10-K 1 a12-29657_110k.htm 10-K

Table of Contents

 

 

 

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, 2012

 

o              TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

 

For the transition period from               to             

 

Commission File Number 333-172244

 


 

TMX Finance LLC

(Exact Name of Registrant as Specified in its Charter)

 


 

Delaware

 

20-1106313

(State of Incorporation)

 

(I.R.S. Employer Identification No.)

 

 

 

15 Bull Street, Savannah, Georgia

 

31401

(Address of Principal Executive Offices)

 

(Zip Code)

 

Registrant’s Telephone Number, Including Area Code: (912) 525-2675

 

Securities registered pursuant to Section 12(b) of the Act: None

 

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 o  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 x  No o

 

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 o  No x

 

(Note:  The registrant has filed all reports pursuant to the Securities Exchange Act of 1934 as applicable for the preceding 12 months)

 

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 o

 

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K.   x

 

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definitions of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer o

 

Accelerated filer o

 

 

 

Non-accelerated filer x

 

Smaller reporting company o

(Do not check if a smaller reporting company)

 

 

 

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).  Yes o  No x

 

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.  Yes x  No o

 

The Company has 100 outstanding limited liability company membership units, all of which are held by TMX Finance Holdings Inc.

 

 

 



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

FORM 10-K FOR THE YEAR ENDED DECEMBER 31, 2012

 

 

 

Page

 

 

 

PART I

 

 

 

Item 1.

Business

3

 

 

 

Item 1A.

Risk Factors

9

 

 

 

Item 1B.

Unresolved Staff Comments

17

 

 

 

Item 2.

Properties

18

 

 

 

Item 3.

Legal Proceedings

18

 

 

 

Item 4.

Mine Safety Disclosures

18

 

 

PART II

 

 

 

Item 5.

Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

19

 

 

 

Item 6.

Selected Financial Data

19

 

 

 

Item 7.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

21

 

 

 

Item 7A.

Quantitative and Qualitative Disclosures About Market Risk

30

 

 

 

Item 8.

Financial Statements and Supplementary Data

31

 

 

 

Item 9.

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

61

 

 

 

Item 9A.

Controls and Procedures

61

 

 

 

Item 9B.

Other Information

61

 

 

PART III

 

 

 

Item 10.

Directors, Executive Officers and Corporate Governance

62

 

 

 

Item 11.

Executive Compensation

64

 

 

 

Item 12.

Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

70

 

 

 

Item 13.

Certain Relationships and Related Transactions, and Director Independence

70

 

 

 

Item 14.

Principal Accountant Fees and Services

72

 

 

PART IV

 

 

 

Item 15.

Exhibits and Financial Statement Schedules

73

 

 

SIGNATURES

 

76

 

2



Table of Contents

 

FORWARD-LOOKING STATEMENTS

 

This report contains “forward-looking statements” that involve risks and uncertainties. Forward-looking statements provide current expectations of future events based on certain expectations, assumptions, estimates and projections. Forward-looking statements can be identified by the fact that they do not relate strictly to historical or current facts and frequently contain words such as “anticipate,” “assume,” “believe,” “budget,” “continue,” “could,” “estimate,” “expect,” “future,” “intend,” “may,” “plan,” “potential,” “predict,” “project,” “will” and other similar terms. All statements that address operating performance, events or developments that we expect or anticipate will occur in the future including statements relating to demand for our products and services, sales growth, comparable store sales, store openings, state of the economy, capital allocation and expenditures, liquidity and the effect of adopting certain accounting standards are forward-looking statements. Forward-looking statements involve risk and are not guarantees of future performance. The Company’s actual results may differ significantly from current expectations as expressed or implied in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in “Item 1A. Risk Factors” in this report. The Company assumes no obligation to revise or update any forward-looking statements, except as required by law.

 

PART I

 

ITEM 1. BUSINESS.

 

Introduction

 

TMX Finance LLC is a privately-owned automobile title lending company with 1,035 company-owned stores in 12 states as of December 31, 2012. We provide our customers with access to funds through loans secured by a first or second lien on the customer’s automobile. Our loan products allow our customers to meet their liquidity needs by borrowing against the value of their vehicles while allowing the customer to retain use of the vehicle during the term of the loan.

 

TMX Finance LLC is a limited liability company that was formed in Delaware in 2003 and exists solely as a holding company to own the equity interests of its subsidiaries. TMX Finance LLC changed its name from TitleMax Holdings, LLC to TMX Finance LLC effective June 21, 2010. Effective September 30, 2012, Tracy Young, the former sole member of TMX Finance LLC, transferred 100% of his membership interests to newly-formed TMX Finance Holdings Inc., or our “Parent,” in exchange for shares of common stock of our Parent. Mr. Young is the sole beneficial owner of the common stock of the Parent. We refer to Mr. Young in this report as the “Sole Shareholder.” Unless the context indicates otherwise, references in this report to “TMX Finance,” the “Company,” “we,” “us,” “our” or similar terms represent TMX Finance LLC and its consolidated affiliates.

 

Our principal corporate offices are located at 15 Bull Street, Suite 200, Savannah, Georgia 31401, and our telephone number is (912) 525-2675. Our website address is www.titlemax.biz. The information on our website is not a part of this report.

 

Overview

 

Our automobile title lending business provides a simple, quick and confidential way for consumers to meet their liquidity needs. We offer title loans in amounts ranging from $100 to $5,000 to customers who generally have limited access to consumer credit from banks, thrift institutions, credit card lenders and other traditional sources of consumer credit. As of December 31, 2012, we had approximately 470,000 customers and $577.2 million in title loans receivable. We believe we are the largest automobile title lender in the United States based on title loans receivable.

 

We principally operate under two brands: TitleMax and TitleBucks. TitleMax requires a minimum appraised vehicle value of more than $500 and offers interest rates that we believe, based on market research, are up to 50% less than those offered by other comparable title lenders. TitleBucks provides loans to customers with less valuable vehicles and charges interest rates that are comparable to those charged by competitors for such loans. TitleBucks was created to capture customers who do not meet TitleMax’s minimum vehicle value requirement and who would otherwise use a competitor. We refer non-qualifying customers from TitleMax to TitleBucks when possible.

 

We also offer a second lien automobile product, with operations conducted within 77 TitleMax stores in Georgia under the EquityAuto Loan, or “EAL,” brand and through 53 standalone stores in Georgia and Florida under the InstaLoan, or “INL,” brand as of December 31, 2012. EAL and INL also offer a first lien product in certain situations. In addition, EAL and INL sell insurance products in connection with their loans as agents for an unaffiliated insurance company. The Company is in the process of moving the EAL business into exclusively standalone stores under the InstaLoan brand with separate management and additional loan products. As of December 31, 2012, EAL and INL had approximately $17.1 million of combined gross title loans receivable.

 

In each of 2012, 2011, and 2010, 87.4%, 85.8% and 86.1%, respectively, of our interest and fee income was attributable to our TitleMax brand and 11.6%, 13.3% and 13.3%, respectively, of our interest and fee income was attributable to our TitleBucks brand. In each of these years, less than 1.0% of our interest and fee income was attributable to our EAL and INL brands.

 

3



Table of Contents

 

2012 Highlights

 

·                  We grew our business significantly by opening or acquiring 281 new stores while closing only two stores, representing a net increase in stores of 36.9% in 2012. These new store openings include 46 new InstaLoan stores that previously operated under the EquityAuto Loan brand within TitleMax stores in Georgia.

 

·                  We increased our title loans receivable to $577.2 million at December 31, 2012, representing an increase of 17.8% compared to December 31, 2011.

 

·                  In June 2012, we entered into a credit agreement, or the “Credit Agreement,” to obtain a $25.0 million senior secured revolving credit facility. In July 2012, the Sole Shareholder made an equity contribution of $14.0 million.  In November 2012, our Parent made an equity contribution to us of $44.8 million.

 

Growth Strategy

 

A key objective of our growth strategy is to establish a leading position as a title lender in each market in which we operate. The three elements of our growth strategy are as follows:

 

Grow Existing Store Receivables.

 

Our store title loans receivable have grown at a compound annual rate of 19.0% over the first four years of the stores’ lives and 5.5% thereafter. Originations for 2012 increased 26.6% compared to 2011. We believe there are significant opportunities to grow earnings at substantially all of our existing stores. Our store managers have a strong incentive to continue the growth of our stores because they are evaluated and compensated in significant part based on their achievement of certain operating and growth goals, which we adjust each year to account for the continued improvement in our business. We believe that by focusing on these specific goals and tying them to employee compensation, we can further enhance the operating efficiency of our stores as well as overall operating margins.

 

Open New Stores Within Our Current Footprint.

 

We seek to develop a large presence in each of the markets in which we operate, and we believe we have significant room to grow by opening additional stores in most of the markets in which we currently operate. When considering whether we should open new stores in these markets, we examine a number of factors, including consumer demand for our products, the extent that new stores will be able to leverage existing stores’ marketing efforts and the extent to which new stores might detract from sales from existing stores.

 

Continued Expansion Into Newer Markets.

 

We have identified several key geographic areas or markets for the potential opening or acquisition of additional stores. These markets were identified following a review of demographics, a determination of whether state regulation is favorable and an internal evaluation of each market’s ability to support our store development program. Based on this review, we have expanded into markets in the southern and western regions of the United States, including Florida, Arizona and Nevada. As is the case with our strategy to open new stores in our more established markets, we believe we have management and capital resources sufficient to support our growth strategy in our new markets.

 

Industry Overview

 

We operate in the alternative financial services industry, providing automobile title loans to consumers who own, in most instances, their vehicle free and clear and need convenient and simple access to funds. Other products offered in this industry include other forms of consumer loans, check cashing, money orders and money transfers. Consumers who use alternative financial services are often referred to as “underserved” or “underbanked” by banks and other traditional financial institutions. Customers use the services provided by the alternative financial services industry for a variety of reasons, including that they often:

 

·                  do not have access to traditional credit-based lenders like banks, thrift institutions and credit card companies;

 

·                  have a sudden and unexpected need for cash due to common financial challenges like medical emergencies, vehicle repairs, divorce and job changes;

 

·                  are self-employed small business owners with an immediate need for short-term working capital;

 

·                  need a small amount of cash immediately and do not have time to wait for a traditional lender to approve a loan; and

 

·                  see such services as a sensible alternative to potentially higher costs and negative credit consequences of other alternatives, such as overdraft fees, bounced check fees or late fees.

 

4



Table of Contents

 

We believe that the underbanked consumer market, and in particular the automobile title loan segment of the alternative financial services industry, will continue to grow as a result of a diminishing supply of competing banking services for this segment of the population, as well as underlying demographic trends, including an overall increase in the population and an increase in the number of self-employed, small business and service sector jobs as a percentage of the total workforce. We believe automobile title loans are particularly well-suited to grow in the current regulatory environment of the markets in which we operate, which we view as stable with respect to our loan products and hostile to other alternative financial services products, such as payday loans.

 

Services

 

Our automobile title lending business provides a customer who is 18 years of age or older (except in Alabama where the customer must be 19 years of age or older) with a loan ranging from $100 to $5,000 that is secured in most cases by a first lien on the customer’s automobile. We determine the loan amount based upon the customer’s need and our appraisal of the wholesale value of his or her automobile. We do not run a credit check on the customer when approving the loan application for our first lien title loan product, and performance on the loan does not impact the customer’s credit.

 

Upon approval of a customer’s application, we provide the customer with the determined loan amount, and the customer provides us with a certificate of title to the appraised automobile; however, the customer retains full use and possession of the automobile. We provide our customers with loan funds primarily through the issuance of a check and do not keep a significant amount of cash on hand at any of our stores. The customer is able to cash the check at a nearby partnered bank that does not require payment of a check cashing fee. Following our receipt from the customer of full repayment of the loan, along with interest and fees, we release the lien on the customer’s vehicle and return the certificate of title to the customer.

 

If a customer fails to remit payment to us when due, we may repossess the customer’s automobile. However, we consider the remedy of repossession as a last resort, and we do not repossess a customer’s vehicle unless we have first exhausted all options for repayment. As a result, we first undertake to contact the customer to obtain payment. Only if the customer is unresponsive or it is otherwise clear that the customer will not be able to meet his or her obligations will we initiate repossession. A regional or district manager must approve all repossessions in advance, and only approved third-party companies handle the repossession. Even when permitted by state law, we typically do not repossess a customer’s automobile until the account is at least 14 days past due. Store managers are responsible for arranging vehicle sales. A repossessed vehicle may only be sold to a licensed used car dealer; our employees may not purchase a repossessed vehicle. As required by state regulations in certain states in which we operate, we return any excess proceeds to the customer if the vehicle sells for an amount in excess of the loan value plus expenses.

 

We conduct business in Texas and certain other states through wholly-owned subsidiaries, each of which is registered in the applicable state as a Credit Services Organization, or “CSO.” These CSOs have entered into credit services organization agreements, or “CSO Agreements,” with third-party lenders, or the “CSO Lenders,” that make the loans to our customers. The CSO Agreements govern the terms by which we perform servicing functions and refer customers to the CSO Lenders for a possible extension of a loan. We process loan applications and commit to reimburse the CSO Lenders for any loans or related fees that are not collected from those customers.

 

Underwriting and Risk Management

 

All underwriting decisions related to our first lien title loan product offered by TitleMax and TitleBucks are made based on the appraised “rough” wholesale value of a customer’s vehicle, as adjusted by store employees’ appraisal of the vehicle based on the following characteristics: year, make, model, exterior, interior and mechanical condition, and mileage. We believe this adjustment process reduces the overall risk of our title loans receivable as compared to other first lien title lenders by having more conservative loan to value ratios which results in more security for each loan and less overall risk for our Company. Prior to approval, a customer must present the vehicle, a lien-free title to the vehicle, a government-issued picture identification and proof of income (except in Alabama). We verify that such title is the correct title for the customer’s vehicle based on a review of the vehicle identification number. Upon completion of the transaction, we send the title to the applicable state Department of Motor Vehicles to have the Company named as the first lien holder for the vehicle. We release the lien only when the customer’s account balance is fully paid.

 

Underwriting of our EAL and INL title loan products is based primarily on the customer’s credit report and the payment history of the first lien loan on the vehicle when applicable. Upon completion of the transaction, we have the Company named typically as the second lien holder for the vehicle and we release the lien only when the customer’s account balance is fully paid.

 

We balance the individual store’s autonomy in the underwriting process with a company-wide risk management system supported primarily by our district and regional managers’ periodic underwriting reviews and store audits. Underwriting reviews include a random review of new loan files and their supporting documentation to confirm the appraisals and related documentation adhere to Company policy. Our district managers’ audits of each store twice per month include document inspection (title, picture, contract and key) and new loan review (verifying appraisal of vehicles and completeness of files). Further, our regional managers typically spend one day each week with a different district manager to review the underwriting process and other matters.

 

5



Table of Contents

 

Customers

 

We serve individuals who typically have limited access to consumer credit from banks, thrift institutions, credit card lenders and other traditional sources of consumer credit. Our typical customers rely on all, or nearly all, of their current income to cover immediate living expenses. Thus, we believe that when unexpected expenses arise, these customers value the convenient, immediate, simple and transparent access to funds that we provide. In addition, our customers who are small business owners often use title lending as a source of operating capital.

 

Advertising and Marketing

 

We market our title loans primarily through network television advertising. Clustering of our stores in geographic regions magnifies the effect of our regional television commercials. Further, we market title loans through online pay per click programs, billboards, electronic message centers located in front of our stores and telemarketing to leads generated through our website. In addition, we create customer loyalty through special incentive programs such as Thanksgiving turkey giveaways and customer referral incentive programs. Individual stores employ telemarketing to current and past customers and distribute flyers to local businesses and apartment complexes.

 

Competition

 

We compete with a limited number of businesses that exclusively provide title loans, as well as with many providers of other alternative financial services, such as payday lenders, installment lenders and pawnbrokers. We believe that the principal competitive factors in the title loan industry and the broader alternative financial services industry are interest rates, fees, loan size, location, customer service and convenience. We believe that we offer a more affordable alternative to late payment fees and overdraft fees, and significantly lower annual percentage rates, or “APRs,” than most other title lenders and other providers of alternative financial services, such as payday lenders.

 

We believe that both the title loan industry and the broader alternative financial services industry in the United States are highly fragmented. Historically, there have been low barriers to entry, creating fragmentation and enabling small operators to compete with national chains.

 

Employees

 

As of December 31, 2012, we had 4,335 employees, comprised as follows:

 

Stores and Field Management

 

3,949

 

Corporate

 

386

 

Total

 

4,335

 

 

We consider our employee relations to be good. None of our employees are covered by collective bargaining agreements, and we have never experienced any organized work stoppage, strike or labor dispute.

 

6



Table of Contents

 

Regulation

 

Our automobile title lending operations are primarily regulated at the state level and are subject to laws, regulations and supervision in each of the states in which we operate. We are also subject to federal and state laws and regulations related to the recording and reporting of certain financial transactions and the privacy of customer information. The following is a general description of significant regulations affecting our automobile title lending business.

 

State and Local Regulation.

 

Each of the states in which we operate has specific state or local licensing requirements applicable to offering loans secured by title to personal property, whether through a traditional loan, title loan or pawn transaction. We obtain state or local licenses where required.

 

We are subject to various state regulations governing the terms of the automobile title loans we offer. Several state regulations limit our recourse against the customer and the amount that we may lend or provide, as well as restrict the amount of finance or service charges or fees that we may assess and, in certain situations, limit a customer’s ability to renew any such loans. For example, we are prohibited from providing automobile title loans in excess of $2,500 in Mississippi and Tennessee, and $4,000 in Illinois (under certain circumstances). In addition, we may not provide an automobile title loan to a customer under the age of 19 in Alabama. In some states, we are required to meet minimum bonding or capital requirements and are subject to various transaction recordkeeping requirements. In several states, we are subject to periodic examination by state regulators, including examination at the discretion of, and without notice by, such state regulators. We must also comply with various consumer disclosure requirements, which are typically similar or equivalent to the federal Truth in Lending Act and corresponding federal regulations. In the states in which we have recourse against the customer for payment of the obligation, our collection activities regarding past due loans may also be subject to consumer debt collection laws and regulations adopted by the various states. In addition, we must comply with general consumer protection laws in each state, including laws governing the repossession and foreclosure of collateral.

 

Our business operates under a variety of state statutes and regulations, including those relating to:

 

·                  licensing and posting of fees;

 

·                  lending practices, including disclosure requirements such as those contained in state truth in lending laws and related consumer protection laws;

 

·                  interest rates and fees;

 

·                  currency reporting;

 

·                  recording and reporting of certain financial transactions;

 

·                  privacy and data security of personal consumer information;

 

·                  prompt remittance of excess proceeds from the sale of repossessed automobiles in certain states in which we operate; and

 

·                  serving as a credit services organization, or “CSO,” in certain states in which we may expand our operations.

 

In addition to state laws and regulations, our business is subject to various local rules and regulations such as local zoning regulation and permit licensing. For example, the Austin, Dallas, El Paso and San Antonio, Texas city councils passed ordinances that restrict extensions of consumer credit by title lenders within city limits by, among other things, linking maximum allowable loan size to 3% of a consumer’s gross annual income, mandating a 25% principal reduction requirement on refinances or renewals and limiting the term of a loan to no more than four installments or renewals. Our subsidiary TitleMax of Texas, Inc. is challenging the legality of the ordinances in Austin and Dallas. The Austin, Dallas and San Antonio ordinances went into effect on May 1, 2012, June 18, 2012 and January 1, 2013, respectively. We are complying with the ordinances in each of these markets. The El Paso ordinance will be effective July 1, 2013.

 

7



Table of Contents

 

Federal Regulation.

 

Our lending activities are also subject to several federal statutes and regulations, including the following:

 

·                  The Dodd-Frank Wall Street Reform and Consumer Protection Act, or the “Dodd-Frank Act,” and implementing regulations thereunder, which may impact the marketing and regulation of the products and services offered by the Company, depending on the extent to which the Company and its products and services are ultimately determined to be subject to such Act and regulations. The Consumer Financial Protection Bureau, or the “CFPB,” was established pursuant to the Dodd-Frank Act as a federal authority responsible for administering and enforcing the laws and regulations for consumer financial products and services. The Dodd-Frank Act does not specifically target title lending, traditional pawn lending or installment lending for CFPB regulation. However, the CFPB is currently in the process of developing rules that could subject the Company to some form of regulatory oversight. The CFPB is specifically prohibited from instituting federal usury interest rate caps.

 

·                  The Gramm-Leach-Bliley Act and its underlying regulations, which relate to privacy and data security and require us to disclose to our customers our privacy policy and practices, including those relating to the sharing of a customer’s nonpublic personal information with third parties. This disclosure must occur when establishing the customer relationship and, in some cases, at least annually thereafter. We must ensure that our systems are designed to protect the confidentiality of customers’ nonpublic personal information, and we have policies and procedures in place to address unauthorized disclosure of a customer’s nonpublic personal information.

 

·                  The Bank Secrecy Act, or “BSA,” as amended by the Uniting and Strengthening America by Providing Appropriate Tools Required to Intercept and Obstruct Terrorism Act of 2001, or “USA PATRIOT Act,” which imposes a range of anti-money laundering, or “AML,” and anti-terrorism obligations on covered financial institutions. As required by the BSA and USA PATRIOT Act, we undertake certain AML and anti-terrorism compliance measures, including steps to verify the identity of our customers, and we may be required to employ other measures to ensure our compliance with requirements that we report and maintain records regarding transactions that satisfy certain thresholds. In addition, the Office of Foreign Assets Control, or “OFAC,” is responsible for administering and enforcing economic and trade sanctions based on U.S. foreign policy and national security goals against targeted foreign countries and regimes, terrorists, international narcotics traffickers, those engaged in activities related to the proliferation of weapons of mass destruction and other threats to the national security, foreign policy or economy of the U.S. to insure that U.S. entities do not engage in transactions with certain prohibited parties, as defined by various Executive Orders and Acts of Congress. OFAC publishes, and routinely updates, lists of names of persons and organizations suspected of aiding, harboring or engaging in terrorist acts, including the Specially Designated Nationals and Blocked Persons. If we find a name on any transaction, account or wire transfer that is on an OFAC list, we must undertake certain specified activities, which could include blocking or freezing the transaction requested, and we must notify the appropriate authorities.

 

·                  The Equal Credit Opportunity Act, or “ECOA,” which prohibits discrimination against any credit applicant on the basis of any protected category, such as race, color, religion, national origin, sex, marital status, age, whether the applicant receives public assistance and whether the applicant has exercised a right under the Consumer Credit Protection Act. The ECOA requires us to notify credit applicants of any action taken on the individual’s credit application. We must provide a loan applicant a Notice of Adverse Action, or “NOAA,” when we deny an application for credit, which must include, among other things, a statement of the ECOA’s prohibition on discrimination and an explanation of the applicant’s rights under the ECOA.

 

·                  The Fair Credit Reporting Act, or “FCRA,” which requires that we give certain notices to customers if we deny credit based upon a credit report or offer a customer less favorable credit terms based upon information in a credit report. Further, the FCRA requires us to implement and follow a “Red Flags Policy” to detect and prevent identity theft.

 

·                  The Truth in Lending Act and its underlying regulations, which impose specific requirements on our disclosure to customers of credit terms, including the annual percentage rate, finance charge, amount financed, total of payments, payment schedule, security, late charges, prepayment and default, related to each automobile title lending transaction.

 

·                  Federal laws which cap the annual percentage rate that may be charged on consumer loans made to active duty military personnel and their immediate families at 36% per year. This 36% annual cap applies to automobile title loans that have terms of 181 days or fewer. In addition, we are subject to the Servicemembers Civil Relief Act, which limits the amount of interest we can charge and our right to repossess collateral from military customers.

 

8



Table of Contents

 

ITEM 1A.  RISK FACTORS.

 

Our business faces a variety of risks and uncertainties, including those described below, that could materially and adversely affect our business, financial condition and results of operations and could cause actual results to differ materially from our expectations and projections. You should read these risk factors in conjunction with “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and our consolidated financial statements and related notes in “Item 8. Financial Statements and Supplementary Data.”

 

Our industry is strictly regulated at the state, federal and local levels. Our failure to comply with applicable laws and regulations governing consumer protection, lending practices and other aspects of our business, as well as changes in applicable laws and regulations, could have a significant adverse impact on our business, results of operations, financial condition and ability to service our debt obligations.

 

Our business and products are subject to extensive regulation by state, federal and local governments that do or may impose significant costs or limitations on the way we conduct or expand our business. In general, these regulations are intended to protect consumers, rather than our investors or creditors. See “Item 1. Business—Regulation” for a summary of the many significant state, federal and local laws and regulations governing our business and industry. Furthermore, the laws and regulations governing our business are subject to change.

 

Our failure or the failure of any of our employees to comply with applicable state, federal and local requirements, whether voluntary or involuntary, could require us to discontinue our automobile title lending business in applicable jurisdictions, which could negatively impact our business. Failure to comply with applicable laws or regulations could result in sanctions by regulatory agencies, civil money penalties or reputational damage, which could have a material adverse effect on our business, financial condition, results of operations and ability to service our debt obligations.

 

The Dodd-Frank Act, as well as potential legislation in various states if adopted, creates significant uncertainty about various important aspects of our business.

 

The Dodd-Frank Act that took effect on July 21, 2010 is extensive and significant legislation that, among other things:

 

·                  creates a liquidation framework for the resolution of large bank holding companies and systemically significant nonbank financial companies;

 

·                  creates a new framework for the regulation of over-the-counter derivatives activities;

 

·                  strengthens the regulatory oversight of securities and capital markets activities by the Securities and Exchange Commission, or “SEC;” and

 

·                  creates the CFPB, a new federal authority responsible for administering and enforcing the laws and regulations for consumer financial products and services.

 

The Dodd-Frank Act will impact the offering, marketing and regulation of consumer financial products and services offered by financial institutions, which may include the products and services offered by the Company. The CFPB has supervision, examination and enforcement authority over the consumer financial products and services of certain non-depository institutions, which could include the Company. Compliance with the regulations implemented under the Dodd-Frank Act or the oversight of the SEC or CFPB may impose costs on, create operational constraints for or place limits on pricing with respect to finance companies such as the Company. Until implementing regulations are issued, no assurance can be given that these new requirements imposed by the Dodd-Frank Act will not increase our cost of doing business, impose new restrictions on the way in which we conduct our business or add significant operational constraints that might impair our profitability. The CFPB also has the power to define and ban “unfair, deceptive or abusive” practices in connection with consumer products.

 

We are currently following legislative and regulatory developments in Congress and in individual states where we conduct business. It is difficult to assess the likelihood of the enactment of any unfavorable federal or state legislation, and there can be no assurance that additional legislative or regulatory initiatives will not be enacted which would severely restrict, prohibit or eliminate our ability to offer title loans. Any federal or state legislative or regulatory action that would serve to restrict the types of activities in which the Company is engaged could have a material adverse impact on our business, prospects, results of operations, financial condition and cash flows and could impair our ability to service our debt obligations and to continue current operations. For example, certain consumer advocacy groups and federal and state legislators have asserted that laws and regulations should be tightened to severely limit, if not eliminate, the availability of certain consumer loan products, including title loans. Additional possible restrictive actions include, among others, the imposition of limits on APRs on consumer loan transactions or the prohibition of cash advance and similar services. The extent of the impact of any future legislative or regulatory changes will depend on the nature of the legislative or regulatory change, the jurisdictions to which the new or modified laws would apply and the amount of business we do in that jurisdiction. Moreover, similar actions by states in which we do not currently operate could limit our opportunities to pursue our growth strategies.

 

9



Table of Contents

 

In addition to state and federal laws and regulations, our business is subject to various local rules and regulations such as local zoning regulation and permit licensing. Local jurisdictions’ efforts to restrict the business of alternative financial services product providers through the use of local zoning and permitting laws have been on the rise. Actions taken in the future by local governing bodies to require special use permits or impose other restrictions on such lenders could have a material adverse effect on us. See “Business—Regulation” in Item 1 of this report.

 

Failure to maintain certain criteria required by state and local regulatory bodies could result in fines or the loss of our licenses to conduct business.

 

Most states in which we operate require licenses to conduct our business. These states or their respective regulatory bodies have established criteria we must meet in order to obtain, maintain and renew those licenses. For example, many of the states in which we operate require us to maintain a minimum amount of net worth or equity. From time to time, we are subject to audits in these states to ensure we are meeting the applicable requirements to maintain these licenses. Failure to meet these requirements could result in the revocation of our existing licenses, the denial of our new licensing requests or the imposition of fines, which could adversely affect our results of operations, cash flows and ability to service our debt obligations. We also cannot guarantee that future license applications or renewals will not be denied. If we were to lose any of our licenses to conduct our business, it could result in the temporary or permanent closure of stores, which could adversely affect our results of operations, cash flows and ability to service our debt obligations.

 

Media reports and public perception of consumer loans, such as automobile title loans, as being predatory or abusive could decrease the demand for our automobile title loans and lead to more restrictive regulation.

 

Certain consumer advocacy groups and federal and state legislators have asserted that laws and regulations should be tightened to severely limit, if not eliminate, the availability of certain loan products, such as automobile title loans, to consumers. The consumer advocacy groups and media reports generally focus on the cost to a consumer for this type of loan, which is often alleged to be higher than the interest typically charged by banks or similar lending institutions to consumers with better credit histories. The consumer advocacy groups and media reports characterize these consumer loans as predatory or abusive. If the negative characterization of these types of loans becomes increasingly accepted by consumers, demand for automobile title loans could significantly decrease, which could have a material adverse effect on our business, results of operations, financial condition and ability to service our debt obligations. Additionally, if the negative characterization of these types of loans is accepted by legislators and regulators, we could become subject to more restrictive laws and regulations, which could have a material adverse effect on our business, results of operations, financial condition and ability to service our debt obligations.

 

Legal proceedings may increase our costs and distract our management team.

 

In the past, we and our competitors have been subject to regulatory proceedings, class action lawsuits and other litigation regarding the offering of alternative financial services. We are currently a defendant in multiple legal proceedings. See “Item 3. Legal Proceedings.” It is likely that in the future, we will be subject to currently unforeseen legal proceedings. The adverse resolution of any current or future legal proceeding could cause us to have to refund fees and interest collected, refund the principal amount of advances, pay damages or other monetary penalties or modify or terminate our operations in certain local, state or federal jurisdictions. The defense of such legal proceedings, even if successful, requires significant time and attention of our senior officers and other management personnel that would otherwise be spent on other aspects of our business and requires the expenditure of substantial amounts for legal fees and other related costs. Settlement of lawsuits may also result in significant cash payouts and modifications to our operations. Due to the uncertainty surrounding the litigation process, except for those matters for which an accrual has been provided, we are unable to reasonably estimate the range of loss, if any, at this time in connection with the legal proceedings in which we are currently involved. An adverse judgment or settlement of a legal proceeding may substantially exceed any amount currently accrued and could have a material adverse effect on our business, results of operations, financial condition and ability to service our debt obligations.

 

10



Table of Contents

 

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 any customer disputes through individual arbitration rather than in court. Our arbitration provisions explicitly provide that all arbitrations will be conducted on an individual basis and not on a class basis. Thus, our arbitration agreements, if enforced, have the effect of shielding us from class action liability. They do not generally have any impact on regulatory enforcement proceedings.

 

We take the position that the Federal Arbitration Act requires the enforcement in accordance with the terms of arbitration agreements containing class action waivers of the type we use. While many courts, particularly federal courts, have agreed with this argument in cases involving other parties, an increasing number of courts, including courts in California, Missouri, Washington, New Jersey, and a number of other states, 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 recently ruled in the AT&T Mobility v. Concepcion case that consumer arbitration agreements meeting certain specifications are enforceable, our arbitration agreements differ in several respects from the agreement at issue in that case, thereby potentially limiting the precedential effect of the decision on our business. In addition, 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. Further, the Dodd-Frank Act directs the CFPB to study consumer arbitration and report to Congress and 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 as well as litigation in plaintiff-friendly jurisdictions. Such litigation could have a material adverse effect on our business, results of operations, financial condition and ability to service our debt obligations.

 

Our insurance coverage limits may be inadequate to cover our liabilities or one or more of our insurance carriers could default on their obligations.

 

As a result of the liability risks inherent in our line of business, we maintain liability insurance intended to cover various types of property, casualty and other risks. The types and amounts of insurance that we obtain vary from time to time, depending on availability, cost and our decisions with respect to risk retention. The policies are subject to deductibles and exclusions that result in our retention of a level of risk on a self-insured basis. Our insurance policies are subject to annual renewal. The coverage limits of our insurance policies may not be adequate, and we may not be able to obtain liability insurance in the future on acceptable terms or at all. In addition, our insurance premiums may be subject to increases in the future which may be material. Furthermore, the losses that are insured through commercial insurance are subject to the credit risk of those insurance companies. While we believe our commercial insurance providers are currently credit worthy, we cannot assure you that such insurance companies will remain so in the future. Inadequate insurance coverage limits, increases in our insurance costs or losses suffered due to one or more of our insurance carriers defaulting on their obligations, could have a material adverse effect on our financial condition, results of operations and ability to service our debt obligations.

 

A significant portion of our revenue is generated by our stores in Georgia, Alabama, Tennessee and South Carolina.

 

Approximately 28%, 12%, 11% and 8% of our stores are located in Georgia, Alabama, Tennessee and South Carolina, respectively, which accounted for approximately 36%, 16%, 13% and 13% of our revenue, respectively, for the year ended December 31, 2012. As a result, if any of the events noted in these risk factors were to occur in these states, including changes in the regulatory environment or worsening of economic conditions, it could significantly reduce our revenue and cash flow and could have a material adverse effect on our business, results of operations, financial condition and ability to service our debt obligations.

 

11



Table of Contents

 

If we lose key management or are unable to attract and retain quality management talent, we may be unable to profitably operate and grow our business.

 

Our continued growth and future success will depend on our ability to retain the members of our senior management team, who possess valuable knowledge of, and experience with, the legal and regulatory environment of our industry and who have been instrumental in developing our strategic plans and procuring capital to enable the pursuit of those plans. The loss of the services of members of senior management, together with any inability to attract new skilled management, could harm our business and future development.

 

The interests of our Parent’s sole beneficial owner may be different than those of our investors.

 

Tracy Young is our founder, Chairman of the Board, Chief Executive Officer, President and the sole beneficial owner of our parent holding company, TMX Finance Holdings Inc. As a result, subject to the limitations in the agreements governing our indebtedness, including the indenture governing our senior secured notes, or the “Indenture,” Mr. Young has the ability to control substantially all matters of significance to the Company, including the strategic direction of our business, the election and removal of the managers of TMX Finance LLC, the appointment and removal of our officers, the approval or rejection of a sale, merger, consolidation or other business combination, the issuances of additional equity or debt securities, amendments of our organizational documents, the entering into of related party transactions and the dissolution and liquidation of the Company, regardless of whether the holders of the senior secured notes, or our “bondholders,” believe that any such action is in their best interests.

 

As a result of Mr. Young’s complete beneficial ownership and control of our Company, his interests could conflict with the interests of our bondholders. For example, if we encounter financial difficulties or are unable to pay our debts as they mature, Mr. Young’s interests as the sole equity owner of our Parent might conflict with the interests of our bondholders. Mr. Young might also have an interest in pursuing transactions that, in his judgment, could enhance his equity investment, even though such transactions might involve risks to our bondholders. In addition, Mr. Young could cause us to make acquisitions that increase the amount of our indebtedness or sell assets, either of which may impair our ability to make payments under the notes.

 

Economic recession, unemployment and other factors could result in a reduction in demand for our products and services, and we may be unable to adapt to any such reduction.

 

Factors that influence demand for our products and services include macroeconomic conditions such as employment, personal income and consumer sentiment. If consumers become more pessimistic regarding the outlook for the economy and therefore spend less and save more, demand for title loans may decline. In addition, weakened economic conditions may result in an increase in loan defaults and loan losses. We can give no assurance that we will be able to sustain our current charge-off rates or that we will not experience increasing difficulty in collecting defaulted loans. Further, in an economic slowdown, we could be required to tighten our underwriting standards, which likely would reduce our loan balances.

 

Should we fail to adapt to any significant declines in consumers’ demand for our products or services, our revenues could decrease significantly and our operations could be harmed. Even if we do make changes to existing products or services or introduce new products or services to fulfill consumer demand, consumers may resist or may reject such products or services.

 

We are subject to liabilities for claims related to repossession of automobiles.

 

We use licensed third-party providers in connection with the repossession of defaulting customers’ automobiles. We typically enter into agreements with these providers in which they indemnify us for all losses related to claims arising from a repossession and warrant that they maintain insurance sufficient to cover such claims and indemnification obligations; however, we do not enter into these agreements with every third-party provider. We are subject to the risk that any third-party provider that we use may not have sufficient insurance to cover such claims or indemnification obligations. In such event, we may be subject to claims of customers related to repossession, which could have an adverse effect on our business.

 

12



Table of Contents

 

Disruptions in the credit and capital markets could negatively impact the availability and cost of borrowing.

 

Borrowed funds represent a significant portion of our capital. We rely on borrowed capital, together with cash flows from operations, to fund our working capital needs, including making title loans. Disruptions in the credit and capital markets, such as those experienced in 2008 and 2009, could adversely affect our ability to obtain cash to make title loans and to refinance existing debt obligations. Efficient access to these markets is critical to our ongoing financial success; however, our future access to the credit and debt capital markets could become restricted due to a variety of factors, including a deterioration of our earnings, cash flow, balance sheet quality or overall business or industry prospects, a sustained disruption or further deterioration in the state of the credit or capital markets or a negative bias toward our industry by market participants. Our ability to obtain additional financing in the future will depend in part upon prevailing credit and capital markets conditions. The credit and capital markets are volatile and a decline in those markets may adversely affect our efforts to arrange additional financing on satisfactory terms. If adequate funds are not available on acceptable terms, we may not be able to make future title loans, take advantage of acquisitions or other opportunities or respond to competitive challenges.

 

Changes in credit ratings issued by statistical rating organizations could adversely affect our costs of financing.

 

Credit rating agencies rate our indebtedness based on factors that include our operating results, actions that we take, their view of the general outlook for our industry and their view of the general outlook for the economy. Actions taken by the rating agencies can include maintaining, upgrading or downgrading the current rating or placing us on a watch list for possible future downgrading. Downgrading the credit rating of our indebtedness or placing us on a watch list for possible future downgrading could limit our ability to access the capital markets to meet liquidity needs and refinance maturing liabilities or increase the interest rates and our cost of financing.

 

The Indenture and Credit Agreement impose significant operating and financial restrictions, which may prevent us from pursuing certain business opportunities and taking certain actions.

 

The Indenture and Credit Agreement impose, and future debt agreements may impose, operating and financial restrictions on us. These restrictions limit or prohibit, among other things, our ability to:

 

·                  incur additional indebtedness unless certain financial tests are satisfied;

 

·                  issue disqualified capital stock;

 

·                  pay dividends, redeem subordinated debt or make other restricted payments;

 

·                  make certain investments or acquisitions;

 

·                  issue stock of subsidiaries;

 

·                  grant or permit certain liens on our assets;

 

·                  enter into certain transactions with affiliates;

 

·                  merge, consolidate or transfer substantially all of our assets;

 

·                  incur dividend or other payment restrictions affecting certain of our subsidiaries;

 

·                  transfer, sell or acquire assets, including capital stock of our subsidiaries; and

 

·                  change the business we conduct.

 

These covenants could adversely affect our ability to finance our future operations or capital needs, withstand a future downturn in our business or the economy in general, engage in new business activities, including future opportunities that may be in our interest, and plan for or react to market conditions or otherwise execute our business strategies. A breach of any of these covenants could result in a default with respect to the related indebtedness. If a default occurs, the relevant lenders or holders of such indebtedness could elect to declare the indebtedness, together with accrued interest and other fees, to be immediately due and payable and proceed against any collateral securing that indebtedness. Acceleration of our other indebtedness could result in a default under the terms of the Indenture and Credit Agreement.

 

13



Table of Contents

 

Competition in the financial services industry could cause us to lose market share and revenues.

 

The industry in which we operate has low barriers to entry and is highly fragmented and very competitive. We encounter significant competition from other automobile title lending companies, pawnshops, installment lending companies, online lenders, consumer finance companies and providers of other forms of alternative financial services, many of which have significantly greater financial resources than we do. Significant increases in the number or size of competitors or other changes in competitive influences could cause us to lose market share and experience slowing or declining revenues, thereby affecting our ability to generate sufficient cash flow to fund our operations and service our indebtedness. We cannot assure you that we will be able to compete successfully with our competitors.

 

Competition for market share will likely intensify. Increased competition could lead to consolidation within the industry. If our competitors get stronger through consolidation and we are unable to identify attractive consolidation opportunities, we could be at a competitive disadvantage and experience declining market share and revenue. If these events materialize, they could negatively affect our ability to generate sufficient cash flow to fund our operations and service our indebtedness.

 

In addition to increasing competition among traditional providers of alternative financial services to consumers, there is a risk of losing market share to new market entrants such as banks and credit unions. Several large financial institutions have introduced payday-like products in the last few years. Broad consumer adoption of these alternatives could reduce the number of loans we make and adversely affect our cash flows.

 

Our growth strategy calls for opening additional stores, both in states in which we currently operate and states into which we are looking to expand. If our competitors aggressively pursue store expansion, competition for store sites could result in a failure to open the planned number of stores and could result in increased costs to procure desired locations, both of which could impair our results of operations.

 

External factors and other circumstances over which we have limited control or that are beyond our control could adversely affect our ability to grow through the opening of new stores.

 

Our expansion strategy includes opening new stores. The success of this strategy is subject to numerous external factors, including, but not limited to:

 

·                  the availability of sites with acceptable restrictions and suitable terms;

 

·                  our ability to attract, train and retain qualified store management personnel;

 

·                  our ability to access capital;

 

·                  our ability to obtain required government permits and licenses;

 

·                  the prevailing laws and regulatory environment of each state or jurisdiction in which we operate or seek to operate, which are subject to change at any time; and

 

·                  the degree of competition in new markets and its effect on our ability to attract new customers and our ability to adapt our infrastructure and systems to accommodate our growth.

 

Some of these factors are outside of our control. The failure to execute our expansion strategy would adversely affect our ability to expand our business and could materially adversely affect our business, results of operations, financial condition and ability to service our debt obligations.

 

Our allowance for loan losses and our accrual for losses on loans we process and guarantee for an unconsolidated third-party lender are only estimates and may not be adequate to fully absorb losses.

 

We maintain an allowance for loan losses for estimated probable losses on our title loans. We also maintain an accrual for losses related to loans we process for an unconsolidated third-party lender that we guarantee. See “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies” for factors considered by management in estimating the allowance for loan losses and accrual for losses related to our unconsolidated third-party lender. These reserves are estimates, and if actual losses are greater than our reserves, our results of operations and financial condition could be adversely affected.

 

14



Table of Contents

 

Our business and results of operations may be adversely affected if we are unable to manage our growth effectively.

 

There can be no assurance that we will be able to continue to grow our business or that our current business, results of operations and financial condition will not suffer if we fail to prudently manage our growth. Failure to grow the business and generate estimated future levels of cash flow could inhibit our ability to service our debt obligations. Our expansion strategy, which contemplates growing our title loans receivable in existing stores, opening new stores in existing markets and opening new stores in new markets, is subject to significant risks. Our current business and results of operations and any future growth depend upon a number of factors, including the ability to obtain and maintain financing to support these opportunities, the ability to hire, train and retain an adequate number of qualified employees, the ability to obtain and maintain any required government permits and licenses, the ability to successfully integrate any acquired operations as well as other factors, some of which are outside of our control, such as the continuation of favorable regulatory and legislative environments. Further, expansion into additional states will increase our regulatory and legal risks. Regulatory and legal actions could divert management’s attention away from executing our growth strategy. The profitability of our current operations could suffer as management’s attention is diverted toward our expansion plans.

 

If we are not successful at entering new businesses or broadening the scope of our existing product and service offerings, we may not achieve our expected growth rate or recoup our investment.

 

We may enter into new businesses that are adjacent or complementary to our existing businesses and that broaden the scope of our existing product and service offerings. We may not achieve our expected growth if we are not successful in these efforts. In addition, entering into new businesses and broadening the scope of our existing product and service offerings may require significant upfront expenditures that we may not be able to recoup in the future. These efforts may also divert management’s attention and expose us to new risks and regulations which may have a material adverse effect on our business, results of operations, financial condition and ability to service our debt obligations.

 

In certain states, we rely on third parties to make loans to our customers, and the loss of access to any of these third parties could significantly increase our costs and change the way we operate in these states.

 

In certain states, particularly including Texas, we operate as a Credit Services Organization and therefore arrange for an unrelated third party to make loans to our customers. There are a limited number of third parties that make these types of loans, and there is significant demand and competition for the services of these third parties. These third parties rely on borrowed funds in order to make consumer loans. If these third parties lose their ability to make loans or become unwilling to make loans and we are unable to find another lending partner, our cost of arranging loans in these states may increase significantly and we could be forced to change the way we operate in these states, which may have a material adverse effect on our financial results, make it difficult to operate profitably in these locations and negatively affect our ability to service our debt obligations.

 

The lack of availability of an adequate number of hourly employees to run our business could negatively impact our growth, and any increases in wages, benefits or other costs associated with hourly employees could significantly increase our labor costs.

 

Our workforce is comprised primarily of employees who work on an hourly basis. In certain areas where we operate, there is significant competition for employees. The lack of availability of an adequate number of hourly employees or an increase in wages and benefits to current employees could adversely affect our business, results of operations, cash flows, financial condition and ability to service our debt obligations. We are subject to applicable rules and regulations relating to our relationship with our employees, including minimum wage and break requirements, health benefits, unemployment and sales taxes, overtime and working conditions and immigration status. Accordingly, legislated increases in the federal minimum wage, as well as increases in additional labor cost components such as employee benefit costs, workers’ compensation insurance rates and compliance costs and fines, would increase our labor costs, which could have a material adverse effect on our business, prospects, results of operations and financial condition.

 

15



Table of Contents

 

Any disruption in the availability or security of our information systems could cause us to lose customers and revenue, subject us to significant liability and cause us to incur significant expense.

 

We rely heavily upon our information systems to process customer loan transactions, account for our business activities and generate the reporting used by management for analytical and decision-making purposes. Each of our stores is part of an integrated data network designed to facilitate underwriting decisions, reconcile cash balances and report revenue and expense transaction data. Our back-up systems and security measures could fail to prevent a disruption in the availability or performance of our information systems. Any disruption in the availability or performance of our information systems could significantly disrupt our operations and cause us to lose customers and revenue. Further, a security breach of our information systems could also interrupt or damage our operations or harm our reputation. We could be subject to liability if confidential customer information is misappropriated from our information systems. Despite the implementation of significant security measures, our information systems may still be vulnerable to physical break-ins, computer viruses, programming errors, employee misappropriation and attacks by third parties or similar disruptive problems, which could require us to incur significant expense to eliminate these problems and address related data security concerns.

 

We may be unable to protect our proprietary technology or keep up with that of our competitors.

 

The success of our business depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may be unable to deter misappropriation of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. In addition, competitors could, without violating our proprietary rights, develop technologies that are as good as or better than our technology. Our failure to protect our software and other proprietary intellectual property rights or to develop technologies that are as strong as our competitors’ could put us at a disadvantage to our competitors. Any such failures could have a material adverse effect on our business, prospects, results of operations, financial condition and ability to service our debt obligations.

 

Our business may suffer if our trademarks or service marks are infringed.

 

We rely on trademarks and service marks to protect our various brand names in our markets. Many of these trademarks and service marks have been a key part of establishing our business in the communities in which we operate. We believe these trademarks and service marks have significant value and are important to the marketing of our services. We cannot assure you that the steps we have taken or will take to protect our proprietary rights will be adequate to prevent misappropriation of our rights or the use by others of features based upon, or otherwise similar to, ours. In addition, although we believe we have the right to use our trademarks and service marks, we cannot assure you that our trademarks and service marks do not or will not violate the proprietary rights of others, that our trademarks and service marks will be upheld if challenged or that we will not be prevented from using our trademarks and service marks, any of which occurrences could harm our business.

 

Adverse real estate market fluctuations could affect our profits.

 

We currently lease all of our locations except one. A significant rise in real estate prices or real property taxes could result in an increase in store lease costs as we open new locations and renew leases for existing locations. Any such increase, especially in Georgia, Texas, Alabama or Tennessee, could have a material adverse effect on our business, prospects, results of operations and financial condition.

 

Our business is seasonal, which causes our revenues to fluctuate and may adversely affect our ability to service our debt.

 

Our business typically declines slightly in the first quarter as a result of customers’ receipt of tax refund checks. Demand for our services is generally greatest during the fourth quarter. This seasonality requires us to manage our cash flows over the course of the year. If the state or federal government were to pursue economic stimulus actions or issue additional tax refunds or tax credits at other times during the year, such actions could have a material adverse effect on our business, prospects, results of operations and financial condition during those periods. If our revenues were to fall substantially below what we would normally expect during certain periods, our annual financial results would be adversely impacted and our ability to service our debt may also be adversely affected.

 

16



Table of Contents

 

Our substantial level of indebtedness could adversely affect our financial condition and prevent us from fulfilling our obligations under the senior secured notes.

 

We have substantial indebtedness. As of December 31, 2012, TMX Finance LLC had approximately $370.5 million of total debt outstanding. Subject to restrictions in the Indenture, we may incur additional indebtedness.

 

Our substantial level of indebtedness could have important consequences to our bondholders and significant effects on our business, including the following:

 

·                  it may be more difficult for us to satisfy our financial obligations, including with respect to the notes;

 

·                  our ability to obtain additional financing for working capital, capital expenditures, strategic acquisitions or general corporate purposes may be impaired;

 

·                  we must use a substantial portion of our cash flow from operations to pay interest on the notes and our other indebtedness as well as to fund excess cash flow offers on the notes, which will reduce the funds available to use for operations and other purposes;

 

·                  our ability to fund a repurchase of our outstanding senior secured notes upon the occurrence of a change of control of the Company or other event as specified in the Indenture may be limited;

 

·                  our substantial level of indebtedness could place us at a competitive disadvantage compared to our competitors that may have proportionately less debt;

 

·                  our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited; and

 

·                  our substantial level of indebtedness may make us more vulnerable to economic downturns and adverse developments in our business.

 

We expect to obtain the funds to pay our expenses and repay our indebtedness primarily from our operations and, in the case of our indebtedness, from a refinancing thereof. Our ability to meet our expenses and make these payments therefore depends on our future performance, which will be affected by financial, business, economic and other factors, many of which we cannot control. Our business may not generate sufficient cash flow from operations in the future, and our currently anticipated growth in revenue and cash flow may not be realized, either or both of which could result in our being unable to repay indebtedness, including the notes, or to fund other liquidity needs. If we do not have enough funds, we may be required to refinance all or part of our then existing debt, sell assets or borrow more funds, which we may not be able to accomplish on terms acceptable to us, or at all. In addition, the terms of existing or future debt agreements may restrict us from pursuing any of these alternatives.

 

Despite our current indebtedness level, we and any of our existing or future subsidiaries may still be able to incur substantially more debt, which could exacerbate the risks associated with our substantial leverage.

 

We and any of our existing and future subsidiaries may be able to incur substantial additional indebtedness in the future. Although the terms of the Indenture contain limitations on our ability to incur additional indebtedness, these restrictions are subject to a number of qualifications and exceptions. If we incur any additional indebtedness that ranks equally with the notes, the holders of that additional debt will be entitled to share ratably with the holders of the notes in any proceeds distributed in connection with any insolvency, liquidation, reorganization, dissolution or other winding up of the Company, subject to any collateral securing the notes. If new debt is added to our or any of our existing and future subsidiaries’ current debt levels, the related risks that we now face could be exacerbated.

 

ITEM 1B.  UNRESOLVED STAFF COMMENTS.

 

None.

 

17



Table of Contents

 

ITEM 2.  PROPERTIES.

 

Our stores generally range in size from approximately 1,800 to 2,400 square feet. Most of our stores are located in highly visible, accessible locations with arterial roadways that we believe have high daily traffic volume and high concentration of retail users, typically with retailers serving comparable customer bases such as national auto parts and rent-to-own companies. We prefer our stores to be freestanding single tenant buildings, but we also use retail strip shopping center stores, preferably on an end unit or with a bay with high road visibility. We believe that our stores provide a welcoming, personal environment for conducting our business. .

 

All but one of our stores are leased, with typical lease terms of five years and two options to renew at the end of the lease, with an average gross monthly rent of $3,800. Our leases usually require that we pay all maintenance costs, insurance costs and property taxes.

 

The following table shows the composition of our store network at December 31, 2012:

 

State 

 

Store Count

 

Alabama

 

124

 

Arizona

 

62

 

Florida

 

2

 

Georgia

 

290

 

Illinois

 

48

 

Mississippi

 

3

 

Missouri

 

67

 

Nevada

 

26

 

South Carolina

 

81

 

Tennessee

 

109

 

Texas

 

161

 

Virginia

 

62

 

 

 

 

 

Total

 

1,035

 

 

We believe that our facilities, equipment, furniture and fixtures are in good condition and well maintained and that our facilities are sufficient to meet our present needs.

 

ITEM 3. LEGAL PROCEEDINGS.

 

We are involved in a number of active lawsuits, including the legal proceeding discussed below as well as a number of routine litigation and administrative proceedings arising in the ordinary course of business. Due to the uncertainty surrounding the litigation process, except for those matters for which an accrual has been provided, we are unable to reasonably estimate the probability of an unfavorable outcome or the range of loss, if any, at this time in connection with these proceedings. While the outcome of many of these matters is currently not determinable, we believe we have meritorious defenses to the claims in these proceedings and that the ultimate cost to resolve these matters will not have a materially adverse effect on our consolidated financial position, results of operations or cash flows.

 

Justin Johnson, et al v. TitleMax of Missouri, Inc. (f/k/a Mignon Norfolk, et al v. TitleMax of Missouri, Inc.)

 

On February 10, 2011, Mignon Norfolk filed a putative class action lawsuit in the Circuit Court of Jefferson County, Missouri against TitleMax of Missouri, Inc., or “TMM,” and a TMM District Manager. On July 27, 2012, the named plaintiff changed from Mignon Norfolk to Justin Johnson. The complaint alleges, among other things, that TMM failed to pay certain employees overtime compensation as required by Missouri law. The plaintiff seeks, among other things, a judgment for an amount equal to plaintiff’s unpaid compensation, as well as liquidated damages. The litigation is currently in the discovery phase, and it is too early to determine the likelihood of an unfavorable outcome or the ultimate liability, if any, resulting from this action.

 

ITEM 4. MINE SAFETY DISCLOSURES.

 

Not applicable.

 

18



Table of Contents

 

PART II

 

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

 

Tracy Young, the founder, Chairman of the Board, Chief Executive Officer and President of TMX Finance LLC, is the sole beneficial owner of the common stock of TMX Finance Holdings Inc., which owns all 100 of the outstanding limited liability company interests in TMX Finance LLC. There is no established public trading market for common equity of TMX Finance Holdings Inc. or TMX Finance LLC. For information about cash dividends paid by TMX Finance LLC for the past two fiscal years (including certain restrictions that limit the payment of dividends), see “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations—Liquidity and Capital Resources.”

 

ITEM 6. SELECTED CONSOLIDATED FINANCIAL DATA.

 

The following table sets forth selected historical consolidated financial data for the Company as of and for the fiscal years ended December 31, 2012, 2011, 2010, 2009 and 2008. The financial information for the years ended December 31, 2012, 2011 and 2010, and as of December 31, 2012 and 2011, has been derived from our audited financial statements included elsewhere in this report. The financial information for the years ended December 31, 2009 and 2008, and as of December 31, 2010, 2009, and 2008, has been derived from our audited financial statements not included in this report.

 

The historical selected financial information may not be indicative of our future performance and should be read in conjunction with the information contained in “Item 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations” and the consolidated financial statements and related notes in “Item 8. Financial Statements and Supplementary Data.”

 

 

 

Year Ended December 31,

 

(in thousands) 

 

2012

 

2011

 

2010

 

2009

 

2008

 

Statements of Income Data:

 

 

 

 

 

 

 

 

 

 

 

Interest and fee income

 

$

656,755

 

$

505,865

 

$

389,449

 

$

312,022

 

$

262,635

 

Provision for loan losses

 

(144,749

)

(99,542

)

(63,932

)

(51,184

)

(45,318

)

 

 

 

 

 

 

 

 

 

 

 

 

Net interest and fee income

 

512,006

 

406,323

 

325,517

 

260,838

 

217,317

 

 

 

 

 

 

 

 

 

 

 

 

 

Costs, expenses and other:

 

 

 

 

 

 

 

 

 

 

 

Salaries and related expenses

 

201,899

 

159,201

 

116,090

 

90,234

 

78,046

 

Occupancy costs

 

64,727

 

48,556

 

34,939

 

33,366

 

32,698

 

Depreciation and amortization (1)

 

17,210

 

13,813

 

10,353

 

9,027

 

8,670

 

Advertising

 

22,227

 

15,512

 

10,243

 

6,206

 

13,242

 

Other operating and administrative expenses

 

77,469

 

58,696

 

41,407

 

33,720

 

30,345

 

Interest expense, net (2)

 

49,293

 

42,610

 

26,251

 

11,674

 

13,286

 

 

 

 

 

 

 

 

 

 

 

 

 

Total expenses

 

432,825

 

338,388

 

239,283

 

184,227

 

176,287

 

 

 

 

 

 

 

 

 

 

 

 

 

Income from continuing operations before reorganization items

 

79,181

 

67,935

 

86,234

 

76,611

 

41,030

 

 

 

 

 

 

 

 

 

 

 

 

 

Reorganization items (3)

 

 

 

4,548

 

6,655

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Income before discontinued operations

 

79,181

 

67,935

 

81,686

 

69,956

 

41,030

 

(Loss) gain from discontinued operations (4)

 

 

 

 

145

 

(2,184

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income

 

79,181

 

67,935

 

81,686

 

70,101

 

38,846

 

Net income (loss) attributable to noncontrolling interests

 

19

 

(1,627

)

(1,906

)

(4,031

)

(1,977

)

 

 

 

 

 

 

 

 

 

 

 

 

Net income attributable to member’s equity

 

$

79,162

 

$

69,562

 

$

83,592

 

$

74,132

 

$

40,823

 

 

19



Table of Contents

 

 

 

Year Ended December 31,

 

(in thousands) 

 

2012

 

2011

 

2010

 

2009

 

2008

 

Non-GAAP Financial Measures (5) (unaudited):

 

 

 

 

 

 

 

 

 

 

 

Net income

 

$

79,181

 

$

67,935

 

$

81,686

 

$

70,101

 

$

38,846

 

Interest expense, net

 

49,293

 

42,610

 

26,251

 

11,674

 

13,286

 

Taxes

 

948

 

638

 

1,917

 

756

 

13

 

Depreciation and amortization

 

17,210

 

13,813

 

10,353

 

9,027

 

8,999

 

 

 

 

 

 

 

 

 

 

 

 

 

EBITDA

 

$

146,632

 

$

124,996

 

$

120,207

 

$

91,558

 

$

61,144

 

 

 

 

December 31,

 

(in thousands) 

 

2012

 

2011

 

2010

 

2009

 

2008

 

Balance Sheet Data:

 

 

 

 

 

 

 

 

 

 

 

Cash and cash equivalents

 

$

90,794

 

$

38,141

 

$

53,585

 

$

27,008

 

$

10,188

 

Title loans receivable

 

577,172

 

490,093

 

360,325

 

282,917

 

232,450

 

Allowance for loan losses

 

(94,561

)

(73,103

)

(52,048

)

(40,280

)

(29,885

)

Unamortized loan origination costs

 

3,716

 

2,829

 

2,139

 

1,160

 

1,251

 

 

 

 

 

 

 

 

 

 

 

 

 

Title loans receivable, net

 

486,327

 

419,819

 

310,416

 

243,797

 

203,816

 

Total assets

 

767,783

 

604,748

 

470,331

 

338,763

 

283,648

 

Total debt

 

395,454

 

346,054

 

273,401

 

178,353

 

193,884

 

Total liabilities

 

456,795

 

408,410

 

329,195

 

207,489

 

208,550

 

Member’s equity

 

318,365

 

202,484

 

145,876

 

133,198

 

73,904

 

Member’s equity and noncontrolling  interests

 

310,988

 

196,338

 

141,136

 

131,274

 

75,098

 

 

 

 

 

 

 

 

 

 

 

 

 

Statement of Cash Flow Data:

 

 

 

 

 

 

 

 

 

 

 

Net cash provided by operating activities

 

$

222,321

 

$

175,159

 

$

176,211

 

$

144,225

 

$

105,208

 

Net cash used in investing activities

 

(254,528

)

(246,453

)

(154,651

)

(95,964

)

(75,120

)

Net cash provided by (used in) financing  activities

 

84,860

 

55,850

 

5,017

 

(31,441

)

(28,120

)

 


(1)                  Represents depreciation and amortization of property and equipment.

 

(2)                  Includes amortization of debt issuance costs and discount/premium of $3,481, $3,633, $2,035, $1,210 and $3,144 for the fiscal years ended December 31, 2012, 2011, 2010, 2009 and 2008, respectively.

 

(3)                  Reorganization items refer to expenses incurred in connection with our reorganization pursuant to Chapter 11 of the U.S. Bankruptcy Code. See Note 16 of Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.” These items include professional fees and interest earned on accumulated cash resulting from the Chapter 11 proceeding.

 

(4)                 References to discontinued operations relate to payday-lending subsidiaries that were discontinued in April 2008 and had no activity in the fiscal years ended December 31, 2012, 2011 or 2010.

 

(5)                  We disclose our earnings before interest expense, taxes, depreciation and amortization, or “EBITDA,” which is a “non-GAAP financial measure” as defined under the rules of the SEC. It is intended as a supplemental measure of our performance that is not required by, or presented in accordance with, U.S. generally accepted accounting principles, or “GAAP.” We present EBITDA because we believe that, when viewed with the Company’s GAAP results and the accompanying reconciliation, EBITDA provides useful information about our operating performance and period-over-period growth, as well as information that is helpful for evaluating the operating performance of our core business without regard to potential disruptions. Additionally, we believe that EBITDA is commonly used by securities analysts, investors and other interested parties in the evaluation of high yield issuers, many of which present EBITDA when reporting their results. However, EBITDA should not be considered as an alternative to income from continuing operations or any other performance measure derived in accordance with GAAP or as an alternative to cash flows from operating activities or any other liquidity measure derived in accordance with GAAP. Our presentation of EBITDA should not be construed to imply that our future results will be unaffected by unusual or nonrecurring items.

 

20



Table of Contents

 

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

 

This section is intended to provide information that will assist you in understanding our consolidated financial statements, the changes in those financial statements from period to period and the primary factors contributing to those changes. The following discussion and analysis should be read in conjunction with our consolidated financial statements and related notes in “Item 8. Financial Statements and Supplementary Data.”

 

In addition to historical financial information, the following discussion and analysis contains forward-looking statements that reflect our plans, estimates and beliefs but that also involve risks and uncertainties. Our actual results could differ materially from those discussed in the forward-looking statements. Please see “Forward-Looking Statements” and “Item 1A. Risk Factors” for discussions of the uncertainties, risks and assumptions associated with these statements.

 

Company Overview

 

We are a privately-owned automobile title-lending company with 1,035 company-owned stores in 12 states as of December 31, 2012. We serve individuals who generally have limited access to consumer credit from banks, thrift institutions, credit card lenders and other traditional sources of consumer credit. We provide our customers with access to loans secured by a lien on the customers’ automobiles while allowing the customers to retain use of the vehicles during the term of the loans. As of December 31, 2012, we served more than 470,000 customers and had approximately $577.2 million in title loans receivable. We believe that we are the largest automobile title lender in the United States based on title loans receivable.

 

Our business provides a simple, quick and confidential way for consumers to meet their liquidity needs. We offer title loans in amounts ranging from $100 to $5,000 at rates that we believe, based on market research, are up to 50% less than those offered by other comparable title lenders, with an average loan size of approximately $1,300. Our title loans do not impact our customers’ credit ratings as we do not run credit checks on our TitleMax and TitleBucks customers, and we do not make negative credit reports if we are unable to collect loan balances.

 

We conduct business in Texas and certain other states through wholly-owned subsidiaries, each of which is registered in the applicable state as a Credit Services Organization, or “CSO.” These CSOs have entered into credit services organization agreements, or “CSO Agreements,” with third-party lenders, or the “CSO Lenders,” that make the loans to our customers. The CSO Agreements govern the terms by which we perform servicing functions and refer customers to the CSO Lenders for a possible extension of a loan. We process loan applications and commit to reimburse the CSO Lenders for any loans or related fees that are not collected from those customers.

 

Our growth strategy includes increasing our title loans receivable in our existing stores, opening new stores in existing markets and expanding our store base into new markets with favorable characteristics. We seek to develop and maintain a large presence in each of the markets in which we operate. Our strategy has enabled consistent growth throughout the Company’s history that has included fluctuating market conditions.

 

During the year ended December 31, 2012, we continued to execute our growth strategy and opened or acquired 281 new stores while closing only two stores. The new stores opened include 84 in Texas, 49 in Arizona, 36 in Virginia and 62 in Georgia (48 of which were opened under the InstaLoan brand). For the year ended December 31, 2012, the Company had revenues of $656.8 million, an increase of $150.9 million or 29.8%, and net income of $79.2 million, an increase of $11.3 million or 16.6%, from the corresponding results for the year ended December 31, 2011. The increase in net income for 2012 compared to 2011 was the result of strong same-store performance and several of our newer stores becoming profitable, partially offset by costs related to the addition of the new stores discussed above and an increase in our net charge-off rates.

 

21



Table of Contents

 

Key Performance Indicators

 

We measure our performance through certain key performance indicators, or “KPIs,” that drive our revenue and profitability. Our KPIs include total originations, average originations per store, total title loans receivable balance, average receivable balance per store and net charge-off rate as a percent of aggregate originations over the period. We influence our KPIs through operational execution, information systems and proper incentives for our field-level employees. Externally, our KPIs are affected by competition and macroeconomic conditions, including availability of credit, consumer confidence, consumer spending habits, unemployment and state and federal regulations.

 

The following table reflects our results as measured by these KPIs:

 

 

 

Year Ended December 31,

 

(dollars in thousands)

 

2012

 

2011

 

2010

 

Originations

 

$

794,159

 

$

627,485

 

$

441,222

 

Average originations per store

 

910

 

930

 

785

 

Total title loans receivable

 

577,172

 

490,093

 

360,325

 

Average title loans receivable per store

 

662

 

648

 

611

 

Net charge-offs as a percent of originations

 

15.1

%

12.3

%

11.8

%

 

In addition, we closely monitor same-store interest and fee income. The Company considers interest and fee income from stores open more than 13 months in its calculation of same-store interest and fee income. The following summarizes the Company’s same-store interest and fee income for the fiscal years ended December 31, 2012, 2011 and 2010:

 

 

 

Year Ended December 31,

 

(dollars in thousands)

 

2012

 

2011

 

2010

 

Interest and fee income

 

$

552,692

 

$

483,285

 

$

385,160

 

Interest and fee income growth

 

14.4

%

25.3

%

29.1

%

Number of stores open more than 13 months

 

611

 

554

 

540

 

 

22



Table of Contents

 

Results of Operations

 

Store Software System

 

In May 2012, our new proprietary store software system, which is used in approximately 21.4% of our stores as of December 31, 2012, incurred significant service outages. These outages caused us to review the status of the system as a long-term solution for our existing and future stores. Based on this review, we initially determined and announced that we would discontinue further development of the system and write-off the related capitalized costs. However, after the service outages in May, we stabilized the platform and obtained vendor quotes to correct technical deficiencies. Based on this additional information, we decided to reevaluate whether we will continue development of the proprietary system or purchase a new packaged software system to meet our future needs. This evaluation remains on-going. We determined that we are not required to record an impairment charge related to our proprietary store software during the year ended December 31, 2012 because the undiscounted future cash flows from the asset group are greater than the carrying amount. However, depending on the outcome of our full evaluation, it is reasonably possible that we could decide to implement a different store software system and discontinue the development of our proprietary system. This decision could result in a one-time, non-cash expense that could range from $13.0 million to $18.0 million.

 

Year Ended December 31, 2012 Compared to Year Ended December 31, 2011

 

Interest and fee income

 

Interest and fee income was $656.8 million for 2012 compared to $505.9 million for 2011. The increase of $150.9 million, or 29.8%, was primarily due to the addition of a significant number of new stores over the last 12 months and strong same-store performance. Interest and fee income from stores open less than 13 months increased $81.5 in 2012 compared to 2011 and accounted for 54% of the total increase in 2012. Same-store interest and fee income increased $69.4 million, or 14.4%, for 2012 compared to 2011. The Company considers interest and fee income from stores open more than 13 months in its calculation of same-store interest and fee income.

 

Provision for loan losses

 

Our provision for loan losses was $144.7 million for 2012 compared to $99.5 million for 2011, an increase of $45.2 million, or 45.4%. The provision for loan losses is based on loan loss experience, contractual delinquency of title loans receivable, economic and other qualitative considerations and management’s judgment. Approximately $12.0 million of the increase relates to a 26.6% increase in loan originations, and the remaining increase of $33.2 million was due to an increase in our loan loss charge-off rate. Net charge-offs as a percent of originations increased to 15.1% for 2012 from 12.3% for 2011. The net charge-offs and originations include loans made by our CSO Lenders that we guarantee. Our net charge-off rate has increased during the last twelve months, due primarily to the addition of a significant number of new stores and rapid loan growth. During this period, we have worked to manage our charge-offs in the face of the significant increase in new stores and loan volume and we will continue to monitor net charge-off rates and make adjustments as necessary to maximize loan portfolio growth and long-term profitability.

 

Costs, expenses and other

 

Salaries and related expenses

 

Salaries and related expenses were $201.9 million for 2012 compared to $159.2 million for 2011. This represents an increase of $42.7 million, or 26.8%. This increase was mostly due to growth-related increases in headcount, primarily related to operational personnel necessary to service the higher volume of loans and as a result of opening new stores. Also contributing to the increase was higher corporate headcount, primarily in the areas of operations, construction and real estate. In addition, a significant portion of our operations employees’ compensation is incentive-based, which increased $12.1 million due to higher profitability at the store, district and regional levels.

 

Occupancy costs

 

Occupancy costs were $64.7 million for 2012 compared to $48.6 million for 2011. This increase of $16.1 million, or 33.1%, was primarily due to increases in rent, utilities, and maintenance costs associated with opening new stores as well as expanding corporate office space.

 

Depreciation and amortization

 

Depreciation and amortization for 2012 was $17.2 million compared to $13.8 million for 2011. The increase of $3.4 million, or 24.6%, was primarily attributable to remodeling and relocating stores, fitting out new stores and expanding corporate office space.

 

23



Table of Contents

 

Advertising

 

Advertising expense for 2012 was $22.2 million compared to $15.5 million for 2011. The increase of $6.7 million, or 43.2%, was primarily due to increased internet advertising and online lead generation related to our upgraded website.

 

Other operating and administrative expenses

 

Other operating and administrative expenses for 2012 were $77.5 million compared to $58.7 million for 2011. The increase of $18.8 million, or 32.0%, was primarily attributable to growth-related increases in costs associated with collateral collection, technology services and office supplies and postage.

 

Interest expense, net, including amortization of debt issuance costs

 

Interest expense, net, including amortization of debt issuance costs, was $49.3 million for 2012 compared to $42.6 million for 2011. This represents an increase of $6.7 million, or 15.7%. During 2012, we incurred $4.4 million of additional interest compared to 2011 on $60.0 million aggregate principal amount of our 13.25% senior secured notes issued on July 22, 2011. We also incurred interest of $1.3 million in the second half of 2012 on our $25.0 million revolving line of credit obtained on June 27, 2012. Also contributing to the increase in interest expenses was an increase in notes payable issued by TMX Finance LLC and our consolidated CSO Lenders. We expect interest expense to increase in the future relative to prior periods due to the higher average outstanding debt balance.

 

Net income

 

As a result of the above factors, net income was $79.2 million for 2012, an increase of 16.6% over net income of $67.9 million for 2011.

 

Year Ended December 31, 2011 Compared to Year Ended December 31, 2010

 

Interest and fee income

 

Interest and fee income was $505.9 million for 2011 compared to $389.4 million for 2010. The increase of $116.5 million, or 29.9%, is primarily due to strong same-store performance as customers turned more to title lending because of a contraction of credit from other sources. Same-store interest and fee income increased $101.2 million, or 26.3%, for the year ended December 31, 2011 compared to the same period in 2010. The Company considers interest and fee income from stores open more than 13 months in its calculation of same-store interest and fee income. Interest and fee income also was higher in the year ended December 31, 2011 due to an increase of approximately $15.3 million from stores open less than 13 months. The increase from stores open less than 13 months accounted for 13% of the total increase in interest and fee income.

 

Provision for loan losses

 

Our provision for loan losses was $99.5 million for 2011 compared to $63.9 million for 2010. The provision increased $35.6 million, or 55.7%. Approximately $15.0 million of the increase relates to the 29.9% increase in loan originations, and the remaining increase of $20.6 million was due to an increase in our loan loss charge-off rate. Net charge-offs as a percent of originations increased to 12.3% for the year ended December 31, 2011 from 11.8% for the comparable period in 2010. The increase in our net charge-off rate was a result of a shift toward growth in our store management incentive plans, which led to an increase in loan originations.

 

Costs, expenses and other

 

Salaries and related expenses

 

Salaries and related expenses were $159.2 million for 2011 compared to $116.1 million for 2010. This represents an increase of $43.1 million, or 37.1%. Approximately $24.1 million of the increase was due to growth-related increases in headcount, primarily related to operational personnel necessary to service the higher volume of loans and as a result of opening new stores. Also contributing to the increase was higher corporate headcount, primarily in the areas of information technology, recruiting and real estate and construction. In addition, a significant portion of our operations employees’ compensation is incentive-based, which increased $18.9 million due to higher profitability at the store, district and regional levels.

 

Occupancy costs

 

Occupancy costs were $48.6 million for 2011 compared to $34.9 million for 2010. This increase of $13.7 million, or 39.3%, was primarily due to increases in rent, utilities, and maintenance costs associated with opening new stores as well as expanding corporate office space.

 

24



Table of Contents

 

Depreciation and amortization

 

Depreciation and amortization for 2011 was $13.8 million compared to $10.4 million for 2010. The increase of $3.4 million, or 32.7%, was primarily attributable to remodeling and relocating stores, fitting out new stores, expanding corporate office space and the acquisition of an aircraft in the fourth quarter of 2010. Also contributing to the increase was depreciation expense related to an upgrade to our proprietary loan system, which was placed in service in the second quarter of 2011.

 

Advertising

 

Advertising expense for 2011 was $15.5 million compared to $10.2 million for 2010. The increase of $5.3 million, or 52.0%, was primarily due to increased television advertising costs in 2011 related to airtime for our “short on cash” marketing campaign.

 

Other operating and administrative expenses

 

Other operating and administrative expenses for 2011 were $58.7 million compared to $41.4 million for 2010. The $17.3 million increase was primarily driven by growth-related increases in costs associated with recruiting and relocation, collateral collection, accounting and legal services, travel, and office supplies and postage.

 

Interest expense, net, including amortization of debt issuance costs

 

Interest expense, net, including amortization of debt issuance costs, was $42.6 million for 2011 compared to $26.3 million for 2010. This represents an increase of $16.3 million, or 62.0%. During 2011, we incurred $15.6 million of additional interest compared to 2010 on the $250.0 million aggregate principal amount of our 13.25% senior secured notes issued on June 21, 2010. In addition, during 2011, we incurred interest of $3.5 million on $60.0 million aggregate principal amount of our 13.25% senior secured notes issued on July 22, 2011. These increases were partially offset by interest incurred in 2010 on our term loan at the default rate during our bankruptcy proceedings

 

Reorganization items

 

There were no reorganization items in 2011 compared to $4.5 million for 2010. On June 16, 2011, the final Chapter 11 decree closing the bankruptcy case was signed and filed with the court. See Note 16 of Notes to Consolidated Financial Statements in “Item 8. Financial Statements and Supplementary Data.”

 

Net income

 

As a result of the above factors, net income was $67.9 million for 2011 compared to $81.7 million for 2010.

 

25



Table of Contents

 

Liquidity and Capital Resources

 

We manage our liquidity and capital positions to satisfy several objectives. Near-term liquidity is managed to ensure adequate working capital is available to fund seasonal growth in loans and related interest receivable in an amount that exceeds increases in accounts payable and accrued expenses. Growth in working capital is driven by demand for our loan products and is funded on a near-term basis through operating cash flows without the need for reliance on other sources. Long-term capital needs are managed by assessing the growth capital needs of the Company and balancing those needs against the available internal and external capital resources. Long-term capital needs have historically been funded through credit facilities and issuances of debt securities. We manage the risk that we may not be able to refinance our debt securities through proper timing of refinancing transactions ahead of scheduled maturities and, to a lesser extent, as market conditions permit.

 

Our principal sources of near-term liquidity are cash on hand, working capital, cash flows from operations and borrowings under our new $25.0 million secured revolving credit facility described below. Cash and cash equivalents were $90.8 million at December 31, 2012 as compared to $38.1 million at December 31, 2011.

 

In June 2010 and July 2011, we issued $250.0 million and $60.0 million, respectively, of senior secured notes due 2015. These senior secured notes, or “the Notes,” were offered only to qualified institutional buyers pursuant to Rule 144A under the Securities Act of 1933, as amended, or the “Securities Act,” and to non-U.S. persons outside of the United States in compliance with Regulation S under the Securities Act.

 

The indenture governing our Notes, or the “Indenture,” limits our ability to incur additional indebtedness. However, we were permitted to obtain a $25.0 million senior secured revolving loan facility that is equal in priority with the Notes. In June 2012, we entered into a credit agreement, or the “Credit Agreement,” to obtain a senior secured revolving credit facility of up to $25.0 million, or the “Revolving Credit Facility,” that matures June 15, 2015. Subject to certain exceptions, the obligations under the Revolving Credit Facility are fully and unconditionally guaranteed by TMX Finance LLC, TitleMax Finance Corporation and each of their existing and future domestic subsidiaries. The Revolving Credit Facility and the guarantees rank equal in right of payment with the Notes. The Credit Agreement contains certain covenants that are substantially similar to those in the Indenture. The Credit Agreement also contains a financial covenant that requires the maintenance of a minimum earnings to fixed charge ratio of 2:1.

 

The Indenture and Credit Agreement permit us to incur additional debt as long as the new debt does not cause us to maintain less than a 3:1 earnings to fixed charge ratio, as defined in the Indenture. In addition, if our earnings to fixed charge ratio is below 3:1, we are permitted to incur up to $10.0 million of additional indebtedness and an incremental $25.0 million of guarantees under our CSO Agreements. As of December 31, 2012, our earnings to fixed charge ratio was below 3:1. We may seek to draw on the additional permitted sources of borrowing in the foreseeable future to continue to facilitate our growth strategy. For a description of our outstanding borrowings, see “—Other Indebtedness.”

 

Additional covenants in the Indenture and Credit Agreement restrict, among other things, our ability to dispose of assets, incur guarantee obligations, prepay other indebtedness, make dividends and other restricted payments, create liens, make equity or debt investments, make acquisitions, modify terms of the Indenture, engage in mergers or consolidations, change the business we conduct, engage in certain transactions with affiliates and make distributions to the Sole Shareholder. Such restrictions, together with our highly leveraged nature, could limit our ability to respond to changing market conditions, fund our capital spending program, provide for unexpected capital investments or take advantage of business opportunities.

 

We are in compliance with the covenants in the Indenture as of December 31, 2012. The Indenture requires us to maintain an earnings to fixed charge ratio above 3:1 for us to incur additional indebtedness, including the issuance of guarantees under our CSO Agreements. We do not anticipate a significant decline in demand for our products and services, but any such decline or other unexpected changes in financial condition could cause our earnings to fixed charge ratio to remain below 3:1 for an extended period of time. If we are unable to incur additional indebtedness for growth in our CSO operations, our net income may decrease due to impairment of assets and less revenue from CSO operations, which could adversely affect our ability to obtain new credit under favorable terms. To the extent that we experience short-term or long-term funding disruptions, we have the ability to address these risks through various means, including adjustments to short-term lending to customers, reductions in capital spending, reductions in expenses and potential equity contributions from our Parent, all of which could be expected to generate additional liquidity.

 

To the extent permitted by the Indenture and Credit Agreement, we expect to make periodic distributions to our Parent in amounts sufficient to pay some or all of the taxes due on the Company’s items of income, deductions, losses and credits which have been allocated for reporting on the Sole Shareholder’s income tax return. We may also make distributions to our Parent in addition to those required for personal income taxes. Total distributions were approximately $23.3 million, $13.0 million and $75.4 million for the years ended December 31, 2012, 2011 and 2010, respectively. The 2012 amount includes distributions of approximately $0.5 million by our consolidated CSO Lenders. The 2011 amount includes a noncash distribution of approximately $0.3 million related to leasehold improvements in store location properties sold by TY Investments, LLC, which is owned by the Sole Shareholder. See “Item 13. Certain Relationships and Related Transactions, and Director Independence—Real Estate Leases. We anticipate making distributions to the Parent for estimated income taxes for 2012 totaling approximately $23.0 to $26.0 million. At December 31, 2012,

 

26



Table of Contents

 

the availability of permitted distributions for purposes other than estimated income tax payments was approximately $5.0 million (calculated net of an estimate for income taxes).

 

The Indenture requires us, in the first quarter of each year, to make “excess cash flow offers” (as defined in the Indenture) to all holders of Notes to purchase the maximum principal amount of Notes that may be purchased with the lesser of $30.0 million or 75% of our excess cash flow (as defined in the Indenture) for the applicable fiscal year. We made an excess cash flow offer in March 2012 at 102% of the principal amount of the Notes, but no holders of the Notes accepted the offer. We will make another excess cash flow offer in March 2013 at 102% of the principal amount of the notes. An investment banking firm makes a market for our Notes and the volume of transactions is relatively small. Historically, the market price for our Notes based on the limited trading that occurs has been well above the price we must offer in the excess cash flow offer. Therefore, we do not expect a significant amount of cash to be used to fund the 2013 excess cash flow offer.

 

In May 2010, the IRS initiated an examination of the income tax return of TitleMax of Georgia, Inc., or “TMG.” The examination was expanded to cover all of the Company’s wholly-owned subsidiaries and TitleMax Aviation, or “Aviation,” an entity owned by our Parent that we consolidate because we have determined it is a variable interest entity of which we are the primary beneficiary. See “Item 13. Certain Relationships and Related Transactions, and Director Independence—Airplane Payments.” The IRS completed its fieldwork and issued its report in April 2011. We paid approximately $0.9 million in 2011 for agreed adjustments related to the IRS examination. We successfully contested other proposed adjustments, and the examination was closed in September 2012.

 

In November 2010, we acquired an aircraft for $17.5 million that satisfied the requirements of Section 1031 of the Internal Revenue Code to complete the like-kind exchange for an aircraft we sold in May 2010. The purchase of the aircraft was funded by notes payable to the Sole Shareholder. In February 2011, these notes were refinanced into one note payable to the Sole Shareholder with a principal balance of $17.4 million bearing interest at 10%. In December 2011, this note was refinanced into two notes payable to the Sole Shareholder. As of December 31, 2012, these notes have principal balances of $11.4 million and $5.4 million and bear interest at 5.12% and 10%, respectively. See “Item 13. Certain Relationships and Related Transactions, and Director Independence—Airplane Payments.”

 

In July 2012, the Sole Shareholder made an equity contribution of $14.0 million to the Company. In November 2012, the Parent made an equity contribution of $44.8 million to the Company. The November 2012 contribution was funded by proceeds from the sale of $100 million of 11.0% PIK Notes due October 15, 2015, or the “PIK Notes,” by the Parent to unrelated parties. Under the terms of the indenture governing the PIK Notes, interest on the PIK Notes is payable in cash to the extent distributions are available under the terms of the indenture governing the Company’s Notes. If distributions are not permitted under the terms of the indenture governing the Company’s Notes, the Parent may issue additional PIK notes in a principal amount to satisfy the interest due. Distributions from the Company to the Parent, when permitted, will provide the primary means for the Parent to make any cash interest payments on the PIK Notes. The maximum potential amount of distributions for purposes of funding the Parent’s interest payments is $11.0 million for each of the years ending December 31, 2013, 2014 and 2015.

 

Cash flows from operating activities

 

Net cash provided by operating activities was $222.3 million for 2012 compared to $175.2 million for 2011. The increase of $47.1 million, or 26.9%, was due to an $11.3 million increase in net income, as well as a $35.8 million increase in adjustments to reconcile net income to cash provided by operating activities. The increase in adjustments to reconcile net income to cash provided by operating activities was primarily driven by a $45.2 million increase in the provision for loan losses, which resulted from increased demand for our loan products and an increase in our net charge-off rate, as well as a $3.4 million increase in depreciation and amortization expense. These increases were partially offset by decreases in cash from changes in other assets and accounts payable. The decrease in cash from changes in other assets was primarily attributable to $7.1 million more cash used for deposits related to our unconsolidated CSO Lender and an increase of $4.1 million in prepaid expenses. The decrease in cash from changes in accounts payable was due to timing of payments.

 

Cash flows from investing activities

 

Net cash used in investing activities was $254.5 million for 2012 compared to $246.5 million for 2011. The increase of $8.0 million, or 3.2%, was primarily attributable to an $8.7 million increase in capital expenditures and a $5.3 million increase in net title loan originations. The increase in capital expenditures was related to ongoing projects to upgrade our technology and to manage our store portfolio through remodels or movement of locations, fitting out new stores and installing new signs. These increases were partially offset by $8.0 million of cash paid for acquisitions during 2011.

 

Cash flows from financing activities

 

Net cash provided by financing activities for 2012 was $84.9 million compared to $55.9 million for 2011. The increase of $29.0 million, or 51.9%, was primarily the result of proceeds of $58.8 million from equity contributions and $25.0 million from the

 

27



Table of Contents

 

Revolving Credit Facility in 2012 compared with proceeds of $64.2 million from the Notes issued in 2011. Also contributing to the increase in cash provided by financing activities was a decrease of $11.8 million in repayments of notes payable and capital leases.  These increases were partially offset by a $10.6 million increase in cash used for distributions.

 

Other Indebtedness

 

As of December 31, 2012, we have $57.0 million of notes payable in the aggregate, consisting of one unsecured note payable to a bank, three unsecured notes payable to other unrelated entities, three unsecured notes payable to the Sole Shareholder and several notes payable to third parties issued by our two consolidated CSO Lenders.

 

The note payable to a bank and the three notes payable to the Sole Shareholder are payable by Aviation. The note payable to a bank has a principal balance of $0.4 million as of December 31, 2012 and incurs interest at 4.4%. The three notes payable to the Sole Shareholder are in the amounts of $11.4 million, $5.4 million and $2.8 million as of December 31, 2012. The $11.4 million note has a fixed interest rate of 5.12% and is payable in monthly installments of $104,000, including interest and principal, with a final payment of $8.4 million due in December 2016. The $5.4 million note has a fixed interest rate of 10% payable monthly, with the full principal amount due in December 2015. The $2.8 million note is collateralized by an aircraft owned by Aviation and guaranteed by the Company. This note has a fixed interest rate of 6.35% and is payable in monthly installments of $35,000, including interest and principal, with a final payment of $2.1 million due in October 2015.

 

The three notes payable to other unrelated entities are in the amounts of $6.0 million, $5.0 million and $1.0 million as of December 31, 2012. Each of these notes bears interest at 13% with interest payable monthly. The principal amount of each of these notes is due in July 2013, although the $5.0 million note and the $1.0 million note may be extended for up to one additional year at our sole discretion.

 

As of December 31, 2012, our consolidated CSO Lenders had outstanding a total of $25.0 million of notes payable to third parties. One consolidated CSO Lender had 41 notes due in 2013 that bear interest ranging from 10% to 15% and are secured by the assets of the consolidated CSO Lender. These notes allow the consolidated CSO Lender to take one or more draws up to a total maximum principal of $17.1 million. As of December 31, 2012, a total of $14.1 million was drawn under these notes. As of December 31, 2012, the other consolidated CSO Lender had 22 unsecured notes due in 2013 that bear interest ranging from 12% to 14% and allow draws up to a total maximum principal of $11.9 million. As of December 31, 2012, a total of $10.9 million was drawn under these notes. Each of these notes has an automatic annual renewal provision.

 

Management believes that our available short-term and long-term capital resources will be sufficient to fund our anticipated cash requirements, including working capital requirements, capital expenditures, scheduled principal and interest payments, payments pursuant to any excess cash flow offers and income tax obligations of our Sole Shareholder, for at least the next 12 months.

 

Capital Expenditures

 

Capital expenditures as of December 31, 2012, 2011 and 2010 were $40.3 million, $32.0 million and 18.6 million, respectively, which we used to open new stores and develop our software systems. We do not have any material capital expenditure commitments as of December 31, 2012. However, we will continue to open additional stores and further improve our software systems, which will require ongoing capital expenditures.

 

28



Table of Contents

 

Contractual Payment Obligations

 

The following table summarizes our material contractual payment obligations, including periodic interest payments, as of December 31, 2012. These contractual requirements include payments required for our debt obligations, operating leases and contractual purchase obligations.

 

 

 

Payments due by December 31,

 

(in thousands)

 

Total

 

2013

 

2014

 

2015

 

2016

 

2017

 

Thereafter

 

Senior secured notes(1)

 

$

433,225

 

$

41,075

 

$

41,075

 

$

351,075

 

$

 

$

 

$

 

Revolving credit facility

 

31,966

 

2,535

 

2,535

 

26,896

 

 

 

 

Notes payable

 

13,400

 

13,004

 

47

 

47

 

47

 

255

 

 

Notes payable issued by consolidated CSO Lenders

 

26,620

 

26,620

 

 

 

 

 

 

Notes payable to Sole Shareholder

 

29,264

 

2,771

 

3,340

 

11,317

 

11,836

 

 

 

Obligations under capital leases

 

3,105

 

261

 

267

 

272

 

277

 

283

 

1,745

 

Obligations under operating leases

 

206,998

 

46,333

 

41,862

 

36,039

 

27,741

 

17,806

 

37,217

 

Total

 

$

744,578

 

$

132,599

 

$

89,126

 

$

425,646

 

$

39,901

 

$

18,344

 

$

38,962

 

 


(1) The Indenture requires us to make excess cash flow offers in the first quarter of each year for the lesser of $30 million or 75% of our excess cash flow (as defined in the Indenture). The contractual payments shown in the table do not include the effects of any such excess cash flow payments as the amounts, if any, are not presently determinable.

 

Seasonality

 

Our business is seasonal due to fluctuating demand for our title loans during the year. Historically, we have experienced our highest demand in the fourth quarter of each fiscal year, with approximately 30% of our annual originations occurring in this period. Also, we have historically experienced a reduction of 9% to 15% in our title loans receivable in the first quarter of each fiscal year, primarily associated with our customers’ receipts of tax refund checks. Accordingly, we typically experience a higher use of cash in the fourth quarter while generating more cash in the first quarter (exclusive of any other capital usage). Due to the seasonality of our business, results of operations for any fiscal quarter are not necessarily indicative of the results of operations that may be achieved for the full fiscal year or any future period.

 

Critical Accounting Policies

 

The preparation of the Company’s financial statements requires management to make estimates, assumptions and judgments that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. Management bases its estimates on historical experience, empirical data and various 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 may differ using different estimates or under different assumptions or conditions.

 

Management believes the following critical accounting policies affect its more significant estimates, assumptions and judgments used in the preparation of its consolidated financial statements. The development and selection of these critical accounting policies and the related summaries of them below have been reviewed with the Board of Managers of the Company.

 

Allowance for Loan Losses and Accrual for CSO Lender Loan Losses

 

The most significant estimates made in the preparation of our accompanying consolidated financial statements are the determination of an allowance for loan losses and an accrual for losses related to loans we process for our unconsolidated CSO Lender. The allowance for loan losses and accrual for loan losses related to our unconsolidated CSO Lender represent management’s estimate of losses on title loans receivable and loans processed for our unconsolidated CSO Lender that we guarantee under CSO Agreements. These estimates are based on an analytical model that contemplates several factors, including historical delinquencies, charge-offs and recovery rates. Additional factors, such as length of time stores have been open in a state, relative mix of new stores within a state and other relevant factors, are evaluated on a periodic basis to determine the adequacy of the reserve. Based on the results of this analytical model, we record an allowance for loan losses on our consolidated balance sheets. In addition, we record a liability for estimated losses related to the guaranteed loans owned by our unconsolidated CSO Lender in accounts payable and accrued expenses on our consolidated balance sheets. Loans that are deemed to be uncollectible are charged-off against the allowance when they become 61 days contractually past due. Recoveries on losses previously charged to the allowance are credited to the

 

29



Table of Contents

 

allowance when collected. For the years ended December 31, 2012 and 2011, if default rates had been 2.5% higher or lower, the allowance for loan losses would have changed by approximately $14.4 million and $12.2 million, respectively.

 

Income Recognition

 

Interest and fee income is recognized using the interest method. Accrual of interest and fee income on title loans receivable is discontinued when no payment has been received for 35 days or more. Effective October 1, 2009, management changed its accounting estimate related to the suspension of interest and fee income. Prior to this date, accrual of interest and fee income on title loans receivable ceased when no payment was received for 30 days or more pursuant to contractual terms. Based on additional information and analysis of customer trends, management determined that the likelihood of receiving a payment from a customer diminishes when no payment is received for 35 days. The accrual of income is not resumed until the account is less than five days past due on a contractual basis, at which time management considers collectability to be probable.

 

Recent Accounting Standards

 

In October 2012, the Financial Accounting Standards Board, or the “FASB,” issued ASU 2012-04 to provide technical corrections and improvements to a wide range of Topics in the Accounting Standards Codification, including conforming amendments related to fair value measurements. The amendments in this guidance will be effective for fiscal periods beginning after December 15, 2012. The adoption of this guidance is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

Off-Balance Sheet Arrangements with Unconsolidated CSO Lender

 

Under the terms of the CSO Agreements with non-exclusive third-party lenders, we are contractually obligated to reimburse the lenders for the full amounts of the loans and certain related fees that are not collected from the customers. In certain cases, the lenders sell the related loans, and our obligation to reimburse for the full amounts of the loans and certain related fees that are not collected from the customers extends to the purchasers. As of December 31, 2012, the total amount of loans and related fees guaranteed by us was approximately $26.9 million. The value of the related liability at December 31, 2012 was approximately $4.6 million and is included in accounts payable and accrued expenses on the consolidated balance sheets and provision for loan losses on the consolidated statements of income.

 

ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK.

 

The Company does not have any financial instruments that expose it to material cash flow or earnings fluctuations as a result of market risks.

 

30




Table of Contents

 

Report of Independent Registered Public Accounting Firm

 

To the Board of Directors and Sole Member

TMX Finance LLC and Affiliates

 

We have audited the accompanying consolidated balance sheets of TMX Finance LLC and Affiliates (collectively the “Company”) as of December 31, 2012 and 2011, and the related consolidated statements of income, member’s equity and noncontrolling interests, and cash flows for the three years in the period ended December 31, 2012. These financial statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these financial statements based on our audits.

 

We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement. The Company is not required to have, nor were we engaged to perform an audit of its internal control over financial reporting. Our audits 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 Company’s 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 TMX Finance LLC and Affiliates as of December 31, 2012 and 2011, and the results of their operations and their cash flows for the three years in the period ended December 31, 2012 in conformity with U.S. generally accepted accounting principles.

 

/s/ McGladrey LLP

 

 

 

Raleigh, North Carolina

 

March 27, 2013

 

 

32



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Consolidated Balance Sheets

December 31, 2012 and 2011

(in thousands)

 

 

 

2012

 

2011

 

Assets

 

 

 

 

 

Cash and cash equivalents

 

$

90,794

 

$

38,141

 

 

 

 

 

 

 

Title loans receivable

 

577,172

 

490,093

 

Allowance for loan losses

 

(94,561

)

(73,103

)

Unamortized loan origination costs

 

3,716

 

2,829

 

Title loans receivable, net

 

486,327

 

419,819

 

 

 

 

 

 

 

Interest receivable

 

38,055

 

31,517

 

Property and equipment, net

 

95,239

 

72,571

 

Debt issuance costs, net of accumulated amortization of $9,526 and $5,445 as of December 31, 2012 and December 31, 2011, respectively

 

10,570

 

14,042

 

Goodwill

 

5,975

 

5,975

 

Intangible assets, net

 

 

140

 

Note receivable from Sole Shareholder

 

1,077

 

1,549

 

Other assets

 

39,746

 

20,994

 

Total Assets

 

$

767,783

 

$

604,748

 

 

 

 

 

 

 

Liabilities and Equity

 

 

 

 

 

Senior secured notes, net

 

$

311,519

 

$

312,120

 

Revolving credit facility

 

25,000

 

 

Notes payable

 

37,336

 

11,370

 

Notes payable to related parties

 

19,628

 

20,512

 

Obligations under capital leases

 

1,971

 

2,052

 

Accounts payable and accrued expenses

 

61,341

 

62,356

 

Total Liabilities

 

456,795

 

408,410

 

Commitments and contingencies (Notes 13 and 14)

 

 

 

 

 

Member’s equity and noncontrolling interests:

 

 

 

 

 

Total member’s equity (with retained earnings of $243,835 and $186,704 at December 31, 2012 and December 31, 2011, respectively)

 

318,365

 

202,484

 

Noncontrolling interests

 

(7,377

)

(6,146

)

Total member’s equity and noncontrolling interests

 

310,988

 

196,338

 

Total Liabilities and Equity

 

$

767,783

 

$

604,748

 

 

See notes to consolidated financial statements.

 

33



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Consolidated Statements of Income

For the Years Ended December 31, 2012, 2011 and 2010

(in thousands)

 

 

 

2012

 

2011

 

2010

 

Interest and fee income

 

$

656,755

 

$

505,865

 

$

389,449

 

Provision for loan losses

 

(144,749

)

(99,542

)

(63,932

)

Net interest and fee income

 

512,006

 

406,323

 

325,517

 

 

 

 

 

 

 

 

 

Costs, expenses and other:

 

 

 

 

 

 

 

Salaries and related expenses

 

201,899

 

159,201

 

116,090

 

Occupancy costs

 

64,727

 

48,556

 

34,939

 

Depreciation and amortization

 

17,210

 

13,813

 

10,353

 

Advertising

 

22,227

 

15,512

 

10,243

 

Other operating and administrative expenses

 

77,469

 

58,696

 

41,407

 

Interest, including amortization of debt issuance costs

 

49,293

 

42,610

 

26,251

 

Total expenses

 

432,825

 

338,388

 

239,283

 

Income before reorganization items

 

79,181

 

67,935

 

86,234

 

 

 

 

 

 

 

 

 

Reorganization items:

 

 

 

 

 

 

 

Professional fees

 

 

 

4,548

 

Net income

 

79,181

 

67,935

 

81,686

 

Net income (loss) attributable to noncontrolling interests

 

19

 

(1,627

)

(1,906

)

Net income attributable to member’s equity

 

$

79,162

 

$

69,562

 

$

83,592

 

 

See notes to consolidated financial statements.

 

34



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Consolidated Statements of Member’s Equity and Noncontrolling Interests

For the Years Ended December 31, 2012, 2011 and 2010

(in thousands)

 

 

 

Member’s
Equity

 

Noncontrolling
Interests

 

Total
Member’s
Equity and
Noncontrolling
Interests

 

Balance, December 31, 2009

 

$

133,198

 

$

(1,924

)

$

131,274

 

Net income (loss)

 

83,592

 

(1,906

)

81,686

 

Contributions

 

3,146

 

420

 

3,566

 

Distributions

 

(74,060

)

(1,330

)

(75,390

)

 

 

 

 

 

 

 

 

Balance, December 31, 2010

 

145,876

 

(4,740

)

141,136

 

Net income (loss)

 

69,562

 

(1,627

)

67,935

 

Consolidation of variable interest entities

 

 

221

 

221

 

Distributions

 

(12,954

)

 

(12,954

)

 

 

 

 

 

 

 

 

Balance, December 31, 2011

 

202,484

 

(6,146

)

196,338

 

Net income

 

79,162

 

19

 

79,181

 

Contributions

 

58,750

 

 

58,750

 

Distributions

 

(22,031

)

(1,250

)

(23,281

)

 

 

 

 

 

 

 

 

Balance, December 31, 2012

 

$

318,365

 

$

(7,377

)

$

310,988

 

 

See notes to consolidated financial statements.

 

35



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Consolidated Statements of Cash Flows

For the Years Ended December 31, 2012, 2011 and 2010

(in thousands)

 

 

 

2012

 

2011

 

2010

 

Cash Flows from Operating Activities

 

 

 

 

 

 

 

Net income

 

$

79,181

 

$

67,935

 

$

81,686

 

Adjustments to reconcile net income to net cash provided by operating activities:

 

 

 

 

 

 

 

Provision for loan losses

 

144,749

 

99,542

 

63,932

 

Depreciation and amortization

 

17,210

 

13,813

 

10,353

 

Amortization of discount, premium, debt issuance and upfront lease costs

 

3,832

 

3,887

 

2,230

 

Amortization of acquired intangibles

 

140

 

160

 

 

Net loss on disposal of property and equipment

 

427

 

128

 

264

 

Loss on disposal of aircraft held for sale, net of selling expenses

 

 

 

13

 

Changes in assets and liabilities:

 

 

 

 

 

 

 

Interest receivable

 

(6,538

)

(8,082

)

(7,462

)

Other assets

 

(14,778

)

(7,288

)

(1,256

)

Net change in loan origination costs

 

(887

)

(690

)

(979

)

Accounts payable and accrued expenses

 

(1,015

)

5,754

 

27,430

 

Net cash provided by operating activities

 

222,321

 

175,159

 

176,211

 

 

 

 

 

 

 

 

 

Cash Flows from Investing Activities

 

 

 

 

 

 

 

Net title loans originated

 

(210,370

)

(205,098

)

(129,572

)

Payments for acquisitions, net of cash acquired

 

 

(8,032

)

(400

)

Purchase of property and equipment

 

(41,128

)

(32,409

)

(18,713

)

Proceeds from disposal of property and equipment

 

823

 

399

 

112

 

Proceeds from sale of aircraft held for sale, net of selling expenses

 

 

 

12,700

 

Purchase of aircraft

 

 

 

(17,657

)

(Increase) decrease in restricted cash

 

(4,325

)

(3,525

)

846

 

Issuance of note receivable from Sole Shareholder

 

 

 

(2,000

)

Receipt of payments on note receivable from Sole Shareholder

 

472

 

418

 

33

 

Cash from consolidation of CSO Lenders

 

 

1,794

 

 

Net cash used in investing activities

 

(254,528

)

(246,453

)

(154,651

)

 

 

 

 

 

 

 

 

Cash Flows from Financing Activities

 

 

 

 

 

 

 

Proceeds from senior secured notes

 

 

64,200

 

247,695

 

Proceeds from revolving credit facility

 

25,000

 

 

 

Proceeds from notes payable to related parties

 

 

12,000

 

17,750

 

Proceeds from notes payable issued by consolidated CSO Lenders

 

15,307

 

9,080

 

 

Proceeds from notes payable

 

12,376

 

 

 

Repayments of notes payable to related parties

 

(884

)

(13,844

)

(5,647

)

Repayments of notes payable and capital leases

 

(1,797

)

(667

)

(14,762

)

Payments of debt issuance costs

 

(611

)

(2,291

)

(17,195

)

Repayments of term loan, net

 

 

 

(151,000

)

Proceeds from contributions to consolidated CSO Lenders

 

 

76

 

 

Proceeds from contributions

 

58,750

 

 

3,566

 

Distributions by consolidated variable interest entities

 

(1,250

)

 

 

Distributions to Sole Shareholder

 

(22,031

)

(12,704

)

(75,390

)

Net cash provided by financing activities

 

84,860

 

55,850

 

5,017

 

Net increase (decrease) in cash and cash equivalents

 

52,653

 

(15,444

)

26,577

 

Cash and cash equivalents at beginning of period

 

38,141

 

53,585

 

27,008

 

Cash and cash equivalents at end of period

 

$

90,794

 

$

38,141

 

$

53,585

 

 

See notes to consolidated financial statements.

 

36



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Consolidated Statements of Cash Flows, continued

(in thousands)

 

 

 

2012

 

2011

 

2010

 

Supplemental disclosure of cash flow information:

 

 

 

 

 

 

 

Interest paid

 

$

45,962

 

$

38,251

 

$

7,694

 

Leasehold improvements distributed to Sole Shareholder

 

$

 

$

250

 

$

 

Supplemental disclosure of reorganization items:

 

 

 

 

 

 

 

Professional fees paid for services rendered in connection with the Chapter 11 proceeding

 

$

 

$

 

$

6,457

 

 

See notes to consolidated financial statements.

 

37



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Notes to Consolidated Financial Statements

 

(1)                  Nature of Business, Principles of Consolidation and Significant Accounting Policies

 

Nature of Business

 

TMX Finance LLC and affiliates (collectively, unless the context indicates otherwise, the “Company”) is a specialty finance company that originates and services automobile title loans through 1,035 title-lending stores in 12 states as of December 31, 2012. Affiliates include wholly-owned subsidiaries and consolidated variable interest entities (“VIEs”) as described below. The Company operates as TitleMax in 831 stores, and in 151 stores, the Company operates under a TitleBucks brand. The Company also offers a second lien automobile product in Georgia and Florida, with operations conducted within 77 TitleMax stores under the EquityAuto Loan brand, and through 53 standalone stores under the InstaLoan brand. The Company is in the process of fully separating the EquityAuto Loan business into standalone stores under the InstaLoan brand with separate management and the addition of other loan products. Segment information is not presented since all of the Company’s revenue is attributed to a single reportable segment: specialty financial services.

 

TMX Finance LLC changed its name from TitleMax Holdings, LLC to TMX Finance LLC effective June 21, 2010. Effective September 30, 2012, the former sole member of TMX Finance LLC transferred 100% of his membership interests to TMX Finance Holdings Inc. (“Parent”) in exchange for shares of common stock in the Parent. The former sole member of TMX Finance LLC is the sole beneficial owner of the common stock of the Parent (the “Sole Shareholder”).

 

The Company is subject to laws, regulations and supervision in each of the states in which it operates. Most states have laws that specifically regulate the Company’s products and services to establish allowable fees, interest and other economic terms. The terms of products and services offered by the Company vary between states to comply with each state’s specific laws and regulations. In addition to state laws and regulations, the Company’s business is subject to various local rules and regulations such as zoning regulation and permit licensing.

 

The interest rates and fees for the Company’s products and services are not currently regulated directly at the federal level, but laws and regulations governing the business are subject to change. On July 21, 2010, the Dodd-Frank Wall Street Reform and Consumer Protection Act was enacted into law. This act established the Consumer Financial Protection Bureau (“CFPB”) as a federal authority responsible for administering and enforcing the laws and regulations for consumer financial products and services. The legislation does not specifically target title lending, traditional pawn or installment lending for CFPB regulation. However, the CFPB is currently in the process of developing rules that could subject the Company to some form of regulatory oversight. The CFPB is specifically prohibited from instituting federal usury interest rate caps.

 

Principles of Consolidation

 

TMX Finance LLC is a single member Delaware limited liability company that, through its subsidiaries, is engaged primarily in the origination and servicing of automobile title loans.

 

In April 2006, the Sole Shareholder formed EAL. On June 21, 2010, the Sole Shareholder transferred 100% of his membership interests in EAL to TMX Finance LLC. The Company consolidated EAL effective January 1, 2010 in accordance with accounting standards related to consolidation. This transfer between entities under common control has been accounted for at the historical cost of the assets and liabilities transferred.

 

The Company conducts business in Texas and certain other states through wholly-owned subsidiaries, each of which is registered in the applicable state as a Credit Services Organization (“CSO”). These CSOs have entered into credit services organization agreements (“CSO Agreements”) with third-party lenders (the “CSO Lenders”) that make the loans to our customers. The CSO Agreements govern the terms by which the Company performs servicing functions and refers customers to the CSO Lenders for a possible extension of a loan. The Company processes loan applications and commits to reimburse the CSO Lenders for any loans or related fees that are not collected from those customers. Two of the CSO Lenders operate on an exclusive basis with the Company, and the Company has determined that they are VIEs of which the Company is the primary beneficiary. Therefore, the Company has consolidated these VIEs.

 

38



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Notes to Consolidated Financial Statements

 

(1)                  Nature of Business, Principles of Consolidation and Significant Accounting Policies (continued)

 

The Company is associated with several other entities that it must evaluate as potential variable interest entities. TY Investments (“TYI”) and Parker-Young (“PY) are owned 100% and 50%, respectively, by the Sole Shareholder. Each of these entities owns certain real estate that is leased to the Company. The Company evaluated these entities and determined that the Company does not have a variable interest and that neither has characteristics of a variable interest entity pursuant to the applicable accounting guidance. Both entities have sufficient equity at risk without the need for any additional subordinated financial support. The Company has therefore determined that TYI and PY are not variable interest entities. TitleMax Aviation, Inc., a Delaware corporation (“Aviation”), and TitleMax Construction, LLC (“Construction”) are other entities evaluated as potential variable interest entities. Aviation is owned by our Parent and has three aircraft and related debt. The aircraft are used by the Company to conduct its business. The Company and certain subsidiaries guarantee certain debt of Aviation. Construction is owned by the Sole Shareholder and directly handles the store improvement work for the Company. Aviation and Construction are VIEs of which the Company is the primary beneficiary; therefore, these entities have been consolidated.

 

Significant Accounting Policies

 

The accounting and reporting policies of the Company are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the consumer finance industry. The following is a description of significant accounting policies used in preparing the consolidated financial statements.

 

Basis of Presentation

 

The accompanying consolidated financial statements include the accounts of the Company, its wholly-owned subsidiaries and its consolidated VIEs. All significant intercompany transactions and balances have been eliminated in consolidation.

 

Use of Estimates

 

The preparation of consolidated financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of income and expenses during the reporting period. Actual results could differ from those estimates. Material estimates that are particularly susceptible to change relate to the determination of the allowance for loan losses and the valuation of repossessed assets.

 

Cash and Cash Equivalents

 

The Company maintains amounts in bank accounts which, at times, may exceed federally insured limits. The Company has not experienced losses in such accounts. Management believes the Company’s exposure to credit risk is minimal for these accounts.

 

Goodwill and Intangible Assets

 

Goodwill and indefinite-life intangible assets acquired in a business combination are recorded using the acquisition method of accounting and are tested for impairment annually, or more frequently if circumstances indicate potential impairment, on a reporting unit level. In testing for impairment, the Company first assesses qualitative factors as a basis for determining whether it is necessary to perform the two-step goodwill impairment test. The first step of the impairment test, if necessary, is to compare the estimated fair value of the reporting unit to its carrying value. If the fair value is less than the carrying value, then a second step is performed to determine the fair value of goodwill and the amount of impairment loss, if any. In addition, intangible assets with finite lives are amortized over their estimated useful lives and reviewed for impairment whenever events or circumstances indicate the carrying value may not be fully recoverable.

 

39



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Notes to Consolidated Financial Statements

 

(1)                  Nature of Business, Principles of Consolidation and Significant Accounting Policies (continued)

 

Loan Losses

 

Provisions for loan losses are charged to income in amounts sufficient to maintain an adequate allowance for loan losses and an adequate accrual for losses related to guaranteed loans processed for our unconsolidated CSO Lender. Factors used in assessing the overall adequacy of the allowance for loan losses, the accrual for losses related to guaranteed loans processed for our unconsolidated CSO Lender and the resulting provision for loan losses include loan loss experience, contractual delinquency of title loans receivable, economic and other qualitative considerations and management’s judgment. While management uses the best information available to make its evaluation, future adjustments to the allowance may be necessary if there are significant changes in economic conditions. The Company charges-off an account when the customer is 61 days contractually past due.

 

Loan Origination Costs

 

Direct costs incurred for the origination of loans, which consist mainly of employee-related costs, are deferred and recognized as a reduction of the related interest and fee income over the average life of the loan using a method that approximates the interest method.

 

Repossessed Assets

 

The Company may initiate repossession proceedings according to the respective state law if an account becomes past due. Repossessed collateral is valued at the lower of the receivable balance of the loan prior to repossession or estimated net realizable value. Management estimates net realizable value as the projected cash value upon liquidation less costs to sell the related collateral.

 

Property and Equipment

 

Property and equipment, including capitalized interest, are carried at cost. The cost of property retired or sold and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in the consolidated statements of income. Depreciation of property and equipment is provided by the straight-line method over the estimated useful lives of the assets once they are placed in service, as shown in the chart below. Leasehold improvements are amortized using the straight-line method over the lesser of the useful lives of the improvements or the life of the lease. Repairs and maintenance are expensed as incurred.

 

 

 

Useful Lives
(years)

 

Computers and software

 

3 to 5

 

Furniture and fixtures

 

7

 

Leasehold improvements (a)

 

5

 

Signs

 

5

 

Vehicles

 

5

 

Aircraft

 

15

 

Capital lease assets—buildings (b)

 

15

 

Building

 

30

 

 


(a)         Leasehold improvements are depreciated over the terms of the lease agreements with a maximum of five years.

(b)         The depreciation expense on assets acquired under capital leases is included with depreciation expense on owned assets.

 

Impairment of Long-Lived Assets

 

The Company annually or more frequently, if appropriate, evaluates whether events or circumstances have occurred that indicate the carrying amount of long-lived assets may warrant revision or may not be recoverable. When factors indicate that these long-lived assets should be evaluated for possible impairment, the Company assesses the recoverability by determining whether the carrying value of such long-lived assets will be recovered through the future undiscounted cash flows expected from uses of the assets and their eventual disposition.

 

40



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Notes to Consolidated Financial Statements

 

(1)                  Nature of Business, Principles of Consolidation and Significant Accounting Policies (continued)

 

Debt Issuance Costs

 

Costs incurred to obtain debt financing are amortized over the life of the related debt using a method that approximates the interest method. Amortization is included as a component of interest expense in the consolidated statements of income.

 

Income Recognition

 

Interest and fee income is recognized using the interest method. Accrual of interest and fee income on title loans receivable is discontinued when no payment has been received for 35 days or more. The accrual of income is not resumed until the account is less than five days past due on a contractual basis, at which time management considers collectability to be probable.

 

Advertising Costs

 

The Company incurs advertising costs principally related to advertising on television, the internet, billboards and yellow pages. These costs are expensed as incurred.

 

Income Taxes and Distributions

 

The Company, with the consent of the Sole Shareholder, elected in prior years to be taxed under sections of the federal and state income tax laws, which provide that, in lieu of corporate income taxes, the Parent separately accounts for the Company’s items of income, deduction, losses and credits. The consolidated financial statements generally do not include a provision for income taxes as long as these elections remain in effect. Certain subsidiaries operate in states that impose an entity-level tax that is a percentage of income.

 

Given the Company’s income tax elections, the assets and liabilities with significant estimated net differences between the tax bases and the reported amounts are presented below as of December 31, 2012 and 2011. The estimated net differences disregard the assets and liabilities of the consolidated CSO Lenders.

 

The tax bases were less than the carrying amounts as follows:

 

(in thousands) 

 

2012

 

2011

 

Title loans receivable, net

 

$

(25,763

)

$

(27,812

)

Property and equipment, net

 

(71,023

)

(47,142

)

Goodwill

 

(5,975

)

(5,975

)

 

 

 

 

 

 

Total estimated net differences

 

$

(102,761

)

$

(80,929

)

 

While the Company’s tax status and income tax elections remain in effect, the Company may occasionally make distributions to the Parent in amounts sufficient to pay some or all of the taxes due on the Company’s items of income, deductions, losses and credits. The Company anticipates making distributions of $23.0 to $26.0 million to the Parent to pay 2012 federal and state income taxes. The Company may make future distributions to the Parent in addition to those required for income taxes. To the extent distributions are permitted under the terms of the indenture governing the Company’s senior secured notes, distributions from the Company to the Parent will provide the primary means for the Parent to make interest payments on its $100.0 million of 11.0% senior notes issued in October 2012 and due in October 2015. The maximum potential amount of distributions for purposes of funding the Parent’s interest payments is $11.0 million for each of the years ending December 31, 2013, 2014 and 2015. At December 31, 2012, the availability of permitted distributions for purposes other than estimated income tax payments was approximately $5.0 million (calculated net of an estimate for income tax distributions).

 

Phantom Stock Plan

 

The Company accounts for share-based employee compensation by measuring all share-based payments to employees using the intrinsic value method and recording the resulting expense in the consolidated statements of income. The Company measures the liability for grants of phantom stock by using an agreed-upon calculation defined by the terms of the phantom stock plan.

 

41



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Notes to Consolidated Financial Statements

 

(1)                  Nature of Business, Principles of Consolidation and Significant Accounting Policies (continued)

 

Recent Accounting Standards

 

In October 2012, the FASB issued ASU 2012-04 to provide technical corrections and improvements to a wide range of Topics in the Accounting Standards Codification, including conforming amendments related to fair value measurements. The amendments in this guidance will be effective for fiscal periods beginning after December 15, 2012. The adoption of this guidance is not expected to have a material impact on the Company’s financial position, results of operations or cash flows.

 

(2)                  Credit Quality Information, Allowance for Losses on Title Loans Receivable and Liability Related to Unconsolidated CSO Lender Loans

 

The Company loans cash to customers in exchange for a fee and an agreement to repay the amount loaned. The Company’s loan portfolio includes balances outstanding from all title loans, including short-term single payment loans and multi-payment installment loans. The Company utilizes a variety of underwriting criteria to specifically monitor the performance of its portfolio of title loans and maintains an allowance at a level estimated to be adequate to absorb loan losses inherent in the portfolio. The allowance for losses on title loans receivable is presented in the consolidated balance sheets. In addition, the Company maintains a liability for estimated losses related to loans processed for the Company’s unconsolidated CSO Lender that are guaranteed under CSO Agreements. The liability for estimated losses related to these guaranteed loans is included in accounts payable and accrued expenses in the consolidated balance sheets.

 

The Company does not stratify the title loan portfolio when evaluating performance of the loans. Rather, the total portfolio is assessed for losses based on contractual delinquency, the value of underlying collateral, economic and other qualitative considerations and management’s judgment. The Company uses historical collection performance adjusted for recent portfolio performance trends to develop the expected loss rates used to establish the allowance and liability for loan losses. Increases in the allowance and liability for loan losses are recorded as provision for loan losses in the consolidated statements of income. The Company charges-off an account when the customer is 61 days contractually past due. Charge-offs on title loans receivable are equal to the loan balance (including interest and fees). Recoveries on losses previously charged to the allowance are credited to the allowance when collected.

 

Delinquency experience of title loans receivable at December 31, 2012 and 2011 was as follows:

 

(in thousands) 

 

2012

 

2011

 

1-30 days past due

 

$

91,699

 

$

57,494

 

31-60 days past due

 

16,471

 

11,291

 

 

 

 

 

 

 

Total past due

 

108,170

 

68,785

 

Current

 

469,002

 

421,308

 

 

 

 

 

 

 

Total

 

$

577,172

 

$

490,093

 

 

Title loans receivable on the consolidated balance sheets is net of unearned interest and fees of $3.9 million and $2.9 million as of December 31, 2012 and 2011, respectively.

 

Accrual of interest and fee income on title loans receivable is discontinued when no payment has been received for 35 days or more. The accrual of income is not resumed until the account is less than five days past due on a contractual basis, at which time management considers collectability to be probable. Title loans receivable in non-accrual status at December 31, 2012 and 2011 were as follows:

 

(in thousands) 

 

2012

 

2011

 

Nonaccrual loans

 

$

84,520

 

$

54,198

 

 

42



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Notes to Consolidated Financial Statements

 

(2)                  Credit Quality Information, Allowance for Losses on Title Loans Receivable and Liability Related to Unconsolidated CSO Lender Loans (continued)

 

Changes in the allowance for loan losses for the years ended December 31, 2012, 2011 and 2010 were as follows:

 

(in thousands) 

 

2012

 

2011

 

2010

 

Beginning balance

 

$

73,103

 

$

52,048

 

$

40,280

 

Provision for loan losses

 

141,145

 

98,536

 

63,932

 

Charge-offs

 

(162,222

)

(103,552

)

(70,932

)

Recoveries

 

42,535

 

26,071

 

18,768

 

Ending balance

 

$

94,561

 

$

73,103

 

$

52,048

 

 

Changes in the liability for losses on loans processed for the Company’s unconsolidated CSO Lender for the years ended December 31, 2012 and 2011 were as follows:

 

(in thousands) 

 

2012

 

2011

 

Beginning balance

 

$

1,006

 

$

 

Provision for loan losses

 

3,604

 

1,006

 

Ending balance

 

$

4,610

 

$

1,006

 

 

The aggregate provision for loan losses for the years ended December 31, 2012, 2011 and 2010 was $144,749, $99,542 and $63,932, respectively.

 

(3)             Concentration of Credit Risk

 

The Company’s portfolios of automobile title loans receivable are with consumers living primarily in Georgia, Alabama, South Carolina, Tennessee, Missouri, Mississippi, Virginia, Texas, Illinois, Nevada, Arizona and Florida. Consequently, such consumers’ abilities to honor their contracts may be affected by economic conditions in these areas. The Company is exposed to a concentration of credit risk inherent in providing alternate financing to borrowers who cannot obtain traditional bank financing. In the event of default of the title loans receivable, the Company has access to automobiles supporting these title loans receivable through repossession. As of December 31, 2012, all title loans receivable were collateralized by the related consumers’ automobiles. The ability to repossess collateral mitigates this risk. At December 31, 2012, approximately 36%, 14%, 12% and 11% of title loans receivable were in Georgia, Alabama, South Carolina and Tennessee, respectively.

 

The Company also has a risk that its customers will seek protection from creditors by filing under the bankruptcy laws. When a customer files bankruptcy, the Company must cease collection efforts and petition the Bankruptcy Court to obtain their collateral or establish a court-approved bankruptcy plan involving the Company and all other creditors of the customer. It is the Company’s experience that such plans can take an extended period of time to conclude and usually involve a reduction in the interest rate from the rate in the contract to a court-approved rate.

 

43


 


Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Notes to Consolidated Financial Statements

 

(4)                  Property and Equipment

 

Property and equipment at December 31, 2012 and 2011 consisted of the following:

 

(in thousands)

 

2012

 

2011

 

Leasehold improvements

 

$

55,009

 

$

39,165

 

Computers and software

 

26,667

 

23,569

 

Aircraft

 

23,288

 

23,288

 

Furniture and fixtures

 

20,761

 

15,370

 

Signs

 

19,971

 

15,792

 

Assets not placed in service

 

17,456

 

7,022

 

Assets under capital leases

 

2,240

 

2,240

 

Vehicles

 

335

 

339

 

Building

 

285

 

 

Land

 

70

 

 

 

 

 

 

 

 

Subtotal

 

166,082

 

126,785

 

Accumulated depreciation and amortization

 

(70,843

)

(54,214

)

 

 

 

 

 

 

Net property and equipment

 

$

95,239

 

$

72,571

 

 

Capitalized interest at December 31, 2012 and 2011 was $0.9 million and $0.5 million, respectively.

 

During the second quarter of 2012, the Company temporarily decided to stop development of a new proprietary store software system and explore other options for its store software solution. As of December 31, 2012, the Company is continuing to evaluate the best long-term solution for its store software system. It is reasonably possible that the Company could decide to implement a different store software system in the near term. This decision could require the Company to reevaluate the carrying amount of the proprietary store software system, which could result in a one-time, non-cash expense that could range from $13.0 million to $18.0 million.

 

(5)                  Other Assets

 

Other assets at December 31, 2012 and 2011 consisted of the following:

 

(in thousands)

 

2012

 

2011

 

Deposits related to unconsolidated CSO lender

 

$

9,230

 

$

2,112

 

Restricted cash (a)

 

8,600

 

4,275

 

Repossessed assets

 

6,355

 

4,785

 

Prepaid rent

 

4,887

 

1,857

 

Deposits, primarily on leased office space

 

4,671

 

3,071

 

Other prepaid expenses

 

3,413

 

2,349

 

Sign and supplies inventory

 

1,605

 

1,327

 

Other

 

985

 

1,218

 

 

 

 

 

 

 

Total other assets

 

$

39,746

 

$

20,994

 

 


(a)                 The Company deposited money in accounts that were restricted to satisfy various state licensing requirements.

 

44



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Notes to Consolidated Financial Statements

 

(6)                  Acquisitions

 

In May 2011, the Company acquired all of the title loans and assumed all of the operating leases related to 19 locations in Nevada for an aggregate cash purchase price of $6.8 million. The Company recorded goodwill of $5.0 million as a result of this transaction.  In addition, the Company allocated $0.3 million of the purchase price to customer relationships, which was amortized over 15 months. Amortization of the customer relationships intangible asset was $0.1 million and $0.2 million during the years ended December 31, 2012 and 2011, respectively, and is included in other operating and administrative expenses on the consolidated statements of income.

 

In July 2011, the Company acquired all of the title loans and assumed all of the operating leases related to eight locations in Missouri and six locations in Nevada for an aggregate cash purchase price of $1.6 million. The Company recorded goodwill of $1.0 million as a result of this transaction.

 

The goodwill that resulted from these transactions reflects the fact that the transactions expanded the Company’s number of stores and provided a presence in a new market.

 

(7)                  Senior Secured Notes, Revolving Credit Facility and Notes Payable

 

Senior Secured Notes

 

On June 21, 2010, TMX Finance LLC and TitleMax Finance Corporation, as co-issuers (the “Issuers”), issued $250.0 million of Senior Secured Notes (the “2010 Notes”) at 99.078% of par. The 2010 Notes mature July 15, 2015 and bear interest at 13.25% per year, payable semi-annually, in arrears, on July 15 and January 15 of each year. The discount of approximately $2.3 million is being accreted over the life of the 2010 Notes as a component of interest expense using the interest method. The accretion of discount was $0.5 million, $0.5 million and $0.2 million for the years ended December 31, 2012, 2011 and 2010, respectively.

 

On July 22, 2011, the Issuers issued $60.0 million aggregate principal amount of their 13.25% Senior Secured Notes due 2015 (the “2011 Notes”). The 2011 Notes were issued with terms substantially identical to the 2010 Notes and at 107% of par for a $4.2 million premium, which resulted in gross proceeds to the Company of $64.2 million. The premium is being amortized over the life of the 2011 Notes as a component of interest expense using the interest method. The amortization of premium was $1.1 million and $0.5 million for the years ended December 31, 2012 and 2011, respectively.

 

In connection with the issuance of the 2010 Notes and 2011 Notes (collectively, the “Notes”), the Company capitalized approximately $19.5 million in issuance costs, which primarily consisted of underwriting fees, legal fees and other professional expenses. The issuance costs are being amortized over the life of the Notes as a component of interest expense. The amortization of issuance costs related to the Notes was $4.0 million, $3.6 million and $1.8 million for the years ended December 31, 2012, 2011 and 2010, respectively.

 

The Issuers may, at their option, redeem some or all of the Notes on or after July 15, 2013 at the redemption prices (expressed as percentages of principal amount) set forth below, plus accrued and unpaid interest to the redemption date.

 

Year

 

Percentage

 

2013

 

106.625

%

2014 and thereafter

 

100.000

%

 

Prior to July 15, 2013, the Issuers may redeem up to 35% of the aggregate principal amount of the Notes originally issued at a redemption price of 113.25% of the principal amount of the Notes redeemed, plus accrued and unpaid interest, if any, to the redemption date if:

 

·                  such redemption is made with the proceeds of one or more equity offerings;

 

·                  at least 65% of the aggregate principal amount of the Notes originally issued remains outstanding immediately after the occurrence of such redemption; and

 

·                  the redemption occurs within 90 days of such equity offering.

 

45



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Notes to Consolidated Financial Statements

 

(7)                  Senior Secured Notes, Revolving Credit Facility and Notes Payable (continued)

 

The Company must make excess cash flow offers in the first quarter of each year for the lesser of $30.0 million or 75% of excess cash flow as defined in the Notes. The redemption offer price is 102% of the principal amount of the Notes. The Company made an excess cash flow offer in March 2012 at 102% of the principal amount of the notes. The offer expired in April and no holders of the notes accepted the 2012 excess cash flow offer.

 

The Issuers entered into registration rights agreements and were required to file registration statements to exchange the Notes for substantially identical registrable notes. The Notes require the Issuers to post consolidated financial statements and Management Discussion and Analysis of Financial Condition and Results of Operations on its website or with the Securities and Exchange Commission (“SEC”) within 60 days of each quarter end and within 90 days of each year end. In addition, the Issuers must provide current reports for material items and must hold and participate in quarterly conference calls with holders of the Notes.

 

The Issuers may incur unsecured indebtedness subject to certain restrictions in the Notes. In addition, the Notes contain covenants that restrict transactions with affiliates, repayments of subordinated debt, distributions to the Sole Shareholder, compensation for the Sole Shareholder and relatives, the incurrence of liens, the issuance of dividends and the sale of assets. According to these covenants, effective July 1, 2010, general distributions to the Sole Shareholder are permitted under certain circumstances and are limited based on certain restrictions as defined in the Notes. At December 31, 2012, the availability of such distributions to the Sole Shareholder was $5.0 million under the terms of the Notes. The Company is in compliance with the covenants of the indenture governing the Notes as of December 31, 2012.

 

Revolving Credit Facility

 

On June 27, 2012, TMX Finance LLC and TitleMax Finance Corporation entered into a credit agreement (the “Credit Agreement”) that provides a senior secured revolving credit facility of up to $25.0 million (the “Revolving Credit Facility”) that matures June 15, 2015. Borrowings under the Revolving Credit Facility bear annual interest at LIBOR plus 8.5% with a LIBOR floor of 1.5%. The Credit Agreement contains certain restrictive covenants that are substantially similar to those in the indenture governing the senior secured notes. The Credit Agreement also contains a financial covenant that requires the maintenance of a minimum fixed charge ratio of 2:1. In connection with the completion of the Credit Agreement, the Company capitalized approximately $0.6 million in issuance costs, which primarily consisted of legal fees and other professional expenses. The issuance costs are being amortized over the life of the Revolving Credit Facility as a component of interest expense. The amortization of issuance costs related to the Revolving Credit Facility was $0.1 million for the year ended December 31, 2012.

 

Notes Payable

 

The Company had notes payable of $37.3 million and $11.4 million at December 31, 2012 and 2011, respectively. Notes payable at December 31, 2012 includes three notes payable by TMX Finance LLC, a note payable by Aviation and 63 notes issued by our consolidated CSO Lenders.

 

The three notes payable by TMX Finance LLC are in the amounts of $6.0 million, $5.0 million and $1.0 million, and each bears interest at 13.0% with interest payable monthly. The principal amount of each of these notes is due in July 2013, although the $5.0 million note and $1.0 million note may each be extended for up to one additional year at the Company’s sole discretion.

 

The note payable by Aviation has a principal balance of $0.4 million as of December 31, 2012 and bears interest at 4.4% with payments of principal and interest due monthly.

 

Our consolidated CSO Lenders had a total of $25.0 million of notes payable outstanding as of December 31, 2012. These notes bear interest ranging from 10% to 15% and allow the consolidated CSO Lenders to take one or more draws up to a total maximum principal of $29.0 million. The aggregate principal amount of all of these notes is due in 2013, but 22 notes with an aggregate principal amount of $11.9 million available for borrowing have automatic annual renewal provisions. The effect of these renewal provisions has not been reflected in the debt maturities table below. One of the consolidated CSO Lenders has issued six notes payable to its sole member with an aggregate balance of $5.8 million as of December 31, 2012.

 

46



Table of Contents

 

TMX FINANCE LLC

AND AFFILIATES

 

Notes to Consolidated Financial Statements

 

(7)                  Senior Secured Notes, Revolving Credit Facility and Notes Payable (continued)

 

Notes Payable to Related Parties

 

The Company had notes payable to related parties of $19.6 million and $20.5 million at December 31, 2012 and 2011, respectively. Notes payable to related parties at December 31, 2012 includes three notes payable by Aviation to the Sole Shareholder in the amounts of $2.8 million, $11.4 million and $5.4 million. The $2.8 million note bears interest at 6.33% and is payable in monthly installments of $35,000 with a final payment of $2.1 million due in October 2015. The $11.4 million note bears interest at 5.12% and is payable in monthly installments of $104,000 with a final payment of $8.4 million due in December 2016. The $5.4 million note bears interest at 10% payable monthly, with the full principal amount due in December 2015.

 

Debt maturities during each of the next five years ending December 31 are as follows:

 

(in thousands) 

 

2013

 

2014

 

2015

 

2016

 

2017

 

Total

 

Senior secured notes payable

 

$

 

$

 

$

310,000

 

$

 

$

 

$

310,000

 

Revolving credit facility

 

 

 

25,000

 

 

 

25,000

 

Notes payable

 

12,031

 

32

 

33

 

35

 

245

 

12,376

 

Notes payable to Sole Shareholder

 

937

 

988

 

8,508

 

9,195

 

 

19,628

 

Notes payable issued by consolidated CSO Lenders

 

24,960

 

 

 

 

 

24,960

 

 

 

 

 

 

 

 

 

 

 

 

 

 

 

Total

 

$

37,928

 

$

1,020

 

$

343,541

 

$

9,230

 

$

245

 

$

391,964

 

 

Guarantees

 

Senior Secured Notes

 

The Notes are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by the Issuers and each of their existing and future domestic restricted subsidiaries, other than immaterial subsidiaries. This guarantee arose from the issuance of the Notes for the purpose of additional financing. The Notes are secured by first-priority liens on substantially all of the Issuers’ assets and require performance under the guarantee if there is a default on the Notes. Under this guarantee, the maximum potential amount of future, undiscounted payments is $433.2 million. The current carrying amount of the related liability at December 31, 2012 is $310.0 million.

 

Revolving Credit Facility

 

Subject to certain exceptions, the obligations under the Revolving Credit Facility are fully and unconditionally guaranteed, jointly and severally, on a senior secured basis by the Issuers and each of their existing and future domestic subsidiaries. This guarantee arose from entering into the credit agreement that provides the Revolving Credit Facility for the purpose of additional financing. The Revolving Credit Facility and the guarantees will rank senior in right of payment to all of the Issuers’ and the guarantors’ existing and future subordinated indebtedness and equal in right of payment with all of the Issuers’ and guarantors’ existing and future senior indebtedness, including the Notes. The obligations under the Revolving Credit Facility and the guarantees are secured by substantially all of the Issuers’ assets, subject to certain limitations. Under this guarantee, the maximum potential amount of future, undiscounted payments is approximately $31.4 million.  The current carrying amount of the related liability at December 31, 2012 is $25.0 million.

 

CSO Agreements

 

Under the terms of the CSO Agreements with non-exclusive third-party lenders, the Company is contractually obligated to reimburse the lenders for the full amounts of the loans and certain related fees that are not collected from the customers. In certain cases, the lenders sell the related loans, and the Company’s obligation to reimburse for the full amounts of the loans and certain related fees that are not collected from the customers extends to the purchasers. Under this guarantee, the maximum potential amount