incentive Plan. Securities
remaining available for future issuance under our 2004 Equity Incentive Plan may be issued, in any combination, as incentive stock options, non-qualified stock options, stock appreciation rights, performance share awards, restricted stock or other
incentive awards of, or based on, our common stock.
We do not have any equity compensation plans other than the plans
approved by our security stockholders.
34
Recent Sales of Unregistered Securities
Since July 21, 2004, the date of our initial public offering, we have not made any unregistered sales of securities.
Stock Repurchases
The
board of directors has authorized us to repurchase our common stock in the open market or private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in our stock-based compensation programs.
Pursuant to our credit agreement, the maximum amount of our common stock we may repurchase is $60 million.
On May 21,
2013, our board of directors extended our common stock repurchase program through June 30, 2015. The board of directors has previously authorized us to repurchase up to $60 million of our common stock in the open market and through private
purchases. During 2014, we repurchased 196,500 shares for approximately $351,000. As of December 31, 2014, we have repurchased a total of 6.0 million shares at a total cost of approximately $56.5 million, which leaves approximately $3.5
million that may yet be purchased under the current program.
The following table sets forth certain information about the
shares of common stock we repurchased during the fourth quarter of 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Period |
|
Total Number of Shares Purchased |
|
|
Average Price Paid Per Share |
|
|
Total Number of Shares Purchased as Part of
Publicly Announced Program |
|
|
Maximum Approximate Dollar Value of Shares that May Yet
Be Purchased Under the Program |
|
October 1 October 31 |
|
|
|
|
|
$ |
|
|
|
|
|
|
|
$ |
3,855,855 |
|
November 1 November 30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
3,855,855 |
|
December 1 December 31 |
|
|
196,500 |
|
|
$ |
1.78 |
|
|
|
196,500 |
|
|
|
3,505,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
196,500 |
|
|
$ |
1.78 |
|
|
|
196,500 |
|
|
$ |
3,505,140 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
35
Performance Graph
The following Performance Graph and related information shall not be deemed soliciting material or to be filed with the Securities and Exchange Commission, nor shall such
information be incorporated by reference into any future filing under the Securities Act of 1933 or Securities Exchange Act of 1934, each as amended, except to the extent that we specifically incorporate it by reference into such filing.
The following table compares total stockholder returns on our common stock from December 31, 2009 through
December 31, 2014 to the NASDAQ U.S. Index and our peer group assuming a $100 investment made on December 31, 2009 and assumes that all dividends are reinvested. The stock performance shown on the graph below is not necessarily indicative
of future price performance. Our peer group consists of Cash America International, Inc., Dollar Financial Corp., EZCORP, Inc., First Cash Financial Services, Inc., Regional Management Corp. and World Acceptance Corporation.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Company Name / Index |
|
12/31/09 |
|
|
12/31/10 |
|
|
12/31/11 |
|
|
12/31/12 |
|
|
12/31/13 |
|
|
12/31/14 |
|
QC Holdings, Inc. |
|
$ |
100.00 |
|
|
$ |
84.10 |
|
|
$ |
95.08 |
|
|
$ |
80.90 |
|
|
$ |
47.03 |
|
|
$ |
44.29 |
|
Nasdaq Index |
|
|
100.00 |
|
|
|
118.02 |
|
|
|
117.04 |
|
|
|
137.47 |
|
|
|
192.62 |
|
|
|
221.02 |
|
Peer Group |
|
|
100.00 |
|
|
|
132.40 |
|
|
|
150.67 |
|
|
|
149.73 |
|
|
|
149.82 |
|
|
|
142.62 |
|
36
ITEM 6. |
Selected Financial Data |
The following table sets forth our selected consolidated financial data at the dates and for the periods indicated. Selected financial
data should be read in conjunction with, and is qualified in its entirety by, Managements Discussion and Analysis of Financial Condition and Results of Operations and our Consolidated Financial Statements and the Notes thereto
appearing elsewhere in this report.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
|
(in thousands) |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday loan fees |
|
$ |
118,046 |
|
|
$ |
115,216 |
|
|
$ |
116,809 |
|
|
$ |
110,239 |
|
|
$ |
99,379 |
|
Installment interest and fees |
|
|
15,969 |
|
|
|
15,791 |
|
|
|
19,678 |
|
|
|
31,655 |
|
|
|
38,488 |
|
Other |
|
|
16,482 |
|
|
|
17,584 |
|
|
|
15,529 |
|
|
|
14,238 |
|
|
|
15,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
150,497 |
|
|
|
148,591 |
|
|
|
152,016 |
|
|
|
156,132 |
|
|
|
153,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
32,614 |
|
|
|
32,147 |
|
|
|
34,305 |
|
|
|
34,255 |
|
|
|
33,199 |
|
Provision for losses |
|
|
29,373 |
|
|
|
28,452 |
|
|
|
33,517 |
|
|
|
46,676 |
|
|
|
44,887 |
|
Occupancy |
|
|
16,073 |
|
|
|
16,875 |
|
|
|
17,364 |
|
|
|
17,456 |
|
|
|
17,844 |
|
Depreciation and amortization |
|
|
2,646 |
|
|
|
2,227 |
|
|
|
2,046 |
|
|
|
1,992 |
|
|
|
1,802 |
|
Other |
|
|
9,397 |
|
|
|
9,306 |
|
|
|
11,463 |
|
|
|
12,489 |
|
|
|
14,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
90,103 |
|
|
|
89,007 |
|
|
|
98,695 |
|
|
|
112,868 |
|
|
|
112,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
60,394 |
|
|
|
59,584 |
|
|
|
53,321 |
|
|
|
43,264 |
|
|
|
40,512 |
|
Regional expenses |
|
|
12,870 |
|
|
|
12,150 |
|
|
|
11,997 |
|
|
|
9,433 |
|
|
|
8,564 |
|
Corporate expenses |
|
|
21,413 |
|
|
|
24,147 |
|
|
|
20,805 |
|
|
|
19,178 |
|
|
|
18,299 |
|
Depreciation and amortization |
|
|
2,560 |
|
|
|
2,101 |
|
|
|
1,878 |
|
|
|
1,798 |
|
|
|
1,680 |
|
Interest expense |
|
|
2,024 |
|
|
|
1,883 |
|
|
|
2,742 |
|
|
|
1,418 |
|
|
|
1,369 |
|
Impairment of goodwill and intangibles |
|
|
|
|
|
|
|
|
|
|
2,330 |
|
|
|
22,055 |
|
|
|
|
|
Other expense (income), net |
|
|
77 |
|
|
|
479 |
|
|
|
(1,386 |
) |
|
|
819 |
|
|
|
2,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes |
|
|
21,450 |
|
|
|
18,824 |
|
|
|
14,955 |
|
|
|
(11,437 |
) |
|
|
8,430 |
|
Provision (benefit) for income taxes |
|
|
8,122 |
|
|
|
7,077 |
|
|
|
6,078 |
|
|
|
(1,762 |
) |
|
|
3,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
13,328 |
|
|
|
11,747 |
|
|
|
8,877 |
|
|
|
(9,675 |
) |
|
|
5,079 |
|
Gain (loss) from discontinued operations, net of income tax |
|
|
(1,385 |
) |
|
|
(1,579 |
) |
|
|
(3,504 |
) |
|
|
(4,318 |
) |
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
11,943 |
|
|
$ |
10,168 |
|
|
$ |
5,373 |
|
|
$ |
(13,993 |
) |
|
$ |
5,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
37
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.74 |
|
|
$ |
0.66 |
|
|
$ |
0.50 |
|
|
$ |
(0.55 |
) |
|
$ |
0.29 |
|
Discontinued operations |
|
|
(0.08 |
) |
|
|
(0.09 |
) |
|
|
(0.20 |
) |
|
|
(0.24 |
) |
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.66 |
|
|
$ |
0.57 |
|
|
$ |
0.30 |
|
|
$ |
(0.79 |
) |
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.74 |
|
|
$ |
0.66 |
|
|
$ |
0.50 |
|
|
$ |
(0.55 |
) |
|
$ |
0.29 |
|
Discontinued operations |
|
|
(0.08 |
) |
|
|
(0.09 |
) |
|
|
(0.20 |
) |
|
|
(0.24 |
) |
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.66 |
|
|
$ |
0.57 |
|
|
$ |
0.30 |
|
|
$ |
(0.79 |
) |
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
17,258,899 |
|
|
|
17,027,080 |
|
|
|
17,169,398 |
|
|
|
17,369,840 |
|
|
|
17,483,515 |
|
Diluted |
|
|
17,341,092 |
|
|
|
17,109,840 |
|
|
|
17,226,067 |
|
|
|
17,369,840 |
|
|
|
17,511,617 |
|
Cash dividends declared per share |
|
$ |
0.30 |
|
|
$ |
0.20 |
|
|
$ |
0.20 |
|
|
$ |
0.15 |
|
|
$ |
0.05 |
|
|
|
|
|
Year Ended December 31, |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Operating Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branches (at end of period) |
|
|
523 |
|
|
|
482 |
|
|
|
466 |
|
|
|
432 |
|
|
|
409 |
|
|
|
|
|
|
|
Payday loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan volume (in thousands) |
|
$ |
805,234 |
|
|
$ |
780,857 |
|
|
$ |
789,896 |
|
|
$ |
743,865 |
|
|
$ |
671,532 |
|
Average loan (principal plus fee) |
|
|
370.68 |
|
|
|
372.80 |
|
|
|
379.26 |
|
|
|
385.02 |
|
|
|
385.42 |
|
Average fee |
|
|
56.34 |
|
|
|
56.16 |
|
|
|
57.71 |
|
|
|
59.30 |
|
|
|
59.07 |
|
|
|
|
|
|
|
Brach-Based installment loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan volume (in thousands) |
|
$ |
22,766 |
|
|
$ |
19,635 |
|
|
$ |
24,571 |
|
|
$ |
28,416 |
|
|
$ |
34,758 |
|
Average loan (principal) |
|
|
489 |
|
|
|
514 |
|
|
|
537 |
|
|
|
593 |
|
|
|
604 |
|
Average term (months) |
|
|
6 |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
|
|
Signature installment loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan volume (in thousands) |
|
|
|
|
|
|
|
|
|
$ |
4,605 |
|
|
$ |
14,034 |
|
|
$ |
15,617 |
|
Average loan (principal) |
|
|
|
|
|
|
|
|
|
|
1,725 |
|
|
|
1,834 |
|
|
|
1,845 |
|
Average term (months) |
|
|
|
|
|
|
|
|
|
|
18 |
|
|
|
20 |
|
|
|
20 |
|
|
|
|
|
|
|
Auto Equity installment loans: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loan volume (in thousands) |
|
|
|
|
|
|
|
|
|
$ |
3,200 |
|
|
$ |
2,234 |
|
|
$ |
1,344 |
|
Average loan (principal) |
|
|
|
|
|
|
|
|
|
|
3,188 |
|
|
|
3,300 |
|
|
|
3,421 |
|
Average term (months) |
|
|
|
|
|
|
|
|
|
|
25 |
|
|
|
30 |
|
|
|
32 |
|
|
|
|
|
As of December 31, |
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
|
(in thousands) |
|
Balance Sheet Data: |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
16,288 |
|
|
$ |
17,738 |
|
|
$ |
14,124 |
|
|
$ |
12,685 |
|
|
$ |
14,220 |
|
Restricted cash and other |
|
|
|
|
|
|
2,175 |
|
|
|
1,076 |
|
|
|
1,076 |
|
|
|
950 |
|
Loans, interest and fees receivable, less allowance for losses (current and non-current) (a) |
|
|
58,433 |
|
|
|
60,420 |
|
|
|
62,139 |
|
|
|
63,681 |
|
|
|
61,347 |
|
Total assets |
|
|
138,042 |
|
|
|
153,229 |
|
|
|
131,700 |
|
|
|
108,104 |
|
|
|
101,499 |
|
Current debt |
|
|
28,113 |
|
|
|
34,990 |
|
|
|
25,000 |
|
|
|
20,800 |
|
|
|
12,000 |
|
Long-term debt |
|
|
16,881 |
|
|
|
14,224 |
|
|
|
3,154 |
|
|
|
3,282 |
|
|
|
3,415 |
|
Stockholders equity |
|
|
71,547 |
|
|
|
79,232 |
|
|
|
82,346 |
|
|
|
65,906 |
|
|
|
70,355 |
|
(a) |
Amounts exclude loan receivables from discontinued automotive business. |
38
ITEM 7. |
Managements Discussion and Analysis of Financial Condition and Results of Operations |
The following should be read in conjunction with Item 6 Selected Financial Data and our Consolidated Financial Statements
and Notes included as Item 8 of this report.
EXECUTIVE SUMMARY
We operate primarily through our wholly-owned subsidiaries, QC Financial Services, Inc., QC Loan Services, Inc., QC E-Services, Inc., QC
Canada Holdings Inc. and QC Capital, Inc. 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, 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).
We derive our revenues primarily by providing short-term consumer loans, known as payday loans, which represented approximately 64.9% of
our total revenues for the year ended December 31, 2014. We earn fees for various other financial services, such as installment loans, credit services, open-end credit, check cashing services, title loans, debit cards, money transfers, money
orders and business invoice factoring. We operated 409 branches in 23 states at December 31, 2014. In all states in which we offer payday loans, we fund our payday loans directly to the customer and receive a fee. Fees charged to customers vary
from state to state, generally ranging from $15 to $20 per $100 borrowed, and in most cases, are limited by state law.
We
began offering branch-based installment loans to customers in our Illinois branches during second quarter 2006 and expanded that product offering to customers in additional states during 2009 and 2010. The loans are payable in monthly installments
(principal plus accrued interest) with a typical term ranging from four months to one year. The fees and interest vary based on the amount borrowed and the term of the loan.
In 2012, we 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 our existing branch network. Signature loans are unsecured installment loans with a typical term of 6 to 36 months and a principal balance of up to $3,000. Fees and interest
vary based on the size and term of the loan and whether the customer pays with cash/check or uses recurring ACH payments. During 2014, the average term of a signature loan was 20 months. Auto equity loans are higher-dollar installment loans secured
by the borrowers auto title with a typical term of 12 to 48 months and a principal balance of up to $15,000. Fees and interest vary based on the size and term of the loan. During 2014, the average term of an auto equity loan was 32 months.
As of December 31, 2014, we offered the installment loan products to our customers in Arizona, California, Colorado,
Idaho, Illinois, Missouri, New Mexico, Texas, Utah and Wisconsin. The following table summarizes the average principal amount of each type of installment loan product originated during 2012, 2013 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Branch-Based |
|
$ |
537 |
|
|
$ |
593 |
|
|
$ |
604 |
|
Signature |
|
|
1,725 |
|
|
|
1,834 |
|
|
|
1,845 |
|
Auto Equity |
|
|
3,188 |
|
|
|
3,300 |
|
|
|
3,421 |
|
In Texas, through one of our subsidiaries, we operate as a credit service organization (CSO) on behalf of
consumers in accordance with Texas laws. We charge the consumer 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.
39
On September 30, 2011, QC Canada Holdings Inc, our wholly-owned subsidiary, acquired
100% of the outstanding stock of Direct Credit Holdings Inc. (Direct Credit), 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 platform in Canada. The acquisition of Direct Credit is part of the implementation of our strategy to diversify by increasing our product offerings and distribution, as well as expanding our presence into international
markets.
In September 2007, we entered into the buy here, pay here segment of the used automotive market in connection with
ongoing efforts to evaluate alternative products that serve our customer base. In December 2013, we sold our automotive business to an unaffiliated buyer for approximately $6.0 million. All revenue, expenses and income reported herein have been
adjusted to reflect reclassification of the discontinued automotive business unit.
We report on our business units as three
reportable segments (Branch Lending, Centralized Lending and E-Lending). The Branch Lending segment includes branches that offer payday loans, installment loans, credit services, check cashing services, title loans, open-end credit, prepaid debit
cards, money transfers and money orders. The Centralized Lending segment includes long-term installment loans (Signature Loans and Auto Equity Loans) that are centrally underwritten. The E-Lending segment includes the Internet lending operations in
the United States and Canada. We evaluate the performance of our reportable segments based on, among other things, gross profit, income from continuing operations before income taxes and return on invested capital.
Our major expenses include salaries and benefits, provisions for losses and occupancy expense for our leased real estate. Salaries and
benefits are generally driven by changes in number of branches and loan volumes. With respect to the provision for losses, if a customers check, ACH or debit card is returned by the bank as uncollected, we make an immediate charge-off to the
provision for losses for the amount of the customers loan, which includes accrued fees and interest. For signature loans (i.e., loans originated without any underlying collateral), we generally charge-off to the provision for losses any
customer loans that are 90 to 120 days past due. Any recoveries on amounts previously charged off are recorded as a reduction to the provision for losses in the period recovered. Regional and corporate expenses, which include compensation of
employees, professional fees and equity award charges, are our other primary costs.
We evaluate our business units based on
revenue growth and loss ratio (which is losses as a percentage of revenues). With respect to our branch network, we also consider the length of time the branch has been open and its geographic location. We monitor newer branches for their progress
to profitability and rate of loan growth.
We have experienced seasonality in our operations, with the first and fourth
quarters typically being our strongest periods as a result of broader economic factors, such as holiday spending habits at the end of each year and income tax refunds during the first quarter.
In response to changes in the overall market, including particularly changes to laws under which we operate, we have closed a significant
number of branches over the past five years. The following table sets forth our de novo branch openings and branch closings since January 1, 2010.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
2010 |
|
|
2011 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Beginning branch locations |
|
|
556 |
|
|
|
523 |
|
|
|
482 |
|
|
|
466 |
|
|
|
432 |
|
De novo branches opened during year |
|
|
1 |
|
|
|
2 |
|
|
|
8 |
|
|
|
6 |
|
|
|
|
|
Branches closed/sold during year (a) |
|
|
(34 |
) |
|
|
(43 |
) |
|
|
(24 |
) |
|
|
(40 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Ending branch locations |
|
|
523 |
|
|
|
482 |
|
|
|
466 |
|
|
|
432 |
|
|
|
409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
See the discussion of our closed branches in Item 1 Business section of this report under Branch Lending for additional information with respect to the closure of
branches in each year. |
40
The payday loan industry has grown rapidly since 1996 when there was an estimated 2,000
payday loan branches in the United States. According to the CFSA, industry analysts estimate that the industry currently has approximately 17,800 payday loan branches in the United States and approximately 1,400 payday loan and check cashing retail
locations in Canada. Absent changes in regulations and laws, we do not expect significant fluctuations in the industrys number of branches in the foreseeable future. As the branch count grew over the last decade, a greater number of
Internet-based payday loan providers emerged. In the last few years, the rate of growth for these Internet providers has exceeded that of the branch-based lenders. We believe this trend will continue into the foreseeable future as consumers become
more comfortable transacting electronically. To the extent, however, there are significant changes to the rules, regulations and key fund transmission requirements related to online lending, this growth could be negatively affected.
In recent years, demand has increased for various types of installment loan products. We expect to continue to see a migration of
customers from the single-pay loan product to various types of installment products as regulations and rules change, the competitive environment evolves and customer demand for repayment flexibility increases. We have focused on growing revenue by
introducing new products that serve our existing loyal customer base and on increasing profitability through streamlined operations. In 2015, we expect to continue the growth of our longer-term, centrally underwritten installment loan products by
introducing them to additional branches within our branch network, where possible, and by actively marketing them to existing and potential customers. We continually evaluate opportunities for product and geographic expansion and for new branch
development to complement existing branches within a given state or market.
We believe the acquisition of Direct Credit
broadens our product platform and distribution, as well as expands our presence by entering into international markets. Although the Canadian market is much smaller than the U.S. market, there is still significant room for organic growth, and Direct
Credit is a scalable platform with a competitive method for funding loans. In December 31, 2013, we started to pilot online payday loans to customers in a limited manner in a small number of states. Throughout 2014, we have focused on
developing an improved user interface and stronger fraud-detection components for the Internet platform. During 2015, we expect to continue to develop an online capability that will complement our branch network by providing our customers an
alternative method for accessing our products.
The payday loan industry has followed, and continues to be significantly
affected by, payday lending legislation and regulation in the various states and on a national level. We actively monitor and evaluate legislative and regulatory initiatives in each of the states and nationally, and are closely involved with the
efforts of the CFSA. To the extent that states enact legislation or regulations that negatively impacts payday lending, whether through preclusion, fee reduction or loan caps, our business has been adversely affected in the past and could be further
adversely affected in the future. Over the past few years, legislatures in certain states (and voter initiatives in a few states) have enacted interest rate caps from 28% to 36% per annum on payday lending. A 36% per annum interest rate
translates to approximately $1.38 per $100 loaned, which effectively precludes us from offering payday loans in those states unless other transaction fees may be charged to the customer. Similarly, customer usage restrictions have negatively
affected revenues and profitability. For example, when passed in states such as Washington, South Carolina and Kentucky, we experienced a 30% to 60% decline in annual revenues in that state and a more significant decline in gross profit for the
state, depending on the types of alternative products that competitors offered within the state.
From a federal perspective,
we are under the purview of the CFPB, which has broad supervisory powers over providers of consumer credit products in the United States such as those offered by us. The CFPB now has the power to create rules and regulations that specifically apply
to payday lending. As of March 12, 2015, no such rules have been proposed. The CFPB also has the power to examine consumer lending organizations and has begun an active examination process of payday lenders, including us. The CFPB is effecting
changes to payday lending practices through the examination process and is likely to continue to effect informal rulemaking through examination and enforcement efforts.
41
KEY DEVELOPMENTS
Amended and Restated Credit Agreement. On July 23, 2014, we entered into an Amended and Restated Credit Agreement (Current Credit Agreement) with a syndicate of banks to replace our prior
credit agreement, which was previously restated on September 30, 2011 and amended at various times since then. The Current Credit Agreement increased the maximum amount available under the revolving credit facility from $16 million to $20
million. See the discussion of our Credit Facility under the Liquidity and Capital Resources section for additional information on our Current Credit Agreement.
Sale of Automotive Business. In December 2013, we completed the disposition of certain assets of the automotive business through a purchase agreement with an unaffiliated buyer for approximately
$6.0 million. All revenue and expenses reported for each period herein have been adjusted to reflect reclassification of the discontinued automotive business. Discontinued operations include the revenue and expenses which can be specifically
identified with the automotive business, and excludes any allocation of general administrative corporate costs, except interest expense. The automotive business was previously accounted for as a reportable segment. For additional information with
respect to discontinued operations, see Note 6 to the consolidated financial statements included in Item 8 of this report.
Restructuring. In January 2013, we announced a restructuring plan for the organization primarily due to a decline in loan volumes over the prior 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 included 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. In fourth quarter 2012, we recorded approximately $298,000 in pre-tax charges associated with our decision to close these 38 underperforming branches. The charges included a $257,000 loss for
the disposition of fixed assets and $41,000 for other costs. We recorded approximately $1.2 million in pre-tax charges during year ended December 31, 2013, associated with the restructuring plan. The charges included approximately $394,000 for
lease terminations and other related occupancy costs and approximately $818,000 in severance and benefit costs for the workforce reduction.
DISCUSSION OF CRITICAL ACCOUNTING POLICIES
Our consolidated financial statements and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of America applied on a consistent basis.
The preparation of these financial statements requires us to make a number of 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 periods. We evaluate these estimates and assumptions on an ongoing basis. We base these estimates on the information currently available to us and on various other
assumptions that we believe are reasonable under the circumstances. Actual results could vary materially from these estimates under different assumptions or conditions.
We believe that the following critical accounting policies affect the more significant estimates and assumptions used in the preparation of our financial statements.
Revenue Recognition
We
record revenue from payday loans 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, we record an estimate of the unearned revenue, which results
in revenues being recognized on a constant-yield basis ratably over the term of each loan.
We record revenues from
installment loans using the simple interest method.
42
With respect to our CSO services in Texas, we earn 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. We also service the loan for the lender. The CSO fee is recognized
ratably over the term of the loan.
With respect to our open-end product, we earn interest on the outstanding balance and the
product in Virginia also includes a monthly non-refundable membership fee.
Generally, we recognize revenue for our 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.
Provision for Losses and Returned Item Policy
We record a provision for losses associated with uncollectible loans. For payday loans, all accrued fees, interest and outstanding principal are charged off on the date we receive a returned check, a
rejected ACH or denied debit card submission, generally within 14 days after the due date of the loan. Accordingly, the majority of payday loans included in our loans 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, we stop accruing interest on installment
loans between 60 to 120 days after the last payment.
With respect to the loans receivable at the end of each reporting
period, we maintain an aggregate allowance for loan losses (including fees and interest) for payday loans, title loans and installment loans at levels estimated to be adequate to absorb estimated incurred losses in the respective outstanding loan
portfolios. We do 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, we compute 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, we compute an adjustment to this percentage to reflect the collections experience in the month immediately following the reporting period-end. To estimate collections experience, we compute 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 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, we review and evaluate 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 our business and operating structure, and geographic or demographic developments. In connection with our decision in 2013 to close 35 branches during the first half of 2014, we recorded a $1.0 million
qualitative adjustment to increase the allowance for loan losses as of December 31, 2013. As of December 31, 2014, we determined that no qualitative adjustment to the allowance for payday loan losses was necessary.
We maintain an allowance for all installment loans at a level we consider sufficient to cover estimated losses in the collection of our
installment loans. The allowance calculation for installment loans is based upon historical charge-off experience (using a trailing average of charge-offs to total volume that approximates the average term of the underlying type of installment loan)
and qualitative factors, with consideration given to
43
recent credit loss trends and economic factors. In connection with our decision in 2013 to close 35 branches during the first half of 2014, we recorded a $262,000 qualitative adjustment to
increase our allowance for loan losses as of December 31, 2013. As of December 31, 2014, we determined that no qualitative adjustment to the allowance for installment loan losses was necessary.
We record 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, we record an adjustment to the allowance for
loan losses through the provision for losses. The overall allowance represents our best estimate of probable losses inherent in the outstanding loan portfolios at the end of each reporting period.
As noted above, to the extent that macroeconomic indicators continue to be inconsistent and vary during 2015 and beyond, our estimates
with respect to the allowance for loan losses could be subject to more volatility and could increase as a percentage of total outstanding loans receivable.
Our results from our operations are seasonal due to fluctuating demand for short-term loans during the year. Historically, we have experienced our highest demand for short-term loans in January and in the
fourth calendar quarter. Our loss ratio historically fluctuates with these changes in short-term loan demand, with a higher loss ratio in the second and third quarters of each calendar year and a lower loss ratio in the first and fourth quarters of
each calendar year. Due to the seasonality of our business, results of operations for any quarter are not necessarily indicative of the results of operations that may be achieved for the full year.
Accounting for Leases and Leasehold Improvements
Occupancy rent costs are amortized on a straight-line basis over the lease life, which includes reasonably assured lease renewals. Similarly, leasehold improvements are amortized over the shorter of their
estimated useful lives or the related lease life including reasonably assured lease renewals. The lease lives plus reasonably assured renewals have generally ranged from 1 to 15 years with an average of 7 years and usually contain cancellation
clauses in the event of regulatory changes. For leases with renewal periods at our option, which are included in substantially all of our operating leases for our branches, we believe that most of the renewal options are reasonably assured of being
exercised due to the following factors: (i) the importance of the branch location to the ultimate success of the branch, (ii) the significance of the property to the continuation of service to our customers and to our development of a
viable customer-base and (iii) the existence of leasehold improvements whose value would be impaired if we vacated or discontinued the use of such property.
Income Taxes
In connection with the preparation of our consolidated
financial statements, we are required to estimate our income taxes in each of the jurisdictions in which we operate. This process involves estimating current tax liability, together with assessing the differences between the financial statement and
tax bases of assets and liabilities as measured by the tax rates that will be in effect when these differences reverse. These differences result in deferred tax assets and liabilities, which are included in the Consolidated Balance Sheets. As of
December 31, 2013 and 2014, we reported a net deferred tax asset in the Consolidated Balance Sheet. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected to be realized. As of
December 31, 2013 and 2014, we have established valuation allowances of $1.1 million and $1.1 million, respectively, for certain deferred tax assets.
In the ordinary course of business, many transactions occur for which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit our income tax returns. These audits
examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. We adjust our income tax provision in the period in which we determine the actual outcomes will likely
be different from our estimates. The recognition or derecognition of income tax expense
44
related to uncertain tax positions is determined under the guidance as prescribed by the Financial Accounting Standards Board (FASB). As of December 31, 2013 and December 31, 2014, the
accrued liability for unrecognized tax benefits was approximately $190,000 and $177,000, respectively.
As of
December 31, 2013 and 2014, the accumulated undistributed earnings of foreign affiliates were a deficit of $7.0 million and $6.9 million, respectively. If the accumulated earnings of the foreign affiliates become positive in the future, we
intend to indefinitely reinvest such earnings in the business of our foreign affiliates, and thus, no federal or state income taxes or foreign withholding taxes will be provided for amounts which would become payable, if any, on the distribution of
such earnings.
Share-Based Compensation
We account for stock-based compensation expense for share-based payment awards to our employees and directors at the estimated fair value on the grant date. The fair value of stock option grants is
determined using the Black-Scholes option pricing model, which requires us to make several assumptions including, but not limited to risk free interest rate, expected volatility, dividend yield and expected term of the option. Restricted stock
awards are valued on the date of grant and have no purchase price. All share-based compensation is recorded net of an estimated forfeiture rate, which is based upon historical activity.
Accounting for Goodwill and Intangible Assets
Goodwill represents the
excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. Goodwill and intangible assets require significant management estimates and judgment, including the
valuation and life determination in connection with the initial purchase price allocation and the ongoing evaluation for impairment.
In connection with the purchase price allocations of acquisitions, we rely on in-house financial expertise or utilize a third-party expert, if considered necessary. The purchase price allocation process
requires management estimates and judgment as to expectations for the acquisition.
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. We evaluate goodwill at the reporting
unit level and perform our annual goodwill and indefinite life impairment test as of December 31 for all reporting units. We use a discounted cash flows approach to compute the fair value of our reporting units. We test 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 our business and products, material and ongoing negative
industry or economic trends, or other factors specific to each asset being evaluated.
As of December 31, 2013, we had
two reporting units with goodwill and indefinite lived intangible assets that required testing. These units included our branch lending operations in the United States and our Canadian Internet lending operations (Direct Credit). In 2013, we
recorded a charge of $21.4 million to impair all of the goodwill associated with our Branch Lending reporting unit and our Direct Credit reporting unit.
Our 2013 annual impairment test indicated that the fair values of both the Branch Lending and Direct Credit reporting units did not exceed their respective carrying amounts. For purposes of the step one
analysis, the fair value of each reporting unit was estimated using an income approach that analyzed projected discounted cash flows. The discount rates used for the reporting units ranged from 16.1% to 23.8%. We believed that certain factors
reflected the declines in the calculated fair values of our Branch Lending and Direct Credit reporting
45
units. These factors included, (i) a significant decline in our market capitalization during fourth quarter 2013 as our stock price declined by 22% (primarily due to the suspension of the
regular quarterly dividend in November 2013), (ii) underperformance compared to peers, (iii) historically high loss ratios on our loan portfolios during fourth quarter 2013 and (iv) a decline in estimated cash flow projections for
future periods. In connection with our annual budgeting and strategic planning process performed in the fourth quarter of 2013 and the review of our 2013 financial results, we assessed our existing revenue growth opportunities and cost structure
(primarily expected loss ratios) for future periods. As a result, we reduced our short term and long term revenue and gross profit forecasts from previous estimates which affected the fair value calculated for each reporting unit.
We hired an independent appraiser to assist with the second step of the impairment test. The amount of impairment for each reporting unit
was calculated by comparing the reporting units implied fair value of 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 each
reporting unit. Any remaining fair value would represent the implied fair value of goodwill on the testing date. The test results showed that the implied fair value of the goodwill for each reporting unit was a negative amount after the allocation
of the fair value to the individual assets and liabilities of each reporting unit and thus, a full impairment of goodwill was recorded for each reporting unit. The $21.4 million non-cash impairment charge recorded to goodwill during 2013 included a
$15.7 million tax deductible charge to our Branch Lending reporting unit and a $5.7 million non-tax deductible charge to our Direct Credit reporting unit.
In addition, we performed an impairment test on our indefinite lived intangible assets as of December 31, 2013 and determined that the indefinite lived intangibles of the Direct Credit reporting unit
was impaired and as a result, we recorded a non-cash impairment charge of $669,000.
As of December 31, 2014, we did not
have any goodwill to test. We tested the remaining indefinite lived intangible asset of our Direct Credit reporting unit as of December 31, 2014, and determined there was no impairment.
Foreign Currency Translations
The functional currency for our 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 are translated at the monthly average exchange rates occurring during each period.
46
SUMMARY OF FINANCIAL INFORMATION
The following table sets forth our results of operations for the years ended December 31, 2012, 2013 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
|
(in thousands) |
|
|
(percentage of revenues) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday loan fees |
|
$ |
116,809 |
|
|
$ |
110,239 |
|
|
$ |
99,379 |
|
|
|
76.8 |
% |
|
|
70.6 |
% |
|
|
64.9 |
% |
Installment interest and fees |
|
|
19,678 |
|
|
|
31,655 |
|
|
|
38,488 |
|
|
|
12.9 |
% |
|
|
20.3 |
% |
|
|
25.1 |
% |
Other |
|
|
15,529 |
|
|
|
14,238 |
|
|
|
15,198 |
|
|
|
10.3 |
% |
|
|
9.1 |
% |
|
|
10.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
152,016 |
|
|
|
156,132 |
|
|
|
153,065 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
34,305 |
|
|
|
34,255 |
|
|
|
33,199 |
|
|
|
22.6 |
% |
|
|
21.9 |
% |
|
|
21.7 |
% |
Provision for losses |
|
|
33,517 |
|
|
|
46,676 |
|
|
|
44,887 |
|
|
|
22.0 |
% |
|
|
29.9 |
% |
|
|
29.3 |
% |
Occupancy |
|
|
17,364 |
|
|
|
17,456 |
|
|
|
17,844 |
|
|
|
11.4 |
% |
|
|
11.2 |
% |
|
|
11.7 |
% |
Depreciation and amortization |
|
|
2,046 |
|
|
|
1,992 |
|
|
|
1,802 |
|
|
|
1.3 |
% |
|
|
1.3 |
% |
|
|
1.2 |
% |
Other |
|
|
11,463 |
|
|
|
12,489 |
|
|
|
14,821 |
|
|
|
7.6 |
% |
|
|
8.0 |
% |
|
|
9.6 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
98,695 |
|
|
|
112,868 |
|
|
|
112,553 |
|
|
|
64.9 |
% |
|
|
72.3 |
% |
|
|
73.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
53,321 |
|
|
|
43,264 |
|
|
|
40,512 |
|
|
|
35.1 |
% |
|
|
27.7 |
% |
|
|
26.5 |
% |
Regional expenses |
|
|
11,997 |
|
|
|
9,433 |
|
|
|
8,564 |
|
|
|
7.9 |
% |
|
|
6.0 |
% |
|
|
5.6 |
% |
Corporate expenses |
|
|
20,805 |
|
|
|
19,178 |
|
|
|
18,299 |
|
|
|
13.7 |
% |
|
|
12.3 |
% |
|
|
12.0 |
% |
Depreciation and amortization |
|
|
1,878 |
|
|
|
1,798 |
|
|
|
1,680 |
|
|
|
1.2 |
% |
|
|
1.2 |
% |
|
|
1.1 |
% |
Interest expense |
|
|
2,742 |
|
|
|
1,418 |
|
|
|
1,369 |
|
|
|
1.8 |
% |
|
|
0.9 |
% |
|
|
0.9 |
% |
Impairment of goodwill and intangible assets |
|
|
2,330 |
|
|
|
22,055 |
|
|
|
|
|
|
|
1.6 |
% |
|
|
14.1 |
% |
|
|
|
|
Other expense (income), net |
|
|
(1,386 |
) |
|
|
819 |
|
|
|
2,170 |
|
|
|
(0.9 |
)% |
|
|
0.5 |
% |
|
|
1.4 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes |
|
|
14,955 |
|
|
|
(11,437 |
) |
|
|
8,430 |
|
|
|
9.8 |
% |
|
|
(7.3 |
)% |
|
|
5.5 |
% |
Provision (benefit) for income taxes |
|
|
6,078 |
|
|
|
(1,762 |
) |
|
|
3,351 |
|
|
|
4.0 |
% |
|
|
(1.1 |
)% |
|
|
2.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
8,877 |
|
|
|
(9,675 |
) |
|
|
5,079 |
|
|
|
5.8 |
% |
|
|
(6.2 |
)% |
|
|
3.3 |
% |
Gain (loss) from discontinued operations, net of income tax |
|
|
(3,504 |
) |
|
|
(4,318 |
) |
|
|
266 |
|
|
|
(2.3 |
)% |
|
|
(2.8 |
)% |
|
|
0.2 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
5,373 |
|
|
$ |
(13,993 |
) |
|
$ |
5,345 |
|
|
|
3.5 |
% |
|
|
(9.0 |
)% |
|
|
3.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
SUMMARY OF OPERATING INFORMATION
The following tables set forth our branch information and other operating information for the years ended December 31, 2012, 2013 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Branch Information: |
|
|
|
|
|
|
|
|
|
|
|
|
Number of branches, beginning of year |
|
|
482 |
|
|
|
466 |
|
|
|
432 |
|
De novo opened |
|
|
8 |
|
|
|
6 |
|
|
|
|
|
Closed |
|
|
(24 |
) |
|
|
(40 |
) |
|
|
(23 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Number of branches, end of year |
|
|
466 |
|
|
|
432 |
|
|
|
409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of branches open during year |
|
|
475 |
|
|
|
439 |
|
|
|
419 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average number of branches open during year (excluding branches reported as discontinued operations) |
|
|
403 |
|
|
|
409 |
|
|
|
409 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Average revenue per branch (in thousands) |
|
$ |
349 |
|
|
$ |
336 |
|
|
$ |
309 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
47
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Other Information: |
|
|
|
|
|
|
|
|
|
|
|
|
Payday loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Loan volume (in thousands) |
|
$ |
789,896 |
|
|
$ |
743,865 |
|
|
$ |
671,532 |
|
Average loan (principal plus fee) |
|
|
379 |
|
|
|
385 |
|
|
|
385 |
|
Average fees per loan |
|
|
57.71 |
|
|
|
59.30 |
|
|
|
59.07 |
|
|
|
|
|
Branch-Based installment loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Installment loan volume (in thousands) |
|
$ |
24,571 |
|
|
$ |
28,416 |
|
|
$ |
34,758 |
|
Average loan (principal) |
|
|
537 |
|
|
|
593 |
|
|
|
604 |
|
Average term (months) |
|
|
7 |
|
|
|
7 |
|
|
|
7 |
|
|
|
|
|
Signature installment loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Installment loan volume (in thousands) |
|
$ |
4,605 |
|
|
$ |
14,034 |
|
|
$ |
15,617 |
|
Average loan (principal) |
|
|
1,725 |
|
|
|
1,834 |
|
|
|
1,845 |
|
Average term (months) |
|
|
18 |
|
|
|
20 |
|
|
|
20 |
|
|
|
|
|
Auto Equity installment loans: |
|
|
|
|
|
|
|
|
|
|
|
|
Installment loan volume (in thousands) |
|
$ |
3,200 |
|
|
$ |
2,234 |
|
|
$ |
1,344 |
|
Average loan (principal) |
|
|
3,188 |
|
|
|
3,300 |
|
|
|
3,421 |
|
Average term (months) |
|
|
25 |
|
|
|
30 |
|
|
|
32 |
|
Results of Operations2014 Compared to 2013
Income from Continuing Operations
For the year ended December 31,
2014, income from continuing operations was $5.1 million compared to a loss from continuing operations of $9.7 million in the prior year. The loss in 2013 was primarily due to non-cash impairment charges to goodwill and intangible assets totaling
$22.1 million. A discussion of the various components of our income (loss) from continuing operations for the years ending December 31, 2013 and 2014 follows.
Revenues
The following table summarizes our revenues for the years ending
December 31, 2013 and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
Year Ended December 31, |
|
|
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
|
(in thousands) |
|
|
(percentage of total revenues) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday loan fees |
|
$ |
110,239 |
|
|
$ |
99,379 |
|
|
|
70.6 |
% |
|
|
64.9 |
% |
Installment loan fees |
|
|
31,655 |
|
|
|
38,488 |
|
|
|
20.3 |
% |
|
|
25.1 |
% |
Credit service fees |
|
|
6,192 |
|
|
|
5,097 |
|
|
|
4.0 |
% |
|
|
3.3 |
% |
Open-end credit fees |
|
|
2,092 |
|
|
|
4,733 |
|
|
|
1.3 |
% |
|
|
3.1 |
% |
Check cashing fees |
|
|
2,750 |
|
|
|
2,560 |
|
|
|
1.8 |
% |
|
|
1.7 |
% |
Title loan fees |
|
|
789 |
|
|
|
310 |
|
|
|
0.5 |
% |
|
|
0.2 |
% |
Other fees |
|
|
2,415 |
|
|
|
2,498 |
|
|
|
1.5 |
% |
|
|
1.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
156,132 |
|
|
$ |
153,065 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues declined by $3.0 million or 1.9% in 2014 as compared to 2013. Lower payday loan revenues
were partially offset by higher fees and interest from our longer-term, higher-dollar installment products indicative of customer demand and our efforts to transition qualifying customers from our payday loan product.
48
Revenues from our payday loan product declined by $10.8 million or 9.8% in 2014 as compared
to 2013 due to lower payday loan volumes. With respect to payday loan volume, we originated approximately $671.5 million in loans during 2014, which was a decline of 9.7% from the $743.9 million originated during 2013. The decline was primarily
attributable to lower volumes from our Branch Lending segment resulting from, among other things, migration to other company products, competition from other companies offering installment lending products and customers transacting online.
In 2014, revenues from installment loan fees increased by $6.8 million or 21.5% over 2013. The increase was primarily a
result of the introduction of longer-term, higher-dollar loans distributed through our branch network and evaluated, underwritten and collected centrally in our corporate home office.
Revenues from credit service fees, check cashing, title loans, open-end credit and other sources totaled $14.2 million and $15.2 million
for the years ended December 31, 2013 and 2014, respectively. The increase in open-end credit fees was partially offset by a decline in revenues from credit service fees, check cashing fees and title loan fees, which reflects the reduced demand
for these products.
We anticipate our payday loan volumes and revenues in the U.S. will continue to remain soft for the
majority of our branches during 2015 due to higher unemployment rates, ongoing regulatory and legislative pressures and increasing competition from alternative short and intermediate term lending providers. In addition, beginning in late fourth
quarter 2013 and throughout 2014, we initiated a new underwriting platform for our single-pay loan products in various states. We expect that this platform, over time, will result in a modest reduction in revenues, but will improve overall credit
quality, thereby improving gross profit. Throughout 2014, we have focused on monitoring, evaluating and modifying this new process to improve its capabilities and results. We plan to introduce this underwriting platform in the remainder of our
states throughout 2015. In 2015, we also expect to continue the growth of our longer-term, centrally underwritten installment loan products by introducing them to additional branches within our branch network, where possible, and by actively
marketing them to existing and potential customers.
Operating Expenses
Total operating expenses were $112.6 million during 2014 compared to $112.9 million in 2013, a decline of $300,000. Total operating costs,
exclusive of loan losses, increased to $67.7 million during 2014 compared to $66.2 million during 2013. This increase was attributable to new marketing initiatives in the Branch Lending and E-Lending segments. Occupancy costs were $17.8 million
during 2014, compared to $17.5 million in 2013, an increase of $300,000.
Our provision for losses decreased from $46.7
million during 2013 to $44.9 million during 2014. Our loss ratio was 29.9% during 2013 versus 29.3% during 2014. Our charge-offs as a percentage of revenue were 51.0% during 2014 compared to 48.6% during 2013. The higher rate of returned items is
primarily related to our newer, higher-dollar installment products. Our collection rate in our Branch Lending segment improved slightly in 2014 versus 2013. We received cash of approximately $772,000 from selling older debt during 2014 compared to
$540,000 during 2013.
Our loss ratios in 2013 and 2014 were higher than historical averages, partly due to the introduction
of new products and technology. The higher loss ratios reflect increased charge-offs from our higher dollar installment loan product due to the seasoning of our installment loan portfolio, together with our continued education and development as it
relates to underwriting and customer credit quality for installment loan products. We expect the loss ratio in 2015 to improve over the rates in 2013 and 2014 but skew modestly higher than historical averages given our continued emphasis on new
products and to implementation of technology to enhance the customer experience.
49
Gross Profit
The following table summarizes our gross profit and gross margin (gross profit as a percentage of revenues) of each reportable segment for the years ended December 31, 2013 and 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
Gross Margin % |
|
Reportable Segment |
|
2013 |
|
|
2014 |
|
|
2013 |
|
|
2014 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Branch Lending |
|
$ |
41,159 |
|
|
$ |
36,464 |
|
|
|
30.0 |
% |
|
|
28.8 |
% |
Centralized Lending |
|
|
1,534 |
|
|
|
3,117 |
|
|
|
13.3 |
% |
|
|
16.0 |
% |
E-Lending |
|
|
571 |
|
|
|
931 |
|
|
|
7.9 |
% |
|
|
13.1 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
43,264 |
|
|
$ |
40,512 |
|
|
|
27.7 |
% |
|
|
26.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
In 2014, gross profit declined by $2.8 million or 6.5% compared to 2013. The decrease year-to-year was
primarily attributable to revenue declines in our Branch Lending segment, higher losses in our Centralized Lending segment and an increase in marketing initiatives as discussed above.
Regional and Corporate Expenses
Regional and corporate expenses decreased
by $1.7 million, from $28.6 million during 2013 to $26.9 million during 2014. The decline reflects: i) $525,000 in severance and related costs in connection with a company restructuring during 2013, ii) reduced public affairs expenditures during
2014, and iii) lower overall compensation during 2014 resulting from the first quarter 2013 restructuring and reduced equity costs.
Impairment of Goodwill and Intangible Assets
The results for 2013 include approximately $22.1 million in non-cash impairment charges to goodwill, which included a $15.7 million tax deductible charge to goodwill for our Branch Lending reporting unit
and $5.7 million charge for our Direct Credit reporting unit, which was not deductible for income tax purposes. In addition, we recorded a $669,000 non-cash charge for the impairment of intangible assets of our Direct Credit reporting unit.
Other Expense (Income), Net
We reported $2.2 million of other expense during 2014, compared to $819,000 in 2013. The results for 2014 include a write-off of capitalized software costs totaling $1.0 million and a charge of $291,000
in third quarter to reduce the carrying amount of two properties held for sale to estimated fair value.
Income Tax
Provision (Benefit)
The effective income tax rate for the year ended December 31, 2014 was 39.8% compared to
15.4% in the prior year. The low rate in 2013 is due to the non-deductible goodwill impairment charge for our Direct Credit reporting unit and other certain non-deductible items.
Results of Operations2013 Compared to 2012
Income from Continuing Operations
For the year ended December 31, 2013, we reported a loss from continuing operations of $9.7 million compared to
income from continuing operations of $8.9 million in 2012. A discussion of the various components of our income (loss) from continuing operations for the years ending December 31, 2012 and 2013 follows.
50
Revenues
The following table summarizes our revenues for the years ending December 31, 2012 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2012 |
|
|
2013 |
|
|
|
(in thousands) |
|
|
(percentage of total revenues) |
|
Revenues |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Payday loan fees |
|
$ |
116,809 |
|
|
$ |
110,239 |
|
|
|
76.8 |
% |
|
|
70.6 |
% |
Installment loan fees |
|
|
19,678 |
|
|
|
31,655 |
|
|
|
12.9 |
% |
|
|
20.3 |
% |
Credit service fees |
|
|
6,731 |
|
|
|
6,192 |
|
|
|
4.4 |
% |
|
|
4.0 |
% |
Check cashing fees |
|
|
3,063 |
|
|
|
2,750 |
|
|
|
2.0 |
% |
|
|
1.8 |
% |
Open-end credit fees |
|
|
675 |
|
|
|
2,092 |
|
|
|
0.4 |
% |
|
|
1.3 |
% |
Title loan fees |
|
|
2,677 |
|
|
|
789 |
|
|
|
1.8 |
% |
|
|
0.5 |
% |
Other fees |
|
|
2,383 |
|
|
|
2,415 |
|
|
|
1.7 |
% |
|
|
1.5 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
152,016 |
|
|
$ |
156,132 |
|
|
|
100.0 |
% |
|
|
100.0 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues increased by $4.1 million or 2.7% in 2013 as compared to 2012. The increase was due to
higher fees and interest from our longer-term, higher-dollar installment products, which were introduced in early 2012, partially offset by reduced payday loan fees as a result of increased competition.
Revenues from our payday loan product declined by $6.6 million or 5.7% in 2013 as compared to 2012 due to lower payday loan volumes in
2013. With respect to payday loan volume, we originated approximately $743.9 million in loans during 2013, which was a decline of 5.8% from the $789.9 million during 2012.
In 2013, revenues from installment loan fees increased by $12.0 million or 60.9% over 2012. The increase was primarily a result of the introduction of longer-term, higher-dollar loans distributed through
our branch network and evaluated, underwritten and collected centrally in our corporate home office.
Revenues from credit
service fees, check cashing, title loans, open-end credit and other sources totaled $15.5 million and $14.2 million for the years ended December 31, 2012 and 2013, respectively. The increase in open-end credit fees was offset by a decline in
revenues from credit service fees, check cashing fees and title loan fees, which reflects the reduced demand for these products.
Operating
Expenses
Total operating expenses were $112.9 million during 2013 compared to $98.7 million in 2012, an increase of $14.2
million, or 14.4%. Total operating costs, exclusive of loan losses, increased to $66.2 million during 2013 compared to $65.2 million during 2012. This increase was attributable to new marketing initiatives and higher bank-related charges. Occupancy
costs were $17.5 million during 2013, compared to $17.4 million in 2012, an increase of $100,000.
Our provision for losses
increased from $33.5 million during 2012 to $46.7 million during 2013. Our loss ratio was 22.0% during 2012 versus 29.9% during 2013. The increase in the loss ratio from 2012 to 2013 was primarily attributable to a higher rate of returned items in
the current year versus prior year. Our charge-offs as a percentage of revenue were 48.6% during 2013 compared to 38.9% during 2012. The higher rate of returned items is primarily related to the introduction of electronic collateralization of loans
(in lieu of checks), the seasoning of our newer, higher-dollar installment products and the prolonged economic recovery. Our collection rate was 45.0% in 2013 versus 46.7% in 2012. We received cash of approximately $540,000 from selling older debt
during 2013 compared to $685,000 during 2012. The 2012 amount does not include the sale of our Automobile receivables in December 2012.
51
Our loss ratio for 2013 was higher than historical averages, partly due to the introduction
of new products and technology, as well as the delay during first quarter 2013 in tax return processing by the Internal Revenue Service (which we believe affected our customers cash flow planning).
Gross Profit
The
following table summarizes our gross profit and gross margin (gross profit as a percentage of revenues) of each reportable segment for the years ended December 31, 2012 and 2013.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross Profit |
|
|
Gross Margin % |
|
Reportable Segment |
|
2012 |
|
|
2013 |
|
|
2012 |
|
|
2013 |
|
|
|
(in thousands) |
|
|
|
|
|
|
|
Branch Lending |
|
$ |
50,897 |
|
|
$ |
41,159 |
|
|
|
36.1 |
% |
|
|
30.0 |
% |
Centralized Lending |
|
|
580 |
|
|
|
1,534 |
|
|
|
18.9 |
% |
|
|
13.3 |
% |
E-Lending |
|
|
1,844 |
|
|
|
571 |
|
|
|
22.9 |
% |
|
|
7.9 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
53,321 |
|
|
$ |
43,264 |
|
|
|
35.1 |
% |
|
|
27.7 |
% |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit declined by $10.0 million, or 18.8%, from $53.3 million in 2012 to $43.3 million in 2013.
The decrease year-to-year was primarily attributable to revenue declines in our Branch Lending segment and the increase in our provision for losses as discussed above.
Regional and Corporate Expenses
Regional and corporate expenses decreased
by $4.2 million, from $32.8 million during 2012 to $28.6 million during 2013. The results for 2012 include a $739,000 gain resulting from the cash settlement of an expiring life insurance policy. The results for 2013, includes approximately $525,000
in severance and related costs in connection with a restructuring necessitated by declining loan volumes over the past few years as a result of shifting customer demand, the sluggish economy, regulatory changes and increasing competition in the
short-term credit industry. Exclusive of the 2013 severance and related costs and the 2012 non-recurring gain, the decline in expenses year-to-year reflects reduced salaries and performance-based incentive compensation, as well as lower governmental
affairs expenditures.
Interest and Other Expenses
Interest expense totaled $1.4 million for the year ended December 31, 2013 compared to interest expense of $2.7 million in 2012. The decline was a result of lower average debt balances.
Impairment of Goodwill and Intangible Assets
The results for 2013 include approximately $22.1 million in non-cash impairment charges to goodwill, which included a $15.7 million tax deductible charge to goodwill for our Branch Lending reporting unit
and $5.7 million charge for our Direct Credit reporting unit, which was not deductible for income tax purposes. In addition, we recorded a $669,000 non-cash charge for the impairment of intangible assets of our Direct Credit reporting unit.
The results for 2012 include $2.3 million in goodwill and intangible impairment charges, which included a $1.7 million
non-cash impairment charge to goodwill for our Direct Credit reporting unit and a $600,000 charge to reduce the value of the trade name intangible asset associated with the ECA acquisition.
Other Expense (Income), Net
We reported $819,000 of other expense during
2013, compared to other income of $1.4 million in 2012. The results for 2012 included the reversal of the liability that was recorded to estimate the fair value of the contingent supplemental earn-out payment in connection with our acquisition of
Direct Credit in September 2011.
52
Income Tax Provision (Benefit)
The effective income tax rate for the year ended December 31, 2013 was 15.4% compared to 40.6% in the prior year. The low rate in
2013 is due to the non-deductible goodwill impairment charge for our Direct Credit reporting unit and other certain non-deductible items.
Liquidity and Capital Resources
Sources and Uses of Cash
Our primary source of liquidity is cash provided by operations. In addition, liquidity is available through our credit arrangements,
principally our $20 million revolving line of credit.
At this time, we believe that our available short-term and long-term
capital resources are sufficient to fund our working capital requirements, scheduled debt payments, interest payments, capital expenditures and income tax obligations. In addition to the generally tight credit markets in the past five years as a
result of the 2008-2009 recession and national credit crisis, we have experienced declining financial results in the past three years, which have resulted in our failure to meet various financial covenants in our prior credit agreement. While our
bank lending group waived or amended those financial covenants in the past, it is possible that we may not be able to obtain a waiver or amendment if we violate any financial covenants in the future. In addition, each waiver or amendment we have
received in the past resulted in less availability of funds under our prior credit agreement, stricter payment requirements on our term loans and generally higher loan costs and tighter loan covenants (including restrictions on payment of
dividends). If financial results continue to decline, a reduction in the availability of funds under our Current Credit Agreement could require us to take measures to conserve cash until the markets stabilize and our results improve. Such measures
could include deferring capital expenditures (including acquisitions), restricting growth of the long-term installment loan product, reducing operating expenses, eliminating cash dividends, pursuing the sale of certain assets or considering other
alternatives designed to enhance liquidity.
Credit Facility
On July 23, 2014, we entered into an amended and restated credit agreement (Current Credit Agreement) with a syndicate of banks to replace our prior credit agreement. The Current Credit Agreement
increased the maximum amount available under the revolving credit facility from $16 million to $20 million. The Current Credit Agreement contains financial covenants related to a minimum fixed charge coverage ratio, a maximum senior leverage ratio
and a minimum liquidity (expressed as consolidated current assets to total consolidated debt). Our obligations under the Current Credit Agreement are guaranteed by all our operating subsidiaries (other than foreign subsidiaries), and are secured by
liens on substantially all of the personal property of the company and our domestic operating subsidiaries. We pledged 65% of the stock of our two Canadian subsidiary holding companies to secure our obligations under the Current Credit Agreement.
The lenders may accelerate our obligations under the Current Credit Agreement if there is a change in control of the company, including an acquisition of 25% or more of our equity securities by any person or group. The Current Credit Agreement
matures on July 23, 2016.
Borrowings under the facility are available based on two types of loans, Base Rate loans or
LIBOR Rate loans. Base Rate loans bear interest at a rate ranging from 1.50% to 2.50% depending on our 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 loans bear interest at rates based on the LIBOR rate for the applicable loan period with a margin over LIBOR ranging from 3.50% to 4.50% depending on our 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. The credit facility also includes a non-use fee ranging from 0.375% to 0.625%,
which is based upon our leverage ratio.
53
Subordinated Notes
As a condition to entering into the prior credit agreement, the lenders required that we issue $3.0 million of senior subordinated notes. On September 30, 2011, we issued $2.5 million initial
principal amount of senior subordinated notes to our Chairman of the Board. The remaining $500,000 principal amount of subordinated notes was issued to another major 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. As a condition to
entering into the amendment of the credit agreement on July 23, 2014, the lenders required that the maturity date of the subordinated notes be extended. On July 23, 2014, we entered into an amendment with the holders of the subordinated
notes to extend the maturity of the outstanding notes to September 30, 2016. The subordinated notes are subject to prepayment at our option, 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 our total debt to total capitalization ratio and our total debt to EBITDA ratio. The subordinated notes further provide that upon
occurrence of an event of default on the subordinated notes, we may not declare or pay any cash dividend or distribution of cash or other property (other than our equity securities) on our capital stock. As of December 31, 2014, the balance of
the subordinated notes was approximately $3.4 million.
Cash Flow
Summary cash flow data is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
|
|
(in thousands) |
|
|
|
|
|
Cash flows provided by (used for): |
|
|
|
|
|
|
|
|
|
|
|
|
Operating activities |
|
$ |
23,814 |
|
|
$ |
3,053 |
|
|
$ |
13,359 |
|
Investing activities |
|
|
(1,495 |
) |
|
|
3,154 |
|
|
|
(1,137 |
) |
Financing activities |
|
|
(25,961 |
) |
|
|
(7,504 |
) |
|
|
(10,512 |
) |
Effect of exchange rate changes on cash and cash equivalents |
|
|
28 |
|
|
|
(142 |
) |
|
|
(175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) in cash and cash equivalents |
|
|
(3,614 |
) |
|
|
(1,439 |
) |
|
|
1,535 |
|
|
|
|
|
Cash and cash equivalents, beginning of year |
|
|
17,738 |
|
|
|
14,124 |
|
|
|
12,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents, end of year |
|
$ |
14,124 |
|
|
$ |
12,685 |
|
|
$ |
14,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net cash provided by operating activities was $23.8 million in 2012, $3.1 million in 2013 and $13.4
million in 2014. The decline in operating cash flows from 2012 to 2013 was due to a reduction of net income and changes in working capital items, primarily attributable to growth in installment loans receivable in 2013 compared to 2012. Operating
cash flows increased from 2013 to 2014 due to an increase in net income and changes in working capital items year-to-year.
Investing activities for each year were as follows:
|
|
|
Net cash used by investing activities for the year ended December 31, 2014 was $1.1 million which included $2.4 million in capital expenditures
partially offset by $1.1 million in proceeds from the sale of three owned properties (branch locations in St. Louis, Missouri, Grandview, Missouri, and Jackson, Mississippi). The capital expenditures primarily included $1.5 million for technology
and other furnishings at the corporate office and $851,000 for renovations and technology upgrades to existing branches. |
|
|
|
Net cash provided by investing activities for the year ended December 31, 2013 was $3.2 million which included $5.9 million in proceeds from the
sale of the automotive business partially offset by |
54
|
$2.9 million in capital expenditures. The capital expenditures primarily included $1.1 million for technology and other furnishings at the corporate office, $643,000 for renovations and
technology upgrades to existing branches, $545,000 to develop Internet lending operations in the United States and $161,000 to open six de novo branches. |
|
|
|
Net cash used by investing activities for the year ended December 31, 2012 was $1.5 million which included $3.4 million in capital expenditures
that was partially offset by proceeds of $739,000 from the settlement of a life insurance policy and a $1.1 million change in the restricted cash balance. The capital expenditures primarily included $1.1 million for technology and furnishings at the
corporate office and $1.3 million for technology improvements with respect to Direct Credit. The change in the restricted cash balance was a result of the payment of $1.9 million for a legal settlement in Missouri partially offset by an increase in
amounts required to be held pursuant to state licensing requirements. |
Net cash used by financing activities
was $26.0 million in 2012, $7.5 million in 2013 and $10.5 million in 2014. Financing activities for each year were as follow:
|
|
|
Net cash used for financing activities for the year ended December 31, 2014 primarily consisted of $21.8 million in repayments of indebtedness under
the revolving credit facility, $4.5 million in repayments on a term loan, $881,000 in dividend payments to stockholders and $525,000 for the repurchase of 266,000 shares of common stock. These items were partially offset by proceeds received from
the borrowing of $17.5 million under the revolving credit facility. |
|
|
|
Net cash used for financing activities for the year ended December 31, 2013 was $7.5 million, which primarily consisted of $26.5 million in
repayments of indebtedness under the revolving credit facility, $4.5 million in repayments on a term loan, $2.7 million in dividend payments to stockholders and $523,000 for the repurchase of 167,000 shares of common stock. These items were
partially offset by proceeds received from the borrowing of $17.8 million under the revolving credit facility and $9.0 million term loan. |
|
|
|
Net cash used for financing activities for the year ended December 31, 2012 was $26.0 million, which primarily consisted of $24.7 million in
repayments of indebtedness under the revolving credit facility, $32.0 million in repayments on a term loan, $3.6 million in dividend payments to stockholders and $791,000 for the repurchase of 213,000 shares of common stock. These items were
partially offset by proceeds received from the borrowing of $35.2 million under the revolving credit facility. |
Cash
Flows from Discontinued Operations
In our statement of cash flows, the cash flows from discontinued operations are
combined with the cash flows from continuing operations. During 2012, 2013 and 2014, the absence of cash flows from discontinued operations did not have a material effect on our liquidity and capital resource needs.
Short-term Liquidity and Capital Requirements
We believe that our available cash, expected cash flow from operations, and borrowings available under our credit facility will be sufficient to fund our liquidity and capital expenditure requirements
during 2015. Expected short-term uses of cash include funding of any increases in payday and installment loans, debt repayments, interest payments on outstanding debt, financing of branch improvements and small acquisitions, if any, and development
of an Internet lending platform in the United States. Our credit facility matures on July 23, 2016.
We expect that the
majority of our cash requirements will be satisfied through internally generated cash flows, with any shortfall being funded through borrowing under our revolving credit facility. If cash flows from operations, cash resources or availability under
the credit agreement fall below expectations, we may be forced to seek additional financing, restrict growth of the long-term installment loan product, reduce operating expenses, pursue the sale of certain assets or consider other alternatives
designed to enhance liquidity.
55
We believe that any acquisition-related capital requirements would be satisfied by draws on
our current revolving credit facility, an additional term loan under an amended credit facility or a similar debt product. Our ability to pursue business opportunities may be more constrained than in previous years as the maximum amount available
under our revolving portion of the credit agreement has declined from previous years ($27 million in 2013 to $20 million under our Current Credit Agreement).
In November 2008, our board of directors established a regular quarterly dividend of $0.05 per common share. In connection with the amendment to our prior credit agreement in November 2013, we were
prohibited from paying any dividends through the maturity of the prior credit agreement. As a result, our board of directors suspended the regular quarterly cash dividend. Our Current Credit Agreement (dated July 23, 2014), does not directly
restrict the payment of dividends other that through compliance with various financial covenants. The declaration of dividends is subject to the discretion of our board of directors. The future determination as to the payment of cash dividends will
depend on our operating results, financial condition, cash and capital requirements and other factors as the board of directors deems relevant.
Our board of directors has authorized us to repurchase up to $60 million of our 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. As of December 31, 2014, we have repurchased a total of 6.0 million shares at a total cost of approximately $56.5 million, which leaves approximately $3.5 million
that may yet be purchased under the current program, which expires June 30, 2015.
In third quarter 2014, we committed to
a plan to sell our company-owned properties. These properties include (i) a building located in Kansas City, Kansas which is presently leased to an unrelated tenant, (ii) three branch buildings located in St. Louis, Missouri, Grandview,
Missouri and Jackson, Mississippi and (iii) an auto sales facility in Overland Park, Kansas which includes three buildings and accompanying parking spaces.
In fourth quarter 2014, we completed the sale-leaseback of the three branch buildings. Pursuant to the agreements, we sold the three properties for an aggregate purchase price of $1.1 million, net of
fees, and leased each building back over an initial lease term of 10 years. Under the terms of the lease agreements, we are classifying the leases as operating leases.
As of December 31, 2014, the building located in Kansas City, Kansas and the auto sales facility located in Overland Park, Kansas are classified as assets held for sale in the Consolidated Balance
Sheets. The auto sales facility was sold in February 2015 for approximately $1.2 million. The building located in Kansas City, Kansas is currently listed for sale with a commercial broker and we anticipate that it will be sold within the next 12
months.
Long-term Liquidity and Capital Requirements
The following table summarizes our expected long-term capital requirements as of December 31, 2014.
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
|
Less than 1 year |
|
|
2-3 years |
|
|
4-5 years |
|
|
More than 5 years |
|
|
|
(in thousands) |
|
Non-cancelable operating lease commitments |
|
$ |
19,519 |
|
|
$ |
8,730 |
|
|
$ |
8,331 |
|
|
$ |
1,603 |
|
|
$ |
855 |
|
Reasonably assured renewals of operating leases |
|
|
38,324 |
|
|
|
2,548 |
|
|
|
10,913 |
|
|
|
11,637 |
|
|
|
13,226 |
|
Uncertain tax positions |
|
|
177 |
|
|
|
|
|
|
|
177 |
|
|
|
|
|
|
|
|
|
Revolving credit facility |
|
|
12,000 |
|
|
|
12,000 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Interest on revolving credit facility (a) |
|
|
502 |
|
|
|
502 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Long-term debt |
|
|
3,415 |
|
|
|
|
|
|
|
3,415 |
|
|
|
|
|
|
|
|
|
Interest on subordinated debt |
|
|
739 |
|
|
|
416 |
|
|
|
323 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
74,676 |
|
|
$ |
24,196 |
|
|
$ |
23,159 |
|
|
$ |
13,240 |
|
|
$ |
14,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
56
(a) |
Represents estimated interest payments to be made on our revolving credit facility. Interest payments on the revolving credit facility are estimated based on the
current interest rates at December 31, 2014, and assume that the balance remains constant through 2015. |
As
part of our business strategy, we consider acquisitions and strategic business expansion opportunities from time to time. We believe our current cash position, the availability under the credit facility and our expected cash flow from operations
should provide the capital needed to fund internal growth opportunities, assuming no material acquisitions in 2015.
In
response to changes in the overall market, over the past few years we have substantially reduced our branch expansion efforts. The capital costs of opening a de novo branch include leasehold improvements, signage, computer equipment and security
systems, and the costs vary depending on the branch size, location and the services being offered. Historically, the average cost of capital expenditures to open a de novo branch is approximately $50,000. Existing branches require minimal ongoing
capital expenditure, with the majority of any expenditure related to discretionary renovation or relocation projects.
Over
the last several years, we have focused on minimizing discretionary spending as it relates to the look and feel of our branches. We expect to invest in a general branch update and refresh over the next two to three years. Depending on the results
from various market tests, the cost to complete could range between $10,000 and $30,000 per branch.
On September 30,
2011, we acquired Direct Credit. Direct Credit has continued its pre-acquisition ability to generate sufficient cash flows to fund its business and any related growth. Pursuant to our credit agreement, we may provide working capital financing to
support Direct Credits business needs. As we intend to indefinitely reinvest the earnings of our foreign affiliates, those earnings will not be available for repatriation.
In 2012, we introduced new installment loan products (signature loans and auto equity loans) to meet high customer demand for longer-term
loan options. The growth and acceptance of these products by our customers has been very strong. We expect to continue the growth of our longer-term, centrally underwritten installment loan product by introducing it to additional branches within our
branch network, where possible, by transitioning qualifying customers from shorter-term loan products and by actively marketing them to existing and potential customers. As these products progress, we will evaluate the capital requirements needed as
these products are cash flow negative in the early stages due to the long term nature of the products, the larger original loan amounts and lower interest rate.
Off-Balance Sheet Arrangements
In September 2005, we began operating
through a subsidiary as a CSO in our Texas branches. As a CSO, we charge the consumer a fee for arranging for an unrelated third-party lender 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. This arrangement is described in Note 12 to the consolidated financial statements included in Item 8 of this report.
Concentration of Risk
Our short-term lending branches located in the
states of Missouri, California, Kansas and Illinois represented approximately 22%, 15%, 5% and 5%, respectively, of total revenues for the year ended December 31, 2014. Our short-term lending branches located in the states of Missouri,
California, Kansas and Illinois represented approximately 31%, 14%, 7% and 6%, respectively, of total gross profit for the year ended December 31, 2014. To the extent that laws and regulations are passed that affect our ability to offer loans
or the manner in which we offer loans in any one of those states, our financial position, results of operations and cash flows could be adversely affected. As noted above in the Executive Summary section of Item 7 of this report, we have
experienced several negative effects to revenues and gross profit resulting from law changes in recent years.
57
In addition, there was an effort in Missouri to place a voter initiative on the statewide
ballot in each of the November 2012 and November 2014 elections. The voter initiative 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 either election. For the year ended December 31, 2014, our Missouri branches accounted for approximately 22% and 31% of our total revenues and gross profits, respectively. The loss of revenues
and gross profit would likely cause us to violate one or more of the financial covenants under our Current Credit Agreement and our outstanding subordinated notes.
Impact of Inflation
We do not believe that inflation has a material impact
on our income or operations.
Seasonality
Our businesses are seasonal due to fluctuating demand for short-term loans during the year. Historically, we have experienced our highest demand for short-term loans in January and in the fourth calendar
quarter. As a result, to the extent that internally generated cash flows are not sufficient to fund the growth in loans receivable, fourth quarter and the month of January are the most likely periods of time for utilization or increase in borrowings
under our credit facility. Due to the receipt by customers of their income tax refunds, demand for short-term loans has historically declined in the balance of the first quarter of each calendar year and the first month of the second quarter.
Accordingly, this period is typically when any outstanding borrowings under the credit facility would be repaid (exclusive of any other capital-usage activity, such as acquisitions, significant stock repurchases, etc.). Our loss ratio historically
fluctuates with these changes in short-term loan demand, with a higher loss ratio in the second and third quarters of each calendar year and a lower loss ratio in the first and fourth quarters of each calendar year. During mid-second quarter through
third quarter, periodic utilization of our credit facility is not unusual, based on the level of loan losses and other capital-usage activities. Due to the seasonality of our business, results of operations for any quarter are not necessarily
indicative of the results of operations that may be achieved for the full year.
ITEM 7A. |
Quantitative and Qualitative Disclosures About Market Risk |
As of December 31, 2014, we have no material market risk sensitive instruments entered into for trading or other purposes, as defined by accounting principles generally accepted in the United States
of America.
Interest rate risk
To the extent we have any, we invest our excess cash balances in short-term investment grade securities including money market accounts that are subject to interest rate risk. The cash and cash
equivalents reflected on our balance sheet represent largely uninvested cash in our branches and cash-in-transit. The amount of interest income we earn on these funds will decline with a decline in interest rates. However, due to the short-term
nature of short-term investment grade securities and money market accounts, an immediate decline in interest rates would not have a material impact on our financial position, results of operations or cash flows.
As of December 31, 2014, we had $15.4 million of indebtedness, of which $12.0 million is subject to variable interest rates (Federal
Funds rates, LIBOR rates, Prime rates). If prevailing interest rates were to increase 1% (or 100 basis points) over the rates as of December 31, 2014, and the borrowings remained constant, our interest expense would have increased by
$120,000 on an annualized basis.
Foreign currency exchange risk
We are subject to currency exchange rate fluctuations in Canada. We do not currently manage our exposure to risk from foreign currency
exchange rate fluctuations through the use of foreign exchange forward contracts in Canada. As our Canadian operations continue to grow, we will continue to evaluate and implement foreign exchange rate risk management strategies.
58
ITEM 8. |
Financial Statements and Supplementary Data |
Our Consolidated Financial Statements and Supplementary Data appear following Item 15 of this report.
ITEM 9. |
Changes in and Disagreements with Accountants on Accounting and Financial Disclosure |
None
ITEM 9A. |
Controls and Procedures |
Evaluation of
Disclosure Controls and Procedures
We maintain a system of disclosure controls and procedures that are designed to provide
reasonable assurance that information, which is required to be disclosed timely, is accumulated and communicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provide only reasonable, not
absolute, assurance that the objectives of the control system are met. Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e)
of the Securities Exchange Act of 1934, as amended (the Exchange Act)) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that
information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to
allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange
Commissions rules and forms.
Managements Report on Internal Control Over Financial Reporting
Our management is responsible for establishing and maintaining adequate internal control over financial reporting. As defined in Exchange
Act Rule 13a-15(f), internal control over financial reporting is a process designed by, or under the supervision of, our Chief Executive Officer and Chief Financial Officer and effected by our board of directors, management and other personnel, to
provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles.
Under the supervision and with the participation of our management, including our Chief Executive Officer and Chief Financial Officer, we
carried out an evaluation of the effectiveness of our internal control over financial reporting as of December 31, 2014 based on the criteria in Internal ControlIntegrated Framework issued by the Committee of Sponsoring
Organizations of the Treadway Commission (COSO) in Internal ControlIntegrated Framework (2013 framework).
Based upon
this evaluation, our management concluded that our internal control over financial reporting was effective as of December 31, 2014.
Changes in Internal Control Over Financial Reporting
Our internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15 (f)) is designed to provide reasonable assurance regarding the reliability of financial reporting and
the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter
that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting.
59
ITEM 9B. |
Other Information |
None
PART III
ITEM 10. |
Directors, Executive Officers and Corporate Governance |
Incorporated by reference to our Proxy Statement for our 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the year ended
December 31, 2014.
ITEM 11. |
Executive Compensation |
Incorporated by reference to our Proxy Statement for our 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of the year ended December 31, 2014.
ITEM 12. |
Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters |
Incorporated by reference to our Proxy Statement for our 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange
Commission within 120 days after the close of the year ended December 31, 2014.
ITEM 13. |
Certain Relationships and Related Transactions, and Director Independence |
Incorporated by reference to our Proxy Statement for our 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the year ended
December 31, 2014.
ITEM 14. |
Principal Accounting Fees and Services |
Incorporated by reference to our Proxy Statement for our 2015 Annual Meeting of Stockholders to be filed with the Securities and Exchange Commission within 120 days after the close of the year ended
December 31, 2014.
PART IV
ITEM 15. |
Exhibits and Financial Statement Schedules |
The following documents are filed as a part of this report:
|
(1) |
Financial Statements. The following financial statements, contained on pages 62 to 100 of this report, are filed as part of this report under
Item 8Financial Statements and Supplementary Data. |
|
(2) |
Financial Statement Schedules. All schedules have been omitted because they are not applicable, are insignificant or the required information is shown in the
consolidated financial statements or notes thereto. |
|
(3) |
Exhibits. Exhibits are listed on the Exhibit Index at the end of this report. |
60
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, as amended, the Company has duly caused
this Report to be signed on its behalf by the undersigned, thereunto duly authorized.
|
|
|
QC HOLDINGS, INC. |
|
|
By: |
|
/s/ DARRIN J.
ANDERSEN |
|
|
Darrin J. Andersen |
|
|
President and Chief Executive Officer |
Dated: March 12, 2015
Pursuant to the requirements of the Securities Exchange Act of 1934, as amended, this Report has been signed below by the following persons on behalf of the Company and in the capacities indicated on
March 12, 2015.
|
|
|
/s/ RICHARD B.
CHALKER |
|
/s/ DON
EARLY |
Richard B. Chalker |
|
Don Early |
Director |
|
Chairman of the Board |
|
|
/s/ GERALD F.
LAMBERTI |
|
/s/ MARY LOU
EARLY |
Gerald F. Lamberti |
|
Mary Lou Early |
Director |
|
Vice Chairman, Secretary and Director |
|
|
/s/ JACK L.
SUTHERLAND |
|
/s/ DARRIN J.
ANDERSEN |
Jack L. Sutherland |
|
Darrin J. Andersen |
Director |
|
President and Chief Executive Officer |
|
|
(Principal Executive Officer) |
|
|
|
|
/s/ DOUGLAS E.
NICKERSON |
|
|
Douglas E. Nickerson |
|
|
Chief Financial Officer |
|
|
(Principal Financial and Accounting Officer) |
61
QC Holdings, Inc.
Index to Consolidated Financial Statements
62
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
The Board of Directors and Shareholders
QC Holdings, Inc.
We have audited the accompanying consolidated balance sheets of
QC Holdings, Inc. (a Kansas corporation) and subsidiaries (the Company) as of December 31, 2014 and 2013, and the related consolidated statements of operations, comprehensive income (loss), changes in stockholders equity, and
cash flows for each of the three years in the period ended December 31, 2014. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United
States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal
control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on
the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial
statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position
of QC Holdings, Inc. and subsidiaries as of December 31, 2014 and 2013, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2014 in conformity with accounting principles
generally accepted in the United States of America.
|
/s/ GRANT THORNTON LLP |
|
Kansas City, Missouri |
March 12, 2015 |
63
QC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share and per share amounts)
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 |
|
|
December 31, 2014 |
|
ASSETS |
|
|
|
|
|
|
|
|
|
|
|
Current assets: |
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
$ |
12,685 |
|
|
$ |
14,220 |
|
Restricted cash and other |
|
|
1,076 |
|
|
|
950 |
|
Loans receivable, less allowance for losses of $8,272 at December 31, 2013 and $6,794 at December 31,
2014 |
|
|
57,349 |
|
|
|
55,744 |
|
Deferred income taxes |
|
|
981 |
|
|
|
824 |
|
Assets held for sale |
|
|
3,702 |
|
|
|
2,110 |
|
Prepaid expenses and other current assets |
|
|
5,742 |
|
|
|
3,894 |
|
|
|
|
|
|
|
|
|
|
Total current assets |
|
|
81,535 |
|
|
|
77,742 |
|
|
|
|
Non-current loans receivable, less allowance for losses of $2,171 at December 31, 2013 and $2,133 at December 31,
2014 |
|
|
6,332 |
|
|
|
5,603 |
|
Property and equipment, net |
|
|
6,628 |
|
|
|
5,013 |
|
Intangible assets, net |
|
|
1,560 |
|
|
|
835 |
|
Deferred income taxes |
|
|
7,598 |
|
|
|
7,751 |
|
Other assets, net |
|
|
4,451 |
|
|
|
4,555 |
|
|
|
|
|
|
|
|
|
|
Total assets |
|
$ |
108,104 |
|
|
$ |
101,499 |
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND STOCKHOLDERS EQUITY |
|
|
|
|
|
|
|
|
|
|
|
Current liabilities: |
|
|
|
|
|
|
|
|
Accounts payable |
|
$ |
817 |
|
|
$ |
638 |
|
Accrued expenses and other current liabilities |
|
|
4,105 |
|
|
|
2,562 |
|
Accrued compensation and benefits |
|
|
3,665 |
|
|
|
4,130 |
|
Deferred revenue |
|
|
3,669 |
|
|
|
2,917 |
|
Debt due within one year |
|
|
20,800 |
|
|
|
12,000 |
|
|
|
|
|
|
|
|
|
|
Total current liabilities |
|
|
33,056 |
|
|
|
22,247 |
|
|
|
|
Long-term debt |
|
|
3,282 |
|
|
|
3,415 |
|
Other non-current liabilities |
|
|
5,860 |
|
|
|
5,482 |
|
|
|
|
|
|
|
|
|
|
Total liabilities |
|
|
42,198 |
|
|
|
31,144 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Commitments and contingencies |
|
|
|
|
|
|
|
|
|
|
|
Stockholders equity: |
|
|
|
|
|
|
|
|
Common stock, $0.01 par value: 75,000,000 shares authorized; 20,700,250 shares issued and 17,359,382 outstanding at
December 31, 2013; 20,700,250 shares issued and 17,314,791 outstanding at December 31, 2014 |
|
|
207 |
|
|
|
207 |
|
Additional paid-in capital |
|
|
62,976 |
|
|
|
61,561 |
|
Retained earnings |
|
|
30,441 |
|
|
|
34,905 |
|
Treasury stock, at cost |
|
|
(27,575 |
) |
|
|
(26,276 |
) |
Accumulated other comprehensive loss |
|
|
(143 |
) |
|
|
(42 |
) |
|
|
|
|
|
|
|
|
|
Total stockholders equity |
|
|
65,906 |
|
|
|
70,355 |
|
|
|
|
|
|
|
|
|
|
Total liabilities and stockholders equity |
|
$ |
108,104 |
|
|
$ |
101,499 |
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
64
QC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF OPERATIONS
(in thousands, except per share amounts)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Revenues: |
|
|
|
|
|
|
|
|
|
|
|
|
Payday loan fees |
|
$ |
116,809 |
|
|
$ |
110,239 |
|
|
$ |
99,379 |
|
Installment interest and fees |
|
|
19,678 |
|
|
|
31,655 |
|
|
|
38,488 |
|
Other |
|
|
15,529 |
|
|
|
14,238 |
|
|
|
15,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total revenues |
|
|
152,016 |
|
|
|
156,132 |
|
|
|
153,065 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Operating expenses: |
|
|
|
|
|
|
|
|
|
|
|
|
Salaries and benefits |
|
|
34,305 |
|
|
|
34,255 |
|
|
|
33,199 |
|
Provision for losses |
|
|
33,517 |
|
|
|
46,676 |
|
|
|
44,887 |
|
Occupancy |
|
|
17,364 |
|
|
|
17,456 |
|
|
|
17,844 |
|
Depreciation and amortization |
|
|
2,046 |
|
|
|
1,992 |
|
|
|
1,802 |
|
Other |
|
|
11,463 |
|
|
|
12,489 |
|
|
|
14,821 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total operating expenses |
|
|
98,695 |
|
|
|
112,868 |
|
|
|
112,553 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
53,321 |
|
|
|
43,264 |
|
|
|
40,512 |
|
|
|
|
|
Regional expenses |
|
|
11,997 |
|
|
|
9,433 |
|
|
|
8,564 |
|
Corporate expenses |
|
|
20,805 |
|
|
|
19,178 |
|
|
|
18,299 |
|
Depreciation and amortization |
|
|
1,878 |
|
|
|
1,798 |
|
|
|
1,680 |
|
Interest expense |
|
|
2,742 |
|
|
|
1,418 |
|
|
|
1,369 |
|
Impairment of goodwill and intangible assets |
|
|
2,330 |
|
|
|
22,055 |
|
|
|
|
|
Other expense (income), net |
|
|
(1,386 |
) |
|
|
819 |
|
|
|
2,170 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes |
|
|
14,955 |
|
|
|
(11,437 |
) |
|
|
8,430 |
|
Provision (benefit) for income taxes |
|
|
6,078 |
|
|
|
(1,762 |
) |
|
|
3,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations |
|
|
8,877 |
|
|
|
(9,675 |
) |
|
|
5,079 |
|
Gain (loss) from discontinued operations, net of income tax |
|
|
(3,504 |
) |
|
|
(4,318 |
) |
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
5,373 |
|
|
$ |
(13,993 |
) |
|
$ |
5,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average number of common shares outstanding: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
17,169 |
|
|
|
17,370 |
|
|
|
17,484 |
|
Diluted |
|
|
17,226 |
|
|
|
17,370 |
|
|
|
17,512 |
|
|
|
|
|
Earnings (loss) per share: |
|
|
|
|
|
|
|
|
|
|
|
|
Basic: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.50 |
|
|
$ |
(0.55 |
) |
|
$ |
0.29 |
|
Discontinued operations |
|
|
(0.20 |
) |
|
|
(0.24 |
) |
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.30 |
|
|
$ |
(0.79 |
) |
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted: |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.50 |
|
|
$ |
(0.55 |
) |
|
$ |
0.29 |
|
Discontinued operations |
|
|
(0.20 |
) |
|
|
(0.24 |
) |
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.30 |
|
|
$ |
(0.79 |
) |
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
65
QC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Net income (loss) |
|
$ |
5,373 |
|
|
$ |
(13,993 |
) |
|
$ |
5,345 |
|
Other comprehensive income (loss): |
|
|
|
|
|
|
|
|
|
|
|
|
Reclassification adjustment for amounts included in net income related to derivative instrument |
|
|
275 |
|
|
|
|
|
|
|
|
|
Foreign currency translation |
|
|
180 |
|
|
|
(341 |
) |
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total comprehensive income (loss) |
|
$ |
5,828 |
|
|
$ |
(14,334 |
) |
|
$ |
5,446 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
66
QC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS EQUITY
Years Ended December 31, 2012, 2013 and 2014
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding shares |
|
|
Common stock |
|
|
Additional paid-in capital |
|
|
Retained earnings |
|
|
Treasury stock |
|
|
Accumulated other comprehensive (income) loss |
|
|
Total stockholders equity |
|
Balance, December 31, 2011 |
|
|
16,999 |
|
|
$ |
207 |
|
|
$ |
66,623 |
|
|
$ |
45,282 |
|
|
$ |
(32,623 |
) |
|
$ |
(257 |
) |
|
$ |
79,232 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,373 |
|
|
|
|
|
|
|
|
|
|
|
5,373 |
|
Common stock repurchases |
|
|
(213 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(791 |
) |
|
|
|
|
|
|
(791 |
) |
Dividends to stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(3,562 |
) |
|
|
|
|
|
|
|
|
|
|
(3,562 |
) |
Issuance of restricted stock awards |
|
|
370 |
|
|
|
|
|
|
|
(3,231 |
) |
|
|
|
|
|
|
3,231 |
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
1,749 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,749 |
|
Stock option exercises |
|
|
26 |
|
|
|
|
|
|
|
(174 |
) |
|
|
|
|
|
|
225 |
|
|
|
|
|
|
|
51 |
|
Tax impact of stock-based compensation |
|
|
|
|
|
|
|
|
|
|
(161 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(161 |
) |
Reclassification of amount included in net income related to derivative instrument |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
275 |
|
|
|
275 |
|
Foreign currency trranslation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
180 |
|
|
|
180 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2012 |
|
|
17,182 |
|
|
|
207 |
|
|
|
64,806 |
|
|
|
47,093 |
|
|
|
(29,958 |
) |
|
|
198 |
|
|
|
82,346 |
|
Net loss |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(13,993 |
) |
|
|
|
|
|
|
|
|
|
|
(13,993 |
) |
Common stock repurchases |
|
|
(167 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(523 |
) |
|
|
|
|
|
|
(523 |
) |
Dividends to stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(2,659 |
) |
|
|
|
|
|
|
|
|
|
|
(2,659 |
) |
Issuance of restricted stock awards |
|
|
344 |
|
|
|
|
|
|
|
(2,906 |
) |
|
|
|
|
|
|
2,906 |
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
1,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,192 |
|
Tax impact of stock-based compensation |
|
|
|
|
|
|
|
|
|
|
(116 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(116 |
) |
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(341 |
) |
|
|
(341 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2013 |
|
|
17,359 |
|
|
|
207 |
|
|
|
62,976 |
|
|
|
30,441 |
|
|
|
(27,575 |
) |
|
|
(143 |
) |
|
|
65,906 |
|
Net income |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
5,345 |
|
|
|
|
|
|
|
|
|
|
|
5,345 |
|
Common stock repurchases |
|
|
(266 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(525 |
) |
|
|
|
|
|
|
(525 |
) |
Dividends to stockholders |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(881 |
) |
|
|
|
|
|
|
|
|
|
|
(881 |
) |
Issuance of restricted stock awards |
|
|
222 |
|
|
|
|
|
|
|
(1,824 |
) |
|
|
|
|
|
|
1,824 |
|
|
|
|
|
|
|
|
|
Stock-based compensation expense |
|
|
|
|
|
|
|
|
|
|
577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
577 |
|
Tax impact of stock-based compensation |
|
|
|
|
|
|
|
|
|
|
(168 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(168 |
) |
Foreign currency translation |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
101 |
|
|
|
101 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, December 31, 2014 |
|
|
17,315 |
|
|
$ |
207 |
|
|
$ |
61,561 |
|
|
$ |
34,905 |
|
|
$ |
(26,276 |
) |
|
$ |
(42 |
) |
|
$ |
70,355 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
67
QC HOLDINGS, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Cash flows from operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
5,373 |
|
|
$ |
(13,993 |
) |
|
$ |
5,345 |
|
Adjustments to reconcile net income (loss) to net cash provided by operating activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Depreciation and amortization |
|
|
4,284 |
|
|
|
3,922 |
|
|
|
3,482 |
|
Provision for losses |
|
|
46,208 |
|
|
|
54,172 |
|
|
|
44,950 |
|
Deferred income taxes |
|
|
1,902 |
|
|
|
(6,026 |
) |
|
|
(50 |
) |
Non-cash interest expense |
|
|
1,301 |
|
|
|
501 |
|
|
|
481 |
|
Gain from non-cash adjustment to contingent consideration |
|
|
(1,125 |
) |
|
|
|
|
|
|
|
|
Loss (gain) from foreign currency transaction |
|
|
(263 |
) |
|
|
517 |
|
|
|
554 |
|
Loss on debt extinguishment |
|
|
|
|
|
|
116 |
|
|
|
|
|
Gain on cash surrender value of life insurance |
|
|
(351 |
) |
|
|
(532 |
) |
|
|
(135 |
) |
Loss on disposal of property and equipment |
|
|
384 |
|
|
|
548 |
|
|
|
1,531 |
|
Loss from sale of assets of automotive business |
|
|
|
|
|
|
256 |
|
|
|
|
|
Gain on settlement of life insurance policy |
|
|
(739 |
) |
|
|
|
|
|
|
|
|
Loss from sale of automotive loans receivable |
|
|
2,554 |
|
|
|
985 |
|
|
|
|
|
Loss on impairment of goodwill and intangible assets |
|
|
2,330 |
|
|
|
22,734 |
|
|
|
|
|
Stock-based compensation |
|
|
1,749 |
|
|
|
1,192 |
|
|
|
577 |
|
Changes in operating assets and liabilities: |
|
|
|
|
|
|
|
|
|
|
|
|
Loans, interest and fees receivable, net |
|
|
(47,782 |
) |
|
|
(60,757 |
) |
|
|
(42,749 |
) |
Proceeds from sale of automotive loans receivable |
|
|
10,782 |
|
|
|
173 |
|
|
|
|
|
Prepaid expenses and other current assets |
|
|
1,727 |
|
|
|
1,515 |
|
|
|
674 |
|
Other assets |
|
|
687 |
|
|
|
165 |
|
|
|
31 |
|
Accounts payable |
|
|
1,827 |
|
|
|
(1,236 |
) |
|
|
(178 |
) |
Accrued expenses, other liabilities, accrued compensation and benefits and deferred revenue |
|
|
(4,897 |
) |
|
|
(2,707 |
) |
|
|
(1,420 |
) |
Income taxes |
|
|
(2,435 |
) |
|
|
1,825 |
|
|
|
268 |
|
Other non-current liabilities |
|
|
298 |
|
|
|
(317 |
) |
|
|
(2 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Net operating |
|
|
23,814 |
|
|
|
3,053 |
|
|
|
13,359 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from investing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Purchase of property and equipment |
|
|
(3,373 |
) |
|
|
(2,895 |
) |
|
|
(2,379 |
) |
Proceeds from sale of automotive business |
|
|
|
|
|
|
5,926 |
|
|
|
|
|
Proceeds from sale of property and equipment |
|
|
40 |
|
|
|
123 |
|
|
|
1,116 |
|
Changes in restricted cash and other |
|
|
1,099 |
|
|
|
|
|
|
|
126 |
|
Proceeds from settlement of life insurance policy |
|
|
739 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net investing |
|
|
(1,495 |
) |
|
|
3,154 |
|
|
|
(1,137 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash flows from financing activities: |
|
|
|
|
|
|
|
|
|
|
|
|
Borrowings under credit facility |
|
|
35,200 |
|
|
|
17,800 |
|
|
|
17,500 |
|
Payments on credit facility |
|
|
(24,700 |
) |
|
|
(26,500 |
) |
|
|
(21,800 |
) |
Borrowings on long-term debt |
|
|
|
|
|
|
9,000 |
|
|
|
|
|
Repayments of long-term debt |
|
|
(32,000 |
) |
|
|
(4,500 |
) |
|
|
(4,500 |
) |
Payments for debt issuance costs |
|
|
(159 |
) |
|
|
(122 |
) |
|
|
(306 |
) |
Dividends to stockholders |
|
|
(3,562 |
) |
|
|
(2,659 |
) |
|
|
(881 |
) |
Repurchase of common stock |
|
|
(791 |
) |
|
|
(523 |
) |
|
|
(525 |
) |
Exercise of stock options |
|
|
51 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net financing |
|
|
(25,961 |
) |
|
|
(7,504 |
) |
|
|
(10,512 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Effect of exchange rate changes on cash and cash equivalents |
|
|
28 |
|
|
|
(142 |
) |
|
|
(175 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Cash and cash equivalents |
|
|
|
|
|
|
|
|
|
|
|
|
Net increase (decrease) |
|
|
(3,614 |
) |
|
|
(1,439 |
) |
|
|
1,535 |
|
At beginning of year |
|
|
17,738 |
|
|
|
14,124 |
|
|
|
12,685 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
At end of year |
|
$ |
14,124 |
|
|
$ |
12,685 |
|
|
$ |
14,220 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
See accompanying notes to consolidated financial statements.
68
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1DESCRIPTION OF THE BUSINESS
QC Holdings, Inc. and its subsidiaries (hereinafter referred to as the Company) provide various financial services
(primarily payday loans and installment loans) through its retail branches and Internet lending operations. The Company also provides other financial products and services, such as credit services, open-end credit, check cashing services, title
loans, prepaid debit cards, money transfers, money orders and business invoice factoring.
All of the Companys loans and
other services are subject to state regulation, which vary from state to state, as well as to the Consumer Financial Protection Bureau (CFPB) and other federal and local regulation, where applicable. As of December 31, 2014, the Company
operated 409 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.
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. The payday loans are
collateralized either by a check from the customer (for the principal amount of the loan plus a specified fee), ACH authorization or a debit card. The fee charged on payday loans varies by state, but typically ranges from $15 to $20 per $100
borrowed, although recent legislation in a few states has capped the fee below $2 per $100 borrowed. To repay the cash advance, customers may redeem their check by paying cash or they may allow the check, ACH or debit card to be presented to the
bank for collection.
In recent years, the Company has expanded its product offerings to include various types of installment
loans (branch-based, signature and auto equity). Branch-based installment loans are similar to payday loans in principal amount, fees and interest, but allow customers to repay the loan in bi-weekly installments. Signature loans and auto equity
loans are higher-dollar and longer-term installment loans that are centrally underwritten and distributed through the Companys existing branch network. As of December 31, 2014, the Company offered the installment loan products to its
customers in Arizona, California, Colorado, Idaho, Illinois, Missouri, New Mexico, Texas, 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 type of installment loan, amount borrowed and the term of the loan. Generally, the amount that the Company advances under
an installment loan ranges from $400 to $4,000.
The following table summarizes the average principal amount of each type of
installment loan product originated during 2012, 2013 and 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Branch-Based |
|
$ |
537 |
|
|
$ |
593 |
|
|
$ |
604 |
|
Signature |
|
|
1,725 |
|
|
|
1,834 |
|
|
|
1,845 |
|
Auto Equity |
|
|
3,188 |
|
|
|
3,300 |
|
|
|
3,421 |
|
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.
69
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 December 2013, the Company sold its automotive business to a buyer for approximately $6.0 million. All revenue,
expenses and income reported herein have been adjusted to reflect reclassification of the discontinued automotive business unit. See additional information in Note 6.
NOTE 2SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation. The accompanying consolidated financial statements are prepared in accordance with
accounting principles generally accepted in the United States of America (GAAP) and include the accounts of the Company and its subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
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.
With respect to the open-end product, the Company earns interest on the
outstanding balance. The open-end product in Virginia also includes a monthly non-refundable membership fee and 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.
70
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The components of Other revenues as reported in the Consolidated Statements
of Operations are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Credit service fees |
|
$ |
6,731 |
|
|
$ |
6,192 |
|
|
$ |
5,097 |
|
Check cashing fees |
|
|
3,063 |
|
|
|
2,750 |
|
|
|
2,560 |
|
Title loan fees |
|
|
2,677 |
|
|
|
789 |
|
|
|
310 |
|
Open-end credit fees |
|
|
675 |
|
|
|
2,092 |
|
|
|
4,733 |
|
Other fees |
|
|
2,383 |
|
|
|
2,415 |
|
|
|
2,498 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
15,529 |
|
|
$ |
14,238 |
|
|
$ |
15,198 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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, 2013 and 2014. Substantially all cash balances are in excess of federal deposit
insurance limits.
Restricted Cash and Other. Restricted cash and other includes cash in certain money market accounts
and certificates of deposit. The carrying amount of restricted cash and other approximates the estimated fair value at December 31, 2013 and 2014. The cash balances are restricted primarily due to licensing requirements in certain states.
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.
The following table summarizes certain data with respect to the Companys payday loans:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Average amount of cash provided to customer |
|
$ |
321.55 |
|
|
$ |
325.72 |
|
|
$ |
326.34 |
|
Average fee received by the Company |
|
$ |
57.71 |
|
|
$ |
59.30 |
|
|
$ |
59.07 |
|
Average term of loan (days) |
|
|
18 |
|
|
|
18 |
|
|
|
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 provision for losses associated with uncollectible loans. For payday loans, all accrued fees, interest and
outstanding principal are charged off on the date the Company receives a returned check, a rejected ACH or denied debit card submission, generally within 14 days after the due date of the payday loan. 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.
71
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 and installment 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 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. In connection with the Companys decision in 2013
to close 35 branches during the first half of 2014, the Company recorded a $1.0 million qualitative adjustment to increase its allowance for loan losses as of December 31, 2013. As of December 31, 2014, the Company determined that no
qualitative adjustment to the allowance for payday loan losses was necessary.
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 (using a trailing average of
charge-offs to total volume that approximates the average term of the underlying type of installment loan) and qualitative factors, with consideration given to recent credit loss trends and economic factors. In connection with the Companys
decision in 2013 to close 35 branches during the first half of 2014, the Company recorded a $262,000 qualitative adjustment to increase its allowance for loan losses as of December 31, 2013. As of December 31, 2014, the Company determined
that no qualitative adjustment to the allowance for installment loan losses was necessary.
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, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Cash received from sale of payday loan receivables |
|
$ |
685 |
|
|
$ |
540 |
|
|
$ |
772 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
72
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 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, marketing and other costs incurred by the business units. The provision for losses is also a component of operating expenses.
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.
Assets Held for Sale. Assets held for sale represent buildings, land and leasehold improvements for locations that have met the criteria of held for sale accounting. In third quarter
2014, the Company committed to a plan to sell its company-owned properties. These properties included (i) a building located in Kansas City, Kansas which is presently leased to an unrelated tenant, (ii) three branch buildings located in
St. Louis, Missouri, Grandview, Missouri and Jackson, Mississippi and (iii) an auto sales facility in Overland Park, Kansas which includes three buildings and accompanying parking spaces. These assets were reclassified to assets held for sale
in the accompanying balance sheet as of December 31, 2013. The Company ceased depreciation on these properties during third quarter 2014.
The Company measures long-lived assets held for sale at the lower of carrying amount or estimated fair value. In 2014, the Company recorded impairment charges totaling $502,000 to reduce the carrying
amount of certain properties held for sale to the propertys estimated fair value less estimated costs to sell. The impairment charges consisted of $291,000 on the two branch buildings located in Grandview, Missouri and Jackson Mississippi and
$211,000 on the auto sales facility.
In fourth quarter 2014, the Company completed a sale-leaseback of the three branch
buildings to an unrelated third party. Pursuant to the agreements entered into, the Company sold the three properties for an aggregate purchase price of $1.1 million, net of fees, and leased each building back over an initial lease term of 10 years.
The net book value of the properties sold was approximately $1.0 million and the Company recorded a gain of approximately $32,000. Under the terms of the lease agreements, the Company is classifying the leases as operating leases.
As of December 31, 2014, the building located in Kansas City, Kansas and the auto sales facility located in Overland Park, Kansas
are classified as assets held for sale in the Consolidated Balance Sheets and the assets were listed for sale with a commercial broker. The Company anticipates that these properties will be sold within the next 12 months.
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. Costs for the development of internal use software totaled $1.3 million, $1.0 million and $289,000 for the years
73
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
ending December 31, 2012, 2013 and 2014, respectively. The Company assesses the recoverability of the carrying amount of capitalized software when events or changes in circumstances indicate
that the carrying amount of an asset or asset group may not be recoverable. See Note 9 for additional information on impairment of capitalized software.
Advertising Costs. Advertising costs, including related printing, postage, referral fees, coupons and search engine marketing, are charged to operations when incurred. Advertising expense was $3.8
million, $3.5 million and $5.1 million for the years ended December 31, 2012, 2013 and 2014, 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. Customer relationships are amortized using the straight-line method over the weighted average useful lives 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.
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
Company evaluates 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 uses a discounted cash flows approach to compute the fair value
of its reporting units. 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 for 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.
As of December 31, 2013, the Company had two reporting units with goodwill and indefinite lived intangible assets that required testing. These units included the branch lending operations in the
United States and the Canadian Internet lending operations (Direct Credit). In 2013, the Company recorded a charge of $21.4 million to impair all of the goodwill associated with its Branch Lending reporting unit and its Direct Credit reporting unit.
In addition, the Company performed an impairment test on its indefinite lived intangible assets as of December 31, 2013 and determined that the indefinite lived intangibles of its Direct Credit reporting unit were impaired and as a result, the
Company recorded a non-cash impairment charge of $669,000. As of December 31, 2014, the Company did not have any goodwill to test. The Company tested the remaining indefinite lived intangible asset of its Direct Credit reporting unit as of
December 31, 2014, and determined there was no impairment. 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
74
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 15.
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 16.
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.
From time to time, the Company enters into transactions for which the tax treatment under the Internal Revenue Code or applicable state
tax laws is uncertain. The Company provides federal and/or state income taxes on such transactions, together with related interest, net of income tax benefit, and any applicable penalties in accordance with accounting guidance for income tax
uncertainties. The Company records income tax uncertainties that are estimated to take more than 12 months to resolve as non-current. Interest and penalties related to unrecognized tax benefits, if any, are recorded in income tax expense. See
additional information in Note 13.
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 3.3 million and 3.4 million shares
of common stock held in treasury at December 31, 2013 and 2014, 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. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.
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. Debt is reported at its
carrying amount in the Consolidated Balance Sheets. As of December 31, 2013 and 2014, the fair value of the Companys outstanding indebtedness 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.
In 2011, the Company terminated an interest rate swap agreement that was
previously entered into as a cash flow hedge to interest rate fluctuations under a prior credit facility. The Companys net loss on terminating the
75
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
swap agreement was $343,000 and this amount was deferred in accumulated other comprehensive income and amortized into earnings as an increase to interest expense over the original term of the
hedged transaction, which was scheduled to terminate in 2012. For the year ended December 31, 2012, the Company recorded interest expense totaling approximately $275,000, related to the termination of the swap agreement.
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 3NEW ACCOUNTING PRONOUNCEMENTS
In June 2014, the FASB issued guidance on accounting for share-based payments when the terms of an award provide that a
performance target could be achieved after the requisite service period. This guidance affects entities that grant their employees share-based payments in which terms of the award provide that a performance target that affects vesting could
be achieved after the requisite service period. The amendments in this guidance require that a performance target that affects vesting and that could be achieved after the requisite service period be treated as a performance condition. As such,
the performance target should not be reflected in estimating the grant-date fair value of the award. This guidance is effective for annual reporting periods beginning after December 15, 2015, including interim periods within that reporting
period, with earlier adoption permitted. The adoption of this guidance is not expected to have a significant effect on the Companys consolidated financial statements.
In May 2014, the FASB issued guidance on revenue recognition which specifies how and when to recognize revenue as well as providing informative, relevant disclosures. This guidance will become effective
for fiscal years beginning after December 15, 2016. The Company is currently evaluating the impact of this guidance on its consolidated financial statements.
In April 2014, the FASB issued guidance on reporting discontinued operations and disclosures of disposals of components of an entity, which changes the criteria for determining which disposals can be
presented as discontinued operations and modifies the related disclosure requirements. Under the new guidance, a discontinued operation is defined as a disposal of a component or group of components that represents a strategic shift that has, or
will have, a major effect on an entitys operations and financial results. The revised guidance is effective for annual fiscal periods beginning after December 15, 2014. Early adoption is permitted. The adoption of this guidance is not
expected to have a significant effect on the Companys consolidated financial statements.
In July 2013, the FASB issued
guidance on the presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists. This update specifies that an unrecognized tax benefit, or a portion of an unrecognized tax
benefit, should be presented in the financial statements as a reduction to a deferred tax asset for a net operating loss carryforward, a similar tax loss, or a tax credit carryforward, with certain exceptions. This update is effective for fiscal
years, and interim periods within those years, beginning after December 15, 2013. The adoption of this guidance did not have a material effect on the Companys consolidated financial statements.
NOTE 4RESTRUCTURING AND OTHER EXIT COSTS
Restructuring. In January 2013, the Company announced 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
76
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
included 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. The Company recorded
approximately $1.2 million in pre-tax charges during year ended December 31, 2013, associated with the restructuring plan. The charges included approximately $394,000 for lease terminations and other related occupancy costs and approximately
$818,000 in severance and benefit costs for the workforce reduction.
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.
During the year ended
December 31, 2013, the Company closed two of its lower performing branches by consolidating each of those branches into a nearby branch. In December 2013, the Company decided it would close or sell 35 underperforming branches during first half
of 2014. The Company recorded approximately $364,000 in pre-tax charges during the year ended December 31, 2013 associated with branch closures. The charges included a $247,000 loss for the disposition of fixed assets, $74,000 for lease
terminations and other related occupancy costs, $32,000 in severance and benefit costs and $11,000 for other costs.
During
the year ended December 31, 2014, the Company closed 21 of the 35 branches discussed above. The Company decided not to sell any branches, thereby keeping 14 of the 35 branches open and fully operational. In addition, the Company closed two
branches in August 2014 that were not consolidated into nearby branches. The Company recorded approximately $280,000 in pre-tax charges during year ended December 31, 2014, associated with the closings. The charges included $166,000 for lease
terminations and other related occupancy costs, $109,000 in severance and benefit costs and $5,000 loss for the disposition of fixed assets.
With respect to the branch closings in 2012, 2013 and 2014, a significant portion of the operations and closing costs are included as discontinued operations (see additional information in 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.
NOTE 5FAIR VALUE MEASUREMENTS
Accounting guidance on fair value measurements establishes a three-tier fair value hierarchy, which prioritizes the
inputs used in measuring fair value. These tiers include: Level 1, defined as observable inputs such as quoted prices in active markets; Level 2, defined as inputs other than quoted prices in active markets that are either directly or indirectly
observable; and Level 3, defined as unobservable inputs in which little or no market data exists, therefore requiring an entity to develop its own assumptions. There were no recurring fair value measurements as of December 31, 2013 and
December 31, 2014.
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
77
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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.
The Company measures long-lived assets held for sale at the lower of
carrying amount or estimated fair value. As of December 31, 2014, assets held for sale include the building located in Kansas City, Kansas and the auto sales facility. With respect to the auto sales facility held for sale, the Company recorded
an impairment charge of $211,000 during 2014 to reduce the carrying amount of the property to its estimated fair value less estimated costs to sell.
The following table presents fair value measurements of certain assets on a non-recurring basis as of December 31, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
Total gains (losses) |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Assets held for sale |
|
$ |
|
|
|
$ |
|
|
|
$ |
1,176 |
|
|
$ |
(211 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company evaluates its goodwill and indefinite life intangibles as part of its annual impairment
testing. For the year ended December 31, 2013, the Company recorded a $21.4 million non-cash impairment charge to goodwill, which included $15.7 million to its Branch Lending reporting unit and $5.7 million to its Direct Credit reporting unit.
In addition, it was determined that the trade name intangible asset associated with the acquisition of Direct Credit in September 2011 was impaired. For the year ended December 31, 2013, the Company recorded a non-cash impairment charge of
$669,000.
During the year ended December 31, 2013, the Company recorded an impairment of $244,000 on fixed assets in
connection with the 35 branches the Company had scheduled to close during first half of 2014. 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, 2013
(in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Fair Value Measurements |
|
|
Total gains (losses) |
|
|
|
Level 1 |
|
|
Level 2 |
|
|
Level 3 |
|
|
Goodwill impairment for Branch Lending and Direct Credit |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
$ |
(21,386 |
) |
Indefinite lived intangible asset impairment for Direct Credit |
|
|
|
|
|
|
|
|
|
|
692 |
|
|
|
(669 |
) |
Impaired fixed assets |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(244 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
|
|
|
$ |
|
|
|
$ |
692 |
|
|
$ |
(22,229 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
78
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 6DISCONTINUED OPERATIONS
Summarized financial information for discontinued operations is presented below (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Total revenues |
|
$ |
37,584 |
|
|
$ |
20,853 |
|
|
$ |
1,952 |
|
Provision for losses (a) |
|
|
12,691 |
|
|
|
7,496 |
|
|
|
63 |
|
Other expenses |
|
|
26,104 |
|
|
|
16,842 |
|
|
|
1,754 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit (loss) |
|
|
(1,211 |
) |
|
|
(3,485 |
) |
|
|
135 |
|
Other, net (b) |
|
|
(4,351 |
) |
|
|
(3,184 |
) |
|
|
132 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) before income taxes |
|
|
(5,562 |
) |
|
|
(6,669 |
) |
|
|
267 |
|
Provision (benefit) for income taxes |
|
|
(2,058 |
) |
|
|
(2,351 |
) |
|
|
1 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gain (loss) from discontinued operations, net of income taxes |
|
$ |
(3,504 |
) |
|
$ |
(4,318 |
) |
|
$ |
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
In 2012 and 2013, the provision for loss amount includes $5.7 million and $6.2 million, respectively, from the discontinued automobile business.
|
(b) |
In 2013, other, net includes a $679,000 impairment charge to goodwill and intangible assets. |
Sale of Automotive Business. In September 2013, the Company approved a plan to discontinue its automotive business. The operating
environment for the Companys automotive business had become increasingly challenging and operating results more volatile over the past several quarters, given the difficult general economic climate. In light of these circumstances, the Company
elected to discontinue its automotive business in order to focus on its consumer lending operations in the U.S. and Canada. In December 2013, the Company completed the disposition of certain assets of its automotive business through an agreement
(Purchase Agreement) with an unaffiliated buyer for approximately $6.0 million. The members of the buyer group include (as minority owners) the daughter and son-in-law of Mary Lou Early, the Vice Chairman of the Board of Directors of QC Holdings,
Inc., (which individuals are also the sister and brother-in-law of Darrin J. Andersen, the President and Chief Executive Officer of QC Holdings, Inc.). The Company believes that the terms of this transaction with the related parties described above
was negotiated at arms length and were no less favorable to the Company than terms it could have obtained from unrelated third parties.
The Purchase Agreement provided for the sale of certain assets primarily consisting of loans receivable, automobile inventory, fixed assets and other assets. In addition, the Buyer hired a significant
number of the Companys automotive business personnel. The Buyer assumed no liabilities in conjunction with the purchase of those assets, other than lease obligations for the four buy-here, pay-here locations previously leased by the Company.
The Company also entered into a lease agreement with Buyer for the one location that is owned by the Company. To facilitate the willingness of one landlord to enter into a new lease with Buyer, the Company guaranteed the rental obligations of Buyer
for 12 months of the lease. The aggregate rental obligation under the lease during the guaranteed period was approximately $36,000.
In 2013, the Company recorded a non-cash loss of $2.8 million in connection with the disposal of its automotive business. Approximately $1.9 million of this charge was a non-cash fair-value adjustment to
customer loans receivable. In addition, the Company recorded a non-cash impairment charge related to a write-off of goodwill and intangible assets totaling $679,000. Other fair value adjustments to vehicle inventories, fixed assets and other items
accounted for the remaining charge of $256,000.
In the third quarter of 2013, prior to the annual impairment assessment, the
Company performed an interim goodwill impairment assessment relative to the goodwill associated with the reporting unit that included the
79
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
automotive business. Based on the assessment, the Company determined that the fair value of this reporting unit was less than the carrying value and therefore performed the second step of the
goodwill impairment assessment, which requires estimating the fair values of the reporting units net identifiable assets and calculating the implied fair value of goodwill. The fair value of this reporting unit was determined by a market
approach. The implied fair value of goodwill was determined to be zero and, therefore, recorded goodwill was impaired and a non-cash impairment charge of $671,000 was recognized in the third quarter of 2013. The goodwill impairment was primarily a
result of lower forecasted margins and increased working capital requirements within this reporting unit. In addition, the Company recorded a non-cash impairment charge for amortizable intangible assets totaling $8,000.
The asset fair values utilized in the impairment assessments discussed above were determined using Level 3 inputs as defined by
accounting guidance.
All revenue and expenses reported for each period herein have been adjusted to reflect reclassification
of the discontinued automotive business. Discontinued operations include the revenue and expenses which can be specifically identified with the automotive business, and excludes any allocation of general administrative corporate costs, except
interest expense. The automotive business was previously accounted for as a reportable segment.
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 on the $32 million term loan under its credit agreement. The Company was subject to recourse provisions, which
required it to repurchase certain automobile loans receivable in the event of a default. The recourse period ended on May 9, 2013. As of December 31, 2013, the balance of the recourse liability was approximately $0. During the year ended
December 31, 2013, the Company recorded a loss of approximately $522,000 as a result of the recourse provisions.
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. 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 were classified as collateralized receivables and the cash proceeds received (approximately $618,000) from
the transfer of these automobile loans receivable were classified as a secured borrowing. At the end of the recourse period, approximately $156,000 of the collateralized receivables was retained by the third party to satisfy the secured borrowing
and the Company recorded an additional loss for this amount.
During 2013, the Company separately sold automobile receivables
to a third party resulting in a loss of $307,000.
Closure of Branches. 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. In December 2013, the Company decided it would close or sell an additional 35 underperforming branches during first half of 2014. During
2014, the Company closed 21 of these branches and decided not to sell any branches, thereby keeping 14 of the 35 branches open and fully operational. In addition, the Company closed two branches in August 2014 that were not consolidated into nearby
branches. The branches closed are reported as discontinued operations in the Consolidated Statements of Operations and related disclosures in the accompanying notes for all periods presented. With respect to 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.
80
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 7SEGMENT INFORMATION
The Companys operating units offer various financial services. The Company reports on its business units as three
reportable segments (Branch Lending, Centralized Lending and E-Lending). The Branch Lending 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 Centralized Lending segment includes long-term installment loans (Signature Loans and Auto Equity Loans) that are centrally underwritten. The E-Lending segment includes the Internet lending operations in the
United States and 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.
The following tables present summarized financial information for the Companys segments (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014 |
|
|
|
Branch Lending |
|
|
Centralized Lending |
|
|
E-Lending |
|
|
Consolidated Total |
|
Total revenues |
|
$ |
126,525 |
|
|
$ |
19,418 |
|
|
$ |
7,122 |
|
|
$ |
153,065 |
|
Provision for losses |
|
|
28,556 |
|
|
|
14,286 |
|
|
|
2,045 |
|
|
|
44,887 |
|
Other expenses |
|
|
61,505 |
|
|
|
2,015 |
|
|
|
4,146 |
|
|
|
67,666 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
36,464 |
|
|
|
3,117 |
|
|
|
931 |
|
|
|
40,512 |
|
Other, net (a) |
|
|
(26,356 |
) |
|
|
(2,647 |
) |
|
|
(3,079 |
) |
|
|
(32,082 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before taxes |
|
$ |
10,108 |
|
|
$ |
470 |
|
|
$ |
(2,148 |
) |
|
$ |
8,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013 |
|
|
|
Branch Lending |
|
|
Centralized Lending |
|
|
E-Lending |
|
|
Consolidated Total |
|
Total revenues |
|
$ |
137,352 |
|
|
$ |
11,552 |
|
|
$ |
7,228 |
|
|
$ |
156,132 |
|
Provision for losses |
|
|
34,646 |
|
|
|
8,758 |
|
|
|
3,272 |
|
|
|
46,676 |
|
Other expenses |
|
|
61,547 |
|
|
|
1,260 |
|
|
|
3,385 |
|
|
|
66,192 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
41,159 |
|
|
|
1,534 |
|
|
|
571 |
|
|
|
43,264 |
|
Impairment of goodwill and intangible assets |
|
|
(15,684 |
) |
|
|
|
|
|
|
(6,371 |
) |
|
|
(22,055 |
) |
Other, net (a) |
|
|
(27,487 |
) |
|
|
(1,697 |
) |
|
|
(3,462 |
) |
|
|
(32,646 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Loss from continuing operations before taxes |
|
$ |
(2,012 |
) |
|
$ |
(163 |
) |
|
$ |
(9,262 |
) |
|
$ |
(11,437 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2012 |
|
|
|
Branch Lending |
|
|
Centralized Lending |
|
|
E-Lending |
|
|
Consolidated Total |
|
Total revenues |
|
$ |
140,873 |
|
|
$ |
3,075 |
|
|
$ |
8,068 |
|
|
$ |
152,016 |
|
Provision for losses |
|
|
28,871 |
|
|
|
1,842 |
|
|
|
2,804 |
|
|
|
33,517 |
|
Other expenses |
|
|
61,105 |
|
|
|
653 |
|
|
|
3,420 |
|
|
|
65,178 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Gross profit |
|
|
50,897 |
|
|
|
580 |
|
|
|
1,844 |
|
|
|
53,321 |
|
Impairment of goodwill and intangible assets |
|
|
(600 |
) |
|
|
|
|
|
|
(1,730 |
) |
|
|
(2,330 |
) |
Other, net (a) |
|
|
(33,497 |
) |
|
|
(516 |
) |
|
|
(2,023 |
) |
|
|
(36,036 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before taxes |
|
$ |
16,800 |
|
|
$ |
64 |
|
|
$ |
(1,909 |
) |
|
$ |
14,955 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
(a) |
Represents expenses not associated directly with operations, which includes regional expenses, corporate expenses, depreciation and amortization, interest, other income
and other expenses. Corporate expenses are allocated to each reporting segment based on each reporting units percentage of revenues. For the year ended December 31, 2012, the E-Lending segment includes a gain of $1.1 million for the
reduction of the contingent consideration liability associated with the acquisition of Direct Credit in 2011. |
81
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, |
|
|
|
2013 |
|
|
2014 |
|
Branch Lending |
|
$ |
90,141 |
|
|
$ |
84,009 |
|
Centralized Lending |
|
|
11,495 |
|
|
|
11,467 |
|
E-Lending |
|
|
6,468 |
|
|
|
6,023 |
|
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
108,104 |
|
|
$ |
101,499 |
|
|
|
|
|
|
|
|
|
|
The operations of the Branch Lending and Centralized Lending segments are all located in the United
States. The operations of the E-Lending segment are located in the United States and Canada.
NOTE 8CUSTOMER RECEIVABLES AND ALLOWANCE FOR LOAN LOSSES
The current portion of loans receivable consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 |
|
|
December 31, 2014 |
|
Current portion: |
|
|
|
|
|
|
|
|
Payday and title loans |
|
$ |
42,813 |
|
|
$ |
37,326 |
|
Installment loans |
|
|
17,470 |
|
|
|
17,745 |
|
Other |
|
|
5,338 |
|
|
|
7,467 |
|
|
|
|
|
|
|
|
|
|
Gross current portion of customer receivables |
|
|
65,621 |
|
|
|
62,538 |
|
Less: Allowance for losses |
|
|
(8,272 |
) |
|
|
(6,794 |
) |
|
|
|
|
|
|
|
|
|
Total current portion of customer receivables, net |
|
$ |
57,349 |
|
|
$ |
55,744 |
|
|
|
|
|
|
|
|
|
|
As of December 31, 2013 and 2014, non-current loans receivable consists entirely of installment
loans.
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, installment loans and open-end credit products. The allowance for losses on consumer loans
offsets the outstanding loan amounts in the Consolidated Balance Sheets.
The Company had approximately $9.7 million in
installment loans receivable that were past due as of December 31, 2014 and approximately 45.7% of this amount was more than 60 days past due. The Company had approximately $7.8 million in installment loans receivable past due as of
December 31, 2013 and approximately 36.8% of this amount was more than 60 days past due.
82
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Allowance for loan losses. The following table summarizes the activity in the
allowance for loan losses (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Balance, beginning of year |
|
$ |
3,908 |
|
|
$ |
7,045 |
|
|
$ |
10,443 |
|
Charge-offs |
|
|
(65,377 |
) |
|
|
(75,581 |
) |
|
|
(76,786 |
) |
Recoveries |
|
|
30,398 |
|
|
|
34,607 |
|
|
|
31,902 |
|
Effect of foreign currency translation |
|
|
2 |
|
|
|
(4 |
) |
|
|
(5 |
) |
Provision for losses |
|
|
38,114 |
|
|
|
44,376 |
|
|
|
43,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
7,045 |
|
|
$ |
10,443 |
|
|
$ |
8,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The provision for losses in the Consolidated Statements of Operations includes losses associated with the
CSO (see note 12 for additional information) and excludes loss activity related to discontinued operations (see note 6 for additional information).
The following table summarizes the activity in the allowance for loan losses by product type during the years ended December 31, 2013 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2014 |
|
|
|
Payday and Title Loans |
|
|
Installment Loans |
|
|
Other |
|
|
Total |
|
Balance, beginning of year |
|
$ |
2,867 |
|
|
$ |
6,092 |
|
|
$ |
1,484 |
|
|
$ |
10,443 |
|
Charge-offs |
|
|
(49,430 |
) |
|
|
(23,202 |
) |
|
|
(4,154 |
) |
|
|
(76,786 |
) |
Recoveries |
|
|
29,238 |
|
|
|
2,664 |
|
|
|
|
|
|
|
31,902 |
|
Effect of foreign currency translation |
|
|
|
|
|
|
|
|
|
|
(5 |
) |
|
|
(5 |
) |
Provision for losses |
|
|
18,685 |
|
|
|
20,476 |
|
|
|
4,212 |
|
|
|
43,373 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
1,360 |
|
|
$ |
6,030 |
|
|
$ |
1,537 |
|
|
$ |
8,927 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, 2013 |
|
|
|
Payday and Title Loans |
|
|
Installment Loans |
|
|
Other |
|
|
Total |
|
Balance, beginning of year |
|
$ |
3,211 |
|
|
$ |
3,435 |
|
|
$ |
399 |
|
|
$ |
7,045 |
|
Charge-offs |
|
|
(57,107 |
) |
|
|
(17,056 |
) |
|
|
(1,418 |
) |
|
|
(75,581 |
) |
Recoveries |
|
|
32,005 |
|
|
|
2,418 |
|
|
|
184 |
|
|
|
34,607 |
|
Effect of foreign currency translation |
|
|
|
|
|
|
|
|
|
|
(4 |
) |
|
|
(4 |
) |
Provision for losses |
|
|
24,758 |
|
|
|
17,295 |
|
|
|
2,323 |
|
|
|
44,376 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
2,867 |
|
|
$ |
6,092 |
|
|
$ |
1,484 |
|
|
$ |
10,443 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
83
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 9PROPERTY AND EQUIPMENT
Property and equipment consisted of the following (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2013 |
|
|
2014 |
|
Furniture and equipment |
|
$ |
22,959 |
|
|
$ |
22,280 |
|
Leasehold improvements |
|
|
17,386 |
|
|
|
16,644 |
|
Vehicles |
|
|
966 |
|
|
|
865 |
|
|
|
|
|
|
|
|
|
|
|
|
|
41,311 |
|
|
|
39,789 |
|
Less: Accumulated depreciation and amortization |
|
|
(34,683 |
) |
|
|
(34,776 |
) |
|
|
|
|
|
|
|
|
|
Total |
|
$ |
6,628 |
|
|
$ |
5,013 |
|
|
|
|
|
|
|
|
|
|
In third quarter 2014, the Company decided to terminate an agreement with a vendor who was assisting with
the development of an automated decision-engine software as part of a new underwriting platform for the Companys single-pay loans. In connection with this decision and the fact that the software is no longer effectively serving its stated
purposes, the Company performed an analysis to determine the fair value of the capitalized costs related to the software. The Company determined that the fair value of the vendors software was zero as the software could not be sold by the
Company nor would the software be used by the Company on an ongoing basis. As a result, the Company recorded an impairment loss of approximately $1.0 million during 2014 associated with writing off the carrying amount of the capitalized costs
associated with the software.
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, 2013, the balance of the deferred liability was approximately $214,000, of which $158,000 was classified
as a non-current liability. As of December 31, 2014, the balance of the deferred liability was approximately $158,000 of which $102,000 is classified as a non-current liability.
Depreciation and amortization expense for property and equipment totaled $3.0 million, $2.9 million and $2.9 million for the years ended
December 31, 2012, 2013 and 2014, respectively.
84
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 10GOODWILL AND INTANGIBLE ASSETS
Goodwill. As of December 31, 2013 and 2014, the Company did not have any goodwill. The Company performed
its annual impairment test as of December 31, 2013 and determined that the fair values of both the Branch Lending and Direct Credit reporting units did not exceed their respective carrying amounts. The amount of impairment for each reporting
unit was calculated by comparing the reporting units implied fair value of 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 each
reporting unit. Any remaining fair value would represent the implied fair value of goodwill on the testing date. The test results showed that the implied fair value of the goodwill for each reporting unit was a negative amount after the allocation
of the fair value to the individual assets and liabilities of each reporting unit and thus, a full impairment of goodwill was recorded for each reporting unit. The following table summarizes by reportable segment the changes in the carrying amount
of goodwill for the year ended December 31, 2013 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Branch Lending |
|
|
E-Lending |
|
|
Total |
|
Balances as of December 31, 2012 |
|
$ |
15,684 |
|
|
$ |
6,107 |
|
|
$ |
21,791 |
|
Impairment |
|
|
(15,684 |
) |
|
|
(5,702 |
) |
|
|
(21,386 |
) |
Effect of foreign currency translation |
|
|
|
|
|
|
(405 |
) |
|
|
(405 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Balances as of December 31, 2013 |
|
$ |
|
|
|
$ |
|
|
|
$ |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
With respect to 2012, the Company performed its annual impairment testing of goodwill and concluded that
no impairment existed at December 31, 2012 for its Branch Lending reporting unit. However, the test results showed that the fair value of the Direct Credit reporting unit did not exceed its carrying amount and a step two analysis was required
to determine the amount of the impairment. As a result, the Company recorded a $1.7 million non-cash, non-tax deductible impairment charge to goodwill for its Direct Credit reporting unit during 2012.
Intangible Assets. The following table summarizes intangible assets (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2013 |
|
|
2014 |
|
Non-amortized intangible assets: |
|
|
|
|
|
|
|
|
Trade names |
|
$ |
692 |
|
|
$ |
692 |
|
|
|
|
|
|
|
|
|
|
Amortized intangible assets: |
|
|
|
|
|
|
|
|
Customer relationships |
|
$ |
2,603 |
|
|
$ |
2,603 |
|
Debt issue costs |
|
|
1,413 |
|
|
|
275 |
|
|
|
|
|
|
|
|
|
|
Gross carrying amount |
|
|
4,016 |
|
|
|
2,878 |
|
Less: Accumulated amortization |
|
|
(3,150 |
) |
|
|
(2,675 |
) |
|
|
|
|
|
|
|
|
|
Amortized intangible assets |
|
|
866 |
|
|
|
203 |
|
Effect of foreign currency translation |
|
|
2 |
|
|
|
(60 |
) |
|
|
|
|
|
|
|
|
|
Total intangible assets, net |
|
$ |
1,560 |
|
|
$ |
835 |
|
|
|
|
|
|
|
|
|
|
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. No impairment of intangible assets was recognized during 2014.
Based on testing results for 2013, the Company concluded that the indefinite lived intangible assets associated with the acquisition of
Direct Credit were impaired and recorded an impairment charge of $669,000 to reduce the value of the indefinite lived intangible assets.
85
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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. During 2012, the Company closed the majority of its ECA branches due to a change in
the payday loan law in South Carolina in 2009 that had negatively impacted revenues and gross profits in those branches.
The
amortization of definite lived intangible assets for customer relationships and non-compete agreements is recorded as amortization expense. The deferred debt issue costs are amortized to interest expense over the life of the related debt
instruments. The following table summarizes the amortization of definite lived intangible assets during the years ended December 31, 2012, 2013 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Customer relationships and non-compete agreements |
|
$ |
913 |
|
|
$ |
861 |
|
|
$ |
605 |
|
Debt issue costs |
|
|
550 |
|
|
|
489 |
|
|
|
348 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
1,463 |
|
|
$ |
1,350 |
|
|
$ |
953 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
As of December 31, 2014, the intangible assets recorded for customer relationships and non-compete
agreements were fully amortized. The following table summarizes the estimated annual interest expense for debt issue costs recorded as of December 31, 2014 (in thousands):
|
|
|
|
|
|
|
December 31, 2014 |
|
2015 |
|
$ |
130 |
|
2016 |
|
|
73 |
|
|
|
|
|
|
Total |
|
$ |
203 |
|
|
|
|
|
|
NOTE 11INDEBTEDNESS
Credit Agreement. The following table summarizes long-term debt at December 31, 2013 and December 31,
2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 |
|
|
December 31, 2014 |
|
Revolving credit facility |
|
$ |
16,300 |
|
|
$ |
12,000 |
|
Term loan |
|
|
4,500 |
|
|
|
|
|
Senior subordinated notes |
|
|
3,282 |
|
|
|
3,415 |
|
|
|
|
|
|
|
|
|
|
Total debt |
|
|
24,082 |
|
|
|
15,415 |
|
Less current portion of debt |
|
|
(20,800 |
) |
|
|
(12,000 |
) |
|
|
|
|
|
|
|
|
|
Long-term debt |
|
$ |
3,282 |
|
|
$ |
3,415 |
|
|
|
|
|
|
|
|
|
|
On July 23, 2014, 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 restated on September 30, 2011 and amended at various times since then. The amendment increases the maximum amount available under the revolving
credit facility from $16 million to $20 million. The Current Credit Agreement contains financial covenants related to a minimum fixed charge coverage ratio, a maximum senior leverage ratio and a minimum liquidity (expressed as consolidated current
assets to total consolidated debt). As of December 31, 2014, the Company was in compliance with these covenants.
86
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 domestic operating subsidiaries. The Company has pledged 65% of the stock of
its two Canadian subsidiary holding companies 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 July 23, 2016.
Borrowings under the facility are available based on two types of loans, Base Rate loans or LIBOR Rate loans. Base Rate loans bear
interest at a rate ranging from 1.50% to 2.50% 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 loans bear interest at rates based on the LIBOR rate for the applicable loan period with a margin over LIBOR ranging from 3.50% to 4.50% 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. The credit facility also includes a non-use fee ranging from 0.375% to 0.625%, which is
based upon the Companys leverage ratio.
The weighted average interest rate for borrowings under the revolving line of
credit at December 31, 2013 and 2014 was 4.1% and 4.0%, respectively.
The prior credit agreement contained various
financial covenants related to, among others, fixed charge coverage, leverage, total indebtedness, liquidity and maximum loss ratio. In fourth quarter 2013, the Company amended the credit facility as it relates to the maximum loss ratio allowed
under the prior credit agreement. As of January 31, 2014, the Company was not in compliance with this revised maximum loss ratio covenant and entered into a fourth amendment with the bank syndicate. As of March 31, 2014, the Company again
was not in compliance with the financial covenant related to maximum loss ratio. On April 24, 2014, the Company entered into a fifth amendment to the prior credit agreement to provide for a trailing 12-month maximum loss ratio of 30% for the
monthly periods ending March 31, 2014 to September 30, 2014. In addition, the amendment also reduced the maximum amount available under the prior revolving credit facility from $18 million to $16 million.
In December 2013, the Company sold substantially all the assets of its automotive business to Buyer for a cash purchase price of
approximately $6.0 million paid at closing. In accordance with certain amendments to the Companys credit facility, the Company used $3.0 million of the sale proceeds to make a mandatory prepayment on its term loan. As of December 31,
2013, the balance of the term loan was $4.5 million. The balance of the term loan was paid in full during 2014.
Subordinated Debt. Under the prior 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. As a condition to entering into the Current Credit Agreement, the lenders required that the maturity date of the subordinated notes be extended. On
July 23, 2014, the Company and the holders of the subordinated notes entered into an amendment to the subordinated notes to extend the maturity of the outstanding notes to September 30, 2016.
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 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
87
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
control. The subordinated notes contain events of default tied to the Companys total debt to total capitalization ratio and total debt to EBITDA ratio. As of December 31, 2014, the
Company was in compliance with these covenants. 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, 2013 and December 31, 2014, the balance of the subordinated notes was approximately $3.3 million and $3.4 million, respectively.
The following table summarizes future principal payments of indebtedness at December 31, 2014 (in thousands):
|
|
|
|
|
|
|
December 31, 2014 |
|
2015 |
|
$ |
12,000 |
|
2016 |
|
|
3,415 |
|
|
|
|
|
|
Total |
|
$ |
15,415 |
|
|
|
|
|
|
NOTE 12CREDIT 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, 2013 and December 31, 2014, the consumers had total loans outstanding with the lender of approximately $2.8 million and $1.5 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 $985,000 as of December 31, 2013 and $380,000 as of December 31, 2014. In 2013, the products offered to consumers in Texas were expanded to include an installment loan product and a new online loan product.
Consistent with the Companys historical experience, losses associated with new product offerings are significantly higher during the initial launch of the product compared to long-term expectations. As a result of this experience and the
Companys guarantee of losses under the CSO model, the liability for estimated losses was significantly increased during 2013.
The following table summarizes the activity in the liability for CSO loan losses during the years ended December 31, 2012, 2013 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
CSO liability: |
|
2012 |
|
|
2013 |
|
|
2014 |
|
Balance, beginning of year |
|
$ |
90 |
|
|
$ |
100 |
|
|
$ |
985 |
|
Charge-offs |
|
|
(3,224 |
) |
|
|
(3,448 |
) |
|
|
(2,751 |
) |
Recoveries |
|
|
889 |
|
|
|
719 |
|
|
|
569 |
|
Provision for losses |
|
|
2,345 |
|
|
|
3,614 |
|
|
|
1,577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Balance, end of year |
|
$ |
100 |
|
|
$ |
985 |
|
|
$ |
380 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
88
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 13INCOME TAXES
The Companys provision (benefit) for income taxes from continuing operations is summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Current: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
$ |
1,111 |
|
|
$ |
375 |
|
|
$ |
2,684 |
|
State |
|
|
102 |
|
|
|
160 |
|
|
|
300 |
|
Foreign |
|
|
196 |
|
|
|
480 |
|
|
|
417 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Current |
|
|
1,409 |
|
|
|
1,015 |
|
|
|
3,401 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred: |
|
|
|
|
|
|
|
|
|
|
|
|
Federal |
|
|
4,220 |
|
|
|
(1,774 |
) |
|
|
358 |
|
State |
|
|
568 |
|
|
|
(239 |
) |
|
|
47 |
|
Foreign |
|
|
(119 |
) |
|
|
(764 |
) |
|
|
(455 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total Deferred |
|
|
4,669 |
|
|
|
(2,777 |
) |
|
|
(50 |
) |
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes |
|
$ |
6,078 |
|
|
$ |
(1,762 |
) |
|
$ |
3,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations: |
|
|
|
|
|
|
|
|
|
|
|
|
Domestic |
|
$ |
15,219 |
|
|
$ |
(4,396 |
) |
|
$ |
8,400 |
|
Foreign |
|
|
(264 |
) |
|
|
(7,041 |
) |
|
|
30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) from continuing operations before income taxes |
|
$ |
14,955 |
|
|
$ |
(11,437 |
) |
|
$ |
8,430 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
89
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The sources of deferred income tax assets (liabilities) are summarized as follows (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2013 |
|
|
2014 |
|
Deferred tax assets related to: |
|
|
|
|
|
|
|
|
Allowance for loan losses |
|
$ |
7,419 |
|
|
$ |
6,168 |
|
Accrued rent |
|
|
666 |
|
|
|
499 |
|
Stock-based compensation |
|
|
2,301 |
|
|
|
2,147 |
|
Unused state tax credits |
|
|
1,054 |
|
|
|
1,089 |
|
Book reserves |
|
|
458 |
|
|
|
411 |
|
Deferred compensation and other employee benefits |
|
|
1,785 |
|
|
|
1,952 |
|
Accrued legal |
|
|
142 |
|
|
|
53 |
|
Foreign net operating loss carry-forwards |
|
|
379 |
|
|
|
456 |
|
Goodwill and intangible assets |
|
|
2,895 |
|
|
|
2,371 |
|
Property and Equipment |
|
|
|
|
|
|
384 |
|
Other |
|
|
443 |
|
|
|
616 |
|
|
|
|
|
|
|
|
|
|
Total gross deferred tax assets |
|
|
17,542 |
|
|
|
16,146 |
|
Less: valuation allowance |
|
|
(1,054 |
) |
|
|
(1,089 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax assets |
|
|
16,488 |
|
|
|
15,057 |
|
|
|
|
|
|
|
|
|
|
|
|
|
Deferred tax liabilities related to: |
|
|
|
|
|
|
|
|
Property and equipment |
|
|
(96 |
) |
|
|
|
|
Loans receivable, tax value |
|
|
(7,538 |
) |
|
|
(6,226 |
) |
Prepaid assets |
|
|
(275 |
) |
|
|
(256 |
) |
|
|
|
|
|
|
|
|
|
Gross deferred tax liabilities |
|
|
(7,909 |
) |
|
|
(6,482 |
) |
|
|
|
|
|
|
|
|
|
Net deferred tax asset |
|
$ |
8,579 |
|
|
$ |
8,575 |
|
|
|
|
|
|
|
|
|
|
The Company has state tax credit and various loss carry-forwards of approximately $1.8 million and $1.8
million as of December 31, 2013 and December 31, 2014, respectively. The deferred tax asset related to these credits and carry-forwards is approximately $1.1 million and $1.1 million as of December 31, 2013 and December 31, 2014,
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 for each subsequent year in which any portion of the credit is
utilized. Until certification to utilize these credits is received, the Company believes that it is not more likely than not that the benefit of these credits will be realized. The loss carry-forwards can only be utilized against income of a certain
character and the tax liabilities of specific subsidiaries in specific jurisdictions, one of which included a discontinued operation. Absent future taxable income of the appropriate character and taxable income in those jurisdictions, it is not more
likely than not that the carry-forwards will be utilized. Accordingly, a valuation allowance in the amount of $1.1 million and $1.1 million has been established at December 31, 2013 and December 31, 2014, respectively. The Company
also has gross foreign net operating loss carry-forwards of approximately $1.8 million that generally expire in 1620 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.
90
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Differences between the Companys effective income tax rate computed for income
(loss) from continuing operations and the statutory federal income tax rate are as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Income tax expense (benefit) using the statutory federal rate in effect |
|
$ |
5,234 |
|
|
$ |
(4,003 |
) |
|
$ |
2,866 |
|
Tax effect of: |
|
|
|
|
|
|
|
|
|
|
|
|
State and local income taxes, net |
|
|
436 |
|
|
|
(52 |
) |
|
|
229 |
|
Goodwill impairment |
|
|
604 |
|
|
|
1,998 |
|
|
|
|
|
Contingent consideration |
|
|
(395 |
) |
|
|
|
|
|
|
|
|
Non-taxable insurance policy proceeds |
|
|
(259 |
) |
|
|
|
|
|
|
|
|
Section 162(m) limitation |
|
|
142 |
|
|
|
|
|
|
|
|
|
Other |
|
|
316 |
|
|
|
295 |
|
|
|
256 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total provision (benefit) for income taxes |
|
$ |
6,078 |
|
|
$ |
(1,762 |
) |
|
$ |
3,351 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Effective tax rate |
|
|
40.7 |
% |
|
|
15.4 |
% |
|
|
39.8 |
% |
Statutory federal tax rate |
|
|
35.0 |
% |
|
|
35.0 |
% |
|
|
34.0 |
% |
The effective income tax rate for the year ended December 31, 2014 was 39.8% compared to 15.4% in
the prior year. The increase is primarily related to the goodwill impairment charge to the Direct Credit reporting unit and other certain non-deductible expenses as a percentage of the pre-tax loss in the prior year.
As of December 31, 2013 and 2014, the accumulated undistributed earnings of foreign affiliates were a deficit of $7.0 million and
$6.9 million, respectively. If the accumulated earnings of the foreign affiliates become positive in the future, the Company intends to indefinitely reinvest such earnings in the business of its foreign affiliates, and thus, no federal or state
income taxes or foreign withholding taxes will be provided for amounts which would become payable, if any, on the distribution of such earnings.
Uncertain Tax Positions. A summary of the total amount of unrecognized tax benefits for the years ended December 31, 2013 and 2014 is as follows (in thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, |
|
|
|
2013 |
|
|
2014 |
|
Balance at beginning of year |
|
$ |
123 |
|
|
$ |
190 |
|
Additions for tax positions taken during the current year |
|
|
78 |
|
|
|
2 |
|
Reductions for tax positions taken during prior years |
|
|
(1 |
) |
|
|
|
|
Lapse of statute of limitations |
|
|
(10 |
) |
|
|
(15 |
) |
|
|
|
|
|
|
|
|
|
Balance at end of year |
|
$ |
190 |
|
|
$ |
177 |
|
|
|
|
|
|
|
|
|
|
Approximately $12,000 of the total unrecognized tax benefits at December 31, 2014, 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 2012, 2013 or 2014.
The Company does not anticipate any material changes in the amount of unrecognized tax benefits in the next twelve months.
91
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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, 2014:
|
|
|
|
|
|
|
Federal |
|
State and Foreign |
|
|
|
Statute remains open |
|
2011-2014 |
|
2010-2014 |
Tax years currently under examination |
|
N/A |
|
N/A |
NOTE 14EMPLOYEE BENEFIT PLANS
The Company has established a defined-contribution 401(k) benefit plan that covers substantially all its full-time
employees. The Companys matching contributions and administrative expenses relating to the 401(k) plan were $436,000, $450,000 and $411,000 during 2012, 2013 and 2014, 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. The Companys matching contributions and administrative expenses relating to the plan were $188,000, $181,000, and $156,000 during 2012, 2013 and 2014, respectively. Deferred amounts are
credited with deemed gains or losses of the underlying hypothetical investments. For the years ended December 31, 2012, 2013 and 2014, the Company recognized compensation expense of approximately $354,000, $613,000 and $188,000, respectively,
as a result of deemed gains on the hypothetical investments. Included in Other Liabilities (non-current) are amounts deferred under this plan of approximately $3.7 million and $4.0 million at December 31, 2013 and 2014, 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 $3.8 million and $3.9 million at December 31, 2013 and 2014, 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, 2012, 2013 and 2014, the Company recognized gains totaling $351,000, $532,000 and
$135,000, respectively, on its investments associated with the life insurance policies, reflected in the cash surrender value.
92
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
NOTE 15STOCKHOLDERS 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, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Income (loss) from continuing operations |
|
$ |
8,877 |
|
|
$ |
(9,675 |
) |
|
$ |
5,079 |
|
Gain (loss) from discontinued operations available to common stockholders |
|
|
(3,504 |
) |
|
|
(4,318 |
) |
|
|
266 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income (loss) available to common stockholders |
|
$ |
5,373 |
|
|
$ |
(13,993 |
) |
|
$ |
5,345 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average basic common shares outstanding |
|
|
17,169 |
|
|
|
17,370 |
|
|
|
17,484 |
|
Incremental shares from assumed conversion of stock options, unvested restricted shares and unvested performance-based
shares |
|
|
57 |
|
|
|
|
|
|
|
28 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Weighted average diluted common shares outstanding |
|
|
17,226 |
|
|
|
17,370 |
|
|
|
17,512 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Earnings (loss) per share |
|
|
|
|
|
|
|
|
|
|
|
|
Basic |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.50 |
|
|
$ |
(0.55 |
) |
|
$ |
0.29 |
|
Discontinued operations |
|
|
(0.20 |
) |
|
|
(0.24 |
) |
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.30 |
|
|
$ |
(0.79 |
) |
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Diluted |
|
|
|
|
|
|
|
|
|
|
|
|
Continuing operations |
|
$ |
0.50 |
|
|
$ |
(0.55 |
) |
|
$ |
0.29 |
|
Discontinued operations |
|
|
(0.20 |
) |
|
|
(0.24 |
) |
|
|
0.01 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net income (loss) |
|
$ |
0.30 |
|
|
$ |
(0.79 |
) |
|
$ |
0.30 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The Company has approximately 17.2 million shares, 17.4 million shares and 17.3 million
shares outstanding at December 31, 2012, 2013 and 2014, respectively. For financial reporting purposes, however, unvested restricted shares in the amount of approximately 604,000 shares, 315,000 shares and 117,000 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, 2012, 2013 and 2014, respectively.
Anti-dilutive securities. Options to purchase approximately 2.6 million shares, 2.5 million shares and 1.6 million
shares of common stock were excluded from the diluted earnings per share calculation for the years ended December 31, 2012, 2013 and 2014, 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 repurchased in
the open market or privately approximately 105,000 shares, 66,000 shares and 197,000 shares during the years ended December 31, 2012, 2013, and 2014, respectively. As of December 31, 2014, the Company had approximately $3.5 million that
may yet be utilized to repurchase shares under the current program. 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.
93
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 connection with the amendment to the Companys credit agreement in November 2013, the Company was prohibited from paying any dividends through the
maturity of the prior credit agreement. As a result, the Companys board of directors suspended the regular quarterly cash dividend. The Current Credit Agreement (dated July 23, 2014), does not directly restrict the payment of dividends
other that through compliance with various financial covenants. The declaration of dividends is subject to the discretion of the Companys board of directors. The future determination as to the payment of cash dividends will depend on operating
results, financial condition, cash and capital requirements and other factors as the board of directors deems relevant. For the years ended December 31, 2012, 2013, and 2014 the Company declared dividends on its common stock of $0.20 per share,
$0.15 per share and $0.05 per share, respectively.
NOTE 16STOCK-BASED COMPENSATION
Long-Term Incentive Stock Plans. As of December 31, 2014, 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. In June 2009, the maximum number of shares of common stock of the Company reserved and available for issuance under the 2004 Plan was increased to five million shares. As of December 31, 2014, there are approximately
179,311 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 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.
94
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
Share-Based Compensation. The following table summarizes the stock-based
compensation expense reported in net income (loss) for the years ended December 31, 2012, 2013 and 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Employee stock-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards |
|
$ |
1,355 |
|
|
$ |
987 |
|
|
$ |
525 |
|
Stock options |
|
|
213 |
|
|
|
17 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,568 |
|
|
|
1,004 |
|
|
|
525 |
|
Non-employee director stock-based compensation: |
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock awards |
|
|
181 |
|
|
|
188 |
|
|
|
52 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total stock-based compensation |
|
$ |
1,749 |
|
|
$ |
1,192 |
|
|
$ |
577 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The related income tax benefit recognized in earnings from share-based compensation arrangements was
$673,000, $459,000 and $222,000 for the years ended December 31, 2012, 2013 and 2014, 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 2012, 2013 and 2014.
The total intrinsic value of options exercised during the year ended
December 31, 2012 was $43,000. No options were exercised during the years ended December 31, 2013 and 2014.
No
options vested during the year ended December 31, 2014.
A summary of all stock option activity under the equity
compensation plans for the year ended December 31, 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Options |
|
|
Weighted Average Exercise Price |
|
|
Weighted Average Remaining Contractual Term (years) |
|
|
Aggregate Intrinsic Value |
|
|
|
|
|
|
|
|
|
|
|
|
(in thousands) |
|
Outstanding, January 1, 2014 |
|
|
2,542,752 |
|
|
$ |
9.84 |
|
|
|
|
|
|
|
|
|
Exercised |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Expired |
|
|
(934,555 |
) |
|
|
12.69 |
|
|
|
|
|
|
|
|
|
Forfeited |
|
|
(5,026 |
) |
|
|
13.76 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Outstanding, December 31, 2014 |
|
|
1,603,171 |
|
|
$ |
8.16 |
|
|
|
2.3 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Exercisable, December 31, 2014 |
|
|
1,603,171 |
|
|
$ |
8.16 |
|
|
|
2.3 |
|
|
$ |
0 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
95
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The following table summarizes information about options outstanding and exercisable at
December 31, 2014:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
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 |
|
|
|
4.1 |
|
|
$ |
4.39 |
|
|
|
525,492 |
|
|
$ |
4.39 |
|
$ 5 to $10 |
|
|
780,902 |
|
|
|
1.0 |
|
|
|
9.47 |
|
|
|
780,902 |
|
|
|
9.47 |
|
$10 to $15 |
|
|
233,927 |
|
|
|
3.0 |
|
|
|
10.42 |
|
|
|
233,927 |
|
|
|
10.42 |
|
$15 to $20 |
|
|
62,850 |
|
|
|
0.1 |
|
|
|
15.07 |
|
|
|
62,850 |
|
|
|
15.07 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1,603,171 |
|
|
|
2.3 |
|
|
$ |
8.16 |
|
|
|
1,603,171 |
|
|
$ |
8.16 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Restricted stock grants. A summary of all restricted stock activity under the equity compensation
plans for the year ended December 31, 2014 is as follows:
|
|
|
|
|
|
|
|
|
|
|
Restricted Stock |
|
|
Weighted Average Grant Date
Fair Value |
|
Nonvested balance, January 1, 2014 |
|
|
314,947 |
|
|
$ |
4.49 |
|
Granted |
|
|
24,700 |
|
|
|
2.09 |
|
Vested |
|
|
(222,100 |
) |
|
|
4.43 |
|
Forfeited |
|
|
(722 |
) |
|
|
4.09 |
|
|
|
|
|
|
|
|
|
|
Nonvested balance, December 31, 2014 |
|
|
116,825 |
|
|
$ |
4.09 |
|
|
|
|
|
|
|
|
|
|
During 2014, the Company granted 24,700 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 $52,000, which the Company recognized as stock-based compensation expense in the second quarter 2014.
During 2013, the Company granted 55,020 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 $188,000, which the Company
recognized as stock-based compensation expense in the first quarter 2013.
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.
As of December 31, 2014, there was $44,000 of total unrecognized compensation costs related to nonvested restricted stock grants.
These costs were amortized during January 2015.
The total fair value of restricted stock vested (at vest date) during the
years ended December 31, 2012, 2013 and 2014 was $1.3 million, $1.2 million and $541,000, respectively. The Company requires employees to tender
96
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
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 2012, 2013 and 2014, the Company
repurchased shares from employees totaling 108,270 shares, 100,973 shares, and 70,191 shares, respectively.
Other
Long-Term Incentive Compensation. In 2012, the Company adopted a new Long-Term Incentive Plan (LTIP), which covers all executive officers, other than its Chairman of the Board and its Vice Chairman of the Board. The annual long-term incentive
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.
Since 2012, the Company has granted Performance Units and RSUs to various officers under the LTIP
effective as of January of each calendar year. The value of the Performance Units is based upon a performance measure established by the Companys compensation committee. If the performance measure is met, the 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. 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.
The following table summarizes expense (income) reported in net income from Performance Units and
RSUs (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Performance Units |
|
$ |
242 |
|
|
$ |
(159 |
) |
|
$ |
|
|
RSUs |
|
|
101 |
|
|
|
40 |
|
|
|
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
343 |
|
|
$ |
(119 |
) |
|
$ |
131 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the liability associated with Performance Units and RSUs (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
December 31, 2013 |
|
|
December 31, 2014 |
|
Performance Units |
|
$ |
83 |
|
|
$ |
83 |
|
RSUs |
|
|
141 |
|
|
|
272 |
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
224 |
|
|
$ |
355 |
|
|
|
|
|
|
|
|
|
|
As of December 31, 2014, the total unrecognized costs related to the Performance Units and RSUs was
approximately $292,000. The Company expects that these costs will be amortized to compensation expense over a weighted average period of 1.9 years.
NOTE 17COMMITMENTS 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
97
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
operating lease plus any payments for periods of expected renewals provided 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, 2014 (in thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Non- Cancelable |
|
|
Reasonably Assured Renewals |
|
|
Total |
|
2015 |
|
$ |
8,730 |
|
|
$ |
2,548 |
|
|
$ |
11,278 |
|
2016 |
|
|
5,410 |
|
|
|
4,694 |
|
|
|
10,104 |
|
2017 |
|
|
2,921 |
|
|
|
6,219 |
|
|
|
9,140 |
|
2018 |
|
|
1,050 |
|
|
|
6,484 |
|
|
|
7,534 |
|
2019 |
|
|
553 |
|
|
|
5,153 |
|
|
|
5,706 |
|
Thereafter |
|
|
855 |
|
|
|
13,226 |
|
|
|
14,081 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Total |
|
$ |
19,519 |
|
|
$ |
38,324 |
|
|
$ |
57,843 |
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Rental expense was $10.5 million, $10.7 million and $10.8 million during the years ended
December 31, 2012, 2013 and 2014, 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 12.
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.
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 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.
98
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
The parties have executed a written settlement of this matter, subject to an audit
verification of proposed settlement amounts and receipt of required court approval of the settlement terms. The Companys share of the settlement amount and ancillary expenses, net of indemnification from the prior owners of Direct Credit, is
$500,000 (Canadian). In June 2014, the Companys share of the settlement and the indemnification amount due from the prior owners of Direct Credit, were funded into a settlement trust held by an independent third party trustee. It is expected
that the settlement will be finalized by the end of the first quarter 2015, with execution of its requirements to continue throughout the remainder of 2015.
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 class.
On September 5, 2014, the
district court granted Plaintiffs Motion for Class Certification. The certified class consists of persons and/or entities who were never customers of the Company, but whose 10-digit California area code cell phone numbers were listed by the
Companys customers in the Employment and/or Contacts fields of their loan applications, and who the Company allegedly called using an Automatic Telephone Dialing System for the purpose of collecting or attempting to
collect an alleged debt from the account holder, between August 13, 2008 and August 13, 2012. The Company has asked the court to reconsider its ruling, and it expects a decision on this motion by the end of the first quarter 2015.
While that reconsideration is pending the case has moved to the discovery phase with a trial tentatively scheduled for early
2016.
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 18REGULATORY ENVRIONMENT AND 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 two states in the United States and 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. From a federal perspective, the Company is under
the purview of the Consumer Financial Protection Bureau (CFPB), which has broad supervisory powers over providers of consumer credit products in the United States such as those offered by the Company. The CFPB now has the power to create rules and
regulations that specifically apply to payday lending. As of December 31, 2014, no such rules have been proposed. The CFPB also has the power to examine consumer lending organizations and has begun an active examination process of payday
lenders, including the Company. The CFPB is changing payday lending practices through the examination process and is likely to continue to effect informal rulemaking through examination and enforcement efforts. 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, Kansas and Illinois represented approximately 22%, 15%, 5% and 5% respectively, of total revenues for the year ended
99
QC HOLDINGS, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
December 31, 2014. Company short-term lending branches located in the states of Missouri, California, Kansas and Illinois represented approximately 31%, 14%, 7% and 6%, respectively, of
total gross profit for the year ended December 31, 2014. 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 that impacted the relative significance of a
given state from year to year. For example, historically when customer usage restrictions have been introduced with new legislation, such as in Washington, South Carolina and Kentucky, the Company experienced a 30% to 60% decline in annual revenues
in that state and a more significant decline in gross profit for the state, depending on the types of alternative products that competitors offered within the state.
There have been efforts in Missouri to place a voter initiative on the statewide ballot in each of the November 2012 and November 2014 elections. The initiative 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 either of the elections.
NOTE 19SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION
The following table sets forth certain cash activities for the years ended December 31, 2012, 2013 and 2014 (in
thousands):
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Year Ended December 31, |
|
|
|
2012 |
|
|
2013 |
|
|
2014 |
|
Cash paid during the year for: |
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes |
|
$ |
4,715 |
|
|
$ |
283 |
|
|
$ |
3,109 |
|
Interest |
|
|
2,220 |
|
|
|
1,267 |
|
|
|
853 |
|
NOTE 20SUBSEQUENT EVENTS
Sale of Auto Facility. In February 2015, the Company completed the sale of its auto facility located in Overland
Park, Kansas for approximately $1.2 million, net of fees to an unrelated third party. The net book value of the properties sold was approximately $1.2 million.
Dividend. On March 6, 2015, the Companys board of directors declared a special quarterly dividend of $0.05 per common share. The dividend is payable on April 6, 2015 to stockholders
of record as of March 23, 2015. The Company estimates that the total amount of the dividend will be approximately $900,000.
100
QC HOLDINGS, INC. AND SUBSIDIARIES
Index to Exhibits
|
|
|
Exhibit No. |
|
Description of Document |
3.1 |
|
Amended and Restated Articles of Incorporation. Incorporated by reference and previously filed as an exhibit to the Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 14, 2006. |
|
|
3.2 |
|
Amended and Restated Bylaws. Incorporated by reference and previously filed as an exhibit to Current Report on Form 8-K filed with the Securities and Exchange Commission on December
20, 2006. |
|
|
4.1 |
|
Specimen Stock Certificate. Incorporated by reference and previously filed as an exhibit to Amendment No. 2 to the Registration Statement on Form S-1 filed with the Securities and
Exchange Commission (Registration No. 333-115297) on June 24, 2004. |
|
|
4.2 |
|
Reference is made to exhibits 3.1 and 3.2. |
|
|
10.1 |
|
Amended and Restated QC Holdings, Inc. 2004 Equity Incentive Plan. Incorporated by reference and previously filed as an exhibit to Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 13, 2009. |
|
|
10.2 |
|
Form of Management Stock Agreement. Incorporated by reference and previously filed as an exhibit to Registration Statement on Form S-1 filed with the Securities and Exchange
Commission (Registration No. 333-115297) on May 7, 2004. |
|
|
10.3 |
|
Registration Rights Agreement among QC Holdings, Inc., Don Early and Prides Capital Fund I, LP, dated as of April 18, 2006. Incorporated by reference and previously filed as an
exhibit to Current Report on Form 8-K filed with the Securities and Exchange Commission on April 21, 2006. |
|
|
10.4 |
|
Form of Indemnification Agreement between QC Holdings, Inc. and the indemnified parties. Incorporated by reference and previously filed as an exhibit to Amendment No. 2 to the
Registration Statement on Form S-1 filed with the Securities and Exchange Commission (Registration No. 333-115297) on June 24, 2004. |
|
|
10.5 |
|
Form of Incentive Stock Option Agreement. Incorporated by reference and previously filed as an exhibit to Annual Report on Form 10-K filed with the Securities and Exchange
Commission on March 13, 2009. |
|
|
10.6 |
|
Form of Non-Qualified Stock Option Agreement (Director). Incorporated by reference and previously filed as an exhibit to Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 13, 2009. |
|
|
10.7 |
|
Form of Non-Qualified Stock Option Agreement (Employee). Incorporated by reference and previously filed as an exhibit to Annual Report on Form 10-K filed with the Securities and
Exchange Commission on March 13, 2009. |
|
|
10.8 |
|
Form of Restricted Stock Award Agreement (Employee). Incorporated by reference and previously filed as an exhibit to Current Report on Form 8-K filed with the Securities and
Exchange Commission on February 12, 2009. |
|
|
10.9 |
|
Form of Restricted Stock Award Agreement (Non-Employee Director). Incorporated by reference and previously filed as an exhibit to Annual Report on Form 10-K filed with the
Securities and Exchange Commission on March 14, 2007. |
|
|
10.10 |
|
Third Amended and Restated Credit Agreement dated as of July 23, 2014, among QC Holdings, Inc., U.S. Bank National Association, as Agent and Arranger, and the Lenders that are
parties thereto. Incorporated by reference and previously filed as an exhibit to Current Report on Form 8-K filed with the Securities and Exchange Commission on July 29, 2014. |
|
|
10.11 |
|
Security Agreement dated as of January 19, 2006, by QC Holdings, Inc., as Grantor, for the benefit of U.S. Bank National Association, as Agent for each of the Banks.
Incorporated by reference and previously filed as an exhibit to Current Report on Form 8-K filed with the Securities and Exchange Commission on January 25, 2006. |
101
QC HOLDINGS, INC. AND SUBSIDIARIES
Index to Exhibits(Continued)
|
|
|
Exhibit No. |
|
Description of Document |
10.12 |
|
Subsidiary Security Agreement dated as of January 19, 2006, by QC Financial Services, Inc.; QC Properties, LLC; QC Financial Services of California, Inc.; QC Advance, Inc.; Cash
Title Loans, Inc. and QC Financial Services of Texas, Inc., as Grantors, for the benefit of U.S. Bank National Association, as Agent for each of the Banks. Incorporated by reference and previously filed as an exhibit to Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 25, 2006. |
|
|
10.13 |
|
Unlimited Continuing Guaranty Agreement dated as of January 19, 2006, by QC Financial Services, Inc.; QC Properties, LLC; QC Financial Services of California, Inc.; QC Advance,
Inc.; Cash Title Loans, Inc. and QC Financial Services of Texas, Inc., for the benefit of U.S. Bank National Association, as Agent for each of the Banks. Incorporated by reference and previously filed as an exhibit to Current Report on Form 8-K
filed with the Securities and Exchange Commission on January 25, 2006. |
|
|
10.14 |
|
Pledge Agreement dated as of January 19, 2006, between QC Holdings, Inc., as Pledgor, and U.S. Bank National Association, Agent, as Secured Party. Incorporated by reference and
previously filed as an exhibit to Current Report on Form 8-K filed with the Securities and Exchange Commission on January 25, 2006. |
|
|
10.15 |
|
Pledge Agreement dated as of January 19, 2006, between QC Financial Services, Inc., as Pledgor, and U.S. Bank National Association, Agent, as Secured Party. Incorporated by
reference and previously filed as an exhibit to Current Report on Form 8-K filed with the Securities and Exchange Commission on January 25, 2006. |
|
|
10.16 |
|
First Amendment to Pledge Agreement dated as of December 1, 2006, between QC Financial Services, Inc., as Pledgor, and U.S. Bank National Association, Agent, as Secured Party.
Incorporated by reference and previously filed as an exhibit to Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2007. |
|
|
10.17 |
|
Subsidiary Security Agreement dated as of December 1, 2006, by Express Check Advance of South Carolina, LLC, as Grantor, for the benefit of U.S. Bank National Association, as Agent
for each of the Banks. Incorporated by reference and previously filed as an exhibit to Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2007. |
|
|
10.18 |
|
Unlimited Continuing Guaranty Agreement dated as of December 1, 2006, by Express Check Advance of South Carolina, LLC, as Guarantor, for the benefit of U.S. Bank National
Association, as Agent for each of the Banks. Incorporated by reference and previously filed as an exhibit to Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 14, 2007. |
|
|
10.19 |
|
Subsidiary Security Agreement dated as of December 7, 2007, by QC E-Services, Inc.; QC Auto Services, Inc.; and QC Loan Services, Inc., as Grantors, for the benefit of U.S. Bank
National Association, as Agent for each of the Lenders. Incorporated by reference and previously filed as an exhibit to Current Report on Form 8-K filed with the Securities and Exchange Commission on December 12, 2007. |
|
|
10.20 |
|
Unlimited Continuing Guaranty Agreement dated as of December 7, 2007, by QC E-Services, Inc.; QC Auto Services, Inc.; and QC Loan Services, Inc., for the benefit of U.S. Bank
National Association, as Agent for each of the Lenders. Incorporated by reference and previously filed as an exhibit to Current Report on Form 8-K filed with the Securities and Exchange Commission on December 12, 2007. |
|
|
10.21 |
|
First Amendment to Pledge Agreement dated as of December 7, 2007, between QC Holdings, Inc., as Pledgor, and U.S. Bank National Association, Agent, as Secured Party. Incorporated by
reference and previously filed as an exhibit to Current Report on Form 8-K filed with the Securities and Exchange Commission on December 12, 2007. |
102
QC HOLDINGS, INC. AND SUBSIDIARIES
Index to Exhibits(Continued)
|
|
|
Exhibit No. |
|
Description of Document |
10.22 |
|
Second Amendment to Pledge Agreement dated as of September 30, 2011, between QC Holdings, Inc., as Pledgor, and U.S. Bank National Association, Agent, as Secured Party. Incorporated
by reference and previously filed as an exhibit to Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2011. |
|
|
10.23 |
|
Note Purchase Agreement dated September 30, 2011, between QC Holdings, Inc. and Buyers (Don Early and Gregory L. Smith). Incorporated by reference and previously filed as an exhibit
to Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2011. |
|
|
10.24 |
|
Subordination Agreement dated September 30, 2011, between QC Holdings, Inc. and Subordinate Lenders (Don Early and Gregory L. Smith). Incorporated by reference and previously filed
as an exhibit to Current Report on Form 8-K filed with the Securities and Exchange Commission on October 6, 2011. |
|
|
10.25 |
|
QC Holdings, Inc. Annual Incentive Plan adopted December 6, 2011. Incorporated by reference and previously filed as an exhibit to Current Report on Form 8-K filed with the
Securities and Exchange Commission on December 12, 2011. |
|
|
10.26 |
|
The Executive Nonqualified Excess Plan Document and Adoption Agreement. Incorporated by reference and previously filed as an exhibit to Annual Report on Form 10-K/A filed with the
Securities and Exchange Commission on June 4, 2009. |
|
|
10.27 |
|
QC Holdings, Inc. Annual Incentive Plan Summary. Incorporated by reference and previously filed as an exhibit to Annual Report on Form 10-K/A filed with the Securities and Exchange
Commission on June 4, 2009. |
|
|
10.28 |
|
QC Holdings, Inc. Long-Term Incentive Plan effective January 1, 2012. Incorporated by reference and previously filed as an exhibit to Current Report on Form 8-K filed with the
Securities and Exchange Commission on April 30, 2012. |
|
|
10.29 |
|
Employment Agreement dated as of August 1, 2012, between QC Holdings, Inc. and Don Early. Incorporated by reference and previously filed as an exhibit to Current Report on Form 8-K
filed with the Securities and Exchange Commission on August 2, 2012. |
|
|
10.30 |
|
Employment Agreement dated as of August 1, 2012, between QC Holdings, Inc. and Mary Lou Early. Incorporated by reference and previously filed as an exhibit to Current Report on Form
8-K filed with the Securities and Exchange Commission on August 2, 2012. |
|
|
21.1 |
|
Subsidiaries of the Registrant. * |
|
|
23.1 |
|
Consent of Grant Thornton LLP. * |
|
|
31.1 |
|
Certifications of Chief Executive Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * |
|
|
31.2 |
|
Certifications of Chief Financial Officer of the Company under Rule 13a-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. * |
|
|
32.1 |
|
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. * |
|
|
32.2 |
|
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350. * |
|
|
101 |
|
The following information from the QC Holdings, Inc. Annual Report on Form 10-K for the year ended December 31, 2014, formatted in Extensible Business Reporting
Language (XBRL): (i) Consolidated Balance Sheets, (ii) Consolidated Statements of Operations, (iii) Consolidated Statements of Stockholders Equity, (iv) Consolidated Statements of Cash Flows, and (v) related Notes to the
Consolidated Financial Statements, tagged as blocks of text.* |
103
EXHIBIT 21.1
QC Holdings, Inc.
A Kansas corporation
|
|
|
Subsidiaries (1) |
|
Jurisdiction of Incorporation |
QC Financial Services, Inc. |
|
Missouri |
QC E-Services, Inc. |
|
Kansas |
QC Auto Services, Inc. |
|
Kansas |
QC Loan Services, Inc. |
|
Kansas |
QC Capital, Inc. |
|
Kansas |
QC Canada Holdings, Inc. |
|
British Columbia, Canada |
Infusion, LLC |
|
Nevada |
QC Properties, LLC (2) |
|
Kansas |
QC Financial Services of California, Inc. (2) |
|
California |
QC Financial Services of Texas, Inc. (2) |
|
Kansas |
Express Check Advance of South Carolina, LLC (2) |
|
Tennessee |
Financial Services of North Carolina, Inc. (2) |
|
Delaware |
QC Advance, Inc. (2) |
|
Missouri |
Cash Title Loans, Inc. (2) |
|
Missouri |
Direct Credit Holdings Inc. (3) |
|
British Columbia, Canada |
Direct Credit Canada Inc. (4) |
|
British Columbia, Canada |
Direct Credit Operations Inc. (4) |
|
British Columbia, Canada |
Direct Credit Services Inc. (4) |
|
British Columbia, Canada |
Direct Credit Atlantic Inc. (4) |
|
British Columbia, Canada |
Direct Credit BC Inc. (4) |
|
British Columbia, Canada |
Direct Credit Ontario Inc. (4) |
|
British Columbia, Canada |
Direct Credit Payday Loans Inc. (4) |
|
British Columbia, Canada |
Direct Credit West Inc. (4) |
|
British Columbia, Canada |
Direct Credit 204 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 564 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 565 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 567 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 569 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 570 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 571 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 572 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 573 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 574 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 575 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 576 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 577 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 578 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 579 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 580 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 581 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 582 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 583 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 584 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 585 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 586 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 587 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 588 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 589 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 590 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 591 Inc. (4) |
|
British Columbia, Canada |
Direct Credit 592 Inc. (4) |
|
British Columbia, Canada |
(1) |
All subsidiaries are 100% owned. |
(2) |
Subsidiary of QC Financial Services, Inc. |
(3) |
Subsidiary of QC Canada Holdings Inc. |
(4) |
Subsidiary of Direct Credit Holdings Inc. |
Exhibit 23.1
CONSENT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
We have issued
our report dated March 12, 2015, with respect to the consolidated financial statements in the Annual Report of QC Holdings, Inc. on Form 10-K for the year ended December 31, 2014. We hereby consent to the incorporation by reference of said
reports in the Registration Statements of QC Holdings, Inc. on Form S-8 (File No. 333-119167, effective September 21, 2004).
|
/s/ GRANT THORNTON LLP |
|
Kansas City, Missouri |
March 12, 2015 |
Exhibit 31.1
CERTIFICATIONS
I, Darrin J. Andersen, certify that:
|
1. |
I have reviewed this annual report on Form 10-K of QC Holdings, Inc.; |
|
2. |
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
|
4. |
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
|
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
|
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and |
|
d) |
disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal
quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
|
|
5. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
|
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial information; and |
|
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial
reporting. |
Dated: March 12, 2015
|
/s/ Darrin J. Andersen |
Darrin J. Andersen |
President and Chief Executive Officer |
Exhibit 31.2
CERTIFICATIONS
I, Douglas E. Nickerson, certify that:
|
1. |
I have reviewed this annual report on Form 10-K of QC Holdings, Inc.; |
|
2. |
Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements
made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; |
|
3. |
Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial
condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; |
|
4. |
The registrants other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act
Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and we have:
|
|
a) |
designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material
information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; |
|
b) |
designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide
reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; |
|
c) |
evaluated the effectiveness of the registrants disclosure controls and procedures and presented in this annual report our conclusions about the effectiveness of
the disclosure controls and procedures, as of the end of the period covered by this annual report based on such evaluation; and |
|
d) |
disclosed in this report any change in the registrants internal control over financial reporting that occurred during the registrants most recent fiscal
quarter (the registrants fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrants internal control over financial reporting; and
|
|
5. |
The registrants other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the
registrants auditors and the audit committee of the registrants board of directors (or persons performing the equivalent functions): |
|
a) |
all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely
affect the registrants ability to record, process, summarize and report financial information; and |
|
b) |
any fraud, whether or not material, that involves management or other employees who have a significant role in the registrants internal control over financial
reporting. |
Dated: March 12, 2015
Douglas E. Nickerson
Chief Financial Officer
Exhibit 32.1
CERTIFICATIONS OF CEO PURSUANT TO 18 U.S.C. SECTION 1350
I, Darrin J. Andersen, President
and Chief Executive Officer of QC Holdings, Inc. (the Company), hereby certify pursuant to Section 1350, of chapter 63 of title 18, United States Code, and Section 906 of the
Sarbanes-Oxley Act of 2002, that, to the best of my knowledge, (1) the annual report on Form 10-K of the Company to which this Exhibit is attached (the
Report) fully complies with the requirements of section 13(a) of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of
operations of the Company.
Darrin J. Andersen
Dated: March 12, 2015
Exhibit 32.2
CERTIFICATIONS OF CFO PURSUANT TO 18 U.S.C. SECTION 1350
I, Douglas E. Nickerson, Chief
Financial Officer of QC Holdings, Inc. (the Company), hereby certify pursuant to Section 1350, of chapter 63 of title 18, United States Code, and Section 906 of the Sarbanes-Oxley Act of
2002, that, to the best of my knowledge, (1) the annual report on Form 10-K of the Company to which this Exhibit is attached (the Report) fully complies with the requirements of section 13(a)
of the Securities Exchange Act of 1934, and (2) the information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.
Douglas E. Nickerson
Dated: March 12, 2015
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