10-K 1 d681985d10k.htm 10-K 10-K
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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, 2013

OR

  
   [    ]   

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 1-9733

 

LOGO

(Exact name of registrant as specified in its charter)

 

Texas     75-2018239
(State or other jurisdiction of     (I.R.S. Employer
incorporation or organization)     Identification No.)
1600 West 7th Street    
Fort Worth, Texas     76102 – 2599
(Address of principal executive offices)     (Zip Code)

Registrant’s telephone number, including area code:

(817) 335-1100

Securities Registered Pursuant to Section 12(b) of the Act:

 

Title of Each Class

  

Name of Each Exchange on Which Registered

Common Stock, $.10 par value per share

   New York Stock Exchange

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    þ                                         No     ¨

Indicate by check if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.

Yes    ¨                                         No     þ

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    þ                                         No     ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Website, 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 time that the registrant was required to submit and post such files).

Yes    þ                                         No     ¨

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.  þ

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       þ   Accelerated filer        ¨

Non-accelerated filer

      ¨   Smaller reporting company        ¨

(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 Act).

Yes    ¨                                         No     þ

The aggregate market value of 28,427,009 shares of the registrant’s Common Stock, par value $0.10 per share, held by non-affiliates on June 30, 2013 was approximately $1,292,291,829.

At February 18, 2014 there were 28,119,630 shares of the registrant’s Common Stock, $0.10 par value per share, issued and outstanding.

DOCUMENTS INCORPORATED BY REFERENCE

Portions of the Registrant’s definitive Proxy Statement pertaining to the 2014 Annual Meeting of Shareholders are incorporated herein by reference into Items 10, 11, 12, 13 and 14 of Part III of this Annual Report on Form 10-K.

 

 

 


Table of Contents

CASH AMERICA INTERNATIONAL, INC.

YEAR ENDED DECEMBER 31, 2013

INDEX TO FORM 10-K

 

PART I

  

  Item 1.

  

Business

     2   

  Item 1A.

  

Risk Factors

     24   

  Item 1B.

  

Unresolved Staff Comments

     44   

  Item 2.

  

Properties

     45   

  Item 3.

  

Legal Proceedings

     47   

  Item 4.

  

Mine Safety Disclosures

     49   

PART II

  

  Item 5.

  

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

     49   

  Item 6.

  

Selected Financial Data

     51   

  Item 7.

  

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

     52   

  Item 7A.

  

Quantitative and Qualitative Disclosures about Market Risk

     109   

  Item 8.

  

Financial Statements and Supplementary Data

     111   

  Item 9.

  

Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

     164   

  Item 9A.

  

Controls and Procedures

     164   

  Item 9B.

  

Other Information

     166   

PART III

  

  Item 10.

  

Directors, Executive Officers and Corporate Governance

     167   

  Item 11.

  

Executive Compensation

     167   

  Item 12.

  

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

     167   

  Item 13.

  

Certain Relationships and Related Transactions, and Director Independence

     167   

  Item 14.

  

Principal Accounting Fees and Services

     167   

PART IV

  

  Item 15.

  

Exhibits, Financial Statement Schedules

     168   

SIGNATURES

     178   


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CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS

This report contains forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934. You should not place undue reliance on these statements. These forward-looking statements give current expectations or forecasts of future events and reflect the views and assumptions of senior management with respect to the business, financial condition, operations and prospects of Cash America International, Inc. and its subsidiaries (collectively, the “Company”). When used in this report, terms such as “believes,” “estimates,” “should,” “could,” “would,” “plans,” “expects,” “anticipates,” “may,” “forecast,” “project” and similar expressions or variations as they relate to the Company or its management are intended to identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties that are beyond the ability of the Company to control and, in some cases, predict. Accordingly, there are or will be important factors that could cause the Company’s actual results to differ materially from those indicated in these statements. Key factors that could cause the Company’s actual financial results, performance or condition to differ from the expectations expressed or implied in such forward-looking statements include, but are not limited to, the following:

 

   

the effect of and compliance with domestic and foreign pawn, consumer credit, tax and other laws and government rules and regulations applicable to the Company’s business, including changes in such laws, rules and regulations, or changes in the interpretation or enforcement thereof, and the regulatory and examination authority of the Consumer Financial Protection Bureau with respect to providers of consumer financial products and services in the United States and the Financial Conduct Authority in the United Kingdom;

   

the deterioration of the political, regulatory or economic environment in foreign countries where the Company operates or in the future may operate;

   

the Company’s ability to process or collect consumer loans through the Automated Clearing House system;

   

the actions of third parties who provide, acquire or offer products and services to, from or for the Company;

   

public perception of the Company’s business, including the Company’s consumer loan business and the Company’s business practices;

   

the effect of any current or future litigation proceedings and any judicial decisions or rule-making that affects the Company, its products or the legality or enforceability of its arbitration agreements;

   

fluctuations, including a sustained decrease, in the price of gold or a deterioration in economic conditions;

   

a prolonged interruption in the Company’s operations of its facilities, systems or business functions, including the Company’s information technology and other business systems;

   

changes in demand for the Company’s services and changes in competition;

   

the Company’s ability to maintain an allowance or liability for estimated losses on consumer loans that are adequate to absorb credit losses;

   

the Company’s ability to attract and retain qualified executive officers;

   

the Company’s ability to open new locations in accordance with plans or to successfully integrate newly acquired businesses into its operations;

   

interest rate and foreign currency exchange rate fluctuations;

   

changes in the capital markets, including the debt and equity markets;

   

changes in the Company’s ability to satisfy the Company’s debt obligations or to refinance existing debt obligations or obtain new capital to finance growth;

   

cyber-attacks or security breaches;

   

acts of God, war or terrorism, pandemics and other events;

   

the effect of any of the above changes on the Company’s business or the markets in which the Company operates; and

   

other risks and uncertainties described in this report or from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”).

The foregoing list of factors is not exhaustive and new factors may emerge or changes to these factors may occur that would impact the Company’s business. Additional information regarding these and other factors may be contained in the Company’s filings with the SEC, especially on Forms 10-Q and 8-K. If one or more events related to these or other risks or uncertainties materialize, or if management’s underlying assumptions prove to be incorrect, actual results may differ materially from what the Company anticipates. The Company disclaims any intention or obligation to update or revise any forward-looking statements to reflect events or circumstances occurring after the date of this report. All forward-looking statements are expressly qualified in their entirety by the foregoing cautionary statements.


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PART I

ITEM 1. BUSINESS

Overview

General

Cash America International, Inc. and its subsidiaries (collectively, the “Company”) provide specialty financial services to individuals through retail services locations and e-commerce activities. The Company was incorporated in Texas in 1984 and has been providing specialty financial services to its customers for approximately 29 years. The Company believes it was the nation’s largest provider of pawn loans and the largest operator of pawn shops in the world in 2013.

The Company offers secured non-recourse loans, commonly referred to as pawn loans, in many of its retail services locations in the United States and Mexico. Pawn loans are short-term loans (generally 30 to 90 days) made on the pledge of tangible personal property. Pawn loan fees and service charges revenue is generated from the Company’s pawn loan portfolio. A related activity of the pawn lending operations is the disposition of collateral from forfeited pawn loans and the liquidation of a smaller volume of merchandise purchased directly from customers or from third parties.

The Company originates, guarantees or purchases consumer loans (collectively referred to as “consumer loans” throughout this discussion). Consumer loans provide customers with cash, typically in exchange for an obligation to repay the amount advanced plus fees and any applicable interest. Consumer loans include short-term loans (commonly referred to as payday loans), line of credit accounts and installment loans.

Short-term loans include unsecured short-term loans written by the Company or by a third-party lender through the Company’s credit services organization and credit access business programs (“CSO programs” as further described below) that the Company guarantees. Line of credit accounts include draws made through the Company’s line of credit products. Installment loans are longer-term multi-payment loans that generally require the pay-down of portions of the outstanding principal balance in multiple installments and include unsecured loans written by the Company and auto equity loans, which are secured by a customer’s vehicle. These secured installment loans may be written by the Company or by a third-party lender through the Company’s CSO programs that the Company guarantees. The Company offers consumer loans in many of its retail services locations in the United States and over the internet under the names “CashNetUSA” and “NetCredit” in the United States, under the names “QuickQuid,” “QuickQuid FlexCredit” and “Pounds to Pocket” in the United Kingdom and under the name “DollarsDirect” in Australia and Canada.

Through the Company’s CSO programs, the Company provides services related to a third-party lender’s consumer loan products in some markets by acting as a credit services organization or credit access business on behalf of consumers in accordance with applicable state laws. Services offered under the CSO programs include credit-related services such as arranging loans with independent third-party lenders and assisting in the preparation of loan applications and loan documents (“CSO loans”). Under the CSO programs, the Company guarantees consumer loan payment obligations to the third-party lender in the event that the customer defaults on the loan. CSO loans are not included in the Company’s financial statements, but the Company has established a liability for the estimated losses in support of the guarantee on these loans in its consolidated balance sheets.

In addition, the Company provides check cashing and other ancillary products and services through many of its retail services locations and through its franchised check cashing centers. The ancillary products and services are described below.

The Company has two reportable operating segments: retail services and e-commerce. The retail services segment includes all of the operations of the Company’s Retail Services Division, which is composed of both domestic and foreign storefront locations that offer some or all of the following services: pawn loans, consumer loans, the purchase and sale of merchandise, check cashing and other ancillary products and services such as money orders, wire transfers, prepaid debit cards, tax filing services and auto insurance. Most of these ancillary products and services offered in the retail services segment are provided through third-party vendors. The e-commerce segment includes the operations of the Company’s E-Commerce Division, which is composed of the Company’s domestic and foreign online

 

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lending channels through which the Company offers consumer loans. The e-commerce segment also includes administrative expenses that are specific to this segment’s operations and are supplemental to the Company’s administrative functions classified as corporate operations.

Corporate operations primarily include corporate expenses, such as legal, occupancy, executive oversight, insurance and risk management, public and government relations, internal audit, treasury, payroll, compliance and licensing, finance, accounting, tax and information systems (except for online lending information systems, which are included in the e-commerce segment). Corporate income includes miscellaneous income not directly attributable to the Company’s segments. Corporate assets primarily include corporate property and equipment, assets related to nonqualified deferred compensation plans, marketable securities, foreign exchange forward contracts and prepaid insurance.

Retail Services Segment

The following table sets forth the number of domestic and foreign Company-owned and franchised locations in the Company’s retail services segment offering pawn lending, consumer lending, and other services as of December 31, 2013, 2012 and 2011. The Company’s domestic retail services locations operate under the names “Cash America Pawn,” “SuperPawn,” “Cash America Payday Advance,” “Cashland” and “Mr. Payroll.” In addition, some recently acquired domestic retail services locations operate under various names that are expected to be changed to “Cash America Pawn.” The Company’s foreign retail services locations operate under the name “Cash America casa de empeño”.

 

      As of December 31,  
      2013      2012      2011  
     Domestic(a)      Foreign      Total      Domestic(a)      Foreign      Total      Domestic(a)(b)      Foreign      Total  

Retail services locations offering:

                          

Both pawn and consumer lending

     582        -         582        581        -         581        572        -         572  

Pawn lending only

     247        47        294        167        47        214        126        190        316  

Consumer lending only

     40        -         40        83        -         83        86        -         86  

Other (c)

     90        -         90        91        -         91        110        -         110  

Total retail services

     959        47        1,006        922        47        969        894        190        1,084  

 

(a) 

Except as described in (c) below, includes locations that operated in 22 states in the United States as of December 31, 2013 and 2012 and 23 states as of December 31, 2011. In 2011, includes five retail services locations that the Company operated under management agreements with a former franchisee.

 

(b) 

Includes one unconsolidated franchised location that operated under the name “Cash America Pawn” as of December 31, 2011.

 

(c) 

As of December 31, 2011, includes six consolidated Company-owned check cashing locations. As of December 31, 2013, 2012 and 2011, includes 90, 91 and 104 unconsolidated franchised check cashing locations, respectively, that operated in 14, 15 and 18 states in the United States, respectively.

E-Commerce Segment

As of December 31, 2013, 2012 and 2011, the Company’s e-commerce segment operated in 32 states in the United States and in three foreign countries:

 

   

in the United States at http://www.cashnetusa.com and http://www.netcredit.com,

   

in the United Kingdom at http://www.quickquid.co.uk, http://www.quickquidflexcredit.co.uk, and http://www.poundstopocket.co.uk,

   

in Australia at http://www.dollarsdirect.com.au, and

   

in Canada at http://www.dollarsdirect.ca.

The Company’s internet websites and the information contained therein or connected thereto are not intended to be incorporated by reference into this Annual Report on Form 10-K.

 

 

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Recent Developments

Business Developments

Acquisition of 34 Pawn Lending Locations in Georgia and North Carolina

In December 2013, the Company completed the acquisition of substantially all of the assets of a 34-store chain of pawn lending locations in Georgia and North Carolina (31 locations in Georgia and three locations in North Carolina) owned by PawnMart, Inc. The aggregate purchase price for the acquisition was approximately $61.1 million, all of which was paid as of December 31, 2013, except for a $0.5 million holdback payment. The acquisition price was paid in cash and funded through borrowings under the Company’s line of credit. The Company incurred approximately $0.6 million of acquisition costs related to the acquisition, which were expensed. The activities and goodwill of $35.2 million related to this acquisition are included in the results of the Company’s retail services segment.

Acquisition of 41 Pawn Lending Locations in Texas

In August 2013, the Company completed the acquisition of substantially all of the assets of a chain of pawn lending locations in Texas that included 41 operating locations and the rights to one additional Texas pawn lending location (that was under construction but not open for business at the time of the acquisition), all of which were acquired from TDP Superstores Corp. and operate primarily under the name “Top Dollar Pawn.” The aggregate consideration paid for the acquisition was approximately $103.7 million. The acquisition price was paid in cash and funded by available cash and through the Company’s line of credit. The Company incurred approximately $0.4 million of acquisition costs related to the acquisition, which were expensed. The activities and goodwill of $62.3 million related to this acquisition are included in the results of the Company’s retail services segment.

Income Taxes

In January 2013, the Company’s Mexico-based pawn operations that were owned by Creazione Estilo, S.A. de C.V., a Mexican sociedad anónima de capital variable (“Creazione”), and operated under the name Prenda Fácil, were sold by Creazione to another wholly-owned subsidiary of the Company, CA Empeños Mexico, S. de R.L. de C.V., and began operating exclusively under the name “Cash America casa de empeño.” As of December 31, 2013, Creazione’s assets had been liquidated and it had entered into formal liquidation proceedings. In connection with the liquidation of Creazione, the Company will include a deduction on its 2013 federal income tax return for its tax basis in the stock of Creazione and has recognized an income tax benefit of $33.2 million as a result of the deduction. The Company believes that it meets the requirements for this deduction and that it should be treated as an ordinary loss, which has reduced the Company’s cash taxes paid in 2013. The Company has obtained a Private Letter Ruling from the Internal Revenue Service with respect to one of the various factors that it considered in making this determination.

Closure of Short-term Consumer Loan Retail Services Locations in Texas

Since 2011, restrictive City ordinances that have been passed have had the effect of reducing the profitability and the volume of short-term consumer loans the Company offers to customers in Texas, and the Company has experienced a related decline in consumer loans in many of the Company’s Texas retail services locations that offer this product as their primary source of revenue. As a result, the Company decided to close a total of 36 of these retail services locations (the “Texas Consumer Loan Store Closures”). The Texas Consumer Loan Store Closures were completed as of December 31, 2013. The Company incurred charges of approximately $1.4 million for the year ended December 31, 2013 in connection with these closures.

Regulatory, Litigation and Other Developments

Consumer Financial Protection Bureau

On November 20, 2013, the Company consented to the issuance of a Consent Order by the Consumer Financial Protection Bureau (the “CFPB”) pursuant to which it agreed, without admitting or denying any of the facts or conclusions made by the CFPB from its 2012 review of the Company, to pay a civil money penalty of $5.0 million, which is non-deductible for tax purposes. In addition, the Company agreed to set aside $8.0 million of cash for a period of 180 days to fund any

 

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further payments to eligible Ohio customers who make valid claims in connection with the Company’s previously announced voluntary program to fully reimburse approximately 14,000 Ohio customers for all funds collected, plus interest accrued from the date collected, in connection with legal collections proceedings initiated by the Company in Ohio from January 1, 2008 through December 4, 2012 (the “Ohio Reimbursement Program”). The decision to make voluntary reimbursements in connection with the Ohio Reimbursement Program was made by the Company in 2012 because the Company determined that a small number of employees did not prepare certain court documents in many of its Ohio legal collections proceedings in accordance with court rules. As of December 31, 2013, the Company had refunded approximately $6.4 million in connection with this program.

The Consent Order relates to issues self-disclosed to the CFPB during its 2012 examination of the Company, including the improper preparation of certain court documents in connection with collections lawsuits initiated by the Company in Ohio, which were previously disclosed by the Company and for which the Company implemented the Ohio Reimbursement Program; the making of a limited number of loans to consumers who may have been members of the military at the time of the loan at rates in excess of the military annual percentage rate permitted by the federal Military Lending Act due in part to system errors, and for which the Company has made refunds of approximately $33,500; and for certain failures to timely provide and preserve records and information in connection with the CFPB’s examination of the Company. In addition, as a result of the CFPB’s review, the Company is in the process of enhancing its compliance management programs and implementing additional procedures to address the issues identified by the CFPB. The Company is also required to provide periodic reports to the CFPB. For further discussion of the CFPB, see “Item 1A. Risk Factors—Risks Related to the Company’s Business and Industry—The Consumer Financial Protection Bureau could have a significant impact on the Company’s U.S. consumer loan business.”

Voluntary Reimbursements to Ohio Customers

On December 4, 2012, the Company announced the Ohio Reimbursement Program (as described above). As of December 31, 2012, the Company estimated the cost of the Ohio Reimbursement Program and related expenses to be approximately $13.4 million before taxes and recorded this amount in “Accounts payable and accrued expenses” in the consolidated balance sheets and in “Operations and administration expense” in the consolidated statements of income for the year ended December 31, 2012. During the year ended December 31, 2013, the Company reimbursed approximately $6.4 million to customers and incurred $1.7 million of related expenses in connection with this program. In addition, the Company decreased its remaining liability related to the Ohio Reimbursement Program during the year ended December 31, 2013 by $5.0 million after the assessment of the claims made to date and related matters. As of December 31, 2013, the Company’s remaining accrual for the Ohio Reimbursement Program was $0.3 million.

Financial Conduct Authority

The Company offers consumer loans over the internet in the United Kingdom where it is currently subject to regulation by the Office of Fair Trading (the “OFT”). In December 2012, the U.K. Parliament passed the Financial Services Act of 2012 (the “Act”), which created a new regulatory framework for the supervision and management of the banking and financial services industry in the United Kingdom, including the consumer lending industry in which the Company operates. The Act mandates that the Financial Conduct Authority (the “FCA”) take over responsibility for regulating consumer credit from the OFT in April 2014.

In October 2013 the FCA issued a consultation paper that proposed certain changes to the current requirements for lenders of unsecured credit in the UK such as the Company, including mandatory affordability checks on borrowers, limiting the number of rollovers to two, restricting how lenders can advertise and proposing the power to ban advertisements it deems misleading, and introducing a limit of two unsuccessful attempts on the use of continuous payment authority (which provides a creditor the ability to directly debit a customer’s account for payment when authorized by the customer to do so) to pay off a loan. On February 28, 2014, the FCA published the Consumer Credit Sourcebook (the “CONC”) within the FCA Handbook that contains the final regulations that will cover the conduct requirements for lenders of unsecured credit in the UK such as the Company. The Company is conducting a review and assessment of the newly published final regulations set forth in the CONC to evaluate and determine the potential impact of the final regulations included in the CONC and what effect such regulations may have on its business, prospects, results of operations and financial condition. If the final FCA regulations included in the CONC are consistent with the proposed rules, the Company will be required to make adjustments to some of its business practices, including its collections processes, which could possibly result in lower collections on loans made by the Company and a decrease in the number of customers that it is able to approve.

In addition, on December 18, 2013, the United Kingdom passed the Financial Services (Banking Reform) Act, which includes an amendment that requires the FCA to introduce rules “with a view to securing an appropriate degree of protection for borrowers against excessive charges” on “high-cost short-term” consumer loans by January 2, 2015 and could result in fee, cost of credit or other restrictions being adopted by the FCA. The Company is still assessing the potential impact of these proposed changes and what effect

 

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such changes may have on its business, prospects, results of operations, financial condition and cash flows. See “Item 1A. Risk Factors—The United Kingdom has recently increased regulation of the consumer loan industry as well as demonstrated an increasing interest in considering legislation or regulations that could further regulate or restrict the consumer loan products the Company offers” and “The OFT is reviewing the payday lending sector in the United Kingdom, including the Company, which could result in changes to the Company’s business processes or payday lending products” for additional information regarding regulation in the United Kingdom.

2013 Litigation Settlement

In October 2013, the Company entered into a Settlement Agreement, which received final court approval in January 2014, to settle an outstanding class action lawsuit that has been ongoing since 2004. The Settlement Agreement requires a minimum payment by the Company of $18.0 million and a maximum payment of $36.0 million to cover class claims (including honorarium payments to the named plaintiffs) and the plaintiffs’ attorneys’ fees and costs (including the costs of claims administration) (the “Class Claims and Costs”), all of which will count towards the aggregate payment for purposes of determining whether the minimum payment has been made or the maximum payment has been reached. The actual payout will depend on the number of claimants who submit claims for payment. The Company denies all of the material allegations of the lawsuit and denies any and all liability or wrongdoing in connection with the conduct described in the lawsuit, but the Company agreed to the settlement to eliminate the uncertainty, distraction, burden and expense of further litigation.

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 450, Contingencies, the Company recognized a liability during the year ended December 31, 2013 in the amount of $18.0 million. In February 2014, the amount to be paid in connection with the Class Claims and Costs was substantially finalized, and the amount is not materially different than the liability accrued by the Company at December 31, 2013. The Class Claims and Costs will be paid during the first quarter of 2014. See “Item 3. Legal Proceedings—Litigation” for additional information regarding this lawsuit.

Ohio Court Decision

On May 28, 2009, one of the Company’s subsidiaries, Ohio Neighborhood Finance, Inc., doing business as Cashland (“Cashland”), filed a standard collections suit in an Elyria Municipal Court in Ohio against Rodney Scott seeking judgment against Mr. Scott in the amount of $570.16, which was the amount due under his loan agreement. Cashland’s loan was offered under the Ohio Mortgage Loan Act (“OMLA”), which allows for interest at a rate of 25% per annum plus certain loan fees allowed by the statute. The Municipal Court, in Ohio Neighborhood Finance, Inc. v. Rodney Scott, held that short-term, single-payment consumer loans made by Cashland are not authorized under the OMLA, and instead should have been offered under the Ohio Short-Term Lender Law, which was passed by the Ohio legislature in 2008 for consumer loans with similar terms. Due to a cap on interest and loan fees at an amount that is less than permitted under the OMLA, the Company does not offer loans under the Ohio Short-Term Lender Law.

On December 3, 2012, the Ohio Ninth District Court of Appeals affirmed the Municipal Court’s ruling in a 2-1 decision. Although this court decision is only legally binding in the Ninth District of Ohio, which includes four counties in northern Ohio where Cashland operates seven stores and where the Company has modified its short-term loan product in response to this decision, other Ohio courts may consider this decision.

The Supreme Court of Ohio heard the Company’s appeal of the Ninth District Court’s decision in December 2013, and a decision is expected during the first half of 2014. If the Ninth District Court’s decision is upheld by the Ohio Supreme Court on appeal, the Company’s Ohio operations may be adversely affected. The Company relies on the OMLA to make short-term loans in its retail services locations in Ohio, and if the Company is unable to continue making short-term loans under this law, it will alter its short-term loan product in Ohio. In addition, following the ruling by the Ninth District Court, four lawsuits were filed against the Company by customers in Ohio, three of which are purported class action complaints, alleging that the Company improperly made loans under the OMLA, and the Company may in the future receive other claims. Each of these four lawsuits has been stayed pending the outcome of the Supreme Court of Ohio’s decision. The Company is currently unable to estimate a range of reasonably possible losses in connection with these lawsuits, as defined by ASC 450-20-20, Contingencies—Loss Contingencies—Glossary, for these litigation matters. The Company believes that the Plaintiffs’ claims in these suits are without merit and will vigorously defend these lawsuits.

 

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Services Offered by the Company

Pawn

Pawn Lending

The Company’s retail services segment offers pawn loans through its retail services locations in the United States and Mexico. The Company began offering pawn loans in the United States in 1984 and in Mexico in 2008. See “Recent Developments” above and “Item 8. Financial Statements and Supplementary Data—Note 3” for additional information regarding the acquisition of retail services locations, including recent acquisitions.

When receiving a pawn loan from the Company, a customer pledges personal property to the Company as security for the loan. The Company delivers a pawn transaction agreement, commonly referred to as a pawn ticket, to the customer, along with the proceeds of the loan. If the customer does not repay the loan and redeem the property, the Company either becomes the owner of the property or becomes the party responsible for the disposition of the collateral in satisfaction of the loan and unpaid fees.

The Company relies solely on the disposition of pawned property to recover the principal amount of an unpaid pawn loan, plus a yield on the investment, because the Company’s pawn loans are non-recourse against the customer. As a result, the customer’s creditworthiness is not a significant factor in the loan decision, and a decision to redeem pawned property does not affect the customer’s personal credit status with other third-party creditors. Goods pledged to secure pawn loans are tangible personal property items such as jewelry, tools, televisions and other electronics, musical instruments and other miscellaneous items.

The Company contracts for pawn loan fees and service charges as compensation for the use of the funds loaned and to cover direct operating expenses related to the transaction. The pawn loan fees and service charges are typically calculated as a percentage of the pawn loan amount based on the size and duration of the transaction and generally range from 12% to 300% annually, as permitted by applicable laws. In addition, as required by applicable laws, the amounts of these charges are disclosed to the customer on the pawn ticket. These pawn loan fees and service charges contributed approximately 17.3% of the Company’s total revenue in 2013, 16.7% in 2012 and 17.8% in 2011.

In the Company’s pawn lending operations, the maximum pawn loan amount is generally assessed as a percentage of the pledged personal property’s estimated disposition value. The Company relies on many sources to determine the estimated disposition value, including its proprietary automated product valuation system, catalogs, “blue books,” newspapers, internet research and its (or its employees’) experience in disposing of similar items of merchandise. The Company does not use a standard or mandated percentage of estimated disposition value in determining the loan amount. Instead, its employees may set the percentage for a particular item and determine whether the item’s disposition, in the event that the loan becomes delinquent and the item is forfeited, would yield a profit margin consistent with the Company’s historical experience with similar items.

The Company holds the pledged property through the term of the loan, unless earlier repaid, renewed or extended. The Company holds forfeited collateral until it is sold, as described in “Merchandise Disposition Activities” below. The typical loan term is 30 to 90 days and, in many cases, an additional grace period (typically 10 to 60 days) may be available to the borrower. The Company’s pawn loans may be either paid in full with accrued pawn loan fees and service charges or, where permitted by law, may be renewed or extended by the customer’s payment of accrued pawn loan fees and service charges. Accrued pawn loan fees and service charges are reversed on forfeited pawn loans and no additional pawn loan fees and service charges are accrued. The Company does not record pawn loan losses or charge-offs because the amount advanced becomes the carrying cost of the forfeited collateral that is to be recovered through the disposition of merchandise (as described below). The Company typically experiences seasonal growth during the second, third and fourth quarter of each year due to loan balance growth that occurs after the heavy repayment of pawn loans with tax refund proceeds received by customers in the first quarter each year.

 

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Merchandise Disposition Activities 

A related activity of the Company’s pawn lending operations is the disposition of collateral from forfeited pawn loans and the liquidation of a smaller volume of merchandise purchased directly from customers or from third parties. The Company’s retail services segment engages in merchandise disposition activities through its retail services locations in the United States and Mexico.

If a customer does not repay, renew or extend a pawn loan at the time a loan is due, the Company becomes the owner of the forfeited collateral. With respect to the Company’s foreign pawn operations, collateral underlying forfeited pawn loans is not owned by the Company; however, the Company assumes the risk of loss on such collateral and is solely responsible for its care and disposition.

Once the Company owns the forfeited collateral or becomes the party responsible for its care and disposition in satisfaction of the loan, the merchandise becomes available for disposition through either retail or commercial sales. Retail sales include the sale of jewelry and general merchandise direct to consumers through the Company’s domestic and foreign retail services locations or over the internet through auction and other similar sites. Commercial sales include the sale of refined gold, platinum, silver and diamonds to brokers or manufacturers.

Upon the sale of merchandise, the Company realizes gross profit, which is the difference between the Company’s cost basis in the loan or the amount paid for purchased merchandise, both of which are recorded as cost of sales, and the amount of proceeds from the sale. The cost of disposed merchandise is computed on the specific identification basis. If the proceeds from the disposition of the collateral are less than the outstanding loan balance, a loss is recorded for the difference at the time the collateral is sold. In the Company’s foreign operations, if within six months of the sale of the merchandise, the customer makes a claim to receive the excess proceeds, the Company refunds that amount to the customer and reduces revenue by the same amount.

The recovery of the amount advanced and the realization of a profit on the disposition of merchandise depends on the Company’s initial assessment of the property’s estimated disposition value when the pawn loan is made. While the Company has historically realized profits when disposing of merchandise, the improper assessment of the disposition value could result in the disposition of the merchandise for an amount less than the loan amount. The Company’s retail services locations also sell used goods purchased from the general public and some new merchandise purchased from third parties, principally accessory merchandise that complements and enhances the marketability of items such as tools, consumer electronics and jewelry. Merchandise sales are typically highest during the first quarter tax refund and fourth quarter holiday seasons. Gross proceeds from merchandise disposition activities contributed approximately 33.1% of the Company’s total revenue in 2013, 39.1% in 2012 and 43.5% in 2011.

The Company offers customers a 30-day satisfaction guarantee, whereby the customer can return merchandise and receive a full refund, a replacement item of comparable value or store credit. The Company provides an allowance for returns and valuation based on management’s evaluation of the characteristics of the merchandise. Customers may purchase merchandise on a layaway plan under which the customer agrees to pay the purchase price for the item plus a layaway fee, makes an initial cash deposit representing a small portion of the disposition price and pays the balance in regularly scheduled, non-interest bearing payments. The Company segregates the layaway item and holds it until the customer has paid the full disposition price. If the customer fails to make a required payment, the item is returned to merchandise held for disposition. The layaway fee is recognized as revenue, and any amounts previously paid toward the item are returned to the customer as store credit.

Consumer Loan Activities

In addition to pawn loans, the Company’s retail services segment also offers certain consumer loans in many of its retail services locations in the United States, including short-term loans and secured and unsecured installment loans. The Company’s e-commerce segment offers certain consumer loans over the internet, including short-term loans, line of credit accounts and unsecured installment loans.

The Company’s retail services segment offers short-term loans in certain domestic retail services locations. The retail services segment also began offering secured auto equity loans in 2010 and unsecured installment loans in 2011 in some of its domestic retail services locations. Consumer loan fees earned in the Company’s retail services segment contributed approximately 6.3% of the Company’s total revenue in 2013, 6.8% in 2012 and 7.5% in 2011.

The Company began offering short-term loans over the internet, through what is now known as its e-commerce segment and is also referred to as Enova, in the United States under the name “CashNetUSA” when that company was

 

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acquired in 2006. Since then, the Company’s e-commerce segment has expanded its online product offerings into the United Kingdom, Australia and Canada. The Company’s e-commerce segment began offering unsecured installment loans over the internet to customers in the United States, United Kingdom and Australia in 2008, 2010 and 2013, respectively. The Company also began offering line of credit accounts over the internet in the United States in 2010 and in the United Kingdom in 2013. Consumer loan fees earned in the Company’s e-commerce segment contributed approximately 42.6% of the Company’s total revenue in 2013, 36.6% in 2012 and 30.3% in 2011.

Consumer loans offered by the Company are unsecured loans, except for auto equity loans, which are secured by the customer’s vehicle. Consumer loan fees include revenue from the loan portfolio owned by the Company and fees paid to the Company for arranging, guaranteeing and processing loans from independent third-party lenders for customers through the CSO programs. Due to the credit risk and high transaction costs of serving the Company’s customer segment, the fees the Company charges are generally considered to be higher than the fees charged to customers with top-tier credit histories by commercial banks and similar lenders who are typically unwilling to make unsecured loans to alternative credit customers. Consumer loan fees earned by the Company contributed approximately 48.9% of the Company’s total revenue in 2013, 43.4% in 2012 and 37.8% in 2011.

The Company offers short-term loans in several states in the United States through its retail services segment and e-commerce segment and in the United Kingdom and Canada through its e-commerce segment. Short-term loans generally have a loan term of seven to 90 days and are usually payable on the customer’s next payday, unless the loan is renewed or extended in accordance with applicable laws. The fees the Company charges on short-term loans in the United States vary by jurisdiction but typically range between $10 to $25 per $100 borrowed, and the fees the Company charges on short-term loans in the foreign markets in which the Company operates also vary but typically range between 20 and 29.50 per 100 borrowed in their respective currencies.

The Company offers line of credit accounts through its e-commerce segment in several states in the United States and in the United Kingdom. Line of credit accounts allow customers to draw on a line of credit in increments of their choosing within certain restrictions, subject to a minimum draw amount set by the Company, up to their credit limit. Customers may pay off their account balance in full at any time or make required minimum payments in accordance with their terms of the line of credit account. As long as the customer’s account is in good standing, customers may continue to borrow on their line of credit.

The Company offers unsecured installment loans through its retail services segment and e-commerce segment in some states in the United States and through its e-commerce segment in the United Kingdom and in Australia. Unsecured installment loans typically have terms between two and 12 months, but may have available terms of up to 36 months. The Company also offers secured auto equity loans through its retail services segment in the United States. Secured auto equity loans typically have terms between three and 24 months, with available terms of up to 42 months. Both unsecured and secured installment loans require the repayment of principal in installments over the term of the loan.

The Company monitors the performance of its portfolio of consumer loans and maintains either an allowance or liability for estimated losses on consumer loans (including fees and interest) at a level estimated to be adequate to absorb credit losses inherent in the portfolio. The allowance for losses on the Company’s owned consumer loans reduces the outstanding loan balance in the consolidated balance sheets. The liability for estimated losses related to loans guaranteed by the Company under its CSO programs is included in the consolidated balance sheets.

In 2013, revenue from the foreign component of the e-commerce segment was 48.4% of total revenue for the e-commerce segment and 20.6% of total consolidated revenue. The total revenue in the foreign component of the e-commerce segment was primarily derived from operations in the United Kingdom. The percentage of total revenue from foreign e-commerce operations to total consolidated revenue has increased over the last three years from 14.3% in 2011 to 20.6% in 2013, as the Company’s e-commerce segment’s operations in the United Kingdom have grown significantly.

The Company generally experiences seasonal growth in consumer loan fees in conjunction with the growth in loan balances that typically occurs after the heavy repayment of consumer loans with tax refund proceeds received by customers in the United States in the first quarter each year. Due to the nature of the short-term loan product and the high velocity of loans written and renewed, seasonal trends are evidenced in quarter-to-quarter performance. In the typical business cycle, the consumer loan loss provision as a percent of combined consumer loans written and renewed for short-term consumer loans

 

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is usually lowest in the first quarter and increases throughout the year. See “Item 7. Management’s Discussion and Analysis—Combined Consumer Loans—Consumer Loan Loss Experience” for additional information about the seasonality of consumer loan losses and for information about combined consumer loans.

Collection activities are an important aspect of the consumer loan product offering. The Company operates centralized collection centers to maximize loan repayment, facilitate regulatory compliance and coordinate a consistent approach to customer service and collections.

Check Cashing and Other Financial Services

The Company provides check cashing and other ancillary products and services through its retail services locations. Other financial services include money orders, wire transfers, prepaid debit cards, tax filing services and auto insurance. Most of these ancillary products and services offered in the retail services segment are provided through third-party vendors. When the Company provides a check cashing service to its customers, it charges check cashing fees based on the type and face amount of the check being cashed. The Company receives check cashing fees from many of its retail services locations. In addition, the Company franchises its stand-alone check cashing business, Mr. Payroll, and each franchisee pays royalties based on the gross revenue of check cashing services provided within the franchisee’s facility.

Financial Information on Segments and Areas

Additional financial information regarding the Company’s operating segments and each of the geographic areas in which the Company does business is provided in “Item 8. Financial Statements and Supplementary Data—Note 20.”

Operations

Management and Personnel

Executive Officers

The Company’s executive officers, and information about each, are listed below. There is no family relationship between any of the executive officers.

 

Name

     Age     

Position

Daniel R. Feehan    63    Chief Executive Officer and President
Thomas A. Bessant, Jr.    55    Executive Vice President – Chief Financial Officer
David A. Fisher    44    Chief Executive Officer – E-Commerce Division
J. Curtis Linscott    48    Executive Vice President – General Counsel and Secretary

Daniel R. Feehan has been Chief Executive Officer and President since February 2000. He served as the Company’s President and Chief Operating Officer from January 1990 until February 2000, except that he served as Chairman and Co-Chief Executive Officer of one of the Company’s subsidiaries from February 1998 to February 1999 before returning to the position of President and Chief Operating Officer of the Company. Mr. Feehan became a director of the Company in 1984 and joined the Company full-time in 1988, serving as its Chief Financial Officer before becoming President and Chief Operating Officer in 1990. Mr. Feehan received a Bachelor of Business Administration degree in Accounting from Texas A&M University.

Thomas A. Bessant, Jr. has been the Company’s Executive Vice President – Chief Financial Officer since July 1998. He joined the Company in May 1993 as Vice President – Finance and Treasurer and was elected Senior Vice President – Chief Financial Officer in July 1997. Prior to joining the Company, Mr. Bessant was a Senior Manager in the Corporate Finance Consulting Services Group of Arthur Andersen & Co., S.C. from June 1989 to April 1993. Prior to that, Mr. Bessant was a Vice President in the Corporate Banking Division of a major money center bank where he started his professional career in 1981. Mr. Bessant holds a Bachelor of Business Administration degree in Accounting and Finance from Texas Tech University and a Masters of Business Administration degree in Finance from Vanderbilt University.

 

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David A. Fisher has been the Chief Executive Officer of the E-Commerce Division (which is also known as Enova) since January 29, 2013. Prior to joining the Company, Mr. Fisher was Chief Executive Officer of optionsXpress Holdings, Inc. (“optionsXpress”) from October 2007 until The Charles Schwab Corporation acquired the business in September 2011. Following the acquisition, Mr. Fisher served as President of optionsXpress until March 2012. Mr. Fisher also served as the President of optionsXpress from March 2007 to October 2007 and as the Chief Financial Officer of optionsXpress from August 2004 to March 2007. Prior to joining optionsXpress, Mr. Fisher served as Chief Financial Officer of Potbelly Sandwich Works from February 2001 to July 2004, and before that in the roles of Chief Financial Officer and General Counsel for Prism Financial Corporation. In addition, Mr. Fisher has served on the Board of Directors of InnerWorkings, Inc., since November 2011 and has served on the Board of Directors of GrubHub, Inc., a venture-backed company, since May 2012. Mr. Fisher also served on the Board of Directors of optionsXpress from October 2007 until September 2011 and CBOE Holdings, Inc. from January 2007 until October 2011. Mr. Fisher received a Bachelor of Science degree in Finance from the University of Illinois and a law degree from Northwestern University School of Law.

J. Curtis Linscott has been Executive Vice President – General Counsel and Secretary since May 2006. He was appointed Vice President, General Counsel and Corporate Secretary in May 2005. Mr. Linscott joined the Company in 1995, serving as Associate General Counsel and Vice President – Associate General Counsel. Before joining the Company, he was in private law practice with Kelly, Hart & Hallman, P.C. for five years. He received his law degree from the University of Kansas School of Law in 1990 and an undergraduate degree in Marketing from Kansas State University.

During 2013, the executive officers of the Company also included the President—Retail Services Division and the President—E-Commerce Division. In January 2014 the President—Retail Services Division left the Company when that position was eliminated, and the Company’s Chief Executive Officer and President has assumed the principal duties and functions of that position. In addition, the Company’s President—E-Commerce Division left the Company in March 2013, and the Chief Executive Officer—E-Commerce Division has assumed the principal duties and functions of that position.

Retail Services Segment

The Company’s retail services segment, which includes its domestic and foreign retail services locations, has store managers who supervise each retail services location’s personnel and assure that each retail services location is managed in accordance with Company guidelines, policies and procedures. A Market Manager or Area Coordinator, who reports to a Regional Operations Director, oversees each store manager. Each domestic Regional Operations Director oversees a portion of each domestic region and reports to a Region Vice President. Four Region Vice Presidents coordinate operations and strategy in the Company’s domestic retail services locations and report to the Senior Vice President of Operations of the Retail Services Division, who reports to the Chief Executive Officer. The Company’s foreign retail services operation has a Regional Operations Director who reports to the Vice President and General Manager of International Operations and is overseen by the Chief Financial Officer and ultimately the Company’s Chief Executive Officer.

E-Commerce Segment

The operations and strategy of the Company’s e-commerce segment is coordinated by the officers of the Company’s E-Commerce Division, Enova, including Vice Presidents and Senior Vice Presidents, who report to the Chief Executive Officer—E-Commerce Division. A Senior Vice President of Operations oversees all consumer loan products in the United States and the United Kingdom, all of which are offered over the internet through the Company’s e-commerce segment. A Vice President of Operations oversees the consumer loan products offered over the internet in Canada and Australia.

Personnel

As of December 31, 2013, the Company employed 7,637 persons in its operations, of whom 6,213 were in the retail services segment, 1,027 were in the e-commerce segment and 397 were in corporate and administrative functions.

 

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Tradenames and Trademarks

The Company operates under the trade names “Cash America Pawn,” “Cash America Payday Advance,” “Cashland,” “Mr. Payroll,” “SuperPawn,” “Cash America casa de empeño,” “CashNetUSA,” “NetCredit,” “QuickQuid,” “QuickQuid FlexCredit,” “DollarsDirect” and “Pounds to Pocket.” The Company has a number of trademarks that are registered under applicable trademark laws including, but not limited to, “Cash America,” “Cashland,” “SuperPawn,” “CashNetUSA,” “Mr. Payroll,” “QuickQuid,” “QuickQuid FlexCredit,” “DollarsDirect,” “Pounds to Pocket,” “NetCredit,” “Enova Financial” and Enova’s “e” logo. These trademarks have varying expiration dates. The Company believes these trademarks are of material importance to the Company and each of its segments and anticipates maintaining and renewing them. In addition, the Company has various other trademark applications pending in the United States and other countries in which it operates.

Franchises

Each of the Company’s unconsolidated franchised check cashing locations is subject to franchise agreements that have varying durations that are negotiated individually with each franchisee. As of December 31, 2013, the Company had 90 unconsolidated franchised check cashing locations, and the revenue from these franchised locations was immaterial to the Company on a consolidated basis.

Future Expansion

Storefront Expansion

The Company historically has expanded by acquiring existing retail services locations and by establishing new start-up locations. The Company intends to continue expanding its retail services business within its existing geographic markets and into other markets that meet its risk/reward considerations. Management believes that such expansion will continue to provide economies of scale in supervision, purchasing, administration and marketing by decreasing the overall average cost of such functions per unit owned. By concentrating multiple lending units in regional and local markets, the Company seeks to expand market penetration, enhance name recognition and leverage marketing programs.

Over the last three years, the Company has expanded its domestic pawn lending presence in the United States. Most recently, in December 2013, the Company completed the acquisition of substantially all of the assets of a 34-store chain of pawn lending locations in the states of Georgia and North Carolina that were owned by PawnMart, Inc. and operate primarily under the name PawnMart. In addition, in August 2013, the Company completed the acquisition of substantially all of the assets of a chain of pawn lending locations in Texas that included 41 operating locations and the rights to one additional Texas pawn-lending location (that was under construction but not open for business at the time of the acquisition), all of which were acquired from TDP Superstores Corp. and operate under the name Top Dollar Pawn.

While the Company’s strategy is to expand its domestic and foreign pawn lending operations, the Company periodically assesses whether the closure of certain locations would improve the overall profitability in its retail services segment. From time-to-time, the Company closes certain under-performing locations to improve profitability of its domestic and foreign retail services segment operations. In connection with the reorganization of its Mexico-based pawn operations during 2012 (the “Mexico Reorganization”), the Company closed 148 of its foreign retail services locations in 2012. During 2013, the Company closed 36 of its domestic retail services locations in connection with the Texas Consumer Loan Store Closures.

 

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The table below outlines acquisitions, start-ups and closures for domestic and foreign Company-owned retail services locations, excluding Company-owned check cashing locations, for the years ended December 31, 2013, 2012 and 2011. See “Recent Developments—Business Developments” for additional information regarding the acquisitions and closures during 2013.

 

     As of December 31,  
     2013     2012     2011  

Retail services locations at beginning of period

     878       973       950  

Acquired

     76       37       8  

Start-ups

     8       22       20  

Combined, or closed

     (46     (154     (5

Retail services locations at end of period

     916       878       973  

When considering acquiring an existing lending location, the Company evaluates, among other things, the annual volume of loan transactions at that location, the carrying cost of merchandise, outstanding loan balances and lease terms of the facility or, if it is to be purchased, the facility’s fair market value. When considering the start-up of a new retail services location, the Company evaluates the location of the prospective site, whether conditions in the surrounding community indicate a sufficient level of potential customers, and whether a suitable facility is available on acceptable terms.

After the Company has leased or acquired a suitable location and obtained the required licenses in the United States, a new retail services location can be ready for business within four to eight weeks. The approximate start-up costs, which consist of the investment in property (excluding real estate) and equipment, for recently established retail services locations in the United States typically range from $450,000 to $650,000. The typical costs associated with start-up retail services locations in Mexico are estimated to be between $150,000 and $200,000 per location, based on exchange rates as of December 31, 2013. The costs in Mexico are less than domestic costs primarily due to the lower cost of labor and materials. These start-up amounts do not include merchandise transferred from other locations, funds to advance on pawn loans and consumer loans or operating expenses.

Organic Growth and Development of New Credit Alternatives

The Company has the ability to leverage its existing retail services platform for pawn loan, consumer loan and check cashing activities to expand its operating margins and add incremental earnings through the addition of new customers. Domestically and internationally, the consumer credit market is evolving, which the Company believes will create new opportunities for the Company to reach customers who have not previously considered using its products and services. The Company plans to utilize marketing and promotional campaigns to pursue new customers and to gain market share by expanding the number of customers being served through its retail services and e-commerce operations.

The Company’s e-commerce segment is actively exploring strategies to increase and enhance its internet presence. The Company now offers an array of consumer credit products over the internet under the names “CashNetUSA,” “NetCredit,” “QuickQuid,” “QuickQuid FlexCredit,” “Pounds to Pocket” and “DollarsDirect.” Over the past few years, the Company has begun offering new credit alternatives, such as line of credit accounts and installment loan products. The Company intends to continue pursuing the development of new products in the current markets that it serves that complement its internet specialty financial services in order to meet the growing financial services needs of consumers, both in the United States and internationally. The Company continues to evaluate new markets in which to establish its internet presence. Other countries, including China and Brazil, are being evaluated for expansion of the Company’s consumer loan products, and any additional expansion will be pursued when the country-specific characteristics and requirements meet the Company’s investment criteria.

The Company’s e-commerce segment utilizes proprietary and custom-designed technology platforms that are built for scalability and flexibility. The technology platforms are designed to be powerful enough to handle the large volumes of data required to evaluate customer applications and flexible enough to capitalize on changing customer preferences, market trends and regulatory changes. Further, the information gathered from these technology platforms allows the Company to focus on both existing and potential customers who it believes are more likely to provide the Company with better credit performance. Through this approach, the Company is able to build a valuable list of

 

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consumers who both use the credit products offered and to whom the Company can market its product offerings to help fulfill the customer’s credit needs. The Company also uses a proprietary point-of-sale system for its retail services locations. The Company will continue to pursue new customer acquisition through channels such as lead generation (sourcing potential customers via third-party lead providers, which use digital, email or other marketing efforts to acquire and provide the Company with loan applicants), traditional advertising and digital advertising.

In some instances in the past, legislative and regulatory activity affecting the Company’s consumer loan products has led the Company to also explore new credit product alternatives to help its customers meet their short-term credit needs. While some legislative and regulatory actions in certain states where the Company operates has reduced the revenue per loan to levels that make the product less profitable or unattractive, these regulatory changes do not eliminate the credit needs of the Company’s customers. The Company remains committed to finding new and innovative solutions to help its customers avoid higher cost alternatives, such as overdraft protection, returned check fees and late charges on bills, in the absence of alternatives such as the Company’s consumer loan products.

Expansion Considerations for Retail Services Locations

The Company’s retail services expansion program is subject to numerous unpredictable factors, such as the availability of attractive acquisition candidates or sites on suitable terms, market and regulatory conditions in the pawn loan business, general economic conditions and other factors. Among the primary factors that could affect the Company’s future planned expansion are:

 

   

Statutory Requirements. The Company’s ability to add start-up locations depends on the Company’s ability to obtain all necessary licenses required to open a new location. In addition, the current statutory and regulatory environment of some states renders expansion into those states impractical.

   

Availability of Real Estate. The Company’s ability to add start-up locations is subject to locating satisfactory real estate sites on terms and conditions acceptable to the Company. Factors that could limit the availability of acceptable real estate sites could include changes in general economic conditions, increases in real estate values or market rents, increases in competition for suitable real estate, changing demographics in surrounding areas, restrictive zoning or sign ordinances, limited visibility or accessibility to public streets, excessive finish-out costs and other factors.

   

Competition. Several competing pawnshop companies are also pursuing expansion and acquisition programs. A number of smaller companies and private equity firms have also entered the market. While the Company believes that it is the largest pawnshop operator in the United States, there can be no assurance that it will be more successful than its competitors in pursuing acquisition opportunities and securing attractive start-up locations. Increased competition could also increase prices for attractive acquisition candidates and could adversely affect the performance of potential acquisition targets.

   

Availability of Qualified Store Management Personnel. The Company’s ability to expand may also be limited by the availability of qualified store management personnel. While the Company seeks to train its existing personnel to enable those capable to assume management positions, there can be no assurance that sufficient qualified personnel will be available to satisfy the Company’s needs with respect to its planned expansion.

   

Capital Requirements. In some states, the Company is required by law to maintain a minimum amount of certain unencumbered net assets per licensed location. The Company’s expansion plans will therefore be limited in these states to the extent the Company is unable to maintain these required levels of unencumbered net assets. At present, these requirements do not limit the Company’s growth opportunities.

 

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Competition

Pawn Lending Activities

The Company has many competitors to its pawn lending activities, such as retailers of new merchandise and retailers of pre-owned merchandise, thrift shops, internet retailers, internet auction and other similar sites and other pawn shops. The pawnshop industry in the United States remains very fragmented, with approximately 11,000 stores nationwide operating in 2013 that were owned primarily by independent operators and, to a lesser extent, by publicly-traded companies. The Company believes that it is the largest operator of pawnshops in the world. The three largest domestic publicly-traded pawnshop companies, First Cash Financial Services, Inc., EZCORP, Inc., and the Company, operated approximately 1,600 total pawnshops in the United States in 2013. During 2013, the Company was the largest publicly-traded pawnshop operator in the United States based on pawn loan balances and number of pawn lending locations. Management believes that the Company can achieve economies of scale and increased operating efficiencies by increasing the number of stores under operation and utilizing modern point-of-sale systems and proven operating methods. Management believes that the principal competitive factors in the pawnshop industry are location, quality customer service, the ability to loan competitive amounts at competitive rates and adequate low-cost working capital.

The pawnshop industry in Mexico is fragmented and remains substantially less developed than it is in the United States. There has been significant growth in the number of pawnshops servicing Mexico over the last several years to an estimated 5,000 locations operating in 2013. Most of these locations provide loans secured only by gold jewelry and are owned by independent operators and small chains, including some owned by not-for-profit organizations and publicly-traded companies. The Company’s primary competitors in Mexico include Monte de Piedad, Luz Saviñón, Rafael Donde, First Cash Financial Services, Inc. and EZCORP, Inc. A large percentage of the population in Mexico is unbanked (or do not have a relationship with a bank) or underbanked (or have limited access to banking or other financial services) and has limited access to consumer credit. The Company believes there is a future opportunity for growth in the number of full-service pawn locations that offer loans secured by general merchandise as well as gold jewelry in Mexico due to the large number of potential customers underserved through traditional credit providers and the limited number of large pawnshop operators in the country.

Consumer Loan Activities

The Company offers consumer loans through many of its retail services locations through its retail services segment. According to the Community Financial Services Association, industry analysts estimate that there were approximately 21,000 consumer loan storefront locations across the United States during 2013. While the consumer loan industry grew significantly during the 1990’s into the early 2000’s with the addition of new storefront locations, the storefront growth has begun to contract in the past several years. This is due in part to changes in laws and regulations governing consumer loans in various states.

The Company offers consumer loans over the internet through its e-commerce segment. Numerous competitors offer consumer loan products and services over the internet, and many significant competitors are privately held, making it difficult for the Company to determine its competitive position in the market. However, the Company believes its principal competitors for its e-commerce segment in the United States include Miami Nation Enterprises, Integrity Advance, Think Finance and certain offshore lenders, many of whom offer consumer loans under multiple brand names and domains. In the United Kingdom, the Company believes that its principal online competitors include PaydayUK, PaydayExpress, Wonga and Lending Stream. In Australia, the Company believes its main online competitors are Nimble, Cash Converters and First Stop Money. In Canada, the industry has been dominated by storefront lenders and as a result, the Company’s principal competitors are not online lenders but storefront lenders, such as Money Mart, The Cash Store and Cash Money.

Storefront consumer loan lenders that offer loans online or in storefronts are also a source of competition in most of the markets where the Company offers consumer loans through its retail services segment or e-commerce segment, including Advance America, Ace Cash Express, Check ‘n Go, Dollar Financial and Check Into Cash. Management believes that competition in the United States in the online consumer loan industry continues to be fragmented and is primarily from competitors who may be operating either off-shore or by partnering with Native American tribes and utilizing their status as a sovereign nation to attempt to immunize themselves from enforcement of restrictive state laws and regulations. Management believes that the principal competitive factors in the online consumer loan industry consist of the sizing and structuring of loans (single or multiple payment) to consumers to meet their loan requests, speed of funding, customer privacy, ease of access, transparency of fees and interest, and customer service.

 

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Impediments exist that prevent new entrants from easily entering the consumer loan market. New entrants must successfully implement underwriting and fraud prevention processes, incur high marketing and customer acquisition costs, overcome consumer brand loyalty and have sufficient capital to withstand early losses associated with unseasoned loan portfolios. In addition, there are substantial regulatory and compliance costs, including the need for expertise to customize products associated with licenses to lend in various states in the United States and in many international jurisdictions.

In addition to consumer loan lenders, the Company also competes with financial institutions, such as banks, credit unions, other consumer lenders and retail businesses offering similar financial services. Other lenders may and do lend money on terms more favorable than those offered by the Company. The Company believes that there is also indirect competition to some of its products and services, including bank overdraft facilities and banks’ and retailers’ insufficient funds policies, many of which may be more expensive alternative approaches for consumers to cover their bills and expenses than the consumer loan products and services offered by the Company.

Regulation

The Company’s operations are subject to extensive regulation, supervision and licensing under various federal, state, local and foreign statutes, ordinances and regulations. (For a geographic breakdown of operation locations see “Item 2. Properties”). The Company’s failure to comply with applicable laws, rules and regulations could subject it to regulatory enforcement actions, result in the assessment against it of civil, monetary, criminal or other penalties (some of which could be significant in the case of knowing or reckless violations), result in the issuance of cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief), require the Company to refund interest or fees, result in a determination that certain loans are not collectible, result in a revocation of licenses, result in a finding that it has engaged in unfair and deceptive practices or cause damage to the Company’s reputation, brands and valued customer relationships. The Company could also be subject to changes in domestic and foreign laws and regulations as discussed under “Item 1A. Risk Factors—Risks Related to the Company’s Business and Industry—New laws or regulations or adverse changes in, or the interpretation or enforcement of, existing laws or regulations affecting the Company’s products and services could negatively impact its operations.,” “Significant changes in, or a deterioration of, the political, regulatory or economic environment of Mexico, Australia, Canada or the United Kingdom could affect the Company’s operations in these countries,” “—The United Kingdom has recently increased regulation of the consumer loan industry as well as demonstrated an increasing interest in considering legislation or regulations that could further regulate or restrict the consumer loan products the Company offers” and “The OFT is reviewing the payday lending sector in the United Kingdom, including the Company, which could result in changes to the Company’s business processes or payday lending products.

U.S. Federal Regulation

Certain U.S. federal regulations are applicable to the Company’s business, as described below.

The federal Truth in Lending Act (“TILA”), and its underlying regulations, known as Regulation Z, require the Company to provide certain disclosures to prospective borrowers and protect against unfair credit practices. The principal disclosures required under TILA are intended to promote the informed use of consumer credit. Under TILA, when acting as a lender, the Company is required to disclose certain material terms related to a credit transaction, including, but not limited to, the annual percentage rate, finance charge, amount financed, total of payments, the number and amount of payments and payment due dates to repay the indebtedness.

The Company is also subject to the federal Fair and Accurate Credit Transactions Act, which limits the sharing of information with affiliates for marketing purposes and requires the Company to adopt written guidance and procedures for detecting, preventing and responding appropriately to mitigate identity theft and to adopt various coworker policies and procedures and provide coworker training and materials that address the importance of protecting non-public personal information and aid the Company in detecting and responding to suspicious activity, including suspicious activity that may suggest a possible identity theft red flag, as appropriate.

 

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In addition, the Company is subject to regulation by the Federal Trade Commission (“FTC”) in the United States. The FTC’s Bureau of Consumer Protection’s mandate is to work to protect consumers against unfair, deceptive, or fraudulent practices in the marketplace. In furtherance of consumer protection, the FTC provides guidance and enforces federal laws concerning truthful advertising and marketing practices; fair financial practices in lending, loan servicing and debt collection; and protection of sensitive consumer information.

Under the USA PATRIOT Act the Company must maintain an anti-money laundering compliance program covering certain of its business activities. The program must include: (1) the development of internal policies, procedures and controls; (2) designation of a compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test the program. In addition, the U.S. Treasury Department’s Office of Foreign Assets Control requires that the Company have controls in place to prevent acquiring assets from and conducting transactions involving target countries and specially designated nationals. Under the Bank Secrecy Act and regulations of the U.S. Department of the Treasury, the Company must report transactions occurring in a single day involving currency in an amount greater than $10,000. In addition, multiple currency transactions must be treated as single transactions if the Company has knowledge that the transactions are by, or on behalf of, any person or entity and result in either cash in or cash out totaling more than $10,000 during any one day. Also, federal regulations require the Company to report suspicious transactions involving at least $2,000 in a single day to the Financial Crimes Enforcement Network of the Treasury Department (“FinCEN”). The regulations generally describe three classes of reportable suspicious transactions—one or more related transactions that the business knows, suspects or has reason to suspect (1) involve funds derived from illegal activity or are intended to hide or disguise such funds, (2) are designed to evade the requirements of the Bank Secrecy Act, or (3) appear to serve no legitimate business or lawful purpose. Certain of the Company’s subsidiaries are registered as money services businesses with the U.S. Treasury Department and must re-register with FinCEN at least every two years. Such subsidiaries must also maintain a list of names and addresses of, and other information about, their business and must make that list available to any requesting law enforcement agency. This list must be updated at least annually. The Company is also subject to the U.S. Foreign Corrupt Practices Act, which generally prohibits companies and their agents or intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits.

The Company is also subject to various federal and state laws and regulations relating to privacy and data security. Under these laws, including the federal Gramm-Leach-Bliley Act, the Company must disclose to its customers the Company’s privacy policy and practices, including those policies relating to the sharing of customers’ nonpublic personal information with third parties. This disclosure must be made to customers when the customer relationship is established and, in some cases, at least annually thereafter. These laws and regulations also require the Company to ensure that its systems are designed to protect the confidentiality of customers’ nonpublic personal information. These laws and regulations also dictate certain actions that the Company must take to notify its consumers if their personal information is disclosed in an unauthorized manner.

In July 2010, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”) and Title X of the Dodd-Frank Act created the CFPB, which regulates consumer financial products and services, including consumer loans offered by the Company. The CFPB has regulatory, supervisory and enforcement powers over providers of consumer financial products and services, including explicit supervisory authority to examine and require registration of such providers. On April 24, 2013, the CFPB issued a report entitled “Payday Loans and Deposit Advance Products: A White Paper of Initial Findings,” indicating that it had “engaged in an in-depth review of short-term small dollar loans, including payday loans.” The report discusses the initial findings of the CFPB regarding short-term payday loans provided by non-bank financial institutions at storefront locations and deposit account advances offered by depository institutions. While the CFPB’s study stated that “these products may work for some consumers for whom an expense needs to be deferred for a short period of time,” the CFPB also stated that its “findings raised substantial consumer protection concerns” related to the sustained use of payday loans and deposit account advances. In the report and subsequent statements, the CFPB reiterated that it has authority to adopt rules identifying acts or practices as unfair, deceptive or abusive, and hence unlawful, in connection with the offering of consumer financial products and services and to act to prevent providers from engaging in such acts or practices. The CFPB announced that, based on the potential consumer harm and the data that it has gathered, further attention was warranted to protect consumers, and that it expects to use its authorities to provide protections to consumers. The report indicated the CFPB plans to analyze the effectiveness of limitations, such as cooling-off periods between payday loans, “in curbing sustained use and other harms.” Additionally, the CFPB indicated that the report did not focus on online lending and that the CFPB is analyzing borrowing activity by consumers using online payday loans. The Company does not currently know the nature and extent of the rules

 

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that the CFPB will adopt, and the CFPB’s 2014 agenda indicates that its target date for proposing such rules is March 2014, although it could act earlier or later than that date. See “Recent Developments—Recent Regulatory, Litigation and Other Developments—Consumer Financial Protection Bureau” for information regarding the Company’s Consent Order issued by the CFPB on November 20, 2013.

For further discussion of the CFPB and its regulatory, supervisory and enforcement powers, see “Risk Factors—Risks Related to the Company’s Business and Industry—The Consumer Financial Protection Bureau could have a significant impact on the Company’s U.S. consumer loan business.”

Pawnshop Regulations

U.S. Regulation

In addition to the U.S. federal regulations described above, the Company’s pawn lending locations are regulated by the states and local jurisdictions where its pawn lending locations are located and generally must be licensed by the state. The statutes and regulations applicable to pawn lending locations vary from state to state and in each local jurisdiction. In general, these statutes and regulations establish licensing requirements for pawnbrokers and pawn lending locations and regulate various aspects of the pawn loan, such as the service charges and interest rates that a pawn lending location may charge, the maximum amount of a pawn loan, the minimum and/or maximum term of a pawn loan, the content and format of the pawn ticket, and the length of time after a loan default that a pawn lending location must hold defaulted pawned collateral or purchased items before disposing of the merchandise. Failure to observe a state’s legal requirements for pawnbroking could result in, among other things, a loss of pawn licenses in that state, the imposition of fines or refunds, and other civil and/or criminal penalties.

Many of the Company’s pawn lending locations are also subject to ordinances in their local jurisdictions that may require, for example, local licenses or permits and specified recordkeeping procedures, among other things. Most of the Company’s pawn lending locations voluntarily, or pursuant to applicable laws, work with local law enforcement agencies and other pawn lenders to determine conflicting claims of rightful ownership. Goods held to secure pawn loans or goods purchased that are determined to belong to an owner other than the borrower or seller are subject to recovery by the rightful owner. The Company historically has not experienced a material number of claims of this nature, and the claims experienced have not had a material adverse effect on the Company’s results of operations.

Each pawn lending location that handles firearms must comply with the Brady Handgun Violence Prevention Act (the “Brady Act”). The Brady Act requires that federally licensed firearms dealers conduct a background check in connection with any disposition of handguns. In addition, the Company must comply with the regulations of the U.S. Department of Justice–Bureau of Alcohol, Tobacco and Firearms that require each pawn lending location dealing in guns to maintain a permanent written record of all receipts and dispositions of firearms.

Mexico Regulation

The Company’s storefront locations in Mexico are regulated by a federal consumer protection agency, Procuraduría Federal del Consumidor (“PROFECO”). PROFECO regulates the form and terms of pawn loan contracts and many operating standards and procedures for pawnshops, including retail operations. All pawnshops operating in Mexico are required to register themselves and their contracts with PROFECO, as well as report certain customer activities that PROFECO determines may be associated with stolen goods. Neither PROFECO nor federal statute imposes interest rate caps on pawn loans. The pawn industry in Mexico is also subject to various regulations in the areas of tax compliance, customs, consumer protection and employment matters, among others, by various federal, state and local governmental agencies. Additionally, certain Mexican states have pawn statutes that require pawnshops to be licensed and regulate certain aspects of a pawn operation such as rate, pawn tickets and other terms of the pawn transaction. Generally, however, federal regulations are intended to control over the state statutes with respect to the pawn operations in Mexico.

 

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Consumer Loan Regulations

U.S. Federal Regulation

In addition to the U.S. federal regulations described above, the Company’s consumer loan business is subject to the Fair Credit Reporting Act (“FCRA”) and the Equal Credit Opportunity Act (“ECOA”). These laws require the Company to provide certain disclosures to prospective borrowers and protect against unfair credit practices. The use of consumer reports and other personal data used in credit underwriting is governed by the FCRA and similar state laws governing the use of consumer credit information. The FCRA also requires the Company to promptly update any credit information reported to a credit reporting agency about a consumer and to allow a process by which consumers may inquire about credit information furnished by the Company to a consumer reporting agency. In addition, the FCRA requires the Company to provide a Notice of Adverse Action to a loan applicant when the Company denies an application for credit, which, among other things, informs the applicant of the action taken regarding the credit application and of their right to learn the specific reasons for the denial of credit. The ECOA prohibits the Company from discriminating against any credit applicant on the basis of any protected category, such as race, color, religion, national origin, sex, marital status or age, and requires the Company to notify credit applicants of any action taken on the individual’s credit application.

Some of the Company’s services may include the assembly and delivery of consumer reports, or similar reports, to affiliated and potentially other third-parties. As a distributor of consumer reports and similar data, if the Company becomes a Consumer Reporting Agency (“CRA”), as defined by the FCRA, the Company would be required to comply with certain aspects of these laws and regulations that apply to CRAs. Non-compliance with the FCRA, either as a user or as a CRA, could lead to statutory penalties, private litigation for damages or, in certain cases, regulatory investigation and sanctions, including obligations under government initiated consent decrees.

Federal law also limits the annual percentage rate to 36% on certain consumer loans made to members of the U.S. military, active-duty reservists and members of the National Guard and their immediate families. This 36% annual percentage rate cap applies to a variety of consumer loan products, including short-term consumer loans. Therefore, due to these rate restrictions, the Company is unable to offer certain short-term consumer loans to active duty military personnel, active members of the National Guard or members on active duty and their immediate dependents.

The consumer loan business is also subject to the federal Electronic Funds Transfer Act and various other laws, rules and guidelines relating to the procedures and disclosures required in debiting or crediting a bank account relating to a consumer loan (i.e., ACH funds transfer). Additionally, in conjunction with the Company’s CSO programs, the Company is required to comply with the federal Fair Debt Collection Practices Act (“FDCPA”), and the Company also otherwise uses the FDCPA as a guide in connection with operating its collection activities. The Company is also required to comply with all applicable state collection practices laws. Furthermore, the Company is subject to various state and federal e-signature rules mandating that certain disclosures be made and certain steps be followed in order to obtain and authenticate e-signatures.

U.S. State Regulation

The Company’s consumer loan business is regulated under a variety of enabling state statutes, all of which are subject to change and which may impose significant costs or limitations on the way the Company conducts or expands its business. As of December 31, 2013, the Company operated in 32 states that have specific statutes and regulations that enable the Company to offer economically viable products. The Company does not conduct business in the remaining states or in the District of Columbia because it does not believe it is economically feasible to operate in those jurisdictions due to specific statutory or regulatory restrictions, such as interest rate ceilings or caps on the fees that may be charged. However, the Company may later offer its products or services in any of these states or the District of Columbia if the Company believes doing so may become economically viable because of changes in applicable statutes or regulations or if the Company determines it can broaden its product offerings to operate under existing laws and regulations. Despite the lack of specific laws, other laws may permit the Company to offer products and services in these states.

The scope of state regulation, including the fees and terms of the Company’s products and services, varies from state to state. The terms of the Company’s products and services vary from state to state in order to comply with the laws and regulations of the states in which it operates.

 

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The states with laws that specifically regulate the Company’s products and services typically limit the principal amount of a consumer loan and set maximum fees or interest rates that customers may be charged. Most states also limit a customer’s ability to renew a short-term consumer loan and require various disclosures to consumers. State statutes often specify minimum and maximum maturity dates for consumer loans and, in some cases, specify mandatory cooling-off periods between transactions. The Company’s collection activities regarding past due amounts are subject to consumer protection laws and state regulations relating to debt collection practices. In addition, some states restrict the advertising content of the Company’s marketing materials. Also, some states require the Company to report loan activity to state-wide databases and restrict the number and/or principal amount of loans a consumer may have outstanding at any particular time or over the course of a particular period of time, typically twelve months.

In states or jurisdictions where the Company offers its CSO programs, the Company complies with that jurisdiction’s Credit Services Organization Act, Credit Access Business law or a similar statute. These laws generally define the services that the Company can provide to consumers and require the Company to provide a contract to the customer outlining the Company’s services and the cost of those services to the customer. In addition, these laws may require additional disclosures to consumers and may require the Company to be registered with the jurisdiction and/or be bonded.

Over the last few years, legislation that prohibits or severely restricts the Company’s products and services has been introduced or adopted in a number of states, and the Company expects that trend to continue for the foreseeable future. Recently, a ballot initiative has been filed in Missouri that, if passed, would likely require the Company to cease offering its consumer loan products in that state, but the cessation of services in Missouri, if necessary, would not have a material effect on the Company, including its consolidated revenue or operations.

U.S. Local Regulation

In addition to state and federal laws and regulations, the Company’s consumer loan business is subject to various local rules and regulations. These local rules and regulations are subject to change and vary widely from city to city. Local jurisdictions’ efforts to restrict short-term lending have been increasing. Typically, these local ordinances apply to storefront operations, however, local jurisdictions could attempt to enforce certain business conduct and registration requirements on online lenders lending to residents of that jurisdiction, even though no such attempt has been made previously. During 2013, the Company closed 36 retail services locations in Texas in connection with the Texas Consumer Loan Store Closures, primarily as a result of restrictive local city ordinances passed since 2011 that had the effect of reducing the profitability and the volume of short-term consumer loans. See “Recent Developments—Business Developments—Closure of Short-term Consumer Loan Retail Services Locations” for additional information regarding these store closures.

In addition, actions taken in the future by local governing bodies to impose other restrictions on consumer lenders such as the Company could have a material adverse effect on its business, prospects, results of operations and financial condition and could impair the Company’s ability to continue current operations.

Foreign Regulation

In the United Kingdom, the Company’s consumer lending activities must comply with the European Union Consumer Credit Directive, the Consumer Credit Act of 1974 that was amended by the Consumer Credit Act of 2006 (collectively, the “CCA”) and with other related rules and regulations, which, among other things, require the Company to obtain governmental licenses and prescribe the presentation, form and content of loan agreements, including statutory warnings and the layout of financial information. The Company must also follow the Irresponsible Lending Guidance of the OFT, which provides greater clarity for lenders as to business practices that the OFT believes constitute irresponsible lending under the CCA. In April 2014, the FCA will take over responsibility for regulating consumer credit from the OFT and will change the way consumer loans are regulated in the United Kingdom.

In October 2013 the FCA issued a consultation paper that proposed certain changes to the current requirements for lenders of unsecured credit in the UK such as the Company, including mandatory affordability checks on borrowers, limiting the number of rollovers to two, restricting how lenders can advertise and proposing the power to ban advertisements it deems misleading, and introducing a limit of two unsuccessful attempts on the use of continuous payment authority to pay off a loan. On February 28, 2014, the FCA published the Consumer Credit Sourcebook (the “CONC”) within the FCA Handbook that contains the final prescriptive regulations that will cover the conduct requirements for lenders of unsecured credit such as the Company. The Company conducting a review and assessment of the newly published final regulations set forth in the CONC to evaluate and determine the potential impact

 

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of the final regulations included in the CONC and what effect such regulations may have on its business, prospects, results of operations and financial condition. If the final FCA regulations included in the CONC are consistent with the proposed rules, the Company will be required to make adjustments to some of its business practices, including its collections processes, which could possibly result in lower collections on loans made by the Company and a decrease in the number of customers that it is able to approve.

In addition, on December 18, 2013, the United Kingdom passed the Financial Services (Banking Reform) Act, which includes an amendment that requires the FCA to introduce rules “with a view to securing an appropriate degree of protection for borrowers against excessive charges” on “high-cost short-term” consumer loans by January 2, 2015 and could result in fee, cost of credit or other restrictions being adopted by the FCA. For recent developments related to the FCA and the OFT, including the OFT’s May 3, 2013 letter to the Company concerning the OFT’s recent examination of the Company’s business and containing findings that the Company may not be fully compliant with the Irresponsible Lending Guidelines or the CCA or other relevant law and guidance and its request that the Company rectify the matters identified in the report, see “Item 1A. Risk Factors—Risks Related to the Company’s Business and Industry—The OFT is reviewing the payday lending sector in the United Kingdom, including the Company, which could result in changes to the Company’s business processes or payday lending products” and “—The United Kingdom has recently increased regulation of the consumer loan industry as well as demonstrated an increasing interest in considering legislation or regulations that could further regulate or restrict the consumer loan products the Company offers.”

In Australia, the Company must comply with the responsible lending guidelines under the National Consumer Credit Protection Act (2010) (“NCCPA”), which was amended in 2012. The amendment includes limitations on permissible fees charged on certain consumer loans, including consumer loans made by the Company. The Company has recently altered the product it offers in Australia. The Company is still assessing the impact that the changes will have on its business in Australia, but the Company expects the product offering will be less profitable. If the reduction in profitability is such that the Company’s product offering is not sustainable, it may need to exit Australia if the product cannot be further modified in a way that retains profitability in that country. If the Company has to exit Australia, it will not have a material effect on the Company, including its consolidated revenue or operations.

In Canada, all regulation of the consumer lending industry is conducted at the provincial level. In general, the regulations require lenders to be licensed, set maximum fees and regulate collection practices.

Check Cashing Regulations

The Company offers check cashing services at many of its pawn lending locations and consumer loan storefront locations. Some states require check cashing companies to meet minimum bonding or capital requirements and to comply with record-keeping requirements. Some states require check cashers to be licensed and have adopted ceilings on check cashing fees. Failure to observe a state’s legal requirements for check cashing could result, among other things, in a loss of the check cashing license in that state, the imposition of fines or customer refunds, and other civil and/or criminal penalties. In addition to state regulations applicable to check cashing companies, the Company’s check cashing activities also must comply with applicable federal regulations. The principal federal regulations governing check cashing operations are described in “U.S. Federal Regulation” above. The Company’s franchising activities are subject to various federal and state regulations that, among other things, mandate disclosures to prospective franchisees and other requirements.

Industry Best Practices

The Company is a member of the Community Financial Services Association of America (the “CFSA”) in the U.S., the Online Lenders Alliance (“OLA”) in the U.S. and the Consumer Finance Association (the “CFA”) in the U.K. These associations have developed guidelines or best practices for responsible lending for their members to follow that often have more extensive requirements than federal, state and local regulatory requirements with which the Company is required to comply. The Company endeavors to adhere to the guidelines or best practices of these associations, which are summarized below.

 

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The CFSA is a national association of lenders that encourages responsible industry practices and promotes consumer loan legislation and regulation to provide consumer loan customers with substantive consumer protections while preserving their access to short-term credit options. The CFSA requires its members to follow the CFSA’s guidelines for responsible lending, to promote responsible lending practices in the consumer loan industry, and to ensure that customers have complete information about their loan and are treated fairly and in compliance with the laws applicable to their loan. Among other things, the guidelines developed by the CFSA include:

 

 

Fully and clearly disclosing the terms of each loan, including prominent disclosure of the service fee amount as both a dollar amount and as an annual percentage rate, as required by the Federal Truth in Lending Act and applicable state laws;

 

Providing customers who are unable to repay a loan according to its original terms an opportunity, at least once in a 12-month period, to repay the loan in four equal installments over an extended period at no extra cost;

 

Limiting loan rollovers (or extensions of outstanding consumer loans) to four, or less if required by applicable state law;

 

Complying with applicable laws, including limiting rates or fees charged to those permitted by applicable state or federal law;

 

Providing customers a one-day right to rescind any consumer loan transaction without incurring any additional charges;

 

Encouraging consumer responsibility by promoting responsible use of consumer loans;

 

Collecting past due amounts in a professional, fair and lawful manner, and utilizing the FDCPA as guidance for collection activities;

 

Prohibiting the taking or threatening of criminal action against a customer as a result of the customer’s check being returned unpaid or the customer’s account not being paid;

 

Participating in self-policing the industry and reporting violations of CFSA’s Best Practices to the CFSA, including agreeing to maintain and post a toll-free consumer hotline number; and

 

Requiring that lenders providing payday advances through the internet must be licensed in each state where their payday advance customers reside and must comply with the disclosure, rollover, rate, and other requirements imposed by each such state, unless such state does not require the lender to be licensed or to comply with such provisions.

The OLA is a professional organization representing the growing industry of companies offering online consumer loans in the United States. All member companies have agreed to OLA Best Practices and a Code of Conduct developed by OLA to ensure that consumer loan customers are fully informed, fairly treated and are using all lending products responsibly. The OLA also has been tasked with clearing up misconceptions and myths surrounding the online lending industry and educating the public, legislators and regulators about the demand for and importance of consumer loan products on the internet. The OLA Best Practices are summarized as follows:

 

 

Disclose all loan terms in a transparent and easy to understand way to help consumers make educated decisions;

 

Provide consumers a chance to change their mind by maintaining a reasonable cancellation policy;

 

Comply with all applicable laws and regulations and be in good standing with applicable governing officials and regulatory bodies;

 

Protect consumers’ personal data with comprehensive website security, a privacy policy and an ability to opt out of information sharing;

 

Help consumers help themselves by providing referrals to credit counseling, education and assistance where appropriate;

 

Use advertising and marketing practices that promote the responsible use of short-term credit services;

 

Prohibit any unfair, false, misleading or deceptive acts or practices;

 

Provide comprehensive website security and fraud prevention practices that include timely and accurate reports on loan activity, consumer notification of account use, and validation of routing numbers;

 

Treat consumers with respect and use fair, professional and non-abusive collection practices; and

 

Prohibit the use of unlawful threats, intimidation, or harassment to collect accounts.

The CFA is a national association of lenders in the United Kingdom that encourages responsible industry practices and promotes consumer loan legislation and regulation to provide consumer loan customers with substantive consumer protections while preserving their access to short-term credit options. The CFA requires its members to follow

 

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the CFA Lending Code for Small Cash Advances and the industry Good Practice Customer Charter. These guidelines help to ensure responsible lending practices in the consumer loan industry and to ensure that customers have complete information about their loan and are treated fairly and in compliance with the laws applicable to their loan. Among other things, the guidelines developed by the CFA include:

 

 

Acting fairly, reasonably and responsibly in all dealings with consumers;

 

Not putting pressure on consumers to enter into any loan agreement or to extend (or roll over) the term of their existing loan agreement;

 

Telling consumers that a payday or short-term loan should be used for short-term financial needs and is not appropriate for long-term borrowing or if they are in financial difficulty;

 

Telling consumers how the loan works and the total cost of the loan (including providing an example of the price for each £100 borrowed, together with the fees and charges);

 

Checking whether the loan is suitable for the consumer by taking into account their specific circumstances;

 

Carrying out a sound, proper and appropriate affordability assessment and reviewing the creditworthiness of the consumer for each loan application and before a loan is extended (or rolled over) to check if the consumer can afford the loan;

 

Explaining to consumers, in general terms, the types of information considered in making a decision;

 

Explaining how payments will be deducted from a consumer’s bank account and how a consumer can contact a lender by phone, email or online and setting out clearly how continuous payment authority works (if used by a lender to electronically debit a consumer’s bank account) and a consumer’s rights to cancel this authority, so the consumer can decide if this type of repayment is acceptable to them;

 

Notifying consumers by email, text, letter or phone at least three days prior to attempting to recover payment using continuous payment authority on the due date;

 

Limiting extensions of short-term loans to three occasions;

 

Dealing with cases of financial difficulty sympathetically and positively and doing what is needed to help a consumer manage what they owe;

 

Freezing interest and charges on consumer loans if the consumer makes repayments under a reasonable repayment plan or after a maximum of 60 days of non-payment;

 

Telling a consumer about free and independent debt-counseling organizations who can help them; and

 

Telling a consumer about a lender’s complaints-handling procedure when they take out a loan or when requested.

Company and Website Information

The Company’s principal executive offices are located at 1600 West 7th Street, Fort Worth, Texas 76102-2599, and its telephone number is (817) 335-1100.

The Company’s website is located at www.cashamerica.com. Through its website, the Company provides free access to its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”). The SEC maintains an internet site that contains reports, proxy and information statements, and other information regarding issuers that file electronically with the SEC at www.sec.gov.

 

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ITEM 1A. RISK FACTORS

The Company’s business and future results may be affected by a number of risks and uncertainties that should be considered carefully in evaluating the Company. In addition, this report also contains forward-looking statements that involve risks and uncertainties. The Company’s actual results could differ materially from those anticipated in such forward-looking statements as a result of certain factors, including the risks faced by the Company described below. The occurrence of one or more of the events listed below could also have a significant adverse effect on the Company’s business, prospects, results of operations, financial condition and cash flows.

Risks Related to the Company’s Business and Industry

The Company’s business is highly regulated under applicable laws, and if it fails to comply with these laws, the Company’s business could be adversely affected.

The Company’s products and services are subject to extensive regulation, supervision and licensing under various federal, state, local and foreign statutes, ordinances and regulations. These state laws, rules and regulations generally require licensing as a pawnbroker, lender or credit services organization or credit access business (“CSO”), establish limits on the amount, duration, renewals or extensions of and charges for (including interest rates and fees) various categories of loans, direct the form and content of the Company’s loan contracts and other documentation, restrict collection practices, and may subject the Company to periodic examination by state regulatory authorities, among other things. Because pawn loans, short-term loans, line of credit accounts and installment loans, such as those provided by the Company, are viewed as extensions of credit, in the United States, the Company must comply with certain federal laws, such as the federal Truth-in-Lending Act and Regulation Z adopted under that Act, the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Electronic Funds Transfer Act, the Gramm-Leach-Bliley Act and Title X of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the “Dodd-Frank Act”), among other laws, and with respect to the Company’s CSO programs, the Fair Debt Collection Practices Act. In addition, the Company’s marketing efforts and the representations made about its products and services are subject to federal and state unfair and deceptive practice statutes, including the Federal Trade Commission Act and analogous state statutes under which the Federal Trade Commission (the “FTC”), state attorneys general or private plaintiffs may bring legal actions. The Company is also subject to various foreign laws in connection with the products or services it offers in Australia, Canada, Mexico and the United Kingdom, which are discussed below. Compliance with applicable laws, rules and regulations requires forms, processes, procedures, controls and the infrastructure to support these requirements. Compliance may also create operational constraints, be costly or affect operating results. See “Item 1. Business—Regulation” for further discussion of the laws applicable to the Company.

The Company’s failure to comply with applicable laws, rules and regulations could subject it to regulatory enforcement actions, result in the assessment against it of civil, monetary, criminal or other penalties (some of which could be significant in the case of knowing or reckless violations), result in the issuance of cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief), require the Company to refund interest or fees, result in a determination that certain loans are not collectible, result in a revocation of licenses, result in a finding that it has engaged in unfair and deceptive practices or cause damage to the Company’s reputation, brands and valued customer relationships, any of which could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and cash flows.

 

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New laws or regulations or adverse changes in, or the interpretation or enforcement of, existing laws or regulations affecting the Company’s products and services could negatively impact its operations.

Governments at the national, state and local levels, as well as foreign governments, may seek to impose new regulatory restrictions or licensing requirements that affect the Company’s products or services. They may also interpret or enforce existing requirements in new ways that could restrict the Company’s ability to continue its current methods of operation or to expand operations and may have a negative effect on its business, prospects, results of operations, financial condition and cash flows.

In recent years, consumer loans, such as those offered by the Company, have come under increased regulatory scrutiny that has resulted in increasingly restrictive regulations and legislation that makes offering such loans in certain states in the United States or the foreign countries where the Company operates (as further described below) less profitable or unattractive to the Company. This scrutiny has resulted in the Company changing some of the consumer loan products offered in those states and has reduced the profitability or volume of consumer loans in some of those states. It has also, in some cases, resulted in the Company ceasing to offer consumer loans in certain states, including, since 2011, the States of Arizona, Montana and New Hampshire, and discontinuation of its CSO program in Maryland. Regulations adopted by some states in the United States require that all borrowers of certain short-term loan products be reported to a centralized database and limit the number of loans a borrower may have outstanding. Other laws adversely impact the availability of some of the Company’s consumer loan products in the United States to active duty military personnel, active members of the National Guard or members on active reserve duty and their immediate dependents. In addition, the Company’s business is subject to various local rules and regulations such as local zoning regulation and permit licensing. Local jurisdictions’ efforts to restrict pawnshop operations and short-term lending through the use of local zoning and permitting laws have been increasing and could reduce profitability and volume of the loans offered or impair the Company’s ability to continue current operations in those jurisdictions. For example, during 2013, the Company closed 36 retail services locations in Texas that offered consumer loans as their primary source of revenue, primarily as a result of restrictive city ordinances that have been passed since 2011 that had the effect of reducing the profitability and the volume of short-term consumer loans. See “Item 1. Business—Recent Developments” for additional information regarding recent regulatory developments and these store closures.

Certain consumer advocacy groups and federal and state legislators have asserted that laws and regulations should be tightened so as to severely limit, if not eliminate, the availability of certain consumer loan products to consumers, and this has resulted in both the executive and legislative branches of the U.S. federal government and state governmental bodies exhibiting an interest in debating legislation that could further regulate consumer loan products such as those offered by the Company. The U.S. Congress, as well as similar state and local bodies and similar foreign governmental authorities, have debated, and may in the future adopt, proposed legislation that could, among other things, place a cap on the effective annual percentage rate on the amount of interest or fees that may be charged, ban or limit loan renewals or extensions (where the customer agrees to pay the current finance charge on a loan for the right to make payment of the outstanding principal balance of such loan at a later date plus an additional finance charge), including the rates to be charged for loan renewals or extensions, require the Company to offer an extended payment plan, allow for only minimal origination fees for advances, require short-term lenders to be bonded or require lenders to report consumer loan activity to databases designed to monitor or restrict consumer borrowing activity by limiting the number of consumer loans that customers may receive or have outstanding, or impose “cooling off” periods between the time a loan is paid off and another loan is obtained. The Company cannot currently assess the likelihood of any future unfavorable federal or state legislation or regulations being proposed or enacted that could affect the Company’s products and services. The Company closely monitors proposed legislation being discussed in states where it does business, especially states where it offers consumer loan products. For example, a ballot initiative is pending in Missouri that, if passed, would likely require the Company to cease offering its consumer loan products in that state. There can be no assurance that additional

 

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legislative or regulatory initiatives will not be enacted that could severely restrict, prohibit or eliminate the Company’s ability to offer a consumer loan product. In addition, under statutory authority, state regulators have broad discretionary power and may impose new licensing requirements, interpret or enforce existing regulatory requirements in different ways or issue new administrative rules, even if not contained in state statutes, that could affect the way the Company does business and may force the Company to terminate or modify its operations in particular states or affect its ability to obtain new licenses or renew the licenses it holds.

Any of these or other legislative or regulatory actions that affect the Company’s pawn or consumer loan business at the national, state and local level could, if enacted, have a material adverse impact on the Company’s business, prospects, results of operations, financial condition and could impair the Company’s ability to continue current operations.

The Consumer Financial Protection Bureau could have a significant impact on the Company’s U.S. consumer loan business.

The Consumer Financial Protection Bureau (the “CFPB”), which regulates consumer financial products and services, including consumer loans offered by the Company, has regulatory, supervisory and enforcement powers over providers of consumer financial products and services, including the explicit supervisory authority to examine and require registration of such providers. The CFPB has begun exercising supervisory review over and examining certain non-bank providers of consumer financial products and services, including providers of consumer loans such as the Company. The CFPB’s examination authority permits CFPB examiners to inspect the books and records of providers of short-term, small dollar lenders, such as the Company, and ask questions about their business practices, and the examination procedures include specific modules for examining marketing activities, loan application and origination activities, payment processing activities and sustained use by consumers, collections, accounts in default, consumer reporting and third-party relationships, as well as compliance programs. As a result of these examinations of non-bank providers of consumer credit, the Company could be required to change its practices or procedures, whether as a result of another party being examined or as a result of an examination of the Company, or could be subject to monetary penalties, which could adversely affect the Company. On November 20, 2013, the Company consented to the issuance of a Consent Order by the CFPB pursuant to which the Company agreed, without admitting or denying any of the facts or conclusions made by the CFPB from its 2012 review of the Company, to pay a civil money penalty of $5 million and to set aside $8 million for a period of 180 days to fund any further payments to eligible Ohio customers who make valid claims in connection with the Company’s Ohio voluntary reimbursement program. In addition, as a result of the CFPB’s review, the Company is in the process of enhancing its compliance management programs and implementing additional procedures to address the issues identified by the CFPB. The Company is also required to provide periodic reports to the CFPB. See “Item 1. Business—Recent Developments—Regulatory, Litigation and Other Developments—Consumer Financial Protection Bureau” and “—Voluntary Reimbursements to Ohio Customers” for additional information regarding the Ohio voluntary reimbursement program.

In addition to having the authority to obtain monetary penalties for violations of applicable federal consumer financial laws (including the CFPB’s own rules), the CFPB can require remediation of practices, pursue administrative proceedings or litigation and obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief). Also, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations implemented under Title X of the Dodd-Frank Act, the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions to remedy violations of state law. If the CFPB or one or more state attorneys general or state regulators believe that the Company has violated any of the applicable laws or regulations, they could exercise their enforcement powers in ways that could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and cash flows.

 

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On April 24, 2013, the CFPB issued a report entitled “Payday Loans and Deposit Advance Products: A White Paper of Initial Findings,” indicating that it had “engaged in an in-depth review of short-term small dollar loans, including payday loans.” The report discusses the initial findings of the CFPB regarding short-term payday loans provided by non-bank financial institutions at storefront locations and deposit account advances offered by depository institutions. While the CFPB’s study stated that “these products may work for some consumers for whom an expense needs to be deferred for a short period of time,” the CFPB also stated that its “findings raised substantial consumer protection concerns” related to the sustained use of payday loans and deposit account advances. In the report and subsequent statements, the CFPB reiterated that it has authority to adopt rules identifying acts or practices as unfair, deceptive or abusive, and hence unlawful, in connection with the offering of consumer financial products and services and to act to prevent providers from engaging in such acts or practices. The CFPB announced that, based on the potential consumer harm and the data that it had gathered, further attention was warranted to protect consumers and that it expects to use its authorities to provide protections to consumers. The report indicated the CFPB plans to analyze the effectiveness of limitations, such as cooling-off periods between payday loans, “in curbing sustained use and other harms.” Additionally, the CFPB indicated that the report did not focus on online lending and that the CFPB is analyzing borrowing activity by consumers using online payday loans. The Company does not currently know the nature and extent of the rules that the CFPB will adopt, and the CFPB’s 2014 agenda indicates that its target date for proposing such rules is March 2014, although it could act earlier or later than that date. If the CFPB adopts any rules or regulations that significantly restrict the conduct of the Company’s consumer loan business, any such rules or regulations could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and cash flows or could make the continuance of all or part of the Company’s U.S. consumer loan business impractical or unprofitable. Any new rules or regulations adopted by the CFPB could also result in significant compliance costs.

The United Kingdom has recently increased regulation of the consumer loan industry as well as demonstrated an increasing interest in considering legislation or regulations that could further regulate or restrict the consumer loan products the Company offers.

In the United Kingdom, the Company must comply with the European Union Consumer Credit Directive, the Irresponsible Lending Guidance of the Office of Fair Trading (the “OFT”), and the Consumer Credit Act of 1974 that was amended by the Consumer Credit Act of 2006 (collectively, the “CCA”), among other rules and regulations. In December 2012, the U.K. Parliament passed the Financial Services Act of 2012 (the “Act”), which created a new regulatory framework for the supervision and management of the banking and financial services industry in the United Kingdom, including the consumer lending industry in which the Company operates. The Act mandates that the Financial Conduct Authority (the “FCA”) take over responsibility for regulating consumer credit from the OFT in April 2014. Certain provisions of the Act took effect on April 1, 2013, and other provisions of the Act will take effect on April 1, 2014. The Act makes changes to the CCA and the Financial Services and Markets Act of 2000 (the “FSMA”), and gives the OFT the power to suspend consumer credit licenses with immediate effect or from a date specified. In addition, under the Act, the Company will be required to obtain authorization from the FCA in 2014 to provide consumer credit, which will require that the Company satisfy, and continue to satisfy, certain minimum standards set out in the FSMA and may result in additional costs to the Company. During the period of transition of regulatory responsibility over consumer credit from the OFT to the FCA, the OFT has continued and will continue to fully and rigorously regulate consumer credit, including the short-term loan market.

In October 2013 the FCA issued a consultation paper that proposed certain changes to the current requirements for lenders of unsecured credit in the UK such as the Company, including mandatory affordability checks on borrowers, limiting the number of rollovers to two, restricting how lenders can advertise and proposing the power to ban advertisements it deems misleading, and introducing a limit of two unsuccessful attempts on the use of continuous payment authority (which provides a creditor the ability to directly debit a customer’s account for payment when authorized by the customer to do so) to pay off a loan. On February 28, 2014, the FCA published the Consumer Credit Sourcebook (the “CONC”) within the FCA Handbook that contains the final regulations that will cover the conduct requirements for lenders of unsecured credit such as the Company. The Company is conducting a review and assessment of the newly published final regulations set forth in the CONC to evaluate and determine the potential impact of the final regulations included in the CONC and what effect such regulations may have on its business, prospects, results of operations and financial condition. If the final FCA regulations included in the CONC are consistent with the proposed rules, the Company will be required to make adjustments to some of its business practices, including its collections processes, which could possibly result in lower collections on loans made by the Company and a decrease in the number of customers that it is able to approve. Subject to certain transitional periods, certain provisions of the CONC take effect on April 1, 2014 and other provisions, such as the potential limits on rollovers, continuous payment authority and advertising, take effect on July 1, 2014. The Company expects that its compliance costs will be significantly increased as a result of these final regulations.

In addition, in June 2013, the OFT referred the payday lending industry in the United Kingdom to the Competition Commission for review to determine whether certain features of the payday lending industry prevent, restrict or distort competition and, if so, what remedial action should be taken. The Competition Commission has been gathering data from industry participants, including the Company, in connection with its review. In January 2014, the Competition Commission published a preliminary report indicating that it has been reviewing, and is continuing to review, impediments in the payday lending market that prevent customers from effectively shopping around for their loan or from switching lenders and whether there are barriers to entry and expansion by new and existing

 

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lenders, primarily due to market concentration by larger, established lenders, that adversely affect competition. In addition, these preliminary findings indicate that the extent to which lenders compete on price may be limited and that a lack of consumer access to other types of credit products may serve to provide little constraint on payday lenders. These findings were only preliminary, and the Competition Commission study is ongoing and is required to be completed by June 26, 2015, although the Competition Commission has stated that it aims to complete the investigation in a shorter period. The ultimate outcome from the study is not yet known, but if the investigation finds remedial action is necessary, the Competition Commission will decide whether to order such remedial action itself or whether it should recommend certain actions or remedies be taken by the industry regulator, which will likely be the FCA by the time the report is issued.

In addition, on December 18, 2013, the UK passed the Financial Services (Banking Reform) Act, which includes an amendment that requires the FCA to introduce rules “with a view to securing an appropriate degree of protection for borrowers against excessive charges” on “high-cost short-term” consumer loans by January 2, 2015. Pursuant to this amendment, the FCA could adopt fee, cost of credit or other restrictions that could reduce the volume or profitability of the consumer loans that the Company offers, could cause the Company to change the products that it offers or could cause the Company to cease offering certain types of consumer loans in the UK.

Any of these regulatory changes could have a material adverse effect on the Company’s business, prospects, results of operations, financial conditions and cash flows and could impair the Company’s ability to continue current operations in the United Kingdom.

The OFT is reviewing the payday lending sector in the United Kingdom, including the Company, which could result in changes to the Company’s business processes or payday lending products.

In February 2012, the OFT announced that it had launched a review of the payday lending sector to assess the sector’s compliance with the CCA, the Irresponsible Lending Guidelines and other relevant guidance and legal obligations. As part of this review, the OFT conducted examinations of a number of U.K. payday lenders, including the Company, to assess individual company compliance with these laws and guidelines. The OFT has announced that these inspections will be used to assess a licensee’s fitness to hold a consumer credit license and could result in formal enforcement action, including potential license revocation or significant fines or penalties where appropriate. The OFT announced the findings of its review during the first quarter of 2013 and enumerated a number of expectations it has for payday lenders related to affordability assessments, rollover practices, advertising, debt collection practices and consumer disclosures, among other expectations.

On May 3, 2013, the OFT sent the Company a letter of findings related to its examination of the Company’s U.K. short-term consumer loan (or payday) business, which indicated that the Company may not be complying fully with all aspects of the Irresponsible Lending Guidelines, the CCA and other relevant laws and guidance. This letter indicated the OFT’s general and specific concerns in the following categories: advertising and marketing, pre-contract information and explanations, affordability assessments, rollovers, including deferred refinance and extended loans, forbearance and debt collection, and regulatory and other compliance issues. The OFT asked the Company to provide an independent audit of the Company’s compliance in relation to each concern identified in the letter by July 29, 2013. The Company believes it has addressed the concerns identified by the OFT, and the Company provided this audit to the OFT by the required date. This audit is intended to evidence how the Company has rectified the areas of concern identified by the OFT. Based upon the Company’s response to the OFT, the Company does not expect any of the changes it implemented in its business to have a material adverse effect on the Company’s future operations and financial condition. However, the Company continues to receive additional requests for data and documentation from the OFT, and the Company is complying with those requests. The Company can provide no assurance as to whether it will successfully resolve the concerns expressed by the OFT or whether, in addressing these concerns, the Company will need to change its business processes or payday lending products in the United Kingdom in a manner that could materially adversely affect the Company’s business, prospects, results of operations, financial condition and cash flows.

 

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Significant changes in foreign laws or regulations or a deterioration of the political, regulatory or economic environment of Mexico, Australia, Canada or the United Kingdom could affect the Company’s operations in these countries.

Significant changes in foreign laws or regulations or a deterioration of the political, regulatory or economic environment of Mexico, Australia, Canada or the United Kingdom could restrict the ability of the Company to sustain or expand its operations in these countries, which could materially adversely affect the Company’s business, prospects, results of operations, financial condition and cash flows and could impair the Company’s ability to continue operations in these countries. In addition, the failure of key service providers to fulfill their obligations as a result of regulatory, political, economic or other factors could disrupt the Company’s operations in Mexico, Australia, Canada or the United Kingdom.

In Mexico, restrictions and regulations affecting pawn services, including licensing restrictions, disclosure requirements and limits on interest rates have been and likely will in the future be proposed from time to time. The Company also maintains business relationships with third-party service providers. The Company’s business in Mexico is also subject to other potential risks and uncertainties that are beyond the Company’s control, such as violence, social unrest, enforcement of property rights and public safety and security, which could restrict or eliminate the ability to operate some or all of its locations in Mexico or significantly reduce customer traffic or demand.

In addition, the Company offers consumer loans over the internet to customers in Australia, Canada and the United Kingdom. Australia and the United Kingdom have recently increased regulation of the Company’s industry as well as demonstrated an increasing interest in considering legislation or regulations that could further regulate or restrict the consumer loan products the Company offers. In Australia the Company must comply with the responsible lending guidelines under the National Consumer Credit Protection Act (2010), which was amended in 2012. The amendment includes limitations on permissible fees charged on certain consumer loans, including consumer loans made by the Company. The Company has recently altered the product it offers in Australia. The Company is still assessing the impact that the changes will have on its business in Australia, but the Company expects the product offering will be less profitable. If

 

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the reduction in profitability is such that the Company’s product offering is not sustainable, it may need to exit Australia if the product cannot be further modified in a way that retains profitability in that country. See “The United Kingdom has recently increased regulation of the consumer loan industry as well as demonstrated an increasing interest in considering legislation or regulations that could further regulate or restrict the consumer loan products the Company offers” and “The OFT is reviewing the payday lending sector in the United Kingdom, including the Company, which could result in changes to the Company’s business processes or payday lending products” above for recent UK regulatory activity.

An inability to disburse U.S. consumer loan proceeds or collect consumer loan payments through the Automated Clearing House system would materially adversely affect the Company’s consumer loan business.

When making consumer loans in the United States, the Company’s online consumer loan business uses the Automated Clearing House (“ACH”), system to deposit loan proceeds into its customers’ bank accounts, and both the Company’s online and storefront consumer loan businesses, including loans made through the CSO programs, depend on the ACH system to collect amounts due by withdrawing funds from its customers’ bank accounts when it has obtained written authorization to do so from the customer. The Company’s ACH transactions are processed by banks, and if these banks cease to provide ACH processing services, the Company would have to materially alter, or possibly discontinue, some or all of its consumer loan business if alternative ACH processors are not available.

It has been reported that recent actions by the U.S. Department of Justice (the “Justice Department”), the FDIC and certain state regulators appear to be intended to discourage banks and ACH payment processors from providing access to the ACH system for certain short-term consumer loan (or payday loan) providers that they believe are operating illegally, cutting off their access to the ACH system to either debit or credit customer accounts (or both). According to published reports, the Justice Department has issued subpoenas to banks and payment processors and the FDIC and other regulators are said to be using bank oversight examinations to discourage banks from providing access to the ACH system to certain online lenders. In August 2013, the Department of Financial Services of the State of New York (the “NY DFS”), sent letters to approximately 35 online short-term consumer loan companies (that did not include the Company as it does not offer consumer loans in New York) demanding that they cease and desist offering illegal payday loans to New York consumers and also sent letters to over 100 banks, as well as the National Automated Clearing House Association (“NACHA”) (which oversees the ACH network), requesting that they work with the NY DFS to cut off ACH system access to New York customer accounts for illegal payday lenders. NACHA, in turn, has requested that its participants review origination activity for these 35 online short-term consumer loan companies and to advise NACHA whether it has terminated these lenders’ access to the ACH system or, if not, the basis for not doing so. NACHA also requested that participants review ACH origination activities related to other online loan companies and to terminate any ACH system access that would violate NACHA rules, which would include, according to NACHA, any authorizations to use the ACH system to pay illegal loans that are unenforceable under state law. Maryland’s Division of Financial Regulation has also been reported to have taken steps to stop banks in Maryland from processing illegal payday loans in its state, and the California Department of Business Oversight similarly directed state-licensed banks and credit unions to monitor transactions with any unlicensed lenders.

This heightened regulatory scrutiny by the Justice Department, the FDIC and other regulators has the potential to cause banks and ACH payment processors to cease doing business with consumer lenders who are operating legally simply to avoid the risk of heightened scrutiny or even litigation. In addition, NACHA has certain operating rules that govern the use of the ACH system. In November 2013, NACHA proposed amendments to these rules that, if adopted, would be effective in March 2015 and would establish limitations on ACH return rates and impose fees on certain ACH returns. If these amendments are adopted in their current form, the Company’s access to the ACH system could be restricted, its ACH costs could increase and the Company could be required to make changes to its business practices.

 

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There can be no assurance that the Company’s access to the ACH system will not be impaired as a result of this heightened scrutiny or the proposed NACHA rule amendments, and if this access is impaired, the Company’s consumer loan business could be materially adversely affected and the Company may find it difficult or impossible to continue some or all of its consumer loan business, which could have a material adverse effect on the Company’s business, prospects, and results of operations, financial condition and cash flows.

The Company’s e-commerce segment uses lead providers to assist it in obtaining new customers, and if its ability to use such lead providers is impaired, it could adversely affect the Company’s online lending business.

The Company’s e-commerce segment is dependent on third parties, referred to as lead generators or lead providers, as a source of new customers. Generally, lead providers operate, or work with affiliates who operate, separate websites to attract prospective customers and then sell those ‘‘leads’’ to online lenders. As a result, the success of the Company’s online consumer lending business depends substantially on the willingness and ability of lead providers to send it customer leads at acceptable prices. If regulatory oversight of lead providers is increased, through the implementation of new laws or regulations or the interpretation of existing laws or regulations, the Company’s ability to use lead providers could be restricted or eliminated. For example, during 2013 the State of California began requiring lead providers to be licensed under its existing laws that govern short-term consumer loans in that state. As a result, the Company has discontinued using lead providers to generate leads for short-term consumer loans in California. While this discontinuation did not have a material adverse effect on the Company, if other states adopt similar requirements, the Company’s ability to use lead providers in those states would also be interrupted. In addition, the CFPB has indicated its intention to examine compliance with federal laws and regulations by lead providers and to scrutinize the flow of non-public, private consumer information between lead providers and lead buyers, such as the Company’s e-commerce segment.

Lead providers’ failure to comply with applicable laws or regulations, or the implementation of new laws or regulations or the interpretation of existing laws or regulations applicable to lead providers, could have an adverse effect on the Company’s online consumer lending business. Additionally, the use of lead providers could subject the Company to additional regulatory cost and expense. If the e-commerce segment’s ability to use lead generators were to be impaired, its business, prospects, results of operations, financial condition and cash flows could be materially adversely affected.

The use of personal data used in credit underwriting is highly regulated under federal laws and regulations.

The Fair Credit Reporting Act (the “FCRA”), and related laws and regulations concerning consumer reports have recently been under regulatory scrutiny, and certain related regulations or interpretations of the FTC were revised by the FTC. The FCRA regulates the collection, dissemination and use of consumer information, including consumer credit information. The FCRA requires the Company to promptly update any credit information reported to a credit reporting agency about a consumer and to allow a process by which consumers may inquire about credit information furnished by the Company to a consumer reporting agency. Historically, the FTC has played a key role in the implementation, oversight, enforcement and interpretation of the FCRA. Pursuant to the Dodd-Frank Act, the CFPB is to have primary supervisory, regulatory and enforcement authority of FCRA issues, although the FTC will also retain its enforcement role regarding the FCRA but will share that role in many respects with the CFPB. It is not certain exactly how the CFPB will supervise and regulate consumer reporting agencies, some of whom the Company rely upon for underwriting data. The CFPB may take a different approach than the FTC, including with respect to regulation, enforcement and supervision. Changes in the regulation, enforcement or supervision of the FCRA may materially affect the Company’s business if new regulations or interpretations by the CFPB of the FTC require the Company to

 

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materially alter the manner in which the Company uses personal data in its credit underwriting. The oversight of the FCRA by either the CFPB or the FTC and any related investigation or enforcement activities may have a materially adverse impact on the Company’s business, including the Company’s operations, its mode and manner of conducting business and its financial results.

Negative public perception of the Company’s business, specifically its consumer loan business and its business practices, could cause demand for the Company’s products to significantly decrease.

In recent years, consumer advocacy groups and some media reports have advocated governmental action to prohibit or place severe restrictions on short-term consumer loans. Such consumer advocacy groups and media reports generally focus on the Annual Percentage Rate to a consumer for this type of loan, which is compared unfavorably to the interest typically charged by banks to consumers with top-tier credit histories. The fees charged by the Company and others in the industry attract media publicity about the industry and can be perceived as controversial by those who do not focus on the credit risk and high transaction costs of serving the Company’s customer segment. If the negative characterization of these types of loans becomes increasingly accepted by consumers, demand for any or all of the consumer loan products offered by the Company could significantly decrease, which could materially affect the Company’s business, prospects, results of operations, financial condition and cash flows. Additionally, if the negative characterization of these types of loans is accepted by legislators and regulators, the Company could become subject to more restrictive laws and regulations applicable to short-term loans or other consumer loan products offered by the Company that could materially adversely affect the Company’s business, prospects, results of operations, financial condition and cash flows and could impair the Company’s ability to continue current operations.

In addition, the Company’s ability to attract and retain customers is highly dependent upon the external perceptions of its level of service, trustworthiness, business practices, financial condition and other subjective qualities. Negative perceptions or publicity regarding these matters— even if related to seemingly isolated incidents—could erode trust and confidence and damage the Company’s reputation among existing and potential customers, which could make it difficult for the Company to attract new customers and maintain existing ones and could significantly decrease the demand for the Company’s products.

Current and future litigation or regulatory proceedings could have a material adverse effect on the Company’s business, prospects, results of operations and financial condition.

The Company has been and is currently subject to lawsuits (including purported class actions) that could cause the Company to incur substantial expenditures, generate adverse publicity and could significantly impair the Company’s business, force the Company to cease doing business in one or more jurisdictions or cause it to cease offering one or more products. The Company is also likely to be subject to further litigation in the future. The consequences of an adverse ruling in or a settlement of any current or future litigation could cause the Company to have to refund fees and/or interest collected, refund the principal amount of advances, pay treble or other multiple damages, pay monetary penalties and/or modify or terminate the Company’s operations in particular states. In October 2013, the Company entered into a Settlement Agreement to settle an outstanding class action lawsuit that had been ongoing since 2004. The Settlement Agreement requires a minimum payment by the Company of $18.0 million and a maximum payment of $36.0 million to cover class claims (including honorarium payments to the named plaintiffs) and the plaintiffs’ attorneys’ fees and costs (including the costs of claims administration). See “Item 3. Legal Proceedings—Litigation” for additional information regarding this settlement.

Defense of any lawsuit, even if successful, could require substantial time and attention of the Company’s management and could require the expenditure of significant amounts for legal fees and other related costs. The Company is also subject to regulatory proceedings, and the Company could suffer losses from interpretations of applicable laws, rules and regulations in those regulatory proceedings, even if the

 

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Company is not a party to those proceedings. Any of these events could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and cash flows and could impair the Company’s ability to continue current operations.

Adverse court interpretations of the laws and regulations under which the Company operates could require the Company to alter the products it offers or impair the Company’s ability to offer certain products.

On May 28, 2009, one of the Company’s subsidiaries, Ohio Neighborhood Finance, Inc., doing business as Cashland (“Cashland”), filed a standard collections suit in an Elyria Municipal Court in Ohio against Rodney Scott seeking judgment against Mr. Scott in the amount of $570.16, which was the amount due under his loan agreement. Cashland’s loan was offered under the Ohio Mortgage Loan Act (“OMLA”), which allows for interest at a rate of 25% per annum plus certain loan fees allowed by the statute. The Municipal Court, in Ohio Neighborhood Finance, Inc. v. Rodney Scott, held that short-term, single-payment consumer loans made by Cashland are not authorized under the OMLA, and instead should have been offered under the Ohio Short-Term Lender Law, which was passed by the Ohio legislature in 2008 for consumer loans with similar terms. Due to a cap on interest and loan fees at an amount that is less than permitted under the OMLA, the Company does not offer loans under the Ohio Short-Term Lender Law. On December 3, 2012, the Ohio Ninth District Court of Appeals affirmed the Municipal Court’s ruling in a 2-1 decision. Although this court decision is only legally binding in the Ninth District of Ohio, which includes four counties in northern Ohio where Cashland operates seven stores and where the Company has modified its short-term loan product in response to this decision, other Ohio courts may consider this decision.

The Supreme Court of Ohio heard the Company’s appeal of the Ninth District Court’s decision in December 2013, and a decision is expected during the first half of 2014. If the Ninth District Court’s decision is upheld by the Ohio Supreme Court on appeal, the Company’s Ohio operations may be adversely affected. The Company relies on the OMLA to make short-term loans in its retail services locations in Ohio, and if the Company is unable to continue making short-term loans under this law, it will alter its short-term loan product in Ohio. In addition, following the ruling by the Ninth District Court, four lawsuits were filed against the Company by customers in Ohio, three of which are purported class action complaints, alleging that the Company improperly made loans under the OMLA, and the Company may in the future receive other claims. Each of these lawsuits have been stayed pending the outcome of the Supreme Court of Ohio’s decision. If such legal proceedings are determined adversely to the Company, it could result in material losses or require the Company to make refunds in connection with certain short-term loans made under the OMLA.

Adverse court interpretations of the various laws and regulations under which the Company operates could require the Company to alter the products that it offers or cease doing business in the jurisdiction where the court interpretation is applicable. Any of these events could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and cash flows.

Judicial decisions, CFPB rule-making or amendments to the Federal Arbitration Act could render the arbitration agreements the Company uses illegal or unenforceable.

The Company includes arbitration provisions in its consumer loan agreements. These provisions are designed to allow the Company to resolve any customer disputes through individual arbitration rather than in court and explicitly provide that all arbitrations will be conducted on an individual and not on a class basis. Thus, the Company’s arbitration agreements, if enforced, have the effect of shielding the Company from class action liability. The Company’s arbitration agreements do not generally have any impact on regulatory enforcement proceedings. The Company takes the position that the arbitration provisions in its consumer loan agreements, including class action waivers, are valid and enforceable; however, the enforceability of arbitration provisions is often challenged in court. If those challenges are successful, the Company’s arbitration and class action waiver provisions could be unenforceable, which could subject the Company to additional litigation, including additional class action litigation.

 

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In addition, the U.S. Congress has considered legislation that would generally limit or prohibit mandatory arbitration agreements in consumer contracts and has enacted legislation with such a prohibition with respect to certain mortgage loan agreements and also certain consumer loan agreements 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 the U.S. Congress, and it authorizes the CFPB to adopt rules limiting or prohibiting consumer arbitration, consistent with the results of its study. In 2013, the CFPB released a preliminary report on consumer arbitration provisions and indicated further study was in process. Any rule adopted by the CFPB 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 the Company’s ability to enter into and enforce consumer arbitration agreements and class action waivers could significantly increase the Company’s exposure to class action litigation as well as litigation in plaintiff-friendly jurisdictions, which would be costly and could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and cash flows.

The Company’s earnings and financial position are subject to changes in the value of gold. A significant or sudden decline in the price of gold could materially affect the Company’s earnings.

A significant portion of the Company’s pawn loans are secured by gold jewelry, and the Company sells significant quantities of refined gold and gold jewelry acquired through forfeitures or purchased directly from customers. The Company’s pawn service charges, sales proceeds and ability to dispose of excess jewelry inventory at an acceptable margin depend on the value of gold. As demonstrated recently, there has been an increased volatility in the price of gold. For example, gold prices have declined meaningfully since 2012, resulting in compressed profit margins on commercial sales and lower overall gross profit. In addition, the recent decline resulted in decreases in commercial merchandise sales, in inventory valuations, in the value of collateral securing outstanding pawn loans, and in the balance of pawn loans secured by gold jewelry. An additional significant decline in the value of gold could materially adversely affect the Company’s business, prospects, results of operations, financial condition and cash flows.

The failure of third parties who provide products, services or support to the Company to maintain their products, services or support could disrupt Company operations or result in a loss of revenue.

The Company’s consumer loan revenue depends in part on the willingness and ability of unaffiliated third-party lenders, through the CSO programs, to make loans to customers and other third parties to provide services to facilitate lending, loan underwriting and payment processing in both the storefront and online lending consumer loan channels. The loss of the relationship with any of these third parties, and an inability to replace them or the failure of these third parties to maintain quality and consistency in their programs or services or to have the ability to provide their products and services, could cause the Company to lose customers and substantially decrease the revenue and earnings of its consumer loan business. The Company’s revenue and earnings from its consumer loan business could also be adversely affected if any of those third-party providers make material changes to products or services that the Company relies on. The Company offers other services provided by various third-party vendors available to its customers. If a third-party provider fails to provide its products or services, makes material changes to such products and services or does not maintain its quality and consistency or fails to have the ability to provide its products and services, the Company could lose customers and related revenue from those products or services. The Company also uses third parties to support and maintain certain of its communication systems and computerized point-of-sale and information systems. The failure of such third parties to fulfill their support and maintenance obligations could disrupt the Company’s operations. Any of these events could result in a loss of revenue and could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and cash flows.

 

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The Company’s business depends on the uninterrupted operation of the Company’s systems and business functions, including its information technology and other business systems.

The Company’s business, particularly its e-commerce lending business, is highly dependent upon the Company’s employees’ ability to perform, in an efficient and uninterrupted fashion, necessary business functions, such as internet support, call center activities, and processing and making consumer loans. Additionally, the Company’s storefront operations depend on the efficiency and reliability of the Company’s point-of-sale system. A shut-down of or inability to access the facilities in which the Company’s internet operations, storefront point-of-sale system and other technology infrastructure are based, such as a power outage, a failure of one or more of its information technology, telecommunications or other systems, or sustained or repeated disruptions of such systems could significantly impair the Company’s ability to perform such functions on a timely basis and could result in a deterioration of the Company’s ability to write and process internet consumer loans, perform efficient storefront lending and merchandise disposition activities, provide customer service, perform collections activities, or perform other necessary business functions. Any such interruption could materially adversely affect the Company’s business, prospects, results of operations, financial condition and cash flows.

A decreased demand for the Company’s products and specialty financial services and the Company’s failure to adapt to such decrease could result in a loss of revenue and could have a material adverse effect on the Company.

Although the Company’s products and services are a staple of its customer base, the demand for a particular product or service may decrease due to a variety of factors, such as regulatory restrictions that reduce customer access to particular products, the availability of competing products or changes in customers’ financial conditions. Should the Company fail to adapt to a significant change in its customers’ demand for, or access to, its products, the Company’s revenue could decrease significantly. Even if the Company makes adaptations or introduces new products to fulfill customer demand, customers may resist or may reject products whose adaptations make them less attractive or less available. In any event, the effect of any product change on the results of the Company’s business may not be fully ascertainable until the change has been in effect for some time. In particular, the Company has changed, and will continue to change, some of the consumer loan operations of the Company and the products it offers. Any of these events could result in a loss of revenue and could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and cash flows.

 

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If the Company’s allowance for losses and liability for estimated losses on third-party lender-owned consumer loans are not adequate to absorb losses or if the Company does not successfully manage its credit risk for unsecured consumer loans, the Company’s business, results of operations and financial condition may be adversely affected.

As more fully described under “Item 8. Financial Statements and Supplementary Data—Note 5,” the Company utilizes a variety of underwriting criteria, monitors the performance of its consumer loan portfolios and maintains either an allowance or liability for estimated losses on consumer loans (including fees and interest) at a level estimated to be adequate to absorb credit losses inherent in the receivables portfolio and expected losses from loans guaranteed under the CSO programs. The allowance deducted from the carrying value of consumer loans was $87.9 million at December 31, 2013, and the liability for estimated losses on third-party lender-owned consumer loans was $3.1 million at December 31, 2013. These reserves are estimates, and if actual loan losses are materially greater than the Company’s reserves, the Company’s results of operations and financial condition could be adversely affected. In addition, if the Company does not successfully manage credit risk for its unsecured consumer loans through its loan underwriting, it could incur substantial credit losses due to customers being unable to repay their loans. Any failure to manage credit risk could materially adversely affect the Company’s business, results of operations, financial condition and cash flows.

There can be no assurance that the Company will be able to operate at an acceptable level of profitability in Mexico following the reorganization of its Mexico-based pawn operations.

During the third and fourth quarters of 2012, the Company substantially completed the reorganization of its Mexico-based pawn operations that comprise the foreign component of the Company’s retail services segment so that they now include only full-service pawn locations that offer pawn loans based on the pledge of general merchandise and jewelry-based collateral (the “Mexico Reorganization”). The Company recognized $28.9 million of charges related to the Mexico Reorganization during the year ended December 31, 2012. The Company is operating 47 full-service pawn locations in Mexico as of December 31, 2013. There is no assurance that these remaining full-service pawn locations will be able to operate in Mexico at an acceptable level of profitability. If these remaining pawn locations have to be closed in the future, the Company will incur additional charges, which could adversely affect the Company’s results of operations in the period when it takes such charges.

The Company is subject to impairment risk.

At December 31, 2013, the Company had goodwill totaling $705.6 million, consisting of $495.2 million related to the retail services segment and $210.4 million related to the e-commerce segment, on its consolidated balance sheets, all of which represent assets capitalized in connection with the Company’s acquisitions and business combinations. In addition, at December 31, 2013, the Company had intangible assets, net of accumulated amortization, of $52.3 million, consisting of $52.3 million which related to its retail services segment. Accounting for goodwill and intangible assets requires significant management estimates and judgment. Events may occur in the future and the Company may not realize the value of its goodwill or intangible assets. Management performs periodic reviews of the carrying values of its goodwill and intangible assets to determine whether events and circumstances indicate that impairment in value may have occurred. A variety of factors could cause the carrying value of goodwill or an intangible asset to become impaired. Should a review indicate impairment, a write-down of the carrying value of the goodwill or intangible asset would occur, resulting in a non-cash charge, which could adversely affect the Company’s results of operations and could also lead to the Company’s inability to comply with certain covenants in the Company’s financing documents, which could cause a default under those agreements.

 

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Certain tax positions taken by the Company require the judgment of management and could be challenged by the Internal Revenue Service.

Management’s judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. Management’s judgment is also required in evaluating whether tax benefits meet the more-likely-than-not threshold for recognition under ASC 740-10-25, Income Taxes. For example, in connection with the liquidation of Creazione Estilo, S.A. de C.V., a Mexican sociedad anónima de capital variable (“Creazione”), the Company will include a deduction on its 2013 federal income tax return for the Company’s tax basis in the stock of Creazione and has recognized a tax benefit of approximately $33.2 million as a result of the deduction. Management believes that the Company meets the requirements for this deduction and that it should be treated as an ordinary loss, which has reduced the Company’s cash taxes paid in 2013. The Company has obtained a Private Letter Ruling from the Internal Revenue Service (the “IRS”), with respect to one of the various factors that the Company considered in making this determination. Because there are a number of factors that must be considered in making this determination, some of which were not specifically addressed in the Private Letter Ruling, the IRS could challenge the availability and/or characterization of the loss. If the deduction is ultimately denied or is determined to be a capital loss by the IRS, the Company may be required to reverse the previously recognized tax benefit and may be required to make additional income tax payments, which could materially adversely affect the Company’s results of operations and cash flows.

The Company is subject to the U.S. Foreign Corrupt Practices Act, the U.K. Bribery Act of 2010 and other anticorruption laws, and the Company’s failure to comply therewith could result in penalties that could harm its reputation and have a material adverse effect on its business, prospects, results of operations, financial condition and cash flows.

The Company is subject to the U.S. Foreign Corrupt Practices Act (the “FCPA”), which generally prohibits companies and their agents or intermediaries from making improper payments to foreign officials for the purpose of obtaining or keeping business and/or other benefits. Although the Company has policies and procedures designed to ensure that the Company, its employees, agents and intermediaries comply with the FCPA and other anticorruption laws, there can be no assurance that such policies or procedures will work effectively all of the time or protect the Company against liability for actions taken by its employees, agents and intermediaries with respect to its business or any businesses that it may acquire. In the event that the Company believes, or has reason to believe, that its employees, agents or intermediaries have or may have violated applicable anti-corruption laws, including the FCPA, the Company may be required to investigate or have a third party investigate the relevant facts and circumstances, which can be expensive and require significant time and attention from senior management. The Company’s continued operation and expansion outside the United States could increase the risk of such violations in the future. If the Company is not in compliance with the FCPA and other laws governing the conduct of business with government entities (including local laws), the Company may be subject to criminal and civil penalties and other remedial measures, which could have an adverse effect on the Company’s business, results of operations and financial condition. Any investigation of any potential violations of the FCPA or other anticorruption laws by U.S. or foreign authorities could harm the Company’s reputation and could have a material adverse effect on its business, prospects, results of operations, financial condition and cash flows.

The Company is also subject to other anti-corruption laws, such as the U.K. Bribery Act 2010 (the “Bribery Act”). The Bribery Act prohibits bribery of public officials, and it also makes failing to prevent bribery by relevant commercial organizations a criminal offense. This offense applies when any person associated with the organization offers or accepts bribes anywhere in the world intending to obtain or retain a business advantage for the organization or in the conduct of business. The Bribery Act is applicable to businesses that operate in the United Kingdom such as the Company. The Bribery Act is broader in scope than the FCPA in that it directly addresses commercial bribery in addition to bribery of government officials and it does not recognize certain exceptions, notably facilitation payments that are permitted by the FCPA. As with the FCPA, if the Company is not in compliance with the Bribery Act as well as similar laws that are applicable to the Company’s business in the United Kingdom or in other countries where the Company does business, or in the future may do business, it may be subject to criminal and civil penalties and other remedial measures, which could have an adverse effect on the Company’s business, results of operations and financial condition.

 

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Increased competition from banks, savings and loans, other consumer lenders, and other entities offering similar financial services, as well as retail businesses that offer products and services offered by the Company, could adversely affect the Company’s business, prospects, results of operations, financial condition and cash flows.

The Company has many competitors. Its principal competitors are other pawnshops, consumer loan companies, CSOs, online lenders, consumer finance companies and other financial institutions that serve the Company’s primary customer base. Many other financial institutions or other businesses that do not now offer products or services directed toward the Company’s traditional customer base, many of whom may be much larger than the Company, could begin doing so. Significant increases in the number and size of competitors for the Company’s business could result in a decrease in the number of consumer loans or pawn loans that the Company writes, resulting in lower levels of revenue and earnings in these categories.

The Company has many competitors to its retail operations, such as retailers of new merchandise, retailers of pre-owned merchandise, other pawnshops, thrift shops, Internet retailers and internet auction sites. Increased competition or aggressive marketing and pricing practices by these competitors could result in decreased revenue, margins and turnover rates in the Company’s retail operations. In addition, competitors of the Company’s e-commerce consumer loan business may operate, or begin to operate, under business models less focused on legal and regulatory compliance, which could put the Company at a competitive disadvantage. The Company cannot assure that it will be able to compete successfully against any or all of its current or future competitors. As a result, the Company could lose market share and its revenue could decline, thereby affecting the Company’s ability to generate sufficient cash flow to service its indebtedness and fund the Company’s operations.

Any such changes in the Company’s competition could materially adversely affect the Company’s business, prospects, results of operations, financial condition and cash flows.

The Company’s success is dependent, in part, upon its executive officers, and if the Company is not able to attract and retain qualified executive officers, the Company’s business could be materially adversely affected.

The Company’s success depends, in part, on its executive officers, which is comprised of a relatively small group of individuals. Many members of the senior management team have significant industry experience, and the Company believes that its senior management would be difficult to replace, if necessary. Because the market for qualified individuals is highly competitive, the Company may not be able to attract and retain qualified executive officers or candidates. In addition, increasing regulations and negative publicity on the consumer financial services industry could affect the Company’s ability to attract and retain qualified executive officers. If the Company is unable to attract or retain qualified executive officers, it could materially adversely affect the Company’s business.

Future acquisitions and/or the failure to successfully integrate newly acquired businesses into the Company’s operations could negatively impact the Company’s performance.

The Company has historically grown through strategic acquisitions, and a key component of the Company’s future strategy is to continue to pursue attractive acquisition opportunities in order to expand its product and service offerings and markets and grow its business in response to changing customer demands, regulatory environments, technologies and competitive pressures. In some circumstances, the Company may expand its offerings through the acquisition of complementary businesses, solutions or technologies rather

 

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than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and the Company may not be able to successfully complete identified acquisitions. Furthermore, even if the Company successfully completes an acquisition, it may not be able to successfully assimilate and integrate the business, technologies, solutions, personnel or operations of the business that it acquires, particularly if key personnel of an acquired company decide not to work for the Company. In addition, the Company may issue equity securities to complete an acquisition, which would dilute its shareholders’ ownership and could adversely affect the price of the Company’s common stock. Acquisitions may also involve the entry into geographic or business markets in which the Company has little or no prior experience or may expose the Company to additional material liabilities. In addition, any acquisition has the risk that the Company may not realize a return on the acquisition or the Company’s investment. Consequently, the Company may not achieve anticipated benefits of the acquisitions, which could materially adversely affect the Company’s business, prospects, results of operations, financial condition and cash flows.

The Company’s expansion strategy is subject to external factors and other circumstances over which the Company has limited control or that are beyond the Company’s control. These factors and circumstances could adversely affect the Company’s ability to grow through the opening and acquisition of new operating units.

The Company’s expansion strategy for its retail services segment includes acquiring existing stores and opening new ones. The success of this strategy is subject to numerous external factors, such as the availability of attractive acquisition candidates, the availability of sites with acceptable restrictions and suitable terms, the Company’s ability to attract, train and retain qualified store management personnel, the ability to access capital, the ability to obtain required government permits and licenses, the prevailing laws and regulatory environment of each state or jurisdiction in which the Company operates or seeks to operate, which are subject to change at any time, the degree of competition in new markets and its effect on the Company’s ability to attract new customers and the ability to adapt the Company’s infrastructure and systems to accommodate its growth. Some of these factors are beyond the Company’s control. The failure to execute this expansion strategy would adversely affect the Company’s ability to expand its business and could materially adversely affect its business, prospects, results of operations, financial condition and cash flows.

The Company’s foreign operations subject the Company to foreign exchange risk.

The Company is subject to the risk of unexpected changes in foreign currency exchange rates by virtue of its loans to residents of Australia, Canada and the United Kingdom and its operations in Mexico. The Company’s results of operations and certain of its intercompany balances associated with the Company’s Australia, Canada, United Kingdom and Mexico loans are denominated in their respective currencies and are, as a result, exposed to foreign exchange rate fluctuations. Upon consolidation, as exchange rates vary, net sales and other operating results may differ materially from expectations, and the Company may record significant gains or losses on the remeasurement of intercompany balances.

 

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A sustained deterioration in the economy could reduce demand for the Company’s products and services and result in reduced earnings.

A sustained deterioration in the economy could cause deterioration in the performance of the Company’s pawn loan or consumer loan portfolios and in consumer demand for pre-owned merchandise such as the merchandise sold in the Company’s pawnshops. An economic slowdown could result in a decreased number of consumer loans being made to customers due to higher unemployment or an increase in loan defaults in the Company’s consumer loan products. During an economic slowdown, the Company could be required to tighten its underwriting standards, which would likely reduce consumer loan balances, and could face more difficulty in collecting defaulted consumer loans, which could lead to an increase in loan losses. While the credit risk for much of the Company’s pawn lending is mitigated by the collateralized nature of pawn lending, a sustained deterioration in the economy could reduce the demand for and resale value of pre-owned merchandise and reduce the amount that the Company could effectively lend on an item of collateral. Such reductions could adversely affect pawn loan balances, pawn loan redemption rates, inventory balances, inventory mixes and gross profit margins.

An inability to access the debt capital markets or obtain financing could reduce available capital.

In the past, the Company has accessed the debt capital markets or utilized its line of credit with banks to obtain capital, to finance growth and to refinance existing debt obligations. Efficient access to this capital is critical to the Company’s ongoing financial success; however, the Company’s future access to debt capital could become restricted due to a variety of factors, such as a deterioration of the Company’s earnings, cash flows, balance sheet quality, or overall business or industry prospects, a disruption or deterioration in the state of the capital markets or a negative bias toward the Company’s industry. Banks and other credit providers could restrict available lines of credit and require higher pricing upon renewal of the Company’s existing line of credit. The Company’s ability to obtain additional financing in the future will depend in part upon prevailing capital market conditions, and a potential disruption in the capital markets may adversely affect the Company’s efforts to arrange additional financing on terms that are satisfactory to the Company. If adequate funds are not available, or are not available on acceptable terms, the Company may not be able to grow its business, make future investments, take advantage of potential acquisitions or other opportunities, or respond to competitive challenges and this, in turn, could adversely affect the Company’s ability to advance its strategic plans. Additionally, if the capital and credit markets experience volatility and the availability of funds is limited, third parties with whom the Company does business may incur increased costs or business disruption and this could adversely affect the Company’s business relationships with such third parties. If the Company is unable to obtain financing it could have a material adverse effect on its business, prospects, results of operations, financial condition and cash flows.

Some of the Company’s debt agreements contain financial covenants and other restrictions that may limit the Company’s ability to operate its business.

Some of the Company’s debt agreements contain various restrictive covenants, compliance with which is essential to continued credit availability. These restrictive covenants, among other things, restrict the Company’s ability to:

 

   

incur additional debt;

   

incur or permit certain liens to exist;

   

make certain investments;

   

merge or consolidate with or into, or convey, transfer, lease or dispose of all or substantially all of its assets to, another company;

   

make certain dispositions;

   

make certain payments; and

   

engage in certain transactions with affiliates.

 

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Some of the Company’s debt agreements also require the Company to maintain certain financial ratios. The covenants and restrictions contained in the debt agreements could limit the Company’s ability to fund its business, make capital expenditures, and make acquisitions or other investments in the future. Any failure to comply with any of these financial and other affirmative and negative covenants could constitute an event of default under the debt agreements, entitling the lenders to, among other things, terminate future credit availability under the agreement, and/or increase the interest rate on outstanding debt, and/or accelerate the maturity of outstanding obligations under that agreement. Any such default could materially adversely affect the Company’s business, prospects, results of operations, financial condition and cash flows and could impair the Company’s ability to continue current operations. See “Item 8. Financial Statements and Supplementary Data—Note 12” for additional information concerning the Company’s debt agreements.

Failure to satisfy the Company’s debt obligations could have a material adverse effect on the Company’s business.

As of December 31, 2013, the Company had $740.0 million total debt outstanding, including the Company’s line of credit, senior unsecured notes and convertible notes as more fully described under “Item 8. Financial Statements and Supplementary Data — Note 11.” If the Company is unable to generate sufficient cash flow or otherwise obtain funds necessary to make required payments on these debt obligations or if it is in breach of the covenants contained in the debt agreements it would default under the terms of the applicable agreement or indenture. Any such default could result in an acceleration of the repayment obligations to such lenders as well as the lenders under any of its other debt agreements under applicable cross default provisions. Any such default could materially adversely affect the Company’s business, prospects, results of operations, financial condition and cash flows and could impair the Company’s ability to continue current operations.

The Company may be unable to protect its proprietary technology or keep up with that of its competitors.

The success of the Company’s business, particularly its online lending business, depends to a significant degree upon the protection of its software and other proprietary intellectual property rights. The Company may be unable to deter misappropriation of its proprietary information, detect unauthorized use or take appropriate steps to enforce its intellectual property rights. In addition, competitors could, without violating the Company’s proprietary rights, develop technologies that are as good as or better than its technology. The Company’s failure to protect its software and other proprietary intellectual property rights or to develop technologies that are as good as its competitors’ could put the Company at a disadvantage to its competitors. Any such failures could have a material adverse effect on the Company’s business.

The Company is subject to cyber security risks and security breaches and may incur increasing costs in an effort to minimize those risks and to respond to cyber incidents.

The Company’s business involves the storage and transmission of customers’ proprietary information, and security breaches could expose the Company to a risk of loss or misuse of this information, litigation, and potential liability. The Company’s e-commerce segment is entirely dependent on the secure operation of its websites and systems as well as the operation of the internet generally. While the Company has incurred no material cyber attacks to date, a number of other companies have disclosed cyber attacks and security breaches, some of which have involved intentional attacks. The Company may not have the resources or technical sophistication to anticipate or prevent rapidly evolving types of cyber attacks. Attacks may be targeted at the Company, its customers, or both. If an actual or perceived breach of security occurs, customer and/or supplier perception of the effectiveness of the Company’s security measures could be harmed and could result in the loss of customers, suppliers or both. Actual or anticipated attacks and risks may cause the Company to incur increasing costs, including costs to deploy additional personnel and protection technologies, train employees, and engage third party experts and consultants.

 

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A person who is able to circumvent the Company’s security measures could misappropriate the Company’s or its customer’s proprietary information, cause interruption in the Company’s operations, damage its computers or those of its customers, or otherwise damage its reputation and business. Any compromise of security could result in a violation of applicable privacy and other laws, significant legal and financial exposure, damage to the Company’s reputation, and a loss of confidence in the Company’s security measures, which could harm its business. In addition, most of the Company’s customers provide personal information, including bank account information when applying for consumer loans. The Company relies on encryption and authentication technology licensed from third parties to provide the security and authentication to effectively secure transmission of confidential information, including customer bank account and other personal information. Advances in computer capabilities, new discoveries in the field of cryptography or other developments may result in the technology used by the Company to protect transaction data being breached or compromised. Data breaches can also occur as a result of non-technical issues.

The Company’s servers are also vulnerable to computer viruses, physical or electronic break-ins, and similar disruptions, including “denial-of-service” type attacks. The Company may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Security breaches, including any breach of the Company or by persons with whom it has commercial relationships that result in the unauthorized release of its customers’ personal information, could damage the Company’s reputation and expose it to a risk of loss or litigation and possible liability. In addition, many of the third parties who provide products, services or support to the Company could also experience any of the above cyber risks or security breaches, which could impact the Company’s customers and the Company’s business and could result in a loss of customers, suppliers or revenue.

Any of these events could result in a loss of revenue and could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and cash flows.

The Company’s operations could be subject to natural disasters and other business disruptions, which could adversely impact its future revenue and financial condition and increase its costs and expenses.

The Company’s services, operations and pawnshops from which it provides products and services are vulnerable to damage or interruption from tornadoes, hurricanes, earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors and similar events. A significant natural disaster, such as a tornado, hurricane, earthquake, fire or flood, could have a material adverse impact on the Company’s ability to conduct business, including causing damage to merchandise or collateral that it holds in any of its retail services locations, and the Company’s insurance coverage may be insufficient to compensate for losses that may occur. Acts of terrorism, civil unrest or violence could cause disruptions to the Company’s business or the economy as a whole. Any of these events could cause consumer confidence to decrease, which could result in a decreased number of loans being made to customers or reduced demand for pre-owned merchandise such as the merchandise sold in the Company’s pawnshops. Any of these occurrences could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and cash flows.

The Company may incur property, casualty or other losses not covered by insurance.

The Company maintains a program of insurance coverage for various types of property, casualty and other risks. The types and amounts of insurance that it obtains vary from time to time, depending on availability, cost and management’s decisions with respect to risk retention. The policies are subject to deductibles and exclusions that result in the Company’s retention of a level of risk on a self-insurance basis. Losses not covered by insurance could be substantial and may increase the Company’s expenses, which could harm the Company’s results of operations and financial condition.

 

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The Company’s reported results require the judgment of management, and the Company could be subject to risks associated with these judgments or could be adversely affected by the implementation of new, or changes in the interpretation of existing, accounting principles or financial reporting requirements.

The preparation of the Company’s financial statements 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 dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. In addition, the Company prepares its financial statements in accordance with generally accepted accounting principles in the United States (“GAAP”), and GAAP and its interpretations are subject to change over time. If new rules or interpretations of existing rules require the Company to change its financial reporting, the Company’s results of operations and financial condition could be materially adversely affected, and the Company could be required to restate historical financial reporting.

Adverse real estate market fluctuations could affect the Company’s profitability.

The Company leases most of its locations. A significant rise in real estate prices or real property taxes could result in an increase in store lease costs as the Company opens new locations and renews leases for existing locations.

Other risk factors are discussed under “Quantitative and Qualitative Disclosures about Market Risk.”

Risks Related to the Company’s Common Stock

The price of the Company’s common stock has been volatile and could continue to fluctuate substantially.

The Company’s common stock is traded on the New York Stock Exchange. The market price of the Company’s common stock has been volatile and could fluctuate substantially based on a variety of factors, including the following:

 

   

variations in results of operations;

   

legislative or regulatory changes, and in particular, legislative or regulatory changes affecting the Company’s consumer loan operations;

   

fluctuations in commodity prices;

   

general trends in the industry;

   

market conditions;

   

analysts’ estimates; and

   

perceptions of and other events related to the pawn or consumer loan industry.

The market price for the Company’s common stock has varied between a high of $54.12 on March 8, 2013 and a low of $35.30 on December 5, 2013 in the twelve-month period ended December 31, 2013. The Company’s stock price is likely to continue to be volatile and subject to significant price and volume fluctuations in response to market and other factors, including the other factors discussed in “Risks Related to the Company’s Business and Industry,” variations in the Company’s quarterly operating results from management’s expectations or those of securities analysts or investors, downward revisions in securities analysts’ estimates and announcements by the Company or its competitors of significant acquisitions, strategic partnerships, joint ventures or capital commitments.

 

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In addition, the stock market in general may experience significant volatility that is unrelated to the operating performance of companies whose shares are traded. These market fluctuations could adversely affect the trading price of the Company’s common stock, regardless of the Company’s actual operating performance.

Future issuances of additional shares of the Company’s common stock could cause dilution of ownership interests and adversely affect the Company’s stock price.

The Company may, in the future, issue its previously authorized and unissued shares of common stock, including the potential issuance of shares of common stock upon conversion of its 2029 Convertible Notes due 2029 (as more fully described under “Item 8. Financial Statements and Supplementary Data—Note 11”), resulting in the dilution of the ownership interests of the Company’s shareholders. The Company is currently authorized to issue up to 80,000,000 shares of common stock, par value $0.10 per share, and as of February 18, 2014, the Company had 28,119,630 shares of common stock issued and outstanding. The potential issuance of additional shares of common stock may create downward pressure on the trading price of the Company’s common stock. The Company may also issue additional shares of its common stock or other securities that are convertible into or exercisable for common stock for capital-raising or other business purposes. Future sales of substantial amounts of common stock, or the perception that sales could occur, could have a material adverse effect on the price of the Company’s common stock.

 

ITEM 1B. UNRESOLVED STAFF COMMENTS

None.

 

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ITEM 2. PROPERTIES

The Company’s principal locations are as follows:

 

   

A corporate headquarters building that is owned by the Company and used for both the retail services segment and e-commerce segment;

   

Corporate locations leased for the Company’s retail services segment in Fort Worth, Texas, Cincinnati, Ohio and Mexico City, Mexico;

   

Corporate locations leased for the Company’s e-commerce segment in Chicago, Illinois and Gurnee, Illinois; and

   

Multiple retail services locations used by the Company’s retail services segment set forth in the table below, 12 of which are owned by the Company.

 

   Retail Services
Segment  Locations(a)
   E-Commerce
Segment(b)

United States:

     

Alabama

   9    Y

Alaska

   6    Y

Arizona

   36    -

California

   23    Y

Colorado

   5    -

Delaware

   -    Y

Florida

   76    Y

Georgia

   48    -

Hawaii

   -    Y

Idaho

   -    Y

Illinois

   26    Y

Indiana

   37    -

Kansas

   -    Y

Kentucky

   21    -

Louisiana

   24    Y

Maine

   -    Y

Maryland

   -    Y

Michigan

   10    Y

Minnesota

   -    Y

Mississippi

   -    Y

Missouri

   17    Y

Nevada

   28    Y

New Mexico

   -    Y

North Carolina

   20    -

North Dakota

   -    Y

Ohio

   120    Y

Oklahoma

   15    Y

Oregon

   -    Y

Rhode Island

   -    Y

South Carolina

   6    Y

South Dakota

   -    Y

Tennessee

   41    Y

Texas

   260    Y

Utah

   7    Y

Virginia

   -    Y

 

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   Retail Services
Segment  Locations(a)
   E-Commerce
Segment(b)

United States (continued):

     

Washington

   34    Y

Wisconsin

   -    Y

Wyoming

   -    Y

  Total U.S.

   869    -

  Number of U.S. states

   22    32

United Kingdom

   -    Y

Australia

   -    Y

Canada

   -    Y

Mexico

   47    -

  Total Foreign

   47    -

  Number of Foreign Countries

   1    3

Total Company

   916    35
(a) 

Includes retail services locations that served the Company’s retail services segment as of December 31, 2013.

(b) 

Includes the states in the United States and other foreign countries where the Company’s e-commerce segment offered consumer loans over the internet as of December 31, 2013.

The Company considers its equipment, furniture and fixtures and owned buildings to be in good condition. The Company has its own construction supervisors who engage local contractors to selectively remodel and upgrade its retail services locations throughout the year.

All properties leased by the Company are leased under non-cancelable operating leases with initial lease periods of one to 22 years that serve its retail services segment. The Company’s leases typically require the Company to pay all maintenance costs, insurance costs and property taxes. For additional information concerning the Company’s leases, see “Item 8. Financial Statements and Supplementary Data—Note 13.”

 

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ITEM 3. LEGAL PROCEEDINGS

Litigation

2013 Litigation Settlement

On August 6, 2004, James E. Strong filed a purported class action lawsuit in the State Court of Cobb County, Georgia against Georgia Cash America, Inc., Cash America International, Inc. (together with Georgia Cash America, Inc., “Cash America”), Daniel R. Feehan (the Company’s chief executive officer), and several unnamed officers, directors, owners and “stakeholders” of Cash America. In August 2006, James H. Greene and Mennie Johnson were permitted to join the lawsuit as named plaintiffs, and in June 2009, the court agreed to the removal of James E. Strong as a named plaintiff. The lawsuit alleges many different causes of action, among the most significant of which is that Cash America made illegal short-term loans in Georgia in violation of Georgia’s usury law, the Georgia Industrial Loan Act and Georgia’s Racketeer Influenced and Corrupt Organizations Act. First National Bank of Brookings, South Dakota (“FNB”), and Community State Bank of Milbank, South Dakota (“CSB”), for some time made loans to Georgia residents through Cash America’s Georgia operating locations. The complaint in this lawsuit claims that Cash America was the true lender with respect to the loans made to Georgia borrowers and that FNB and CSB’s involvement in the process is “a mere subterfuge.” Based on this claim, the suit alleges that Cash America was the “de facto” lender and was illegally operating in Georgia. The complaint seeks unspecified compensatory damages, attorney’s fees, punitive damages and the trebling of any compensatory damages. In November 2009 the case was certified as a class action lawsuit.

This case was scheduled to go to trial in November 2013, but on October 9, 2013, the parties agreed to a memorandum of understanding (the “Settlement Memorandum”). Pursuant to the Settlement Memorandum, the parties filed a joint motion containing the full terms of the settlement (the “Settlement Agreement”) with the trial court for approval on October 24, 2013, and the trial court preliminarily approved the Settlement Agreement on November 4, 2013. On January 16, 2014, the trial court issued its final approval of the settlement and entered the Final Order and Judgment. The Settlement Agreement requires a minimum payment by the Company of $18.0 million and a maximum payment of $36.0 million to cover class claims (including honorarium payments to the named plaintiffs) and the plaintiffs’ attorneys’ fees and costs (including the costs of claims administration) (the “Class Claims and Costs”), all of which will count towards the aggregate payment for purposes of determining whether the minimum payment has been made or the maximum payment has been reached. The actual payout will depend on the number of claimants who submit claims for payment. The Company denies all of the material allegations of the lawsuit and denies any and all liability or wrongdoing in connection with the conduct described in the lawsuit, but the Company agreed to the settlement to eliminate the uncertainty, distraction, burden and expense of further litigation.

In accordance with Financial Accounting Standards Codification Accounting Standards Codification (“ASC”) 450, Contingencies, the Company recognized a liability in 2013 in the amount of $18.0 million. The liability was recorded in “Accounts payable and accrued liabilities” in the consolidated balance sheets and “Operations and administration expense” in the consolidated statements of income for the year ended December 31, 2013. In February 2014, the amount to be paid in connection with the Class Claims and Costs was substantially finalized, and the amount is not materially different than the liability accrued by the Company at December 31, 2013. The Class Claims and Costs will be paid during the first quarter of 2014.

Ohio Litigation

On May 28, 2009, one of the Company’s subsidiaries, Ohio Neighborhood Finance, Inc., doing business as Cashland (“Cashland”), filed a standard collections suit in an Elyria Municipal Court in Ohio against Rodney Scott seeking judgment against Mr. Scott in the amount of $570.16, which was the amount due under his loan agreement. Cashland’s loan was offered under the Ohio Mortgage Loan Act (“OMLA”), which allows for interest at a rate of 25% per annum plus certain loan fees allowed by the statute. The Municipal Court, in Ohio Neighborhood Finance, Inc. v. Rodney Scott, held that short-term, single-payment consumer loans made by Cashland are not authorized under the OMLA, and instead should have been offered under the Ohio Short-Term Lender Law, which was passed by the Ohio legislature in 2008 for consumer loans with similar terms. Due to a cap on interest and loan fees at an amount that is less than permitted under the OMLA, the Company does not offer loans under the Ohio Short-Term Lender Law.

 

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On December 3, 2012, the Ohio Ninth District Court of Appeals affirmed the Municipal Court’s ruling in a 2-1 decision. Although this court decision is only legally binding in the Ninth District of Ohio, which includes four counties in northern Ohio where Cashland operates seven stores and where the Company has modified its short-term loan product in response to this decision, other Ohio courts may consider this decision.

The Supreme Court of Ohio heard the Company’s appeal of the Ninth District Court’s decision in December 2013, and a decision is expected during the first half of 2014. If the Ninth District Court’s decision is upheld by the Ohio Supreme Court on appeal, the Company’s Ohio operations may be adversely affected. The Company relies on the OMLA to make short-term loans in its retail services locations in Ohio, and if the Company is unable to continue making short-term loans under this law, it will alter its short-term loan product in Ohio. In addition, following the ruling by the Ninth District Court, four lawsuits were filed against the Company by customers in Ohio, three of which are purported class action complaints, alleging that the Company improperly made loans under the OMLA, and the Company may in the future receive other claims. Each of these four lawsuits has been stayed pending the outcome of the Supreme Court of Ohio’s decision. The Company is currently unable to estimate a range of reasonably possible losses in connection with these lawsuits, as defined by ASC 450-20-20, Contingencies—Loss Contingencies—Glossary, for these litigation matters. The Company believes that the Plaintiffs’ claims in these suits are without merit and will vigorously defend these lawsuits.

The Company is also a defendant in certain routine litigation matters encountered in the ordinary course of its business. Certain of these matters are covered to an extent by insurance. In the opinion of management, the resolution of these matters is not expected to have a material adverse effect on the Company’s financial position, results of operations or liquidity.

Consumer Financial Protection Bureau

On November 20, 2013, the Company consented to the issuance of a Consent Order by the Consumer Financial Protection Bureau (the “CFPB”) pursuant to which it agreed, without admitting or denying any of the facts or conclusions made by the CFPB from its 2012 review of the Company, to pay a civil money penalty of $5.0 million, which is non-deductible for tax purposes. The Company also agreed to set aside $8.0 million of cash for a period of 180 days to fund any further payments to eligible Ohio customers who make valid claims in connection with the Company’s voluntary program that was announced in December 2012 to fully reimburse approximately 14,000 Ohio customers for all funds collected, plus interest accrued from the date collected, in connection with legal collections proceedings initiated by the Company in Ohio from January 1, 2008 through December 4, 2012 (the “Ohio Reimbursement Program”). The decision to make voluntary reimbursements in connection with the Ohio Reimbursement Program was made by the Company in 2012 because the Company determined that a small number of employees did not prepare certain court documents in many of its Ohio legal collections proceedings in accordance with court rules. As of December 31, 2013, the Company had refunded approximately $6.4 million in connection with this program.

The Consent Order relates to issues self-disclosed to the CFPB during its 2012 examination of the Company, including the improper preparation of certain court documents in connection with collections lawsuits initiated by the Company in Ohio, which were previously disclosed by the Company and for which the Company implemented the Ohio Reimbursement Program; the making of a limited number of loans to consumers who may have been members of the military at the time of the loan at rates in excess of the military annual percentage rate permitted by the federal Military Lending Act due in part to system errors, and for which the Company has made refunds of approximately $33,500; and for certain failures to timely provide and preserve records and information in connection with the CFPB’s examination of the Company. In addition, as a result of the CFPB’s review, the Company is in the process of enhancing its compliance management programs and implementing additional procedures to address the issues identified by the CFPB. The Company is also required to provide periodic reports to the CFPB. For further discussion of the CFPB see “Item 1A. Risk Factors—Risks Related to the Company’s Business and Industry—The Consumer Financial Protection Bureau could have a significant impact on the Company’s U.S. consumer loan business.”

 

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ITEM 4. MINE SAFETY DISCLOSURES

Not Applicable.

PART II

 

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

(a) Market for Registrant’s Common Equity

The New York Stock Exchange is the principal exchange on which the Company’s common stock, par value $0.10 per share, is traded under the symbol “CSH”. There were 512 shareholders of record (not including individual participants in security listings) as of February 18, 2014. The high and low sales prices of common stock as quoted on the New York Stock Exchange and cash dividends declared per share during 2013 and 2012 were as follows:

 

     First Quarter      Second
Quarter
     Third Quarter      Fourth
Quarter
 

2013

           

High

   $         54.12      $         53.04      $         49.11      $         46.36  

Low

     39.54        42.23        39.73        35.30  

Cash dividend declared per share

     0.035        0.035        0.035        0.035  

2012

           

High

   $ 49.42      $ 48.69      $ 46.06      $ 40.92  

Low

     40.02        40.35        34.85        34.21  

Cash dividend declared per share

     0.035        0.035        0.035        0.035  

The Company expects that comparable cash dividends will continue to be paid in the future.

 

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(c) Issuer Purchases of Equity Securities

The following table provides the information with respect to purchases made by the Company of shares of its common stock during each of the months in 2013:

 

Period    Total Number
of Shares
Purchased
(a)
     Average
Price Paid
Per Share
     Total Number of
Shares Purchased as
Part of Publicly
Announced Plan
(b)
     Maximum Number
of Shares that May
Yet Be Purchased
Under the Plan
(b)
 

January 1 to January 31

     10,608      $ 47.81         10,000        2,490,000  

February 1 to February 28

     302,147        49.22        270,000        2,220,000  

March 1 to March 31

     155,000        51.54        155,000        2,065,000  

April 1 to April 30

     20,000        52.40        20,000        2,045,000  

May 1 to May 31

     185,023        46.49        185,000        1,860,000  

June 1 to June 30

     206,700        47.97        206,700        1,653,300  

July 1 to July 31

     -         -         -        1,653,300  

August 1 to August 31

     60,770        42.01        60,000        1,593,300  

September 1 to September 30

     -        -         -        1,593,300  

October 1 to October 31

     -        -         -        1,593,300  

November 1 to November 30

     29        37.89        -        1,593,300  

December 1 to December 31

     60,000        36.36        60,000        1,533,300  

Total

     1,000,277      $ 47.66         966,700           

 

(a) 

Includes the following: shares withheld from employees as partial tax payments for shares issued under the Company’s stock-based compensation plans of 608, 32,126 and 745 shares for the months of January, February and August, respectively; and the reinvestment of dividends in the Company’s nonqualified deferred compensation plan for its directors, which resulted in the purchase of 21, 23, 25 and 29 shares for the months of February, May, August and November, respectively.

(b) 

On January 24, 2013, the Board of Directors authorized the Company’s repurchase of up to a total of 2,500,000 shares of the Company’s common stock. This repurchase authorization canceled and replaced the Company’s previous authorization for the repurchase of up to a total of 2,500,000 shares of the Company’s common stock that was approved by the Board of Directors on January 26, 2011.

 

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ITEM 6. SELECTED FINANCIAL DATA

Five-Year Summary of Selected Consolidated Financial Data

(dollars and shares in thousands, except per share data)

 

      Year Ended December 31,  
      2013     2012     2011     2010     2009  

Statement of Income Data (a)(b)(c)

          

Total revenue

   $ 1,797,226     $ 1,800,430     $ 1,583,064     $ 1,337,050     $ 1,149,125  

Income from operations

     211,783       215,915       244,342       207,132       175,652  

Income before income taxes

     173,590       186,320       217,526       184,513       154,716  

Net income attributable to Cash America International, Inc.

     142,528       107,470       135,963       115,538       96,678  

Net income per share:

          

Basic

   $ 4.97     $ 3.64     $ 4.59     $ 3.90     $ 3.26  

Diluted

   $ 4.66     $ 3.42     $ 4.25     $ 3.67     $ 3.17  

Dividends declared per share

   $ 0.14     $ 0.14     $ 0.14     $ 0.14     $ 0.14  

Weighted average shares:

          

Basic

     28,657       29,514       29,602       29,640       29,639  

Diluted

     30,613       31,452       31,991       31,521       30,503  

Balance Sheet Data at End of Year

          

Pawn loans

   $ 261,148     $ 244,640     $ 253,519     $ 217,402     $ 188,285  

Consumer loans, net (d)

     358,841       289,418       222,778       139,377       108,789  

Merchandise held for disposition, net

     208,899       167,409       161,884       130,956       116,593  

Working capital

     862,067       710,566       644,891       491,298       414,450  

Total assets

     2,081,741       1,818,258       1,674,249       1,427,186       1,269,655  

Long-term debt

     739,989       578,330       537,291       456,704       429,183  

Total equity

     1,082,423       990,620       907,590       802,731       683,199  

Ratio Data at End of Year

          

Current ratio

     5.8 x        4.8 x        4.8 x        4.8 x        4.1 x   

Debt to equity ratio

     68.4      58.4      59.2      56.9      62.8 

 

(a)

See “Item 8. Financial Statements and Supplementary Data—Note 3” for discussion of the Company’s acquisitions in 2011, 2012 and 2013.

(b) 

In 2009 and 2010, the Company provided micro line of credit (“MLOC”) services in the United States, whereby advances were processed on behalf of, and participation interests in MLOC receivables were purchased from, a third-party lender. The Company’s MLOC services generated earnings through loan processing services as well as from fees generated from the participation interests it acquired in MLOC advances made to the third-party lender’s customers. The Company stopped providing MLOC services on behalf of the third-party lender in October 2010 when the third-party lender discontinued offering MLOC advances.

(c) 

See “Item 7. Management’s Discussion and Analysis—Results of Continuing Operations—Adjusted Earnings Measures and “—Adjusted EBITDA” for additional information about certain 2012 and 2013 income and expense items that affected the Company’s consolidated income from operations, income before income taxes, net income and net income per share attributable to Cash America International, Inc.

(d) 

Excludes loans originated by third-party lenders through the CSO programs. See “Item 8. Financial Statements and Supplementary Data—Notes 2 and 5” for further discussion.

 

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

GENERAL

 

Cash America International, Inc. and its subsidiaries (collectively, the “Company”) provide specialty financial services to individuals through retail services locations and e-commerce activities.

The Company offers secured non-recourse loans, commonly referred to as pawn loans, in many of its retail services locations in the United States and Mexico. Pawn loans are short-term loans (generally 30 to 90 days) made on the pledge of tangible personal property. Pawn loan fees and service charges revenue is generated from the Company’s pawn loan portfolio. A related activity of the pawn lending operations is the disposition of collateral from forfeited pawn loans and the liquidation of a smaller volume of merchandise purchased directly from customers or from third parties.

The Company originates, guarantees or purchases consumer loans (collectively referred to as “consumer loans” throughout this discussion). Consumer loans provide customers with cash, typically in exchange for an obligation to repay the amount advanced plus fees and any applicable interest. Consumer loans include short-term loans (commonly referred to as payday loans), line of credit accounts and installment loans.

Short-term loans include unsecured short-term loans written by the Company or by a third-party lender through the Company’s credit services organization and credit access business programs (“CSO programs” as further described below) that the Company guarantees. Line of credit accounts include draws made through the Company’s line of credit products. Installment loans are longer-term multi-payment loans that generally require the pay-down of portions of the outstanding principal balance in multiple installments and include unsecured loans written by the Company and auto equity loans, which are secured by a customer’s vehicle. These secured installment loans may be written by the Company or by a third-party lender through the Company’s CSO programs that the Company guarantees. The Company offers consumer loans in many of its retail services locations in the United States and over the internet under the names “CashNetUSA” and “NetCredit” in the United States, under the names “QuickQuid,” “QuickQuid FlexCredit” and “Pounds to Pocket” in the United Kingdom and under the name “DollarsDirect” in Australia and Canada.

Through the Company’s CSO programs, the Company provides services related to a third-party lender’s consumer loan products in some markets by acting as a credit services organization or credit access business on behalf of consumers in accordance with applicable state laws. Services offered under the CSO programs include credit-related services such as arranging loans with independent third-party lenders and assisting in the preparation of loan applications and loan documents (“CSO loans”). Under the CSO programs, the Company guarantees consumer loan payment obligations to the third-party lender in the event that the customer defaults on the loan. CSO loans are not included in the Company’s financial statements, but the Company has established a liability for the estimated losses in support of the guarantee on these loans in its consolidated balance sheets.

In addition, the Company provides check cashing and other ancillary products and services through many of its retail services locations and through its franchised check cashing centers. The ancillary products and services are described below.

The Company has two reportable operating segments: retail services and e-commerce. The retail services segment includes all of the operations of the Company’s Retail Services Division, which is composed of both domestic and foreign storefront locations that offer some or all of the following services: pawn loans, consumer loans, the purchase and sale of merchandise, check cashing and other ancillary products and services such as money orders, wire transfers, prepaid debit cards, tax filing services and auto insurance. Most of these ancillary products and services offered in the retail services segment are provided through third-party vendors. The e-commerce segment includes the operations of the Company’s E-Commerce Division, which is composed of the Company’s domestic and foreign online lending channels through which the Company offers consumer loans. The e-commerce segment also includes administrative expenses that are specific to this segment’s operations and are supplemental to the Company’s administrative functions classified as corporate operations.

Corporate operations primarily include corporate expenses, such as legal, occupancy, executive oversight, insurance and risk management, public and government relations, internal audit, treasury, payroll, compliance and

 

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licensing, finance, accounting, tax and information systems (except for online lending information systems, which are included in the e-commerce segment). Corporate income includes miscellaneous income not directly attributable to the Company’s segments. Corporate assets primarily include corporate property and equipment, assets related to nonqualified deferred compensation plans, marketable securities, foreign exchange forward contracts and prepaid insurance.

Retail Services Segment

The following table sets forth the number of domestic and foreign Company-owned and franchised locations in the Company’s retail services segment offering pawn lending, consumer lending, and other services as of December 31, 2013, 2012 and 2011. The Company’s domestic retail services locations operate under the names “Cash America Pawn,” “SuperPawn,” “Cash America Payday Advance,” “Cashland” and “Mr. Payroll.” In addition, some recently acquired domestic retail services locations operate under various names that are expected to be changed to “Cash America Pawn.” The Company’s foreign retail services locations operate under the name “Cash America casa de empeño”.

 

     As of December 31,  
     2013      2012      2011  
     Domestic(a)      Foreign      Total      Domestic(a)      Foreign      Total      Domestic(a)(b)      Foreign      Total  

Retail services locations offering:

                          

Both pawn and consumer lending

     582        -        582        581        -        581        572        -        572  

Pawn lending only

     247        47        294        167        47        214        126        190        316  

Consumer lending only

     40        -        40        83        -        83        86        -        86  

Other (c)

     90        -        90        91        -        91        110        -        110  

Total retail services

     959        47        1,006        922        47        969        894        190        1,084  

 

(a) 

Except as described in (c) below, includes locations that operated in 22 states in the United States as of December 31, 2013 and 2012 and 23 states as of December 31, 2011. In 2011, includes five retail services locations that the Company operated under management agreements with a former franchisee.

(b) 

Includes one unconsolidated franchised location that operated under the name “Cash America Pawn” as of December 31, 2011.

(c) 

As of December 31, 2011, includes six consolidated Company-owned check cashing locations. As of December 31, 2013, 2012 and 2011, includes 90, 91 and 104 unconsolidated franchised check cashing locations, respectively, that operated in 14, 15 and 18 states in the United States, respectively.

E-Commerce Segment

As of December 31, 2013, 2012 and 2011, the Company’s e-commerce segment operated in 32 states in the United States and in three foreign countries:

 

   

in the United States at http://www.cashnetusa.com and http://www.netcredit.com,

   

in the United Kingdom at http://www.quickquid.co.uk, http://www.quickquidflexcredit.co.uk, and http://www.poundstopocket.co.uk,

   

in Australia at http://www.dollarsdirect.com.au, and

   

in Canada at http://www.dollarsdirect.ca.

The Company’s internet websites and the information contained therein or connected thereto are not intended to be incorporated by reference into this Annual Report on Form 10-K.

Recent Developments

Due to the significant developments that occurred in both years, recent developments for the years ended December 31, 2013 and 2012 are described below.

 

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2013 Business Developments

Acquisition of 34 Pawn Lending Locations in Georgia and North Carolina

In December 2013, the Company completed the acquisition of substantially all of the assets of a 34-store chain of pawn lending locations in Georgia and North Carolina (31 locations in Georgia and three locations in North Carolina) owned by PawnMart, Inc. The aggregate purchase price for the acquisition was approximately $61.1 million, all of which was paid as of December 31, 2013, except for a $0.5 million holdback payment. The acquisition price was paid in cash and funded through borrowings under the Company’s line of credit. The Company incurred approximately $0.6 million of acquisition costs related to the acquisition, which were expensed. The activities and goodwill of $35.2 million related to this acquisition are included in the results of the Company’s retail services segment.

Acquisition of 41 Pawn Lending Locations in Texas

In August 2013, the Company completed the acquisition of substantially all of the assets of a chain of pawn lending locations in Texas that included 41 operating locations and the rights to one additional Texas pawn lending location (that was under construction but not open for business at the time of the acquisition), all of which were acquired from TDP Superstores Corp. and operate primarily under the name “Top Dollar Pawn.” The aggregate consideration paid for the acquisition was approximately $103.7 million. The acquisition price was paid in cash and funded by available cash and through the Company’s line of credit. The Company incurred approximately $0.4 million of acquisition costs related to the acquisition, which were expensed. The activities and goodwill of $62.3 million related to this acquisition are included in the results of the Company’s retail services segment.

Income Taxes

In January 2013, the Company’s Mexico-based pawn operations that were owned by Creazione Estilo, S.A. de C.V., a Mexican sociedad anónima de capital variable (“Creazione”), and operated under the name Prenda Fácil, were sold by Creazione to another wholly-owned subsidiary of the Company, CA Empeños Mexico, S. de R.L. de C.V., and began operating exclusively under the name “Cash America casa de empeño.” As of December 31, 2013, Creazione’s assets had been liquidated and it had entered into formal liquidation proceedings. In connection with the liquidation of Creazione, the Company will include a deduction on its 2013 federal income tax return for its tax basis in the stock of Creazione and has recognized an income tax benefit of $33.2 million as a result of the deduction (the “Creazione Deduction”). The Company believes that it meets the requirements for this deduction and that it should be treated as an ordinary loss, which has reduced the Company’s cash taxes paid in 2013. The Company has obtained a Private Letter Ruling from the Internal Revenue Service with respect to one of the various factors that it considered in making this determination. As of December 31, 2012, the Company had recorded an income tax benefit of $9.3 million and an offsetting valuation allowance associated with the Company’s excess tax basis over its basis for financial purposes in the stock of Creazione. During the three months ended March 31, 2013, the Company recorded an additional income tax benefit of $23.9 million associated with its remaining tax basis in the stock of Creazione, released the valuation allowance recorded in 2012 of $9.3 million and recorded a $33.2 million liability for uncertain tax benefits. Following the receipt of a favorable Private Letter Ruling from the Internal Revenue Service in September of 2013, the Company released the $33.2 million liability for uncertain tax benefits during the three months ended September 30, 2013, reducing the provision for income taxes during that period.

Closure of Short-term Consumer Loan Retail Services Locations in Texas

Since 2011, restrictive City ordinances that have been passed have had the effect of reducing the profitability and the volume of short-term consumer loans the Company offers to customers in Texas, and the Company has experienced a related decline in consumer loans in many of the Company’s Texas retail services locations that offer this product as their primary source of revenue. As a result, the Company decided to close a total of 36 of these retail services locations (the “Texas Consumer Loan Store Closures”). The Texas Consumer Loan Store Closures were completed as of December 31, 2013. The Company incurred charges of approximately $1.4 million for the year ended December 31, 2013 in connection with these closures.

 

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Regulatory, Litigation and Other Developments

Consumer Financial Protection Bureau

On November 20, 2013, the Company consented to the issuance of a Consent Order by the Consumer Financial Protection Bureau (the “CFPB”) pursuant to which it agreed, without admitting or denying any of the facts or conclusions made by the CFPB from its 2012 review of the Company, to pay a civil money penalty of $5.0 million (the “Regulatory Penalty”), which is non-deductible for tax purposes. The Company also agreed to set aside $8.0 million of cash for a period of 180 days to fund any further payments to eligible Ohio customers who make valid claims in connection with the Company’s previously announced voluntary program to fully reimburse approximately 14,000 Ohio customers for all funds collected, plus interest accrued from the date collected, in connection with legal collections proceedings initiated by the Company in Ohio from January 1, 2008 through December 4, 2012 (the “Ohio Reimbursement Program”). The decision to make voluntary reimbursements in connection with the Ohio Reimbursement Program was made by the Company in 2012 because the Company determined that a small number of employees did not prepare certain court documents in many of its Ohio legal collections proceedings in accordance with court rules. As of December 31, 2013, the Company had refunded approximately $6.4 million in connection with this program.

The Consent Order relates to issues self-disclosed to the CFPB during its 2012 examination of the Company, including the improper preparation of certain court documents in connection with collections lawsuits initiated by the Company in Ohio, which were previously disclosed by the Company and for which the Company implemented the Ohio Reimbursement Program; the making of a limited number of loans to consumers who may have been members of the military at the time of the loan at rates in excess of the military annual percentage rate permitted by the federal Military Lending Act due in part to system errors, and for which the Company has made refunds of approximately $33,500; and for certain failures to timely provide and preserve records and information in connection with the CFPB’s examination of the Company. In addition, as a result of the CFPB’s review, the Company is in the process of enhancing its compliance management programs and implementing additional procedures to address the issues identified by the CFPB. The Company is also required to provide periodic reports to the CFPB. For further discussion of the CFPB, see “Item 1A. Risk Factors—Risks Related to the Company’s Business and Industry—The Consumer Financial Protection Bureau could have a significant impact on the Company’s U.S. consumer loan business.”

Voluntary Reimbursements to Ohio Customers

On December 4, 2012, the Company announced the Ohio Reimbursement Program (as described above). As of December 31, 2012, the Company estimated the cost of the Ohio Reimbursement Program and related expenses to be approximately $13.4 million before taxes and recorded this amount in “Accounts payable and accrued expenses” in the consolidated balance sheets and in “Operations and administration expense” in the consolidated statements of income for the year ended December 31, 2012. During the year ended December 31, 2013, the Company reimbursed approximately $6.4 million to customers and incurred $1.7 million of related expenses in connection with this program. In addition, the Company decreased its remaining liability related to the Ohio Reimbursement Program during the year ended December 31, 2013 by $5.0 million after the assessment of the claims made to date and related matters (the “Ohio Adjustment”). As of December 31, 2013, the Company’s remaining accrual for the Ohio Reimbursement Program was $0.3 million.

Financial Conduct Authority

The Company offers consumer loans over the internet in the United Kingdom where it is currently subject to regulation by the Office of Fair Trading (the “OFT”). In December 2012, the U.K. Parliament passed the Financial Services Act of 2012 (the “Act”), which created a new regulatory framework for the supervision and management of the banking and financial services industry in the United Kingdom, including the consumer lending industry in which the Company operates. The Act mandates that the Financial Conduct Authority (the “FCA”) take over responsibility for regulating consumer credit from the OFT in April 2014.

In October 2013 the FCA issued a consultation paper that proposed certain changes to the current requirements for lenders of unsecured credit in the UK such as the Company, including mandatory affordability checks on borrowers, limiting the number of rollovers to two, restricting how lenders can advertise and proposing the power to ban advertisements it deems misleading, and introducing a limit of two unsuccessful attempts on the use of continuous payment authority (which provides a creditor the ability to directly debit a customer’s account for payment when authorized by the customer to do so) to pay off a loan. On February 28, 2014, the FCA published the Consumer Credit Sourcebook (the “CONC”) within the FCA Handbook that contains the final regulations that will cover the conduct requirements for lenders of unsecured credit in the UK such as the Company. The Company is conducting a review and

 

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assessment of the newly published final regulations set forth in the CONC to evaluate and determine the potential impact of the final regulations included in the CONC and what effect such regulations may have on its business, prospects, results of operations and financial condition. If the final FCA regulations included in the CONC are consistent with the proposed rules, the Company will be required to make adjustments to some of its business practices, including its collections processes, which could possibly result in lower collections on loans made by the Company and a decrease in the number of customers that it is able to approve.

In addition, on December 18, 2013, the United Kingdom passed the Financial Services (Banking Reform) Act, which includes an amendment that requires the FCA to introduce rules “with a view to securing an appropriate degree of protection for borrowers against excessive charges” on “high-cost short-term” consumer loans by January 2, 2015 and could result in fee, cost of credit or other restrictions being adopted by the FCA. The Company is still assessing the potential impact of these proposed changes and what effect such changes may have on its business, prospects, results of operations, financial condition and cash flows. See “Item 1A. Risk Factors—The United Kingdom has recently increased regulation of the consumer loan industry as well as demonstrated an increasing interest in considering legislation or regulations that could further regulate or restrict the consumer loan products the Company offers” and “The OFT is reviewing the payday lending sector in the United Kingdom, including the Company, which could result in changes to the Company’s business processes or payday lending products” for additional information regarding regulation in the United Kingdom.

2013 Litigation Settlement

In October 2013, the Company entered into a Settlement Agreement, which received final court approval in January 2014, to settle an outstanding class action lawsuit that has been ongoing since 2004. The Settlement Agreement requires a minimum payment by the Company of $18.0 million and a maximum payment of $36.0 million to cover class claims (including honorarium payments to the named plaintiffs) and the plaintiffs’ attorneys’ fees and costs (including the costs of claims administration) (the “Class Claims and Costs”), all of which will count towards the aggregate payment for purposes of determining whether the minimum payment has been made or the maximum payment has been reached. The actual payout will depend on the number of claimants who submit claims for payment. The Company denies all of the material allegations of the lawsuit and denies any and all liability or wrongdoing in connection with the conduct described in the lawsuit, but the Company agreed to the settlement to eliminate the uncertainty, distraction, burden and expense of further litigation.

In accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 450, Contingencies, the Company recognized a liability during the year ended December 31, 2013 in the amount of $18.0 million. In February 2014, the amount to be paid in connection with the Class Claims and Costs was substantially finalized, and the amount is not materially different than the liability accrued by the Company at December 31, 2013. The Class Claims and Costs will be paid during the first quarter of 2014. This settlement is collectively referred to as the “2013 Litigation Settlement.” See “Item 3. Legal Proceedings—Litigation” for additional information regarding this lawsuit.

Ohio Court Decision

On May 28, 2009, one of the Company’s subsidiaries, Ohio Neighborhood Finance, Inc., doing business as Cashland (“Cashland”), filed a standard collections suit in an Elyria Municipal Court in Ohio against Rodney Scott seeking judgment against Mr. Scott in the amount of $570.16, which was the amount due under his loan agreement. Cashland’s loan was offered under the Ohio Mortgage Loan Act (“OMLA”), which allows for interest at a rate of 25% per annum plus certain loan fees allowed by the statute. The Municipal Court, in Ohio Neighborhood Finance, Inc. v. Rodney Scott, held that short-term, single-payment consumer loans made by Cashland are not authorized under the OMLA, and instead should have been offered under the Ohio Short-Term Lender Law, which was passed by the Ohio legislature in 2008 for consumer loans with similar terms. Due to a cap on interest and loan fees at an amount that is less than permitted under the OMLA, the Company does not offer loans under the Ohio Short-Term Lender Law.

On December 3, 2012, the Ohio Ninth District Court of Appeals affirmed the Municipal Court’s ruling in a 2-1 decision. Although this court decision is only legally binding in the Ninth District of Ohio, which includes four counties in northern Ohio where Cashland operates seven stores and where the Company has modified its short-term loan product in response to this decision, other Ohio courts may consider this decision.

The Supreme Court of Ohio heard the Company’s appeal of the Ninth District Court’s decision in December 2013, and a decision is expected during the first half of 2014. If the Ninth District Court’s decision is upheld by the Ohio Supreme Court on appeal, the Company’s Ohio operations may be adversely affected. The Company relies on the OMLA to make short-term loans in its retail services locations in Ohio, and if the Company is unable to continue

 

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making short-term loans under this law, it will alter its short-term loan product in Ohio. In addition, following the ruling by the Ninth District Court, four lawsuits were filed against the Company by customers in Ohio, three of which are purported class action complaints, alleging that the Company improperly made loans under the OMLA, and the Company may in the future receive other claims. Each of these four lawsuits has been stayed pending the outcome of the Supreme Court of Ohio’s decision. The Company is currently unable to estimate a range of reasonably possible losses in connection with these lawsuits, as defined by ASC 450-20-20, Contingencies—Loss Contingencies—Glossary, for these litigation matters. The Company believes that the Plaintiffs’ claims in these suits are without merit and will vigorously defend these lawsuits.

2012 Business Developments

Acquisition of Nine-Store Chain of Pawn Lending Locations in Arizona

In October 2012, the Company completed the acquisition of substantially all of the assets of a nine-store chain of pawn lending locations in Arizona owned by Ca$h Corporation, Pawn Corp #1, Inc., Pawncorp #2, Inc. and Pawncorp #4, Inc. The aggregate cash consideration for this transaction, which was funded with borrowings under the Company’s line of credit, was approximately $15.6 million. The activities and goodwill of $7.7 million related to this acquisition are included in the results of the Company’s retail services segment.

Acquisition of 25-Store Chain of Pawn Lending Locations in Kentucky, North Carolina and Tennessee

In September 2012, the Company entered into an agreement to acquire substantially all of the assets of a 25-store chain of pawn lending locations located in Kentucky, North Carolina, and Tennessee owned by Standon, Inc., Casa Credit, Inc., Classic Credit, Inc. and Falcon Credit, Inc. The Company assumed the economic benefits of all of these pawnshops by operating them under management agreements that commenced on September 27, 2012 and the final closing occurred on December 16, 2012. The aggregate cash consideration for the transaction, which was funded with borrowings under the Company’s line of credit, was approximately $55.1 million The Company incurred an immaterial amount of acquisition costs related to the acquisition. The activities and goodwill of $31.5 million related to this acquisition are included in the results of the Company’s retail services segment.

Reorganization of Mexico-based Pawn Operations and Purchase of Noncontrolling Interest

On September 24, 2012, the Company’s Board of Directors approved a plan to significantly modify the business plan and strategy of the Company’s Mexico-based pawn operations, which comprise the foreign component of its retail services segment. The Company reorganized these operations to include only full-service pawn locations that offer pawn loans based on the pledge of general merchandise and jewelry-based collateral and discontinued the operations of 148 of its Mexico-based pawn locations that primarily offered pawn loans based on the pledge of jewelry-based collateral (“the Mexico Reorganization”). The Mexico Reorganization was substantially completed as of December 31, 2012. As of December 31, 2012 and 2013, the Company was operating 47 full-service pawn locations in Mexico. The Mexico Reorganization reflects management’s decision to modify its strategy in Mexico to achieve profitability in its Mexico-based pawn operations and to evaluate the potential to expand its services to customers in Latin American markets.

In connection with the Mexico Reorganization, the Company incurred charges for employee termination costs, lease termination costs, asset impairments, loss on sale of assets, the recognition of a deferred tax asset valuation allowance, uncollectible receivables and other charges. The Company recognized $28.9 million of charges related to the Mexico Reorganization during the year ended December 31, 2012.

Withdrawal of Proposed Initial Public Offering of Enova International, Inc.

On September 15, 2011, Enova International Inc. (“Enova”) filed a registration statement on Form S-1 (“Registration Statement”) with the Securities and Exchange Commission (the “SEC”) in connection with a proposed initial public offering (“IPO”) of its common stock. On July 25, 2012, Enova filed an Application for Withdrawal of Registration Statement with the SEC to withdraw the proposed IPO and the Registration Statement, together with all exhibits and amendments. The Registration Statement had not been declared effective by the SEC, and no securities have been sold in connection with the offering pursuant to the Registration Statement. During the year ended December 31, 2012, expenses that were previously capitalized totaling $3.9 million were recognized in earnings due to the withdrawal of the Registration Statement and are included in “Operations and administration expenses” in the consolidated statements of income.

 

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CRITICAL ACCOUNTING POLICIES

 

Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on the Company’s consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States (“GAAP”). The preparation of these financial statements 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 dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition on pawn loan fees and service charges and consumer loan fees, allowance for losses on merchandise held for disposition and consumer loans, goodwill, long-lived and intangible assets, income taxes, contingencies and litigation. Management bases its estimates on historical experience, empirical data and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates. The development and selection of the critical accounting policies and the related disclosures below have been reviewed with the Audit Committee of the Board of Directors of the Company.

Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.

Pawn Loan Fees and Service Charges

Pawn Loans and Pawn Loan Fees and Service Charges Receivable

Pawn loans are short-term loans made on the pledge of tangible personal property. The maximum pawn loan amount is generally assessed as a percentage of the personal property’s estimated disposition value. The typical loan term is generally 30 to 90 days and, in many cases, an additional grace period (typically 10 to 60 days) may be available to the borrower. A pawn loan is considered delinquent if the customer does not repay or, where allowed by law, renew or extend the loan on or prior to its contractual maturity date plus any applicable grace period. Pawn loan fees and service charges do not accrue on delinquent pawn loans. When a pawn loan is considered delinquent, any accrued pawn loan fees and service charges are reversed and no additional pawn loan fees and service charges are accrued. Pawn loans written during each calendar month are aggregated and tracked for performance. This empirical data allows the Company to analyze the characteristics of its outstanding pawn loan portfolio and assess the collectability of the principal balance in addition to pawn loan fees and service charges.

Revenue Recognition

Pawn loan fees and service charges revenue are accrued ratably over the term of the loan for the portion of those pawn loans deemed collectible. If the future actual performance of the loan portfolio differs significantly (positively or negatively) from expectations, revenue for the next reporting period would be likewise affected.

At the end of the current year and based on the revenue recognition method described above, the Company had accrued $53.4 million of pawn loan fees and service charges receivable. Assuming the year-end accrual of pawn loan fees and service charges revenue was overestimated or underestimated by 10%, pawn loan fees and service charges revenue would decrease or increase by $5.3 million in 2013 and net income attributable to the Company would decrease or increase by $3.3 million, net of taxes. Some or all of the decrease would potentially be mitigated through the profit on the disposition of the related forfeited loan collateral. Any increase would be realized as additional pawn loan fees and service charges revenue.

 

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Consumer Loans and Allowance and Liability for Estimated Losses on Consumer Loans

Revenue Recognition

The Company recognizes consumer loan fees based on the loan products it offers. “Consumer loan fees” in the consolidated statements of income include: interest income, finance charges, fees for services provided through the CSO programs (“CSO fees”), service charges, draw fees, minimum fees, late fees, nonsufficient funds fees and any other fees or charges permitted by applicable laws and pursuant to the agreement with the borrower. For short-term loans that the Company writes, interest and finance charges are recognized on an effective yield basis over the term of the loan, and fees are recognized when assessed to the customer. For line of credit accounts, interest is recognized during the period based upon the balance outstanding and the contractual interest rate, and fees are recognized when assessed to the customer. For installment loans, revenue is recognized on an effective yield basis over the term of the loan and fees are recognized when assessed to the customer. Unpaid and accrued interest and fees are included in “Consumer loans, net” in the consolidated balance sheets. CSO fees are recognized on an effective yield basis over the term of the loan.

Current and Delinquent Consumer Loans

The Company classifies its consumer loans as either current or delinquent. Short-term loans are considered delinquent when payment of an amount due is not made as of the due date. If a line of credit account or installment loan customer misses one payment, that payment is considered delinquent. If a line of credit account or installment loan customer does not make two consecutive payments, the entire account or loan is classified as delinquent. The Company allows for normal payment processing time before considering a loan delinquent but does not provide for any additional grace period.

Where permitted by law and as long as a loan is not considered delinquent, a customer may choose to renew a short-term loan or installment loan or extend the due date on a short-term loan. In order to renew or extend a short-term loan, a customer must agree to pay the current finance charge for the right to make a later payment of the outstanding principal balance plus an additional finance charge. In some instances, customers agree to repay a new short-term loan in two or three payments, and in these cases the Company considers the obligation to make the first payment a new loan and the obligation to make the second and third payments renewals or extensions of that loan because the customer pays the finance charge due at the time of each payment, similar to a loan that has been renewed or extended. In order to renew an installment loan, the customer enters into a new installment loan contract and agrees to pay the principal balance and finance charge in accordance with the terms of the new loan contract. If a short-term loan is renewed, but the customer fails to pay that loan’s current finance charge as of the due date, the unpaid finance charge is classified as delinquent. References throughout Management’s Discussion and Analysis of Financial Condition and Results of Operations to renewed consumer loans include both renewals and extensions made by customers to their existing loans as discussed above.

The Company generally does not accrue interest on delinquent consumer loans and does not resume accrual of interest on a delinquent loan unless it is returned to current status. In addition, delinquent consumer loans generally may not be renewed, and if, during its attempt to collect on a delinquent consumer loan, the Company allows additional time for payment through a payment plan or a promise to pay, it is still considered delinquent. All payments received are first applied against accrued but unpaid interest and fees and then against the principal balance of the loan.

Allowance and Liability for Estimated Losses on Consumer Loans

The Company monitors the performance of its consumer loan portfolio and maintains either an allowance or liability for estimated losses on consumer loans (including fees and interest) at a level estimated to be adequate to absorb credit losses inherent in the portfolio. The allowance for losses on the Company’s owned consumer loans reduces the outstanding loan balance in the consolidated balance sheets. The liability for estimated losses related to loans guaranteed under the CSO programs is included in “Accounts payable and accrued expenses” in the consolidated balance sheets.

In determining the allowance or liability for estimated losses on consumer loans, the Company applies a documented systematic methodology. In calculating the allowance or liability for loan losses, outstanding loans are divided into discrete groups of short-term loans, line of credit accounts and installment loans and are analyzed as current or delinquent. Increases in either the allowance or the liability, net of charge-offs and recoveries, are recorded as a “Consumer loan loss provision” in the consolidated statements of income.

 

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The allowance or liability for short-term loans classified as current is based on historical loss rates adjusted for recent default trends for current loans. For delinquent short-term loans, the allowance or liability is based on a six-month rolling average of loss rates by stage of collection. For line of credit accounts and installment loan portfolios, the Company generally uses a migration analysis to estimate losses inherent in the portfolio. The allowance or liability calculation under the migration analysis is based on historical charge-off experience and the loss emergence period, which represents the average amount of time between the first occurrence of a loss event to the charge-off of a loan. The factors the Company considers to assess the adequacy of the allowance or liability include past due performance, historical behavior of monthly vintages, underwriting changes and recent trends in delinquency in the migration analysis.

The Company fully reserves and generally charges off consumer loans once the loan or a portion of the loan has been classified as delinquent for 60 consecutive days. If a loan is deemed uncollectible before it is fully reserved, it is charged off at that point. Consumer loans classified as delinquent generally have an age of one to 59 days from the date any portion of the loan became delinquent, as defined above. Recoveries on loans previously charged to the allowance are credited to the allowance when collected.

As of December 31, 2013, the allowance for losses on consumer loans was $87.9 million and the liability for estimated losses on third-party lender-owned consumer loans guaranteed by the Company was $3.1 million, in aggregate representing 18.0% of the combined consumer loan portfolio.

For the year ended December 31, 2013, the consumer loan loss provision was $351.3 million. If the loss provision increased or decreased by 10%, or $35.1 million, from 2013 levels (approximately of 1.0% change in the percentage of gross combined consumer loans written and renewed in 2013), net income attributable to the Company would likewise decrease or increase by $22.1 million, net of taxes, for 2013, assuming the same volume of consumer loans written and renewed in 2013.

Merchandise Held for Disposition

Merchandise held for disposition consists primarily of forfeited collateral from pawn loans not repaid and merchandise that is purchased directly from customers or from third parties. The carrying value of the forfeited collateral and other merchandise held for disposition is stated at the lower of cost (which is the cost basis in the loan or the amount paid for purchased merchandise) or fair value. With respect to the Company’s foreign pawn operations, collateral underlying forfeited pawn loans is not owned by the Company; however, the Company assumes the risk of loss on such collateral and is solely responsible for its care and disposition. Accordingly, the Company classifies these domestic and foreign assets as “Merchandise held for disposition, net” in the consolidated balance sheets. The Company provides an allowance for returns and an allowance for valuation based on management’s evaluation of the characteristics of the merchandise and historical shrinkage rates. Because the Company’s pawn loans are made without recourse to the borrower, the Company does not investigate or rely upon the borrower’s creditworthiness with outside third parties, but instead bases its lending decision on an evaluation of the pledged personal property and the borrower’s transaction history with the Company. The amount financed is typically based on a percentage of the pledged personal property’s estimated disposition value. The Company uses numerous sources in determining an item’s estimated disposition value, including the Company’s proprietary automated product valuation system as well as catalogs, “blue books,” newspapers, internet research and previous disposition experience. The Company performs physical counts of its merchandise in each location during the year and reviews the composition of inventory by category and age in order to assess the adequacy of the allowance.

Goodwill and Other Indefinite-Lived Intangible Assets

Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. In accordance with ASC 350, Goodwill – Subsequent Measurement, the Company tests goodwill and intangible assets with an indefinite life for potential impairment annually as of June 30 and between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount.

 

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The Company uses the income approach to complete its annual goodwill assessment. The income approach uses future cash flows and estimated terminal values for each of the Company’s reporting units that are discounted using a market participant perspective to determine the fair value of each reporting unit, which is then compared to the carrying value of that reporting unit to determine if there is impairment. The income approach includes assumptions about revenue growth rates, operating margins and terminal growth rates discounted by an estimated weighted-average cost of capital derived from other publicly-traded companies that are similar but not identical from an operational and economic standpoint. The Company completed its annual assessment of goodwill as of June 30, 2013 and determined that the fair value for each reporting unit exceeded carrying value, and, as a result, no impairment existed at that date.

The Company performed its annual indefinite-lived intangible asset impairment test as of June 30, 2013. The Company elected to perform a qualitative assessment in accordance with FASB Accounting Standards Update No. 2012-02, Intangibles—Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”), and determined that it was not more likely than not that the indefinite-lived intangible assets are impaired. Therefore, no further quantitative assessment was required.

Long-Lived Assets and Other Intangible Assets

An evaluation of the recoverability of property and equipment and intangible assets subject to amortization is performed whenever the facts and circumstances indicate that the carrying value may be impaired. An impairment loss is recognized if the future undiscounted cash flows associated with the asset and the estimated fair value of the asset are less than the asset’s corresponding carrying value. The amount of the impairment loss, if any, is the excess of the asset’s carrying value over its estimated fair value.

The Company amortizes intangible assets subject to amortization on the basis of their expected periods of benefit, generally three to 10 years. The costs of start-up activities and organization costs are charged to expense as incurred.

Equity Securities

The Company accounts for its marketable and non-marketable equity securities in accordance with ASC 323, Investments—Equity Method and Joint Ventures, and ASC 325, Investments—Other—Cost Method Investments, respectively. The Company’s marketable securities, except for marketable securities related to certain of the Company’s nonqualified deferred compensation plans, which are described below, are classified as available-for-sale and unrecognized gains and losses, net of tax, are recorded in “Accumulated other comprehensive income (loss)” in the consolidated statements of equity. The Company sold certain marketable securities it held during the year ended December 31, 2013. The Company’s non-marketable equity securities are recorded on a cost basis. The Company evaluates marketable and non-marketable equity securities for impairment on a quarterly basis. If an impairment of an equity security is determined to be other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary-impairment is identified. Marketable and non-marketable equity securities are held in “Prepaid expenses and other assets” in the consolidated balance sheets.

The Company also holds marketable securities related to its nonqualified deferred compensation plans for certain employees. See “Item 8. Financial Statements and Supplementary Data—Note 15” for a description of these plans. The securities are classified as trading securities, and the unrealized gains and losses on these securities are netted with the costs of the plans in “Operations and administration expenses” in the consolidated statements of income. These marketable securities are recorded at fair value and have an offsetting liability of equal amount. The assets related to the nonqualified deferred compensation plans are held in “Other Assets,” and the offsetting liability is held in “Accounts payable and accrued expenses” in the consolidated balance sheets.

Income Taxes

As part of the process of preparing its consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax expense together with assessing temporary differences in recognition of income for tax and accounting purposes. These

 

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differences result in deferred tax assets and liabilities and are included within the consolidated balance sheets. Management must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is not likely, it must establish a valuation allowance. An expense or benefit is included within the tax provision in the statement of operations for any increase or decrease in the valuation allowance for a given period.

The Company performs an evaluation of the recoverability of its deferred tax assets on a quarterly basis. The Company establishes a valuation allowance if it is more-likely-than-not (greater than 50 percent) that all or some portion of the deferred tax asset will not be realized. The Company analyzes several factors, including the nature and frequency of operating losses, the Company’s carryforward period for any losses, the reversal of future taxable temporary differences, the expected occurrence of future income or loss and the feasibility of available tax planning strategies to protect against the loss of deferred tax assets.

As of December 31, 2013 and 2012 the valuation allowance against the Company’s gross deferred tax assets was $13.8 million and $21.8 million, respectively. In 2013, the Company released a $9.3 million valuation allowance related to the deferred tax asset associated with the Company’s excess tax basis over its basis for financial reporting purposes in the stock of Creazione and recorded an additional $1.3 million valuation allowance related to deferred tax assets at its Mexico subsidiaries.

The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements in accordance with ASC 740, Accounting for Uncertainty in Income Taxes (“ASC 740”). ASC 740 requires that a more-likely-than-not threshold be met before the benefit of a tax position may be recognized in the consolidated financial statements and prescribes how such benefit should be measured. Management must evaluate tax positions taken on the Company’s tax returns for all periods that are open to examination by taxing authorities and make a judgment as to whether and to what extent such positions are more likely than not to be sustained based on merit.

Management’s judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. Management’s judgment is also required in evaluating whether tax benefits meet the more-likely-than-not threshold for recognition under ASC 740.

RECENT ACCOUNTING PRONOUNCEMENTS

 

See “Item 8. Financial Statements and Supplementary Data—Note 2” for a discussion of recent accounting pronouncements that the Company has adopted or will adopt in future periods.

 

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RESULTS OF CONTINUING OPERATIONS

 

Highlights

The Company’s financial results for the year ended December 31, 2013 (“2013”) are summarized below.

 

 

Consolidated total revenue remained relatively flat at $1.80 billion for 2013 compared to the year ended December 31, 2012 (“2012”).

 

 

Consolidated net revenue increased $29.4 million, or 2.9%, to $1.04 billion, in 2013 compared to $1.01 billion in 2012, strengthened mainly from higher net revenue from consumer loans.

 

   

Consumer loan fees, net of consumer loan loss provision, increased 13.3%, or $61.7 million, for 2013 compared to 2012. The increase was mainly due to higher consumer loan balances, which is attributable to the success of the expansion of the Company’s line of credit accounts and installment loan products. In addition, the Company benefitted from an improvement in loan loss experience, resulting in an increase in net revenue from consumer loans.

 

   

Net revenue from pawn related activities, which is the sum of pawn loan fees and service charges and the net proceeds from the disposition of merchandise, decreased 5.7%, or $29.9 million, for 2013 compared to 2012. The decrease in pawn related net revenue was primarily due to a reduction in proceeds from the disposition of gold through commercial sales and, to a lesser extent, a decrease in net revenue from the Company’s foreign pawn operations due to the Mexico Reorganization in 2012.

 

 

Consolidated income from operations was $211.8 million in 2013, compared to $215.9 million in 2012. The decrease in income from operations includes the effect of certain income and expense items in both periods as discussed further below:

 

   

Consolidated income from operations for 2013 includes certain income and expense items of $19.4 million, consisting of expenses of $1.4 million for the Texas Consumer Loan Store Closures, $5.0 million for the Regulatory Penalty and $18.0 million for the 2013 Litigation Settlement, offset by income of $5.0 million related to the Ohio Adjustment. Excluding these items, non-GAAP adjusted income from operations would have been $231.2 million in 2013.

 

   

Consolidated income from operations for 2012 includes certain expense items of $39.0 million, consisting of $3.9 million related to the withdrawn proposed Enova IPO, $21.7 million related to the Mexico Reorganization and $13.4 million related to the Ohio Reimbursement Program. Excluding these items, non-GAAP adjusted income from operations would have been $254.9 million in 2012.

 

 

Consolidated net income was $142.5 million in 2013 compared to $107.5 million in 2012. Consolidated diluted net income per share was $4.66 in 2013 compared to $3.42 in 2012. The increases in net income and diluted net income per share include certain income and expense items in both periods as discussed further below:

 

   

Consolidated net income for 2013 includes certain income and expense items totaling income of $18.8 million, net of tax and noncontrolling interests. These items consist of charges, net of tax, of $0.9 million related to the Texas Consumer Loan Store Closures, $0.4 million related to extinguishment on a portion of the Company’s convertible senior notes (the “Debt Extinguishment”), $5.0 million related to the Regulatory Penalty and $11.3 million related to the 2013 Litigation Settlement. These charges were offset by a $33.2 million tax benefit related to the Creazione Deduction and a $3.2 million, net of tax, benefit related to the Ohio Adjustment. Excluding these items, non-GAAP adjusted net income would have been $123.7 million in 2013 and non-GAAP adjusted diluted net income per share would have been $4.04. See “Overview—Non-GAAP Disclosures—Adjusted Earning Measures” for further discussion.

 

   

Consolidated net income for 2012 includes certain expense items of $36.2 million, net of tax and noncontrolling interests, consisting of $2.4 million related to the withdrawal of the proposed Enova IPO, $25.4 million related to the Mexico Reorganization and $8.4 million related to the Ohio Reimbursement Program. Excluding these items, non-GAAP adjusted net income would have been $143.7 million in 2012 and consolidated diluted net income per share for 2012 would have been $4.57. See “Overview—Non-GAAP Disclosures—Adjusted Earning Measures” for further discussion.

 

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Management believes that the adjustments shown noted above for 2013 and 2012, such as the Texas Consumer Loan Store Closures, the Debt Extinguishment, the Regulatory Penalty, the charges related to the 2013 Litigation Settlement, the Creazione Deduction, the withdrawal of the proposed Enova IPO, the Mexico Reorganization, the Ohio Adjustment and the Ohio Reimbursement Program are useful to investors in order to allow them to compare the Company’s financial results during the periods shown without the effect of these income and expense items.

See “Recent Developments” section above for additional information regarding the income and expense items noted above during 2013 and 2012.

 

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OVERVIEW

 

Consolidated Net Revenue

Consolidated net revenue is composed of total revenue less cost of disposed merchandise and consumer loan loss provision. Net revenue is the income available to satisfy all remaining expenses and is the measure management uses to evaluate top-line performance.

The following tables show the components of net revenue for the years ended December 31, 2013, 2012 and 2011 by segment and for corporate operations on a consolidated basis (dollars in thousands):

 

     Year Ended December 31, 2013  
     Retail Services     E-Commerce     Corporate     Consolidated  
     Amount      % of
Total
    Amount      % of
Total
    Amount      % of
Total
    Amount      % of
Total
 

Pawn loan fees and service charges

   $ 311,799        53.3   $ -        -   $ -        -   $ 311,799        30.1

Proceeds from disposition of merchandise, net of cost of disposed merchandise

     184,826        31.6     -        -     -        -     184,826        17.9

Pawn related

   $ 496,625        84.9   $ -        -   $ -        -   $ 496,625        48.0

Consumer loan fees, net of loss provision

   $ 79,852        13.6   $ 447,076        99.7   $ -        -   $ 526,928        50.9

Other revenue

     8,894        1.5     1,197        0.3     1,714        100.0     11,805        1.1

Net revenue

   $   585,371        100.0   $   448,273        100.0   $   1,714        100.0   $   1,035,358        100.0

 

      Year Ended December 31, 2012  
     Retail Services     E-Commerce     Corporate     Consolidated  
     Amount      % of
Total
    Amount      % of
Total
    Amount      % of
Total
    Amount      % of
Total
 

Pawn loan fees and service charges

   $ 300,929        47.8   $ -        -   $ -        -   $ 300,929        29.9

Proceeds from disposition of merchandise net of cost of disposed merchandise

     225,588        35.9     -        -     -        -     225,588        22.4

Pawn related

   $ 526,517        83.7   $ -        -   $ -        -   $ 526,517        52.3

Consumer loan fees, net of loss provision

   $ 92,667        14.7   $ 372,559        99.6   $ -        -   $ 465,226        46.3

Other revenue

     10,237        1.6     1,359        0.4     2,618        100.0     14,214        1.4

Net revenue

   $   629,421        100.0   $   373,918        100.0   $   2,618        100.0   $   1,005,957        100.0

 

      Year Ended December 31, 2011  
      Retail Services     E-Commerce     Corporate     Consolidated  
     Amount      % of
Total
    Amount      % of
Total
    Amount      % of
Total
    Amount      % of
Total
 

Pawn loan fees and service charges

   $ 282,197        44.8   $ -        -   $ -        -   $ 282,197        31.0

Proceeds from disposition of merchandise net of cost of disposed merchandise

     241,260        38.2     7        -     -        -     241,267        26.5

Pawn related

   $ 523,457        83.0   $ 7        -   $ -        -   $ 523,464        57.5

Consumer loan fees, net of loss provision

   $ 95,191        15.1   $ 277,767        99.7   $ -        -   $ 372,958        41.0

Other revenue

     11,715        1.9     879        0.3     743        100.0     13,337        1.5

Net revenue

   $   630,363        100.0   $   278,653        100.0   $   743        100.0   $   909,759        100.0

For 2013, consolidated net revenue increased $29.4 million, or 2.9%, to $1.04 billion from $1.01 billion in 2012. Consumer loan net revenue accounted for 50.9% and 46.3% of total consolidated net revenue in 2013 and 2012, respectively. Consumer loan net revenue increased $61.7 million to $526.9 million during 2013 from $465.2 million in 2012. The Company’s e-commerce segment drove the increase, mainly due to higher consumer loan balances, which is attributable to the success of the expansion of the Company’s line of credit accounts and installment loan products, as well as a decrease in the loss provision as a percentage of consumer loan fees. The increase in consumer loan net revenue was partially offset by a decrease in consumer loan net revenue in the Company’s retail services segment.

 

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Pawn-related net revenue accounted for 48.0% and 52.3% of total consolidated net revenue in 2013 and 2012, respectively. Pawn-related net revenue decreased $29.9 million, to $496.6 million in 2013 from $526.5 million in 2012. The decrease in pawn-related net revenue was primarily due to a reduction in proceeds from the disposition of gold through commercial sales and, to a lesser extent, decreases in net revenue due to the Mexico Reorganization in 2012.

 

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Non-GAAP Disclosure

In addition to the financial information prepared in conformity with GAAP, the Company provides historical non-GAAP financial information. Management believes that presentation of non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of the Company’s operations. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of the Company’s business that, when viewed with its GAAP results, provide a more complete understanding of factors and trends affecting its business.

Management provides non-GAAP financial information for informational purposes and to enhance understanding of the Company’s GAAP consolidated financial statements. Readers should consider the information in addition to, but not instead of or superior to, its financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes.

Adjusted Earnings Measures

In addition to reporting financial results in accordance with GAAP, the Company has provided adjusted net income and diluted earnings per share attributable to the Company, adjusted earnings and adjusted earnings per share (collectively, the “Adjusted Earnings Measures”), which are non-GAAP measures. Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments and amortization methods, which provides a more complete understanding of the Company’s financial performance, competitive position and prospects for the future. Management also believes that investors regularly rely on non-GAAP financial measures, such as the Adjusted Earnings Measures, to assess operating performance and that such measures may highlight trends in the Company’s business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. In addition, management believes that the adjustments shown below, especially the adjustments for events that occurred during the three years ended December 31, 2013, 2012, and 2011, such as the Texas Consumer Loan Store Closures, the Debt Extinguishment, the Regulatory Penalty, the charges related to the 2013 Litigation Settlement, the Creazione Deduction, the withdrawal of the proposed Enova IPO, the Mexico Reorganization, the Ohio Adjustment and the Ohio Reimbursement Program are useful to investors in order to allow them to compare the Company’s financial results during the periods shown without the effect of each of these income and expense items.

 

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The following table provides a reconciliation for the years ended December 31, 2013, 2012 and 2011, respectively, between net income attributable to the Company and diluted earnings per share calculated in accordance with GAAP to the Adjusted Earnings Measures, which are shown net of tax (dollars in thousands, except per share data):

 

      Year Ended December 31,  
      2013     2012      2011  
     $     Per
Diluted

Share(a)
    $      Per
Diluted

Share(a)
     $      Per
Diluted

Share(a)
 

Net income and diluted earnings per share attributable to Cash America International, Inc.

   $ 142,528     $ 4.66     $ 107,470      $ 3.42      $ 135,963      $ 4.25  

Adjustments (net of tax):

               

Texas Consumer Loan Store Closures(b)

     865       0.03       -        -        -        -  

Loss on Debt Extinguishment(c)

     382       0.01       -        -        -        -  

Regulatory Penalty(d)

     5,000       0.16       -        -        -        -  

2013 Litigation Settlement(e)

     11,340       0.37       -        -        -        -  

Tax benefit related to Creazione Deduction(f)

     (33,201     (1.09     -        -        -        -  

Charges related to withdrawn proposed Enova IPO(g)

     -       -       2,424        0.07        -        -  

Charges related to the Mexico Reorganization(h)

     -       -       25,421        0.81        -        -  

Charges related to Ohio Adjustment and Ohio Reimbursement Program(i)

     (3,209     (0.10     8,442        0.27        -        -  

Adjusted net income and diluted earnings per share attributable to the Company

     123,705       4.04       143,757        4.57        135,963        4.25  

Other adjustments (net of tax):

               

Intangible asset amortization

     3,582       0.12       2,791        0.09        3,905        0.12  

Non-cash equity-based compensation

     3,092       0.10       3,007        0.10        3,064        0.10  

Convertible debt non-cash interest and issuance cost amortization

     2,493       0.09       2,386        0.07        2,214        0.07  

Foreign currency transaction loss

     759       0.02       196        0.01        786        0.02  

Adjusted earnings and adjusted earnings per share

   $ 133,631     $ 4.37     $ 152,137      $ 4.84      $ 145,932      $ 4.56  

 

(a) 

Diluted shares are calculated by giving effect to the potential dilution that could occur if securities or other contracts to issue common shares were exercised and converted into common shares during the period.

(b) 

For the year ended December 31, 2013, represents charges related to the Texas Consumer Loan Store Closures of $1.4 million, net of tax benefit of $0.5 million.

(c) 

For the year ended December 31, 2013, represents charges related to the Debt Extinguishment of $0.6 million, net of tax benefit of $0.2 million.

(d) 

For the year ended December 31, 2013, represents the amount paid in connection with the Regulatory Penalty, which is nondeductible for tax purposes.

(e) 

For the year ended December 31, 2013, represents charges related to the 2013 Litigation Settlement of $18.0 million, net of tax benefit of $6.7 million.

(f) 

For the year ended December 31, 2013, represents an income tax benefit related to the Creazione Deduction.

(g) 

For the year ended December 31, 2012, represents charges directly related to the withdrawn Enova IPO of $3.9 million, net of tax benefit of $1.5 million.

(h) 

For the year ended December 31, 2012, represents charges related to the Mexico Reorganization of $28.9 million, net of tax benefit of $1.2 million and noncontrolling interest of $2.3 million.

(i) 

For the year ended December 31, 2013, represents the Ohio Adjustment of $5.0 million, net of tax provision of $1.8 million. For the year ended December 31, 2012, represents $13.4 million charges, net of tax benefit of $5.0 million, related to the Ohio Reimbursement Program.

 

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Adjusted EBITDA

The table below shows adjusted EBITDA, a non-GAAP measure that the Company defines as earnings excluding depreciation, amortization, interest, foreign currency transaction gains or losses, loss on extinguishment of debt, equity in earnings or loss of unconsolidated subsidiary, taxes and including the net income or loss attributable to noncontrolling interests. Management believes adjusted EBITDA is used by investors to analyze operating performance and evaluate the Company’s ability to incur and service debt and its capacity for making capital expenditures. Adjusted EBITDA is also useful to investors to help assess the Company’s estimated enterprise value. In addition, management believes that the adjustments shown below, especially the adjustments for the Texas Consumer Loan Store Closures, the Regulatory Penalty, the 2013 Litigation Settlement, the withdrawn proposed Enova IPO, the Mexico Reorganization and the Ohio Adjustment and Ohio Reimbursement Program, are useful to investors in order to allow them to compare the Company’s financial results during the periods shown without the effect of each of these income and expense items. The computation of adjusted EBITDA as presented below may differ from the computation of similarly-titled measures provided by other companies (dollars in thousands):

 

     Year Ended
December 31,
 
     2013     2012     2011  

Net income attributable to Cash America International, Inc.

   $ 142,528     $ 107,470     $ 135,963  

Adjustments:

      

Texas Consumer Loan Store Closures(a)

     1,373      

Regulatory Penalty(b)

     5,000      

2013 Litigation Settlement(c)

     18,000      

Charges related to withdrawn proposed Enova IPO(d)

     -       3,879       -  

Charges related to Mexico Reorganization(e)

     -       28,873       -  

Charges related to Ohio Adjustment and Ohio Reimbursement Program(f)

     (5,000     13,400       -  

Depreciation and amortization expenses(g)

     73,092       62,864       54,149  

Interest expense, net

     36,245       28,987       25,447  

Foreign currency transaction loss

     1,205       313       1,265  

Loss on Debt Extinguishment

     607       -       -  

Equity in loss of unconsolidated subsidiary

     136       295       104  

Provision for income taxes(h)

     30,754       77,495       82,360  

Net income (loss) attributable to the noncontrolling interest(i)

     308       (5,806     (797

Adjusted EBITDA

   $ 304,248     $ 317,770     $ 298,491  

Adjusted EBITDA margin calculated as follows:

      

Total revenue

   $ 1,797,226     $ 1,800,430     $ 1,583,064  

Adjusted EBITDA

     304,248       317,770       298,491  

Adjusted EBITDA as a percentage of total revenue

     16.9     17.6     18.9

 

(a) 

Represents charges related to the Texas Consumer Loan Store Closures of $1.4 million, before tax benefit of $0.5 million.

(b) 

Represents charges for the Regulatory Penalty, which is nondeductible for tax purposes.

(c) 

Represents charges related to the 2013 Litigation Settlement of $18.0 million, before tax benefit of $6.7 million.

(d) 

Represents charges directly related to the withdrawn Enova IPO, before tax benefit of $1.5 million.

(e) 

Represents charges related to the Mexico Reorganization, before a tax benefit of $1.2 million and noncontrolling interest of $2.3 million. Includes $12.6 million and $7.2 million of depreciation and amortization expenses and charges for the recognition of a deferred tax asset valuation allowance, respectively, as noted in (g) and (h) below.

(f) 

For the year ended December 31, 2013, represents the Ohio Adjustment of $5.0 million, before tax provision of $1.8 million. For the year ended December 31, 2012, represents charges related to the Ohio Reimbursement Program, before tax benefit of $5.0 million.

(g) 

Excludes $0.2 million and $12.6 million of depreciation and amortization expenses for the years ended December 31, 2013 and 2012, respectively, which are included in “Texas Consumer Loan Store Closures” and “Charges related to the Mexico Reorganization” for the respective periods.

(h) 

For the year ended December 31, 2013, includes an income tax benefit of $33.2 million related to the Creazione Deduction and tax effects for adjustments noted in (a), (c) and (f) above. For the year ended December 31, 2012, excludes a $7.2 million charge for the recognition of a deferred tax asset valuation allowance which is included in “Charges related to the Mexico Reorganization” in the table above and includes an income tax benefit related to the Mexico Reorganization of $1.2 million.

(i) 

For the year ended December 31, 2012, includes $2.3 million of noncontrolling interests related to the Mexico Reorganization.

 

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YEAR ENDED 2013 COMPARED TO YEAR ENDED 2012

 

Pawn Lending Activities

Pawn lending activities consist of pawn loan fees and service charges from the retail services segment during the period and the profit on disposition of collateral from forfeited pawn loans, as well as the sale of merchandise acquired from customers directly or from third parties.

The following table sets forth selected data related to the Company’s pawn lending activities as of and for the years ended December 31, 2013 and 2012 (dollars in thousands except where otherwise noted):

 

     As of December 31,  
     2013     2012     Change     % Change  

Ending pawn loan balances

        

Domestic retail services

   $ 256,772     $ 240,573     $ 16,199       6.7 

Foreign retail services

     4,376       4,067       309       7.6 

Consolidated pawn loan balances

   $ 261,148     $ 244,640     $ 16,508       6.7 

Ending merchandise balance, net

        

Domestic retail services

   $ 203,823     $ 161,655     $ 42,168       26.1 

Foreign retail services

     5,076       5,754       (678     (11.8 )% 

Consolidated merchandise balance, net

   $ 208,899     $ 167,409     $ 41,490       24.8 
     Year Ended December 31,  
     2013     2012     Change     % Change  

Pawn loan fees and service charges

        

Domestic retail services

   $ 304,511     $ 288,161     $ 16,350       5.7 

Foreign retail services

     7,288       12,768       (5,480     (42.9 )% 

Consolidated pawn loan fees and service charges

   $ 311,799     $ 300,929     $ 10,870       3.6 

Average pawn loan balance outstanding

        

Domestic retail services

   $ 233,166     $ 225,066     $ 8,100       3.6 

Foreign retail services

     4,943       12,055       (7,112     (59.0 )% 

Consolidated average pawn loans outstanding

   $ 238,109     $ 237,121     $ 988       0.4 

Amount of pawn loans written and renewed

        

Domestic retail services

   $ 958,542     $ 916,215     $ 42,327       4.6 

Foreign retail services

     56,120       124,263       (68,143     (54.8 )% 

Consolidated amount of pawn loans written and renewed

   $ 1,014,662     $ 1,040,478     $ (25,816     (2.5 )% 

Average amount per pawn loan (in ones)

        

Domestic retail services

   $ 127     $ 131     $ (4     (3.1 )% 

Foreign retail services

   $ 87     $ 88     $ (1     (1.1 )% 

Consolidated average amount per pawn loan (in ones)

   $ 124     $ 124     $ -       -

Annualized yield on pawn loans

        

Domestic retail services

     130.6     128.0    

Foreign retail services

     147.4     105.9    

Consolidated annualized yield on pawn loans

     130.9     126.9                

Gross profit margin on disposition of merchandise

        

Domestic retail services

     31.6     33.5    

Foreign retail services

     13.3     12.0    

Consolidated gross profit margin on disposition of merchandise

     31.0     32.1                

Merchandise turnover

        

Domestic retail services

     2.3       2.9      

Foreign retail services

     2.8       3.9      

Consolidated merchandise turnover

     2.4       3.0                  

 

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Pawn Loan Fees and Service Charges

Consolidated pawn loan balances as of December 31, 2013 were $261.1 million, which was $16.5 million higher than the balances as of December 31, 2012, primarily due to an increase in pawn loan balances from acquisitions in the Company’s domestic pawn operations.

Domestic Pawn Loan Balances

The average balance of domestic pawn loans outstanding during 2013 increased by $8.1 million, or 3.6%, compared to 2012, primarily due to an increase in the loan balances as a result of the addition of 81 pawn lending locations, net of closures, through acquisitions and de novo store growth since 2012. The increase was partially offset by lower average pawn loan balances in same-store domestic retail services locations, which decreased 3.6% in 2013 compared to 2012. Management believes this decrease is primarily attributable to a reduction in demand for pawn loans by customers. The average amount per loan in domestic pawn operations decreased to $127 in 2013 from $131 in 2012 and was influenced by a greater mix of pawn loans being collateralized by non-jewelry merchandise, which generally have a lower average loan amount than loans collateralized by jewelry.

Domestic pawn loan fees and service charges increased $16.4 million, or 5.7%, to $304.5 million in 2013 compared to 2012. The increase is primarily due to higher pawn loan yields and higher average domestic pawn loan balances during 2013. The increase in pawn loan yield was primarily due to a greater mix of pawn loans in markets with higher statutory lending rates on pawn loans and lower forfeiture rates. The increase in average pawn loan balances is primarily due to acquisitions and de novo store growth in the Company’s domestic pawn operations.

Foreign Pawn Loan Balances

The average balance of foreign pawn loans outstanding during 2013 decreased by $7.1 million, or 59.0%, compared to 2012. The decrease was mainly due to the net closure of 148 pawn lending locations in 2012 as part of the Mexico Reorganization. Consequently, foreign pawn loan fees and service charges decreased $5.5 million, or 42.9%, to $7.3 million in 2013 compared to 2012. However, the annualized yield on pawn loans increased from 105.9% in 2012 to 147.4% in 2013, primarily due to the greater mix in 2013 of general merchandise pawn loans, which have a higher yield than jewelry-based pawn loans in the Company’s foreign pawn operations.

Proceeds From Disposition of Merchandise

Profit from the disposition of merchandise represents the proceeds received from the disposition of merchandise in excess of the cost of disposed merchandise, which is the Company’s cost basis in the pawn loan or the amount paid for purchased merchandise. Retail sales include the sale of jewelry and general merchandise direct to consumers through the Company’s domestic and foreign retail services locations or over the internet through auction and other similar sites. Commercial sales include the sale of refined gold, platinum, silver and diamonds to brokers or manufacturers. The following table summarizes the proceeds from the disposition of merchandise and the related profit for the years ended December 31, 2013 and 2012 (dollars in thousands):

 

     Year Ended December 31,  
     2013     2012  
    

 

Retail

    Commercial     Total     Retail     Commercial     Total  

Proceeds from disposition

   $     427,644     $     167,795     $     595,439     $     391,566     $     312,201     $     703,767  

Gross profit on disposition

   $ 151,757     $ 33,069     $ 184,826     $ 144,095     $ 81,493     $ 225,588  

Gross profit margin

     35.5      19.7      31.0      36.8      26.1      32.1 

Percentage of total gross profit

     82.1      17.9      100.0      63.9      36.1      100.0 

As the table above indicates, the Company is placing a greater emphasis on retail disposition of merchandise in its retail services locations and de-emphasizing the commercial disposition of merchandise due to lower market prices for pure gold. Management expects this trend to continue and will focus on the aggregate profit on the disposition of merchandise. This shift is expected to result in higher levels of merchandise available for disposition and a decrease in the inventory turnover ratio as more goods will be available for sale in retail services locations.

 

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The total proceeds from disposition of merchandise decreased $108.3 million, or 15.4%, in 2013 compared to 2012. Total gross profit from the disposition of merchandise decreased $40.8 million, or 18.1%, during 2013 compared to 2012. The overall gross profit margin percentage decreased to 31.0% in 2013 compared to 32.1% in 2012, primarily due to a decrease in gross profit margin on commercial sales. The consolidated merchandise turnover decreased to 2.4 times during 2013 compared to 3.0 times in 2012, primarily due to management’s decision to emphasize retail disposition activity rather than the Company’s recent practice of disposing of a higher volume of merchandise through commercial sales. Commercial sales typically have a higher turnover rate than retail sales.

Proceeds from retail dispositions of merchandise increased $36.1 million, or 9.2%, during 2013 compared to 2012. Proceeds from retail dispositions in domestic retail operations increased $42.9 million, primarily due to management’s emphasis on retail disposition activity and the addition of retail services locations through acquisitions and de novo store growth. Offsetting this increase was a $6.8 million decrease in retail sales proceeds from foreign retail operations, mainly due to the closure in 2012 of pawn lending locations in Mexico as part of the Mexico Reorganization.

Gross profit from retail dispositions increased to 82.1% of total gross profit in 2013 compared to 63.9% in 2012, primarily due to the shift to emphasize more retail disposition activity over commercial sales activity. Consolidated gross profit from retail dispositions increased $7.7 million, composed of a $10.2 million increase from domestic operations, offset by a $2.5 million decrease from foreign operations. Total retail gross profit margin decreased to 35.5% in 2013 compared to 36.8% in 2012, primarily due to management’s discounting of merchandise to encourage retail sales activity.

Proceeds from commercial dispositions decreased $144.4 million, or 46.3%, during 2013 compared to 2012. Proceeds from commercial dispositions from domestic operations decreased by $123.3 million, primarily due to a decrease in the volume of gold sold as part of an effort to place a greater emphasis on retail disposition activity, decreases in the market price of gold sold and the volume of jewelry forfeitures of collateral and jewelry purchased directly from customers. Foreign operations contributed $21.1 million of the decrease, primarily due to the closure of pawn lending locations in Mexico as part of the Mexico Reorganization. Consolidated gross profit from commercial dispositions decreased $48.4 million, mainly due to lower gross profit in domestic operations. The decrease in consolidated gross profit margin from commercial dispositions, which was 19.7% in 2013 compared to 26.1% in 2012, was mainly due to a lower volume of gold sold and a decrease in the market price of gold sold.

In future periods, management expects the ratio of commercial sales to total sales to remain consistent with current levels as part of the Company’s initiative to increase retail sales of jewelry in its retail services locations. Management expects to experience lower levels of gross profit margin on retail dispositions, particularly in some categories such as consumer electronics, which could reduce retail gross profit margins in future periods. Management also expects gross profit margin on commercial dispositions to be slightly lower than current levels in future periods, mainly due to lower prevailing market prices for gold compared to the prior year. The combination of these factors is expected to lead to lower overall gross profit margin in future periods.

 

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The table below summarizes the age of merchandise held for disposition related to the Company’s pawn operations before valuation allowance of $0.9 million as of both December 31, 2013 and 2012, respectively (dollars in thousands):

 

         As of December 31,  
         2013           2012  
          Amount      %           Amount      %  

Jewelry – held for one year or less

     $   116,256        55.4         $ 99,466        59.1  

Other merchandise – held for one year or less

         79,851        38.1             59,914        35.6  

Total merchandise held for one year or less

         196,107        93.5             159,380        94.7  

Jewelry – held for more than one year

       6,734        3.2           3,283        2.0  

Other merchandise – held for more than one year

         7,007        3.3             5,597        3.3  

Total merchandise held for more than one year

         13,741        6.5             8,880        5.3  

Total merchandise held for disposition

       $   209,848        100.0           $ 168,260        100.0  

Consumer Loan Activities

Consumer Loan Fees

Consumer loan fees increased $96.7 million, or 12.4%, to $878.2 million in 2013 compared to $781.5 million in 2012. The increase in consumer loan fees was primarily due to growth in consumer loan balances in the e-commerce segment, with domestic e-commerce operations contributing $61.7 million and foreign e-commerce operations contributing $43.6 million of the consolidated increase. Offsetting the increase from the e-commerce segment was an $8.6 million decrease in consumer loan fees in the retail services segment, primarily due to a decrease in consumer loan demand in the Company’s retail services locations and the Texas Consumer Loan Store Closures. See “General—Recent Developments—2013 Business Developments—Closure of Short-term Consumer Loan Retail Service Locations in Texas” for further discussion.

Consumer loan fees from the foreign component of the e-commerce segment were 48.4% of consumer loan fees for the e-commerce segment and 42.2% of consolidated consumer loan fees in 2013, compared to 49.6% of consumer loan fees for the e-commerce segment and 41.8% of consolidated consumer loan fees in 2012.

Consumer Loan Loss Provision

The consumer loan loss provision increased $35.0 million, or 11.1%, to $351.3 million in 2013 from $316.3 million in 2012, primarily due to the growth and the composition of the consumer loan portfolio in the Company’s domestic and foreign e-commerce operations. The loss provision as a percentage of consumer loan fees decreased slightly to 40.0% in 2013 from 40.5% in 2012, primarily because the portfolios had a higher percentage of customers with established payment histories during 2013 as compared to 2012. New customers tend to have a higher risk of default than customers with a history of successfully repaying loans. Management expects the loss provision as a percentage of fees will continue to be influenced by the mix of new and existing customers and the mix of outstanding loan products.

 

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The following table sets forth interest and fees on consumer loans by product type and segment, and the related loan loss provision for the years ended December 31, 2013 and 2012 (dollars in thousands):

 

     Year Ended December 31,  
     2013     2012  
     Short-
term loans
    Line of
credit
accounts
    Installment
loans
    Total     Short-term
loans
    Line of
credit
accounts
    Installment
loans
    Total  

Retail services

   $ 100,146     $ -     $ 13,065     $ 113,211     $ 109,972     $ -     $ 11,920     $ 121,892  

E-commerce

                

Domestic

     185,522       118,963       89,987       394,472       202,537       73,572       56,643       332,752  

Foreign

     204,184       51,533       114,783       370,500       257,256       -       69,620       326,876  

Total E-commerce

     389,706       170,496       204,770       764,972       459,793       73,572       126,263       659,628  

Consumer loan fees

   $ 489,852     $ 170,496     $ 217,835     $ 878,183     $ 569,765     $ 73,572     $ 138,183     $ 781,520  

Less: consumer loan loss provision

     163,470       74,306       113,479       351,255       202,325       34,793       79,176       316,294  

Consumer loan fees, net loss provision

   $ 326,382     $ 96,190     $ 104,356     $ 526,928     $ 367,440     $ 38,779     $ 59,007     $ 465,226  

Year-over-year change—$

   $ (41,058   $ 57,411     $ 45,349     $ 61,702     $ 37,357     $ 16,014     $ 38,897     $ 92,268  

Year-over-year change—%

     (11.2 %)      148.0     76.9     13.3     11.3     70.3     193.4     24.7

Consumer loan loss provision as a % of consumer loan fees

     33.4     43.6     52.1     40.0     35.5     47.3     57.3     40.5

Combined Consumer Loans

In addition to reporting consumer loans owned by the Company and consumer loans guaranteed by the Company, which are either GAAP items or disclosures required by GAAP, the Company has provided combined consumer loans, which is a non-GAAP measure. In addition, the Company has reported consumer loans written and renewed, which is statistical data that is not included in the Company’s financial statements.

Management believes these non-GAAP measures provide investors with important information needed to evaluate the magnitude of potential loan losses and the opportunity for revenue performance of the consumer loan portfolio on an aggregate basis. Management also believes that the comparison of the aggregate amounts from period to period is more meaningful than comparing only the amounts reflected on the Company’s balance sheet since both revenue and the loss provision for loans are impacted by the aggregate amount of loans owned by the Company and those guaranteed by the Company as reflected in its financial statements.

Consumer Loan Balances

The outstanding combined portfolio balance of consumer loans, net of allowances and liability for estimated losses, increased $64.0 million, or 18.3%, to $414.7 million at December 31, 2013 from $350.7 million at December 31, 2012, primarily due to increased demand for line of credit and installment loan products from the e-commerce segment in both domestic and foreign markets, partially offset by a decrease in demand for short-term loans in the retail services and e-commerce segments. Management expects the loan balances in the line of credit account and installment loan products to continue to comprise a larger percentage of the total consumer loan portfolio, due to customer’s preference for these products and the higher average amount per loan of installment loans relative to short-term loans and line of credit account products.

The combined consumer loan balance includes $446.7 million and $375.1 million at December 31, 2013 and 2012, respectively, of Company-owned consumer loan balances before the allowance for losses of $87.9 million and $85.7 million provided in the consolidated financial statements for December 31, 2013 and 2012, respectively. The combined consumer loan balance also includes $59.0 million and $64.7 million at December 31, 2013 and 2012, respectively, of consumer loan balances that are guaranteed by the Company, which are not included in the Company’s financial statements, before the liability for estimated losses of $3.1 million and $3.5 million provided in the consolidated financial statements for December 31, 2013 and 2012, respectively.

 

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The following table summarizes consumer loan balances outstanding as of December 31, 2013 and 2012 (dollars in thousands):

 

     As of December 31,  
     2013     2012  
     Company
Owned(a)
    Guaranteed
by the
Company(a)
    Combined(b)     Company
Owned
(a)
    Guaranteed
by the
Company
(a)
    Combined(b)  

Ending consumer loan balances:

            

Retail Services

            

Short-term loans

   $         49,856     $         4,900     $         54,756     $         52,171     $         7,134     $         59,305  

Installment loans

     9,787       12,639       22,426       11,246       9,395       20,641  

Total Retail Services, gross

     59,643       17,539       77,182       63,417       16,529       79,946  

E-Commerce

            

Domestic

            

Short-term loans

     33,494       41,411       74,905       38,227       44,261       82,488  

Line of credit accounts

     66,247       -       66,247       42,700       -       42,700  

Installment loans

     76,770       -       76,770       45,996       -       45,996  

Total Domestic, gross

     176,511       41,411       217,922       126,923       44,261       171,184  

Foreign

            

Short-term loans

     47,886       -       47,886       108,899       3,946       112,845  

Line of credit accounts

     59,555       -       59,555       -       -       -  

Installment loans

     103,112       -       103,112       75,882       -       75,882  

Total Foreign, gross

     210,553       -       210,553       184,781       3,946       188,727  

Total E-Commerce, gross

     387,064       41,411       428,475       311,704       48,207       359,911  

Total ending loan balance, gross

     446,707       58,950       505,657       375,121       64,736       439,857  

Less: Allowance and liabilities for losses

     (87,866     (3,080     (90,946     (85,703     (3,498     (89,201

Total ending loan balance, net

   $ 358,841     $ 55,870     $ 414,711     $ 289,418     $ 61,238     $ 350,656  

Allowance and liability for losses as a % of consumer loan balances, gross

     19.7     5.2     18.0     22.8     5.4     20.3

 

(a) 

GAAP measure. The consumer loan balances guaranteed by the Company represent loans originated by third-party lenders through the CSO programs, so these balances are not recorded in the Company’s financial statements. However, the Company has established a liability for estimated losses in support of its guarantee of these loans, which is reflected in the table above and included in its consolidated balance sheets.

(b) 

Except for allowance and liability for estimated losses, amounts represent non-GAAP measures.

Consumer Loans Written and Renewed

The amount of combined consumer loans written and renewed was $3.44 billion in 2013, an increase of $26.3 million from $3.42 billion in 2012. The Company is experiencing a slower rate of growth in short-term consumer loans written and renewed than historically reported, as installment loans and line of credit balances comprise a greater percentage of consumer loans due to customers’ preference for these products over the Company’s short-term consumer loan product. Management believes that the consumer loans written and renewed statistics are becoming less meaningful than the change in the balances of consumer loans outstanding, which have increased from 2012 to 2013 and will influence revenue in future periods.

 

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The following table summarizes the consumer loans written and renewed for the years ended December 31, 2013 and 2012:

 

     Year Ended December 31,  
     2013      2012  
     Company
Owned(a)
     Guaranteed
by the
Company(a)(b)
     Combined(a)      Company
Owned
(a)
     Guaranteed
by the
Company
(a)(b)
     Combined(a)  

Amount of consumer loans written and renewed (dollars in thousands):

                 

Retail Services

                 

Short-term loans

   $     712,253      $     104,236      $     816,489      $     743,575      $     145,221      $     888,796  

Installment loans

     7,488        21,734        29,222        7,723        17,902        25,625  

Total Retail Services

     719,741        125,970        845,711        751,298        163,123        914,421  

E-Commerce

                 

Domestic

                 

Short-term loans

     302,353        708,828        1,011,181        331,754        747,533        1,079,287  

Line of credit accounts

     163,805        -        163,805        116,360        -        116,360  

Installment loans

     155,068        -        155,068        89,598        -        89,598  

Total Domestic

     621,226        708,828        1,330,054        537,712        747,533        1,285,245  

Foreign

                 

Short-term loans

     820,243        14,572        834,815        1,010,334        72,592        1,082,926  

Line of credit accounts

     147,844        -        147,844        -        -