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EX-23.1 - CONSENT OF PRICEWATERHOUSECOOPERS LLP - Enova International, Inc.d228493dex231.htm
Table of Contents

As filed with the Securities and Exchange Commission on September 15, 2011

Registration No. 333-            

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

 

 

FORM S-1

REGISTRATION STATEMENT

UNDER

THE SECURITIES ACT OF 1933

 

 

ENOVA INTERNATIONAL, INC.

(Exact Name of Registrant as Specified in its Charter)

 

Delaware   6141   45-3190813

(State or Other Jurisdiction of

Incorporation or Organization)

 

(Primary Standard Industrial

Classification Code Number)

 

(I.R.S. Employer

Identification Number)

200 West Jackson Blvd.

Chicago, Illinois 60606

(312) 568-4200

(Address, including zip code and telephone number, including area code, of registrant’s principal executive offices)

 

 

Timothy S. Ho

President and Chief Executive Officer

200 West Jackson Blvd.

Chicago, Illinois 60606

(312) 568-4200

(Name, address, including zip code and telephone number, including area code, of agent for service)

 

 

Copies to:

 

L. Steven Leshin

Douglas M. Berman

Hunton & Williams LLP

1445 Ross Avenue, Suite 3700

Dallas, Texas 75202

(214) 979-3000

 

Maurice Blanco

Davis Polk & Wardwell LLP

450 Lexington Avenue

New York, New York 10017

(212) 450-4000

 

 

Approximate date of commencement of proposed sale to the public: As soon as practicable after this registration statement becomes effective.

If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, as amended, check the following box.  ¨

If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering.  ¨

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 the definitions of “large accelerated filer,” “accelerated filer,” “non-accelerated filer,” or “smaller reporting company” in Rule 12b-2 of the Exchange Act.

 

Large accelerated filer     ¨         Accelerated filer      ¨   
Non-accelerated filer (do not check if a smaller reporting company)     x         Smaller reporting company      ¨   

CALCULATION OF REGISTRATION FEE

 

 

Title of Each Class of Securities

to be Registered

  Proposed Maximum Aggregate
Offering Price(1)
  Amount of Registration Fee

Common Stock, $0.00001 par value per share

  $500,000,000   $58,050

 

 

(1)   Estimated solely for purposes of calculating the registration fee in accordance with Rule 457(o) under the Securities Act of 1933, as amended. Includes offering price of shares that the underwriters have the option to purchase to cover over-allotments, if any.

 

 

The Registrant hereby amends this Registration Statement on such date or dates as may be necessary to delay its effective date until the Registrant shall file a further amendment which specifically states that this Registration Statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, or until the Registration Statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.

 

 

 


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The information in this preliminary prospectus is not complete and may be changed. We and the selling stockholder may not sell these securities until the registration statement filed with the Securities and Exchange Commission is effective. This preliminary prospectus is not an offer to sell these securities and we and the selling stockholder are not soliciting offers to buy these securities in any jurisdiction where the offer or sale is not permitted.

 

 

PRELIMINARY PROSPECTUS   Subject to Completion   September 15, 2011

 

                     Shares

LOGO

Common Stock

 

 

This is an initial public offering of the common stock of Enova International, Inc. No public market currently exists for our common stock. We are offering              shares of our common stock, and Cash America International, Inc., is offering              shares of our common stock. Enova International, Inc. is currently a wholly-owned subsidiary of Cash America International, Inc. We will not receive any proceeds from the common stock sold by Cash America International, Inc. We expect the initial public offering price to be between $                     and $                     per share.

We intend to apply to list our common stock on the New York Stock Exchange under the symbol “ENVA.”

Investing in our common stock involves a high degree of risk. Before buying any shares, you should carefully read the discussion of material risks of investing in our common stock in “Risk factors” beginning on page 14 of this prospectus.

Neither the Securities and Exchange Commission nor any state securities commission has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.

 

      Per Share      Total  
Public offering price    $                          $              
Underwriting discounts and commissions    $                          $              
Proceeds, before expenses, to us    $                          $              
Proceeds, before expenses, to Cash America International, Inc.    $                          $              

The underwriters may also purchase up to an additional              shares of our common stock from Cash America International, Inc. at the public offering price, less the underwriting discounts and commissions payable by us, to cover over-allotments, if any, within 30 days from the date of this prospectus. If the underwriters exercise this option in full, the total underwriting discounts and commissions will be $                    .

The underwriters are offering the common stock as set forth under “Underwriting.” Delivery of the shares will be made on or about                     , 2011.

 

UBS Investment Bank    Barclays Capital    Jefferies

 

 

 

JMP Securities    Raymond James    Wells Fargo Securities      William Blair & Company   

 

Keefe, Bruyette & Woods    Roth Capital Partners    Sterne Agee


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We, the underwriters and Cash America International, Inc. have not authorized anyone to provide you with any information other than that contained in this prospectus or in any free writing prospectus prepared by or on behalf of us, or to which we have referred you. We take no responsibility for, and can provide no assurance as to the reliability of, any other information that others may give you. We, the underwriters and Cash America International, Inc. are not making an offer to sell these securities in any jurisdiction where the offer or sale is not permitted. You should assume that the information contained in this prospectus is accurate only as of the date on the front cover of this prospectus. Our business, financial condition, results of operations and prospects may have changed since that date.

TABLE OF CONTENTS

 

 

Prospectus summary

    1   

The offering

    9   

Summary historical consolidated financial data

        11   

Risk factors

    14   

Special note regarding forward-looking statements

    39   

Use of proceeds

    41   

Dividend policy

    41   

Capitalization

    42   

Dilution

    43   

Selected historical consolidated financial data

    45   

Unaudited pro forma consolidated financial information

    48   

Management’s discussion and analysis of financial condition and results of operations

    54   

Business

    86   

Regulation and legal proceedings

     98   

Management

     107   

Executive compensation

     114   

Principal and selling stockholders

     144   

Our relationship with Cash America

     145   

Certain relationships and related transactions

     153   

Description of capital stock

     154   

Shares eligible for future sale

     158   

Certain U.S. federal tax considerations for non-U.S. holders

     160   

Underwriting (Conflicts of interest)

     164   

Legal matters

     172   

Experts

     172   

Where you can find more information

     172   

Index to consolidated financial statements

     F-1   

 

 

 

 

 


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Prospectus summary

This summary highlights information contained elsewhere in this prospectus. This summary does not contain all the information you should consider before buying our common stock. You should read the following summary together with the more detailed information appearing in this prospectus, including our consolidated financial statements and related notes, and our risk factors beginning on page 14, before deciding whether to purchase shares of our common stock.

Unless the context otherwise requires, we use the terms the “company,” “we,” “us” and “our” in this prospectus to refer to Enova International, Inc. and its subsidiaries on a consolidated basis. We use the term “Cash America” in this prospectus to refer to Cash America International, Inc., our parent company, and its subsidiaries on a consolidated basis, other than us. In this prospectus, when we refer to a “transaction,” we mean any transaction whereby a customer is provided an advance of credit, whether through direct funding of a loan originated by us, through a loan funded by an unaffiliated lender in connection with our credit services organization programs (which includes our finance brokerage activity in Australia) or through a micro line of credit advance originated by a third-party lender if we acquired a participation interest in such advance, and includes new loans, renewals and each advance on a line of credit. All references to $’s in this prospectus represent U.S. dollars, unless expressly stated otherwise.

OVERVIEW

We are a leading provider of online financial services to alternative credit consumers in the United States, United Kingdom, Australia and Canada, with over 60 million website page views and over $2.0 billion in credit extended in 2010. Our customers include the large and growing number of consumers who have bank accounts but use alternative financial credit services because of their limited access to more traditional consumer credit from banks, thrifts, credit card companies and other lenders. We believe our customers highly value our services as an important component of their personal finances because our services are convenient, quick and often less expensive than other available alternatives. We attribute the success of our business to our advanced and innovative technology systems, the proprietary analytical models we use to predict loan performance, our sophisticated customer acquisition programs and our dedication to customer service. We are currently a wholly-owned subsidiary of Cash America.

We use our flexible and scalable technology platform to process and complete customers’ transactions quickly and efficiently. In the first six months of 2011, we processed over 1.7 million transactions, and we continue to grow our loan portfolio and increase the number of customers we serve. Our highly customizable technology platform allows us to increase the variety and number of products and services we offer and to enter new markets quickly.

We were an early mover into online lending, launching our online business in 2004. We have developed a proprietary underwriting system based on data we have collected over our seven years of experience. This system employs advanced risk analytics to decide whether to approve loan transactions, to structure the amount and terms of the loans we offer and to speed product delivery. Our systems also monitor loan collection and portfolio performance data that we utilize to continually refine the analytical models and statistical measures used in making our credit, marketing and collection decisions.

We provide or arrange multiple types of lending products for consumers in four countries:

 

Ø  

Short-term consumer loans.    We offer single payment unsecured consumer loans in the United States, the United Kingdom, Australia and Canada. Generally, terms are seven to 45 days, loan amounts

 

 

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range from $50 to $2,400, depending on applicable law, and customers promptly receive funds deposited in their bank account in exchange for a pre-authorized debit from their accounts. We also offer lines of credit of up to $1,800 in several U.S. states, depending on applicable law, which allow customers to draw on the line of credit in increments of their choosing, up to their credit limit.

 

Ø  

Installment consumer loans.    We offer unsecured installment loans in the United Kingdom and in several U.S. states. Generally, terms are between four and 36 months, and loan amounts range from $75 to $2,700, depending on applicable law.

We have achieved significant growth since we began our online business as we have expanded both our product offerings and the geographic markets we serve. We measure our business using several financial and operating metrics. Our key metrics include the number of new customers and total number of customer transactions, in addition to other measures described under “Management’s discussion and analysis of financial condition and results of operations—Measurement of the Business.” The following charts show our growth in the number of new customers and total number of customer transactions completed in each year from 2006 through 2010, excluding the new customers and customer transactions in 2008, 2009 and 2010 related to a micro line of credit, or MLOC, service that ended in October 2010 as described further under “Management’s discussion and analysis of financial condition and results of operations—Our Products.”

LOGO

From 2007 to 2010, our revenue increased from $184.7 million to $378.3 million, which represents a 27% compound annual growth rate, or CAGR. From 2007 to 2010, our Adjusted EBITDA increased from $26.9 million to $62.9 million, which represents a 33% CAGR. See “Adjusted EBITDA” for a definition of Adjusted EBITDA and a reconciliation of Adjusted EBITDA to net income.

We currently operate in the United States and internationally, and we believe there are significant market opportunities in both. In 2010, we derived 73% of our revenue in the United States and 27% of our revenue internationally. For the six-month period ended June 30, 2011, we derived 56% of our revenue in the United States and 44% of our revenue internationally. We currently operate in the following countries:

 

Ø  

United States.    We began our online business in the United States in May 2004. As of the date of this prospectus, we operate in 32 states under the name CashNetUSA at www.cashnetusa.com.

 

Ø  

United Kingdom.    We operate in the United Kingdom under the names QuickQuid at www.quickquid.co.uk and Pounds to Pocket at www.poundstopocket.co.uk. We began our QuickQuid short-term consumer loan business in July 2007 and our Pounds to Pocket installment consumer loan business in September 2010.

 

Ø  

Australia.    We began our operations in Australia in May 2009, where we operate under the name DollarsDirect at www.dollarsdirect.com.au.

 

 

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Ø  

Canada.    We began our operations in Canada in October 2009. As of the date of this prospectus, we operate in the provinces of Ontario, British Columbia and Alberta under the name DollarsDirect at www.dollarsdirect.ca.

OUR INDUSTRY

The Internet has transformed how consumers shop for and acquire products and services. According to Frost & Sullivan, global Internet usage increased 75% from 2005 to 2010, and is expected to increase another 40% by the end of 2015. As Internet usage continues to increase, we expect consumer preference for online purchases to increase. In 2001, less than 30% of adults in the United States used the Internet to buy a product; by 2009, that figure had increased to more than 50%, according to Pew Research.

As a number of traditional financial services such as banking, bill payment and investing have become available online, a growing number of consumers are moving online to complete their financial transactions. According to Forrester Research, or Forrester, approximately 59% of U.S. adults banked online in 2010. This level of use highlights consumer acceptance of the Internet for conducting financial transactions and willingness to entrust financial information to online companies. We believe the increased acceptance of online financial services has led to the increased demand for online lending, the benefits of which include customer privacy, easy access, security, 24 hour per day availability, speed of funding and transparency of fees and interest.

We believe that many traditional financial service providers are unwilling or unable to serve our primary customer base due to the higher costs and risks associated with serving these consumers. Our customer base is comprised largely of individuals living in households that earn less than $75,000 or £40,000 annually in the United States and the United Kingdom, respectively. Based on our analysis of industry data, we believe our addressable markets are approximately 43 million and 15 million households in the United States and United Kingdom, respectively.

Demand for products like ours was highlighted by a recent paper from the National Bureau of Economic Research which found that almost half of the Americans surveyed reported that it is unlikely that they would be able to gain access to $2,000 to cover a financial emergency, even if given a month to do so. We believe consumers want access to fast and convenient credit from a reputable and trustworthy source.

OUR COMPETITIVE STRENGTHS

We believe that the following competitive strengths position us well for continued growth:

 

Ø  

Scalable and flexible technology platform.    Our proprietary and custom-designed technology platform is built for scalability and flexibility and is based on proven open source software. The technology platform was 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. The scalability and flexibility of our technology platform allows us to enter new markets and launch new products quickly, often within three to six months from conception to launch.

 

Ø  

Proprietary analytics and data.    We have developed a fully integrated decision engine that rapidly evaluates and makes credit determinations throughout the customer relationship, including marketing, underwriting, customer service and collections. Our proprietary models are built from 2.75 terabytes of internal data which includes several years of lending history and millions of transactions. We continually refine our underwriting system to manage default risk and to structure loan terms. We

 

 

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believe our system provides more predictive assessments of future loan behavior when compared to traditional credit assessments such as Fair Isaac Corporation, or FICO, scoring models.

 

Ø  

Focus on customer experience.    We believe that alternative credit consumers are not adequately served by other existing providers. To better serve these consumers, we established customer-focused business practices, including 24/7 customer service by phone, email, fax and web chat. We continuously work to improve customer satisfaction by evaluating information from website analytics, customer surveys, call center feedback and focus groups.

 

Ø  

Customer loyalty and brand recognition.    We believe we have established strong relationships with our customer base over the previous seven years. We were an early mover into online lending and have continued to invest in our brands to further increase visibility. We believe customers who wish to access credit again may return to us because of our dedication to customer service and our programs that benefit returning customers. In order to develop a comparable database of customers, we believe that competitors would need to incur high marketing and customer acquisition costs, overcome consumer brand loyalties and have sufficient capital to withstand higher early losses associated with unseasoned loan portfolios.

 

Ø  

Strong emphasis on regulatory and compliance structure.    We conduct our business in a highly regulated industry. We have devoted significant resources to comply with the laws that apply to us while we believe many of our online competitors have not. Consequently, such competitors may face increased regulatory and compliance risks. We have extensive experience in regulatory and legal compliance and have tailored our lending products and services to comply with the specific requirements of each of the jurisdictions in which we operate, including laws and regulations relating to fees, loan durations, loan amounts and disclosures. Our technology platform was designed to allow us to launch new products in compliance with applicable laws and regulations and with a focus on customer protection.

OUR STRATEGY

Our vision is to be the most trusted online alternative financial resource for hard working people internationally through world-class technology, analytics, operational excellence and customer support. The key elements of our strategy to deliver upon this vision include:

 

Ø  

Increase penetration in existing markets.    We believe that we have only reached a small number of the potential customers for our products and services in the markets in which we currently operate. We 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 us with loan applicants), traditional advertising and digital advertising. We also leverage our platform by offering online loans to consumers referred to us by certain bricks and mortar lending companies, including Cash America, further increasing penetration in markets we currently serve.

 

Ø  

Expand globally to reach new markets.    We intend to build on our global reach by entering new markets, particularly in Latin America and Europe. When pursuing geographic expansion, factors we consider include widespread Internet usage and government policies that promote the extension of credit. Our launch into the United Kingdom in 2007 and Australia and Canada in 2009 demonstrate that we can quickly and efficiently enter new markets. Our revenue from international operations has increased from $1.6 million in 2007, or 1% of our total revenue, to $102.0 million in 2010, or 27% of our total revenue. For the six-month period ended June 30, 2011, our revenue from international

 

 

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operations was $89.0 million, or 44% of our total revenue. We are currently exploring new international opportunities, including a micro line of credit product for consumers in Mexico.

 

Ø  

Introduce new products and services.    We plan to further penetrate existing markets and attract new categories of consumers not served by traditional lenders through the introduction of new products and services. We have introduced new products to expand our businesses from solely single payment consumer loans to installment and line of credit products, using our analytics expertise and our flexible and scalable technology platform. We will continue to develop additional solutions for our customer base with other innovative products.

 

Ø  

Continuous process improvement.    Our key areas of continuing focus are:

 

  Ø  

integrating new data sources to refine our predictive models, which is intended to improve the performance of our portfolio;

 

  Ø  

increasing loan volumes through efficient and cost effective marketing;

 

  Ø  

improving customer conversion across the application process; and

 

  Ø  

improving call center efficiency metrics.

OUR RELATIONSHIP WITH CASH AMERICA

We are currently a wholly-owned subsidiary of Cash America. In addition to our business, Cash America provides specialty financial services to individuals through retail services locations. Upon completion of this offering, Cash America will own     % of our outstanding shares of common stock (     % if the underwriters exercise their over-allotment option in full). Cash America has informed us that its objective is to own between 35% and 49% of our outstanding shares of common stock immediately following the offering to permit it to account for its investment in us using the equity method of accounting, and will not continue to consolidate our results of operations with its consolidated results of operations. Further, Cash America has informed us that it desires to establish a public market for our common stock and, by doing so, establish a market value of our business that is independent from the market value of Cash America’s common stock, and give us the ability to focus singularly on our business strategies while Cash America focuses on its strategy of expanding its storefront business and products in the United States and Latin America. As a result of its anticipated ownership of our common stock following this offering, Cash America will be our largest stockholder following the offering and will have significant influence in all matters submitted to the vote of our stockholders. Cash America has advised us that it has no present intention of selling its remaining shares of our common stock in the near-term following the expiration of the lock-up period described under “Underwriting.” However, Cash America, in its sole discretion, may decide to sell all or any portion of the remaining shares it owns at any time following the expiration or waiver of the lock-up period restrictions described under “Underwriting.”

OUR SEPARATION FROM CASH AMERICA

We were formed on September 7, 2011. On September 13, 2011, Cash America contributed to us all of the capital stock of the subsidiaries owned by it through which Cash America has engaged in its online financial services business prior to the contribution in exchange for 33 million shares of our common stock. We presently depend on Cash America for a number of administrative functions. Immediately prior to the completion of this offering, we also will enter into agreements with Cash America related to certain post-offering matters, including a separation agreement, a transition services agreement, a registration rights agreement, a tax sharing agreement, an employee matters agreement and a marketing and customer referral agreement. These agreements will be in effect as of the completion of this offering and will govern various interim and ongoing relationships between Cash America and us, including the extent and manner of our dependence on Cash America for administrative services following the completion of this offering.

 

 

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In addition, following completion of this offering, Cash America will continue to offer alternative financial services and other financial services to consumers through its retail services locations in markets served by us. We currently provide to Cash America underwriting and other analytical services for use in its alternative financial services business. Immediately prior to completion of this offering, we will enter into a credit scoring agreement with Cash America pursuant to which we will continue to provide our underwriting and analytical services to Cash America.

For more information regarding the agreements we will enter into with Cash America, see “Our relationship with Cash America.”

SUMMARY RISK FACTORS

Our business is subject to numerous risks and uncertainties that you should understand before making an investment decision. These risks are discussed more fully in the section entitled “Risk factors” beginning on page 14 of this prospectus. These include:

 

Ø  

Our products and services are subject to extensive regulation and supervision under various federal, state, local and foreign laws, ordinances and regulations. Failure to comply with applicable laws and regulations could subject us to regulatory enforcement action that could result in the assessment against us of civil, monetary or other penalties. The enactment, change or interpretation of applicable laws and regulations could have a material adverse effect on our business activities or effectively eliminate some of our current products and services in certain markets in which we operate.

 

Ø  

Adverse decisions in litigation or regulatory proceedings could cause us to change or eliminate our current or future product offerings, could require substantial management time and expenditures and could have a material adverse effect on our business.

 

Ø  

Judicial decisions, Consumer Financial Protection Bureau rule-making or amendments to the Federal Arbitration Act could render the arbitration agreements we use illegal or unenforceable.

 

Ø  

Media reports and public perception of consumer loans as being predatory or abusive could materially adversely affect our consumer loan business.

 

Ø  

We offer or arrange consumer loans over the Internet to customers in the United Kingdom, Australia and Canada. If political, regulatory or economic conditions deteriorate in any of these countries, our ability to continue offering or arranging consumer loans in such countries could be limited and could have a material adverse effect on our foreign operations. In particular, proposed legislation in Australia, if passed, could limit or restrict our ability to offer or arrange loans there and could cause us to exit that market.

 

Ø  

The concentration of our revenue in certain products and jurisdictions could adversely affect us.

 

Ø  

The failure of lead providers to continue to send us customer leads could have a material adverse effect on our business.

 

Ø  

The failure of third-party lenders to offer loans under our credit services organization programs or the failure of third party suppliers to maintain their products, services or support could have a material adverse effect on our revenues and earnings.

 

Ø  

Any increased restriction on the use or protection of personal data could affect our underwriting and have a material adverse impact on our business.

 

Ø  

A decreased demand for our products and alternative financial services and our failure to adapt to such decrease could adversely affect results of operations and financial condition.

 

Ø  

Our U.S. competitors’ use of other business models could have a material adverse effect on our business.

 

 

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Ø  

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 we offer, could adversely affect our results of operations.

 

Ø  

An interruption to, shutdown of or inability to access the facilities in which our Internet operations and other technology infrastructure reside could materially adversely affect our business, prospects, results of operations and financial condition.

 

Ø  

A security breach of our computer systems or fraudulent activity could interrupt or damage our operations or harm our reputation and subject us to liability if confidential customer information is misappropriated from our computer systems, which could have a material adverse effect on our business.

 

Ø  

Failure to manage our credit risk and allowance and liability for loan losses through our underwriting system may adversely affect our results of operations.

 

Ø  

Failure to manage the risk of impairment, the risk of interest rate fluctuation, the fluctuations in currency exchange rates and the operation of our anticipated credit facility could adversely affect our business.

 

Ø  

Our failure to maintain our technological edge or to protect our software and other proprietary intellectual property rights could put us at a disadvantage to our competitors and could have a material adverse effect on our business.

 

Ø  

The inability to retain our highly-skilled personnel or to hire additional personnel could hinder our ability to develop and successfully market our products and services and our business could be harmed.

 

Ø  

Our results as a separate, stand-alone company could be materially different from those portrayed in our historical financial results.

 

Ø  

Our separation from Cash America may adversely affect our business, and we may not achieve some or all of the expected benefits of the separation.

 

Ø  

Our separation agreement with Cash America requires us to assume the past, present and future liabilities related to our business and may be less favorable to us than if they had been negotiated with unaffiliated third parties.

CORPORATE INFORMATION

We were incorporated under the laws of the State of Delaware on September 7, 2011. Our principal executive offices are located at 200 West Jackson Blvd., Suite 2400, Chicago, IL 60606. Our telephone number is (312) 568-4200. Our website address is www.enovainternational.com. Information contained on or accessible from our websites is not incorporated by reference into this prospectus, and you should not consider information on our websites as part of this prospectus.

TRADEMARKS

CASHNETUSA® , QUICKQUID®, DOLLARSDIRECT, POUNDS TO POCKET and the “e” logo are our key trademarks, and are registered under applicable trademark laws. This prospectus contains references to our trademarks and service marks and to those belonging to other entities. Solely for convenience, trademarks and trade names referred to in this prospectus, including logos, artwork and other visual displays, may appear without the ® or ™ symbols, but such references are not intended to indicate that

 

 

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we will not assert our rights or the rights of the applicable licensor to these trademarks and trade names to the fullest extent under applicable law. We do not intend our use or display of other companies’ trade names, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other companies.

 

 

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The offering

 

Common stock offered by us

             shares

 

Common stock offered by Cash America

             shares

 

Underwriters’ option to purchase additional common stock from Cash America

             shares

 

Common stock to be held by Cash America immediately after completion of this offering

             shares

 

Common stock outstanding immediately after completion of this offering

             shares

 

Use of proceeds

We estimate that we will receive net proceeds from this offering of approximately $             million, assuming an initial offering price of $             , the midpoint of the range of prices set forth on the cover of this prospectus, and after deducting estimated underwriting discounts and commissions relating to the shares to be sold by us and estimated offering expenses. We intend to use the net proceeds that we receive from this offering to repay to Cash America all of our outstanding intercompany indebtedness (totaling approximately $353.2 million), including a $75.0 million dividend paid to Cash America in the form of a promissory note dated September 6, 2011. After repayment of the intercompany indebtedness due to Cash America, we do not expect any additional net proceeds of the offering to be available for use in our business. Additionally, we will not receive any of the proceeds from the sale of shares owned by Cash America to be sold in this offering, including any shares sold by Cash America pursuant to the underwriters’ over-allotment option, although we will bear the costs associated with the sale of these shares, other than underwriting discounts and commissions relating to the shares to be sold by Cash America.

 

Risk factors

Prior to making an investment decision, you should carefully consider all of the information in this prospectus and, in particular, you should evaluate the risk factors set forth under the caption “Risk factors” beginning on page 14.

 

Exchange listing

We intend to apply to list our common stock on the New York Stock Exchange under the symbol “ENVA.”

 

 

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Conflicts of interest

Cash America has informed us that it intends to use a portion of the proceeds it receives from this offering and from our repayment of outstanding intercompany indebtedness owing to Cash America to repay a portion of the amounts outstanding under its domestic line of credit. As a result of these payments, an affiliate of Wells Fargo Securities, LLC may receive a portion of the net proceeds from this offering. Accordingly, this offering will be conducted in compliance with the applicable provisions of Financial Industry Regulatory Authority, or FINRA, Rule 5121. See “Underwriting (Conflicts of interest).”

Unless we specifically state otherwise, all information in this prospectus regarding our common stock:

 

Ø  

assumes an offering price of $             per share, the midpoint of the price range reflected on the cover page of this prospectus;

 

Ø  

gives effect to the transactions described under “Our relationship with Cash America”;

 

Ø  

assumes no exercise by the underwriters of their over-allotment option to purchase additional shares of common stock from Cash America; and

 

Ø  

includes              shares of common stock to be issued to our executive officers, non-employee directors and other employees in connection with the completion of this offering, but excludes shares of common stock reserved for future issuance under our incentive plan.

 

 

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Summary historical consolidated financial data

The following tables present summary historical consolidated financial data for our business. You should read this information together with “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements, related notes and other financial information, each included elsewhere in this prospectus. The summary historical consolidated financial data in this section are not intended to replace the financial statements and are qualified in their entirety by the consolidated financial statements and related notes.

The summary consolidated income statement data for the six months ended June 30, 2011 and 2010 and consolidated balance sheet data as of June 30, 2011 have been derived from our unaudited consolidated financial statements and related notes appearing elsewhere in this prospectus which, in the opinion of our management, have been prepared on the same basis as the audited financial statements and include all adjustments necessary for fair statement of our operating results and financial position as of those dates and for those periods. The summary consolidated other data for the six months ended June 30, 2011 and 2010 was derived from our unaudited financial and operational records. Additional information on these measurements is contained in “Management’s discussion and analysis of financial condition and results of operations.” The summary historical financial information for the six months ended June 30, 2011 is not necessarily indicative of the results that may be expected for the year ending December 31, 2011 and our historical results are not necessarily indicative of our results for any future period.

We derived the summary historical consolidated income statement data for each of the three years in the period ended December 31, 2010 and consolidated balance sheet data as of December 31, 2010 and 2009 from our audited consolidated financial statements and the related notes appearing elsewhere in this prospectus. The summary historical consolidated balance sheet data as of December 31, 2008 was derived from our unaudited financial statements, which are not included in this prospectus. The summary consolidated other data for the years ended December 31, 2010, 2009 and 2008 was derived from our unaudited financial and operational records. Additional information on these measurements is contained in “Management’s discussion and analysis of financial condition and results of operations.”

 

Summary consolidated income      Six Months Ended June 30,        Year Ended December 31,  
statement data:          2011                  2010(1)            2010(1)      2009(1)      2008(1)(2)  
     (Unaudited)      (Audited)  
     (dollars in thousands, except per share data)  

Revenue

              

Domestic

   $ 114,272       $ 130,429       $ 276,295       $ 214,479       $ 200,263   

Foreign

     89,000         40,070         102,022         40,498         23,214   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total Revenue

     203,272         170,499         378,317         254,977         223,477   

Cost of Revenue

     76,690         70,822         164,957         109,174         107,170   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Gross Profit

   $ 126,582       $ 99,677       $ 213,360       $ 145,803       $ 116,307   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Income from Operations

   $ 38,621       $ 28,188       $ 54,369       $ 39,722       $ 42,212   

Net Income

     19,157         13,317         24,821         17,703         21,951   

Earnings per share

              

Basic

   $ 0.58       $ 0.40       $ 0.75       $ 0.54       $ 0.67   

Diluted

   $ 0.58       $ 0.40       $ 0.75       $ 0.54       $ 0.67   

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(1)   Results of operations for the years ended 2010, 2009 and 2008 and the six-month period ended June 30, 2010 include revenues and results of operations of our MLOC services business that ended in October 2010. See “Management’s discussion and analysis of financial information and results of operations” for further information concerning our former MLOC services business.

 

(2)   See Note 4 in the Notes to Consolidated Financial Statements for discussion of our acquisitions in 2008.

 

    As of June 30,     As of December 31,  
Summary consolidated balance sheet data:   2011     2010     2010     2009     2008(1)  
    (Unaudited)     (Audited)     (Unaudited)  
    (dollars in thousands)  

Cash

  $ 33,252      $ 32,911      $ 19,187      $ 27,261      $ 16,496   

Consumer loans, net

    108,648        74,559        90,355        60,787        43,320   

Total assets

    454,204        426,631        421,767        375,736        316,924   
         

Affiliate notes payable

    278,238        272,117        270,269        255,799        204,626   

Long-term liabilities

    312,032        295,205        293,309        274,086        213,682   

 

(1)   See Note 4 in the Notes to Consolidated Financial Statements for discussion of our acquisition in 2008.

 

    Six Months Ended June 30,     Year Ended December 31,  
Summary consolidated other data:   2011     2010(2)     2010(2)     2009(2)     2008(1)(2)  
    (dollars in thousands) (unaudited)  

Number of customer transactions

         

Domestic(2)

    1,062,534       1,981,990       3,905,696       2,947,204       2,314,421   

Foreign

    702,071       378,518       923,474       413,929       192,691   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

    1,764,605       2,360,508       4,829,170       3,361,133       2,507,112   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
         

Volume of customer transactions

         

Domestic(2)

  $ 529,136     $ 759,816     $ 1,554,285     $ 1,230,885     $ 1,099,559   

Foreign

    383,216       178,312       458,811       174,188       97,436   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

  $ 912,352     $ 938,128     $ 2,013,096     $ 1,405,073     $ 1,196,995   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA(3)

  $ 44,343     $ 32,249     $ 62,928     $ 47,019     $ 47,446   

 

(1)   See Note 4 in the Notes to Consolidated Financial Statements for discussion of our acquisition in 2008.
(2)  

Includes number of domestic transactions and dollar amounts of domestic customer transactions associated with our MLOC services business which ended in October 2010. See “Management’s discussion and analysis of financial information and results of operations” for further information concerning our former MLOC services business.

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(3)   The following table presents a reconciliation of net income, the most comparable generally accepted accounting principles, or GAAP, measure to Adjusted EBITDA for each of the periods presented. See “Management’s discussion and analysis of financial condition and results of operations” for a definition of Adjusted EBITDA.

 

    Six Months Ended June 30,     Year Ended December 31,  
             2011             2010             2010     2009     2008  

Net Income

  $ 19,157     $ 13,317     $ 24,821     $ 17,703     $ 21,951    
         

Adjustments:

         

Depreciation and amortization expenses

    5,722       4,061       8,559       7,297       5,234    

Interest expense, net

    8,034       7,309       15,209       11,852       7,099    

Foreign currency transaction loss (gain)

    94       28       156       (38     79    

Provision for income taxes

    11,336       7,534       14,183       10,205       13,083    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

  $ 44,343      $ 32,249      $ 62,928      $ 47,019      $ 47,446   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

 

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Risk factors

Investing in our common stock involves a high degree of risk. You should carefully consider the following risk factors, as well as the other information in this prospectus, before deciding whether to purchase shares of our common stock. The occurrence of any of the events described below could harm our business, financial condition, results of operations and growth prospects. In such an event, the trading price of our common stock may decline and you may lose part or all of your investment.

RISKS RELATED TO OUR BUSINESS AND INDUSTRY

Adverse changes in laws or regulations affecting our consumer loan business could negatively impact our operations.

Our products and services are subject to extensive regulation and supervision under various federal, state, local and foreign laws, ordinances and regulations. In addition, as we develop new products and services, we will become subject to additional federal, state, local and foreign laws, ordinances and regulations. Future legislation or regulations may restrict our ability to continue our current methods of operation or to expand our operations and may have a negative effect on our business, results of operations and financial condition. Governments at the national, state and local levels, as well as foreign governments, may seek to impose new regulatory restrictions or licensing requirements or interpret or enforce existing requirements in new ways. Changes in laws or regulations, or our failure to comply with applicable laws and regulations, could subject us to regulatory enforcement action that could result in the assessment against us of civil, monetary or other penalties. We face the risk that restrictions or limitations resulting from the enactment, change or interpretation of laws and regulations could negatively affect our business activities or effectively eliminate our ability to offer current or future loan products or services.

In particular, the regulatory environment surrounding consumer loans such as we offer has, in recent years, been active in many jurisdictions in which we operate. Legislative or regulatory activities in certain jurisdictions aimed at consumer loan products such as ours have limited, and may in the future limit, the amount of interest and fees allowed on such consumer loans, the number of such consumer loans that customers may receive or have outstanding, or other terms, conditions or features of such consumer loans. As discussed below under “—Consumer loans are highly regulated under state, local and provincial laws and regulations, which can adversely affect our business,” such actions have caused us to cease or modify our offerings in certain jurisdictions and may make the offering of some or all of our products less profitable or could eliminate our ability to offer some or all of our products in the future.

Certain consumer advocacy groups and legislators at the federal and state levels and at comparable levels in foreign governments have also asserted that laws and regulations should be tightened so as to severely limit, if not eliminate, the availability of loan products such as ours. In particular, both the executive and legislative branches of the U.S. federal government continue to receive significant pressure from consumer advocates and other industry opposition groups, and those governmental branches have recently exhibited an increased interest in debating legislation that could further regulate consumer loan products, such as those we provide. The U.S. Congress, as well as similar state and local bodies and similar foreign 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 consumer loans, place a cap on the dollar amount of fees that may be charged for consumer loans, ban renewals (payment of a fee to extend the term of a consumer loan), require lenders to offer extended payment plans, allow only

 

 

 

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minimal origination fees for loans, limit renewals and the rates to be charged for renewals, require lenders to be bonded, or require lenders to report consumer loan activity to databases designed to monitor or restrict consumer borrowing activity.

We cannot currently assess the likelihood of the proposal or enactment of any future unfavorable U.S. federal, state or local or comparable foreign legislation or regulations. There can be no assurance that additional legislative or regulatory initiatives will not be enacted that could restrict, prohibit or eliminate our ability to offer some or a significant part of our consumer loan products. Any legislative or regulatory action that restricts, by imposing interest rate or annual percentage rate limits on consumer loans such as ours or otherwise prohibits, or places restrictions on, such consumer loans and similar services, if enacted, could have a material adverse impact on our business, prospects, results of operations and financial condition and could impair our ability to continue current operations.

Consumer loans are highly regulated under applicable U.S. and foreign federal laws and regulations.

Consumer loans, such as those we provide, are highly regulated under federal laws. Federal legislation affecting consumer lending, such as that engaged in by us, including interest rate cap bills that would effectively prohibit such lending, have been introduced in the U.S. Congress in the past. Earlier federal efforts culminated in federal legislation effective in October 2007 that limits the interest rate and fees charged on certain consumer loans to members of the U.S. military, active duty reservists, members of the National Guard and their immediate families to 36% per annum, which effectively prohibits us from offering certain of our consumer loan products to members of the military or their families.

In addition, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010, or the Dodd-Frank Act. Title X of the Dodd-Frank Act created the Consumer Financial Protection Bureau, or the CFPB. The CFPB became operational in July 2011, although it may not currently have the ability to oversee non-depository institutions and write rules until a permanent director is installed. Once fully operational, the CFPB will have regulatory, supervisory and enforcement powers over providers of consumer financial products and services, including explicit supervisory authority to examine and require registration of consumer loan providers such as us. Included in the powers afforded the CFPB is the authority to adopt rules describing specified acts and practices as being “unfair”, “deceptive” or “abusive”, and hence unlawful. Some consumer advocacy groups have suggested that short-term consumer lending should be a regulatory priority for the CFPB. Since the director of the CFPB will have significant influence in establishing the CFPB’s priorities and the direction of the CFPB’s rulemaking activities, the timeframe on which the CFPB considers rules applicable to consumer loan products and services such as ours, and the nature and extent of such rules, will depend in large part on who ultimately becomes the director of the CFPB. Accordingly, it is possible that at some time in the near future the CFPB could propose and adopt rules making such lending products and services materially less profitable or even impractical to offer, forcing us to modify or terminate certain product offerings. The CFPB could also adopt rules imposing new and potentially burdensome requirements and limitations with respect to our other consumer loan products and services. Any such rules could have a material adverse effect on our business, results of operations and financial condition or could make the continuance of our current business impractical or unprofitable.

In addition to the Dodd-Frank Act’s grant of regulatory and supervisory powers to the CFPB, the Dodd-Frank Act gives the CFPB authority to pursue administrative proceedings or litigation for violations of federal consumer financial laws (including the CFPB’s own rules). In these proceedings, the CFPB can obtain cease and desist orders (which can include orders for restitution or rescission of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from $5,000 per day for ordinary

 

 

 

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violations of federal consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations. Also, where a company has violated Title X of Dodd-Frank or CFPB regulations under Title X, Dodd-Frank empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB. If the CFPB or one or more state officials believe we have violated the foregoing laws or regulations, they could exercise their enforcement powers in ways that would have a material adverse effect on us.

Certain other U.S. federal laws also affect our business. For example, because short-term and installment consumer loans, such as those we provide, are viewed as extensions of credit, we must comply with the federal Truth-in-Lending Act and Regulation Z adopted under that Act. Additionally, we are subject to the Equal Credit Opportunity Act, the Fair Credit Reporting Act, the Electronic Funds Transfer Act, and the Gramm-Leach-Bliley Act, among other laws, and with respect to our Credit Services Organization, or CSO, programs, the Fair Debt Collection Practices Act. A failure to comply with any applicable federal law or regulation could have a material adverse effect on our business, prospects, results of operations and financial condition. In addition, our marketing efforts and the representations we make about our products and services are subject to federal and state unfair and deceptive practice statutes. The Federal Trade Commission enforces the Federal Trade Commission Act, and state attorneys general and private plaintiffs may bring legal actions under analogous state statutes. If we are found to have violated any of these statutes, it could have a material adverse effect on our business, prospects, results of operations and financial condition.

In the United Kingdom, our consumer lending activities must comply with the Consumer Credit Act of 1974, which was amended by the Consumer Credit Act of 2006, or CCA, and related rules and regulations, including certain provisions of the European Union Consumer Credit Directive, or the EU CCD, which, among other things, require us to obtain governmental licenses and prescribe the presentation, form and content of loan agreements, including statutory warnings and the layout of financial information. We must also follow the Irresponsible Lending Guidance of the Office of Fair Trade, or OFT, which provides greater clarity for lenders as to business practices that the OFT believes constitute irresponsible lending under the CCA. We are subject to the requirements of the Data Protection Act 1988, or the DPA, and are fully registered as a data-controller under the DPA as required. Finally, we are certified under the EU Safe Harbor provisions, which allows us to pass European Union, or EU, data to non-EU countries. Changes in these laws or regulations, or changes to the laws or regulations of the EU, or our failure to comply with these laws or regulations, could have a material adverse effect on our business, prospects, results of operations and financial condition.

In Australia, we act as a finance broker, offering the lending products of unaffiliated third-party lenders, which is similar to our CSO programs in the United States. We follow the responsible lending guidelines under the National Consumer Credit Protection Act (2010), or the NCCPA. However, a draft bill covering amendments to the NCCPA was proposed on August 25, 2011 and includes limitations on the interest rate charged on certain consumer loans, such as those arranged by us, and prohibits loan extensions and refinancings. See “—We may need to exit Australia if proposed consumer loan legislation passes.”

In Canada, the Canadian Parliament amended the federal usury law to transfer jurisdiction and the development of laws for and regulation of our industry to the respective provinces, so all regulation of the consumer lending industry is conducted at the provincial level. Changes in Canadian laws and regulations in the future could have an adverse impact on our Canadian business operations.

 

 

 

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Consumer loans are highly regulated under state, local and provincial laws and regulations, which can adversely affect our business.

As of the date of this prospectus, we operate in 32 states in the United States. Currently, we do not conduct business in the remaining states or in the District of Columbia due to, among other reasons, specific legislative restrictions, such as interest rate ceilings and loan amount restrictions. Moreover, the product offerings in the states in which we operate may be limited by future legislative or regulatory restrictions. In addition, regulations adopted by some states require that all borrowers of certain loan products, such as those we provide, be listed in a database and limit the number of such loans a borrower may have outstanding.

In 2010 and 2011, more than 200 bills were introduced in U.S. state legislatures, including bills in virtually every state in which we are doing business, with the intent of addressing various aspects of consumer lending activity, such as that engaged in by us. Laws prohibiting consumer loans and similar products or services, such as those we provide, or making them less profitable or unprofitable, could be passed in states where we currently lend and existing enabling laws for the short-term consumer loans we offer could expire or be amended at any time. For instance, since 2006 legislation enacted in Colorado, Illinois, Maryland, Minnesota, Montana, New Hampshire, Ohio, Oregon, Washington and Wisconsin has impacted the consumer loan products and services we had historically offered in those states. Due to those legislative changes, we ceased offering consumer loans to residents in the states of Colorado, Montana and New Hampshire and discontinued the CSO program that we offered in Maryland. In addition, these changes have altered the terms upon which we offer loans to consumers in other states, such as Illinois, Minnesota, Ohio, Oregon, Washington and Wisconsin, in some instances reducing the profitability and the volume of the loans we offer to customers. In addition, Mississippi, a state in which we operate, has a sunset provision in its short-term consumer loan law that requires renewal of the law by the state legislature, and there is no guarantee that Mississippi will renew this law prior to sunset in 2016. In 2010, Arizona’s short-term consumer loan law under which we operated expired, or sunset, without being renewed, which caused us to discontinue offering consumer loan products in that state. The exits in whole or part from certain states in the past have had a material negative impact on our revenue in the periods in which they occurred.

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

In some cases, we rely on the interpretations of the staff of state regulatory bodies with respect to the laws and regulations of their respective jurisdictions, which may change as the staff of state regulatory bodies change. If staff interpretations on which we rely change, any such changes could have a negative impact on our business. For example, an adverse change in a staff interpretation by the Pennsylvania Department of Banking caused us to suspend our operations in Pennsylvania in July 2009 following our

 

 

 

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unsuccessful challenge to that interpretive change. Further, any misinterpretations by us of existing laws or regulations could have a material adverse effect on our business, results of operations and financial condition.

State attorneys general and financial services regulators scrutinize our products and services and could take actions that may require us to modify, suspend, or cease operations in their respective states. We regularly receive, as part of comprehensive state examinations or audits or otherwise, comments from state attorneys general and financial services regulators about our business operations and compliance with state laws and regulations. These comments sometimes allege violations of, or deficiencies in complying with, applicable laws and regulations. While we have resolved most such allegations promptly and without penalty, we operate in a large number of jurisdictions with varying requirements and we cannot anticipate how state attorneys general and financial services regulators will scrutinize our products and services or the products and services of our industry in the future. If we fail to resolve future allegations satisfactorily, there is a risk that we could be subject to significant penalties, including material fines, or that we may lose our licenses to operate in certain jurisdictions.

In addition, state laws can be changed by ballot initiative or referendum in certain states. A 2010 ballot initiative in Montana adversely affected our short-term consumer loan product in that state, causing us to discontinue our consumer loan product offering in that state. In 2008 a ballot initiative in Arizona and a ballot referendum in Ohio, both of which were intended to protect short-term consumer loan products in those states, failed. Subsequent to the failures of the ballot initiatives in Arizona and Ohio, we ceased providing our consumer loan product in Arizona in 2010, and in 2008 we significantly altered our product offering in Ohio. Ballot initiatives can be expensive to support or oppose, as the case may be, and may be more susceptible to emotion than deliberations in the normal legislative process. Recently, a ballot initiative in Missouri was proposed and if it is placed on the ballot and passed by voters, we may need to exit the state.

In states in which we are licensed to operate, we must comply with all applicable license requirements, including those concerning direct or indirect changes in control of the licensed entities. Most states in which we conduct licensed operations impose requirements related to changes in control of licensed entities or changes of officers of licensed entities or of controlling entities of licensed entities. There is a risk that state agencies responsible for licensing our operations may, as a result of this Offering, impose unexpected requirements related to the change of control of the Company or its subsidiaries. Any such unexpected requirements in any state, if imposed, could result in delays or limitations on our operations in that state.

In addition to state and federal laws and regulations, we may be subject to various local rules and regulations such as local ordinances or local business conduct or licensing requirements applicable to companies lending in that jurisdiction. Local jurisdictions’ efforts to restrict short-term consumer 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. Actions taken in the future by local governing bodies to impose other restrictions on consumer loan lenders such as us could have a material adverse effect on our business, prospects, results of operations and financial condition and could impair our ability to continue current operations.

In Australia, several states have interest rate caps in place. However, the draft bill covering amendments to the NCCPA, proposed on August 25, 2011, includes limitations on the interest rate charged on consumer loans, such as those arranged by us, and prohibits loan extensions and refinancings. If passed, the amendments to the NCCPA would supersede any state interest rate caps. See “—We may need to exit Australia if proposed consumer loan legislation passes.”

 

 

 

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In Canada, after transfer of jurisdiction over our industry to the provinces by the Canadian Parliament, five provinces have adopted a regulatory framework to allow for online short-term consumer lending to date, and we currently offer our lending product in three of those provinces. In general, the regulations require lenders to be licensed, set maximum fees and regulate collection practices. Any changes in Canadian provincial laws or regulations in the future could alter or materially impact our ability to offer our products and services in Canada.

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

We are currently subject to lawsuits (including purported class actions) and other legal proceedings that could cause us to incur substantial expenditures and generate negative publicity, and could significantly impair our business, force us to cease doing business in one or more jurisdictions or cause us to cease offering one or more products. We are also likely to be subject to future litigation, and regulatory proceedings and government investigations. The consequences of an adverse ruling in any current or future litigation, regulatory proceeding or government investigation could cause us to have to refund fees and/or interest collected, refund the principal amount of loans, pay treble or other multiple damages, pay monetary penalties and/or modify or terminate our operations in particular states or jurisdictions.

Defense of any lawsuit, regulatory proceeding or government investigation, even if successful, could require substantial time and attention of our management and could require significant expenditures for legal fees and other related costs. Settlement of lawsuits may also result in significant payments and modifications to our operations. Because we and our competitors may become subject to regulatory proceedings or governmental investigations, we could also suffer losses from interpretations of laws or regulations in those proceedings or investigations, even as a result of proceedings or investigations to which we are not a party. For example, we discontinued our CSO program in Florida in 2008 subsequent to a ruling of the Florida regulator against another company that offered a similar CSO program. Similar or additional actions in the future could have a material adverse effect on our business, prospects, results of operations and financial condition.

Furthermore, our lead providers are subject to federal, state, local and foreign laws and regulations. State legislators and regulators have recently shown an increased interest in oversight and licensing of lead providers in the consumer lending industry in which we operate and could propose or support additional legislation or regulation, or enforce current laws or regulations or new interpretations thereof, governing the business of lead providers or our relationship with them. For example, some states have proposed, or instructed us, that lead providers be licensed under consumer lending laws or have proposed restrictions on lead providers’ sale of leads to unlicensed lenders. Our lead providers’ failure to comply with applicable laws or regulations, or any changes in these laws or in the interpretation thereof, could have a detrimental effect on our consumer lending business or subject us to direct liability or regulatory action, for which we may not be indemnified. See “—The failure of lead providers to continue to send us customers could disrupt our operations or result in a loss of revenue.” Any of these events could have a material adverse effect on our business, prospects, results of operations and financial condition and could impair our ability to continue current operations.

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

We include arbitration provisions in our consumer loan agreements. These provisions are designed to allow us 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. Our arbitration agreements do not generally have any impact on regulatory enforcement proceedings.

 

 

 

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We take the position that the Federal Arbitration Act requires the enforcement of our arbitration agreements and their class action waivers in accordance with their terms. We believe the U.S. Supreme Court’s decision in the AT&T Mobility v. Concepcion case, holding that consumer arbitration agreements meeting certain specifications are enforceable, will now reduce the possibility that lower courts will rule that our arbitration agreements with class action waivers are unenforceable. The AT&T Mobility v. Concepcion decision was rendered on April 27, 2011. Notwithstanding two recent rulings from a Pennsylvania federal district court enforcing our arbitration agreements with class action waivers in reliance on the AT&T Mobility v. Concepcion decision, further challenges to the enforceability of arbitration agreements with class action waivers will likely continue to be brought in an effort to limit the precedential effect of the AT&T Mobility v. Concepcion decision. If those challenges are successful, our arbitration agreements could be unenforceable.

In addition, the U.S. Congress has considered legislation that would generally limit or prohibit mandatory arbitration agreements in consumer contracts and has adopted 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. Any such rule would apply to arbitration agreements entered into more than six months after the final rule becomes effective (and not to prior arbitration agreements).

Any judicial decisions, legislation or other rules or regulations that impair our ability to enter into and enforce consumer arbitration agreements and class action waivers could significantly increase our exposure to class action litigation as well as litigation in plaintiff-friendly jurisdictions. Such litigation could have a material adverse effect on our business, results of operations and financial condition.

Media reports and public perception of short-term or “high-cost” consumer loans as being predatory or abusive could materially adversely affect our business.

In recent years, consumer advocacy groups and some media reports have advocated governmental action to prohibit or place severe restrictions on short-term or “high-cost” consumer loans. Such consumer advocacy groups and media reports generally focus on the Annual Percentage Rate, or APR, 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. If the negative characterization of these types of loans becomes increasingly accepted by consumers, demand for our consumer loan products could significantly decrease. If the negative characterization of these types of loans is accepted by legislators and regulators, we could also become subject to more restrictive laws and regulations. Further, media coverage and public statements that assert some form of inappropriateness in our products and services can lower employee morale, make it more difficult for us to attract and retain qualified employees, management and directors, divert management attention and increase expense. Our financial condition and results of operations could be materially adversely affected if any of these circumstances were to occur.

We may need to exit Australia if proposed consumer loan legislation passes.

In Australia, a draft bill covering amendments to the NCCPA was proposed on August 25, 2011. The proposed legislation would limit the interest charged on consumer loans, such as those arranged by us, and prohibit loan extensions and refinancings. Should the proposed legislation pass, the effective date will likely be in mid-2012. Depending upon the provisions contained in any legislation that is enacted, we may need to exit the Australian market.

 

 

 

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The legislative and regulatory environment in the United Kingdom could become more hostile to the consumer loan business.

The coalition government in the United Kingdom has recently agreed to research the effects upon consumers of a cap on the total charge for credit. The Minister of Treasury and the Minister for Employment Relations, Consumer and Postal Affairs have agreed to the investigation request, which will now involve the commission of research on the market for consumer credit. In addition, the coalition government is exploring whether the current principles-based regulations governing unsecured short-term credit should be replaced with prescriptive-based regulations. Prescriptive-based regulations, as contrasted with principles-based regulations, define what a lender may and may not do, similar to U.S. law. If prescriptive-based regulations are adopted, our compliance costs will be significantly increased. Additionally, the coalition government has recently formed the Financial Conduct Authority, or FCA, and it appears that the FCA may take over regulatory responsibility for consumer credit from the OFT in 2014. The FCA may regulate consumer credit pursuant to the guidance of the Financial Services and Markets Act, or FSMA, which are prescriptive regulations that currently govern the secured credit market, and could possibly call for the repeal of the CCA or enabling legislation in the United Kingdom. Any of these changes could have a material adverse effect on our business, prospects, results of operations and financial conditions and could impair our ability to continue current operations.

The concentration of our revenue in certain products and jurisdictions could adversely affect us.

Our primary business activity is offering short-term and installment consumer loans. If we are unable to maintain our short-term or installment consumer loan business and/or diversify our operations, our revenue and earnings could decline. Our current limited product and business diversification could inhibit our opportunities for growth, reduce our revenue and profits, and make us more susceptible to earnings fluctuations than some of our competitors who may be more diversified and provide other services such as pawn lending, car title lending, or other similar services. External factors, such as changes in laws and regulations, new entrants, and enhanced competition, could also make it more difficult for us to operate as profitably as a more diversified company could operate. Any internal or external change in our industry could result in a decline in our revenue and earnings, which could have a material adverse effect on our business, prospects, results of operations, and financial condition.

We operated in 30 states in the United States as of June 30, 2011, and our five largest states (measured by total revenue) accounted for approximately 65% of our U.S. revenue and 47% of our total revenue for the year ended December 31, 2010 and approximately 74% of our U.S. revenue and 41% of our total revenue for the six months ended June 30, 2011. Our U.K. operations accounted for approximately 25% of our total revenue for the year ended December 31, 2010 and approximately 41% of our revenue for the six months ended June 30, 2011. We expect that a significant portion of our revenue will continue to be generated from several U.S. states and the United Kingdom, largely due to the currently prevailing economic, demographic, regulatory, competitive and other conditions in those jurisdictions. Changes in any of these markets could lead to a reduction in demand for our products and services and a decline in our revenue that could result in a deterioration of our financial condition. Regulatory changes in any one of our larger states or in the United Kingdom may have a material adverse effect on our business, prospects, results of operations, and financial condition.

The failure of lead providers to continue to send us customer leads could disrupt our operations or result in a loss of revenue.

We depend on lead providers to provide us with prospective new customers. Generally, third-party lead providers operate websites that attract prospective customers who complete applications for consumer

 

 

 

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loans on the lead providers’ websites. The lead providers then sell the opportunity to provide services to these prospective new customers, who we refer to as leads, to us and to other consumer lenders for a fee. The majority of our new customers are generated by lead providers. In 2010 seven lead providers received 81% of the total amounts we paid to lead providers. As a result, our consumer lending activity and revenue depend substantially on the willingness and ability of these lead providers to send us customer leads at prices acceptable to us, or at all. There are a limited number of lead providers that provide us with a majority of our customer leads, and we compete with others in our industry for these leads. The loss of the relationship with any of our significant lead providers, and an inability to replace them or the failure of these lead providers to maintain quality and consistency in their programs or services or to continue to provide their services, could cause us to lose the opportunity to gain new customers and substantially decrease the revenue and earnings of our consumer loan business. Our financial condition and results of operation could be materially adversely affected if any of these circumstances were to occur.

The failure of third-party lenders to offer loans under our CSO programs could disrupt our operations or result in a loss of revenue.

In connection with our CSO programs, we arrange third-party lenders’ consumer loan products in some markets by acting as a credit services organization or finance broker on behalf of consumers. Our consumer loan revenue depends in part on the willingness and ability of these lenders to make loans in connection with our CSO programs. Fees we received in connection with loans arranged under our CSO programs accounted for approximately 41% of our total revenue for the year ended December 31, 2010. There are a limited number of third-party lenders that participate in CSO programs, and our CSO programs are conducted through two third-party lenders. These third-party lenders could terminate their services altogether or choose to participate in CSO programs with our competitors instead of us or choose to exit the market altogether. The loss of the relationship with any of these lenders, their inability or unwillingness to continue to offer loans in connection with our CSO programs, or the failure of these lenders to maintain quality and consistency in their programs or services and an inability to replace them, could cause us to lose customers and substantially decrease and materially adversely affect the revenue and earnings of our consumer lending business.

We must also indemnify the third-party lender for any failure to comply with applicable laws and regulations. Further, Cash America has guaranteed our obligations to third-party lenders participating in our CSO programs. After completion of this offering, Cash America intends to cease guaranteeing our obligations to third-party lenders thereafter participating in our CSO programs, and there is no assurance that third-party lenders will participate in our CSO programs without these guaranties. In certain jurisdictions, offering consumer loans outside of our CSO programs may not be economically attractive or legally permissible. The failure to maintain or establish a relationship with suitable third-party lenders in these jurisdictions may cause us to cease offering third-party consumer loans in such jurisdictions and could have a material adverse effect on our consumer lending business.

The failure of third-party suppliers to maintain their products, services or support could disrupt our operations or result in a loss of revenue.

In addition to lead providers and third-party lenders related to our CSO programs, we also rely on other third parties for goods and services. Our consumer loan revenue and earnings depend in part on the willingness and ability of unaffiliated third parties to provide services to facilitate marketing, referrals, lending and loan underwriting. There are a limited number of vendors that provide the services that we require, and we compete with others in our industry for their services. 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

 

 

 

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quality and consistency in their programs or services or to continue to provide their products and services, could cause us to lose customers and substantially decrease the revenue and earnings of our consumer loan business. We also use third parties to support and maintain certain parts of our communication and information systems. The failure of such third parties to fulfill their support and maintenance obligations could disrupt our operations. For example, we rely on Automated Clearing House, or ACH, funds transfers in order to process many of the products we offer, including collection of the principal lent and the fees we charge. An inability to process ACH funds transfers, whether as a result of the unavailability of the ACH network for technical reasons, changes in the rules of NACHA (formerly the National Automated Clearing House Association) and the Federal Reserve, or by other participants, could have a material adverse effect on us. Furthermore, following the completion of this offering, we will also be dependent on Cash America for certain services. See “—Risks related to our relationship with Cash America—Following this offering, we will continue to depend on Cash America to provide us with certain services for our business.”

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

The federal Fair Credit Reporting Act, or the FCRA, and related laws and regulations concerning consumer reports are currently under regulatory scrutiny, and certain related regulations or interpretations of the U.S. Federal Trade Commission, or FTC, may soon be revised. Such changes may materially affect our business if new regulations or interpretations by the FTC require us to materially alter the manner in which we use personal data in our credit underwriting. Furthermore, the CFPB will have authority and powers with respect to the FCRA, including, among other things, supervisory, regulatory and enforcement authority. It is not certain exactly how the CFPB will supervise and regulate Consumer Reporting Agencies, some of whom we rely upon for underwriting data. The CFPB may take a more aggressive approach than did the FTC, including with respect to regulation, enforcement and potential supervision. The CFPB’s position on the FCRA and related investigation or enforcement activities may have a materially adverse impact on our business, including our operations, our mode and manner of conducting business and our financial results.

A decreased demand for our products and alternative financial services and our failure to adapt to such decrease could adversely affect results of operations and financial condition.

The demand from our customers for our products and services may decrease due to a variety of factors, such as regulatory restrictions that reduce customer access to particular products and services, the availability of competing products and services or changes in customers’ financial conditions. Should we fail to adapt to a significant change in our customers’ demand for, or access to, our products or services, our revenue could decrease significantly. Each adaptation or new product and service is subject to risk and uncertainty and requires significant investment in time and capital, including additional marketing expenses, software development costs, legal and compliance costs and other incremental start-up costs. Even if we make adaptations or introduce new products or services to fulfill customer demand, customers may resist or may reject products or services whose adaptations make them less attractive or less available. In any event, the effect of any product or service change on the results of our business may not be fully ascertainable until the change has been in effect for some time.

Our U.S. competitors’ use of other business models could have a material adverse effect on our business.

We operate our U.S. business pursuant to the laws and regulations of the states in which our customers reside, including compliance with the maximum fees allowed and other limitations, and we are licensed in

 

 

 

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every state in which we lend unless a state does not require licensure. Most of our U.S. competitors operate using other business models, including a “single-state model” where the lender is generally licensed in one state and follows only the laws and regulations of that state regardless of the state in which the customer resides, an “offshore model” where the lender is not licensed in any U.S. state and does not typically comply with any particular state’s laws or regulations and a “tribal model” where the lender follows the laws of a Native American tribe regardless of the state in which the customer resides. Competitors using these models may have higher revenue per customer and significantly less burdensome compliance requirements, among other advantages. Additionally, negative perceptions about these models could cause legislators or regulators to pursue additional industry restrictions that could affect the business model under which we operate, which could have a material adverse effect on our business, prospects, results of operations and financial condition.

Increased competition from banks, savings and loans, other consumer loan lenders and other entities offering similar financial services, as well as retail businesses that offer products and services we offer, could adversely affect our results of operations.

We face fierce competition in our business, which operates within a highly fragmented industry. Our principal competitors are online lenders, consumer finance companies, credit service organizations, pawn shops, auto title lenders and other financial institutions that serve our primary customer base. Many financial institutions or other businesses that do not now offer products or services to our customer base, many of whom may be much larger than us, could begin doing so. In addition, competitors may operate, or begin to operate, under business models less focused on legal and regulatory compliance than ours, which could put us at a competitive disadvantage. Significant increases in the number and size of competitors to our business could result in a decrease in the number of our consumer loan transactions, resulting in lower levels of revenue and earnings in these categories. Such additional competition could also result in significant incremental demand for customer leads, resulting in price increases that could have a material adverse effect on our customer acquisition costs. Increased competition or aggressive marketing and pricing practices by these competitors could result in decreased revenue, margins and earnings in our operations.

Our business depends on the uninterrupted operation of our facilities, systems and business functions, including our information technology and other business systems.

Our business highly depends upon our employees’ ability to perform, in an efficient and uninterrupted fashion, necessary business functions, such as Internet support, call centers, and processing, making and collecting consumer loans. Despite our efforts to establish backup or redundant systems, a shutdown of or inability to access the facilities in which our Internet operations and other technology infrastructure are based, such as a power outage, a failure of one or more of our information technology, telecommunications or other systems, or sustained or repeated disruptions of such systems could significantly impair our ability to perform such functions on a timely basis and could result in a deterioration of our ability to offer and process consumer loans, provide customer service, perform collections activities, or perform other necessary business functions. Any such interruption could materially adversely affect our business, prospects, results of operations and financial condition.

Security breaches or fraudulent activity could result in damage to our operations or lead to reputational damage.

A security breach of our computer systems could interrupt or damage our operations or harm our reputation. Despite the implementation of security measures, our systems may still be vulnerable to data theft, computer viruses, programming errors, attacks by third parties or similar disruptive problems. In addition, we could be subject to liability if confidential customer information is misappropriated from

 

 

 

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our computer systems. Any compromise of security could deter consumers from entering into transactions that involve transmitting confidential information to our systems (such as we currently require from customers), which could have a material adverse effect on our business, prospects, results of operations and financial condition.

In addition, criminals are using increasingly sophisticated methods to engage in illegal activities such as fraud. Over the past several years, we and others in our industry have had customers and former customers contacted by unknown criminals making telephone calls attempting to collect debt, purportedly on our behalf. These criminals are often successful in fraudulently inducing payments to them, resulting in high volumes of customer service incidents for us. In addition, we and others were recently subject to an industry-wide fraud attack in the United Kingdom. Increased fraud involving our products and services or affecting our customers could lead to litigation, significantly increased expenses, reputational damage (and reduced use and acceptance of our products and services) or new regulations and compliance obligations, which could have a material adverse effect on our business, prospects, results of operations and financial condition.

Failure to manage our credit risk through performance of our underwriting system may adversely affect our results of operations.

As a provider and guarantor of consumer loans, we are exposed to the risk that our customers will not repay their loans according to their terms. Loans we provide or guarantee are unsecured, leaving us without any collateral to secure the repayment of these loans. The risks inherent in making any loan include risks with respect to the period of time over which the loan may be repaid, risks relating to proper loan underwriting and guidelines, risks resulting from changes in economic and industry conditions and risks inherent in dealing with individual borrowers. Our underwriting system may not prevent us from incurring substantial credit losses. Any failure to manage our credit risks may materially adversely affect our business and our results of operations and financial condition.

If our allowance and liability for loan losses are not adequate to absorb losses, our results of operations and financial condition may be adversely affected.

We may not successfully evaluate the creditworthiness of our customers and may not structure our credit products or services so as to remain profitable. The creditworthiness of our target market generally is considered “subprime” based on guidance issued by the agencies that regulate the banking industry. Thus, our customers generally have a higher frequency of delinquencies and higher risks of nonpayment which result in higher credit losses than consumers who are served by more traditional providers of consumer credit. We monitor the performance of our consumer loan portfolios and maintain either an allowance for losses on consumer loans we originate or maintain a liability for losses on loans originated by third-party lenders that we guaranty (including fees and interest). Our loan loss allowance and liability are established at a level estimated to be adequate to absorb future credit losses inherent in the loan portfolio and expected losses from consumer loans we guaranty in our CSO programs. The allowance deducted from the carrying value of consumer loans was $36.0 million at December 31, 2010, and the liability for losses on third-party lender-owned consumer loans was $2.3 million at December 31, 2010. However, these reserves are estimates based on historical loss rates, adjusted for current performance, which may prove to be an inaccurate predictor of future performance. If actual loan losses are materially greater than our reserves, our results of operations and financial condition could be adversely affected.

 

 

 

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We are subject to impairment risk.

At December 31, 2010, we had goodwill totaling $255.8 million on our consolidated balance sheet, all of which represents the excess of costs paid to acquire assets and liabilities over the fair value of those assets and liabilities. Accounting for goodwill requires significant management estimates and judgment. Events may occur in the future and we may not realize the value of our goodwill. Management performs annual reviews of the carrying values of the goodwill to determine whether events and circumstances indicate that an impairment in value may have occurred. A variety of factors could cause the carrying value of our goodwill to become impaired. Should a review indicate impairment, a write-down of the carrying value of our goodwill would occur, resulting in a non-cash charge, which would adversely affect our results of operations and could also lead to our inability to comply with certain covenants in the credit facility we plan to enter into prior to completion of this offering, which could cause a default under that credit facility.

We expect that our credit facility will contain financial covenants and other restrictions that may limit our ability to operate our business.

We anticipate obtaining a credit facility prior to commencement of this offering that would contain various customary restrictive covenants that could, among other things, restrict our ability to:

 

Ø  

incur additional debt;

 

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incur or permit certain liens to exist;

 

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make certain investments;

 

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

 

Ø  

make certain dispositions;

 

Ø  

make certain payments, including dividend payments; and

 

Ø  

engage in certain transactions with affiliates.

We expect that our credit facility will also require us to maintain certain financial ratios. The covenants and restrictions contained in the credit facility could limit our ability to fund our 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 would constitute an event of default under the credit facility, entitling the lenders to, among other things, terminate future credit availability under the agreement, increase the interest rate on outstanding debt or accelerate the maturity of outstanding obligations under that agreement. Any such default could materially adversely affect our business, prospects, results of operations and financial condition and could impair our ability to continue current operations.

Changes in our financial condition or a potential disruption in the capital markets could reduce available capital.

If funds are not available from our operations and any excess cash, we may be required to rely on the banking and credit markets to meet our financial commitments and short-term liquidity needs. We also expect to access the debt capital markets to obtain capital to finance growth. Efficient access to the debt capital markets may be critical to our ongoing financial success; however, our future access to the debt capital markets could become restricted due to a variety of factors, including a deterioration of our earnings, cash flows, balance sheet quality, or overall business or industry prospects, adverse regulatory

 

 

 

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changes, a disruption to or deterioration in the state of the capital markets or a negative bias toward our industry by market participants. Disruptions and volatility in the capital markets may cause banks and other credit providers to restrict availability of new credit. Our 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 our efforts to arrange additional financing on terms that are satisfactory to us, if at all. If adequate funds are not available, or are not available on acceptable terms, we may not have sufficient liquidity to be able to fund our operations, make future investments, take advantage of acquisitions or other opportunities, or respond to competitive challenges and this, in turn, could adversely affect our ability to advance our strategic plans. Additionally, if the capital and credit markets experience volatility and the availability of funds is limited, third parties with whom we do business may incur increased costs or business disruption and this could adversely affect our business relationships with such third parties.

We are subject to risks from fluctuations in interest rates.

Our profitability may be directly affected by the level of and fluctuations in interest rates. As interest rates increase, our borrowing costs may increase. Because there are statutory maximums of interest or fees we may charge our customers for our loan products and services, our ability to pass on increased interest costs is restricted. We anticipate that we could incur material indebtedness to finance the expansion of our business. We believe that our profitability may be adversely affected during any period of higher interest rates, possibly to a material degree. We intend to monitor the interest rate environment, and we may employ hedging strategies designed to mitigate the impact of changes in interest rates. We cannot assure, however, that any hedging strategies that we may undertake will mitigate the impact of changes in interest rates.

We are exposed to fluctuations in currency exchange rates.

Because we conduct a significant and growing portion of our business outside the United States but report our financial results in U.S. dollars, we face exposure to adverse movements in currency exchange rates. The results of our international operations are exposed to foreign exchange rate fluctuations as the financial results are translated from the local currency into U.S. dollars. If the U.S. dollar weakens against foreign currencies, the translation of these foreign currency denominated transactions will result in increased revenue, operating expenses and net income. Similarly, if the U.S. dollar strengthens against foreign currencies, the translation of these foreign currency denominated transaction will result in decreased revenue, operating expenses and net income. As exchange rates vary, revenue and other operating results, when translated, may differ materially from expectations.

A sustained deterioration in the economies in which we do business could reduce demand for our products and services and result in reduced earnings.

The ongoing current global economic downturn may adversely affect our business in several ways. For example, continued high levels of unemployment in the markets in which we operate could restrict the number of customers who qualify for our products and services, which in turn may limit our revenue. Similarly, reduced consumer confidence and spending, or a change in how consumers obtain credit, may decrease demand for our products. Also, we are unable to predict how the widespread loss of jobs, housing foreclosures and general economic uncertainty may affect our credit losses.

A sustained deterioration in the economies in which we do business could cause deterioration in the performance of consumer loans. 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 our consumer loan products. During an economic slowdown, we could be required to tighten our

 

 

 

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underwriting standards, which would likely reduce consumer loan balances, and we could face more difficulty in collecting defaulted consumer loans, which could lead to an increase in loan losses.

Failure to keep up with the rapid changes in e-commerce and the uses and regulation of the Internet could harm our business.

The business of providing products and services such as ours over the Internet is dynamic and relatively new. We must keep pace with rapid technological change, Internet security risks, risks of system failure or inadequacy, and governmental regulation and taxation, and each of these factors could adversely impact our business. In addition, concerns about fraud, computer security and privacy and or other problems may discourage additional consumers from adopting or continuing to use the Internet as a medium of commerce. In countries such as the United States and the United Kingdom, where e-commerce generally has been available for some time and the level of market penetration of our online financial services is relatively high, acquiring new users for our services may be more difficult and costly than it has been in the past. In order to expand our customer base, we must appeal to and acquire consumers who historically have used traditional means of commerce to conduct their financial services transactions. If these consumers prove to be less profitable than our earlier customers, and we are unable to gain efficiencies in our operating costs, including our cost of acquiring new customers, our business could be adversely impacted.

Public scrutiny of Internet privacy issues may result in increased regulation and different industry standards, which could deter or prevent us from providing our current products to our customers.

The regulatory framework for privacy issues worldwide is currently in flux and is likely to remain so for the foreseeable future. Practices regarding the collection, use, storage, transmission and security of personal information by companies operating over the Internet have recently come under increased public scrutiny. The U.S. government, including the Federal Trade Commission and the Department of Commerce, has announced that it is reviewing the need for greater regulation of the collection of information concerning consumer behavior on the Internet, including regulation aimed at restricting certain targeted advertising practices. In addition, the EU is in the process of proposing reforms to its existing data protection legal framework, which may result in a greater compliance burden for companies such as ours with customers in the United Kingdom. Various government and consumer agencies have also called for new regulation and changes in industry practices. Our business, including our ability to operate and expand internationally, could be adversely affected if legislation or regulations are adopted, interpreted, or implemented in a manner that is inconsistent with our current business practices and that require changes to these practices, or to the design of our websites, products, privacy policies or customer acquisition methods, including the purchase of customer leads from third party providers.

Growth may place significant demands on our management and our infrastructure.

We have experienced substantial growth in our business. This growth has placed and may continue to place significant demands on our management and our operational and financial infrastructure. As our operations grow in size, scope and complexity, we will need to enhance and upgrade our systems and infrastructure to offer an increasing number of customers enhanced solutions, features and functionality. The expansion of our systems and infrastructure will require us to commit substantial financial, operational and technical resources in advance of an increase in the volume of business, with no assurance that the volume of business will increase. Continued growth could also strain our ability to maintain reliable service levels for our customers, develop and improve our operational, financial and management controls, enhance our reporting systems and procedures and recruit, train and retain highly

 

 

 

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skilled personnel. Managing our growth will require significant expenditures and allocation of valuable management resources. If we fail to achieve the necessary level of efficiency in our organization as it grows, our financial condition and results of operations could be materially adversely affected.

If Internet search engines’ methodologies are modified or our search result page rankings decline for other reasons, our potential new customer growth could decline.

We depend in part on various Internet search engines, such as Google, Bing and Yahoo!, to direct a significant amount of traffic to our websites. Our ability to maintain the number of visitors directed to our websites is not entirely within our control. Our competitors’ search engine optimization, or SEO, efforts may result in their websites receiving a higher search result page ranking than ours, or Internet search engines could revise their methodologies in an attempt to improve their search results, which could adversely affect our search result ranking. If search engine companies modify their search algorithms in ways that are detrimental to our new customer growth or in ways that make it harder for our customers to use our websites, or if our competitors’ SEO efforts are more successful than ours, overall growth in our customer base could slow and we could lose existing customers. In addition, search engines could implement policies that restrict the ability of consumer finance companies such as us to advertise their services and products, which could preclude companies in our industry from appearing in a favorable location in the search results when certain search terms are used by the consumer. Our websites have experienced fluctuations in search result rankings in the past, and we anticipate similar fluctuations in the future. Any reduction in the number of users directed to our websites would harm our business and operating results.

New top level domain names may allow the entrance of new competitors or dilution of our brands, which may reduce the value of our domain name assets.

We have invested heavily in promoting our brands, including our website addresses. The Internet Corporation for Assigned Names and Numbers, the entity responsible for administering Internet protocol addresses, has introduced, and has proposed the introduction of, additional new domain name suffixes in different formats, many of which may be more attractive than the formats held by us and which may allow the entrance of new competitors at limited cost. It may also permit other operators to register websites with addresses similar to ours, causing customer confusion and dilution of our brands, which could materially adversely affect our business, prospects, results of operations and financial condition. Any defensive domain registration strategy could become a large and recurring expense.

We are dependent on our existing management, and the loss of key personnel may prevent us from implementing our business plan in a timely manner.

We are dependent on the experience and knowledge of our key executive personnel, particularly our senior executives who have been instrumental in setting our strategic direction and executing our business strategy. We do not have employment agreements with any of our senior executives. Losing the services of any of these individuals could adversely affect our business until qualified replacements could be found. We also believe that it could take some time to replace vacancies with executives of equal experience and capabilities and their successors may not be as effective.

Because competition for our target employees is intense, we may not be able to attract and retain the highly skilled employees we need to support our planned growth.

To execute our growth plan, we must attract and retain highly qualified personnel. Competition for these personnel is intense. We may not be successful in attracting and retaining qualified personnel. We have

 

 

 

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from time to time in the past experienced, and we expect to experience in the future, difficulty in hiring and retaining highly skilled employees with appropriate qualifications. Many of the companies with which we compete for experienced personnel have greater resources than we have. In addition, in making employment decisions, particularly in e-commerce related companies with a focus on technology, job candidates often consider the value of the stock options, restricted stock grants or other equity-based compensation they are to receive in connection with their employment. A decline in the value of our stock after this offering could adversely affect our ability to attract or retain key employees. If we fail to attract new personnel or fail to retain and motivate our current personnel, our business and future growth prospects could be severely harmed.

Future acquisitions could disrupt our business and harm our financial condition and operating results.

Our success will depend, in part, on our ability to expand our product and service offerings and markets and grow our business in response to changing customer demands, regulatory environments, technologies and competitive pressures. In some circumstances, we may expand our offerings through the acquisition of complementary businesses, solutions or technologies rather than through internal development. The identification of suitable acquisition candidates can be difficult, time-consuming and costly, and we may not be able to successfully complete identified acquisitions. Furthermore, even if we successfully complete an acquisition, we may not be able to successfully assimilate and integrate the business, technologies, solutions, personnel or operations of the business that we acquire, particularly if key personnel of an acquired company decide not to work for us. In addition, we may issue equity securities to complete an acquisition, which would dilute our stockholders’ ownership and could adversely affect the price of our common stock. Acquisitions may also involve the entry into geographic or business markets in which we have little or no prior experience or may expose us to additional material liabilities. Consequently, we may not achieve anticipated benefits of the acquisitions which could harm our operating results.

Our operations could be subject to natural disasters and other business disruptions, which could adversely impact our future revenue and financial condition and increase our costs and expenses.

Our services, operations and the call centers from which we provide our services are vulnerable to damage or interruption from earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors and similar events. A significant natural disaster, such as an earthquake, fire or flood, could have a material adverse impact on our business and our insurance coverage may be insufficient to compensate us for losses that may occur. Acts of terrorism could cause disruptions to the Internet, our business or the economy as a whole. More generally, any of these events could cause consumer confidence and spending to decrease or result in increased volatility in the U.S. economy and worldwide financial markets. Any of these occurrences could have a material adverse effect on our business, prospects, results of operations and financial condition.

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

The success of our business depends to a significant degree upon the protection of our software and other proprietary intellectual property rights. We may be unable to deter misappropriation of our proprietary information, detect unauthorized use of it or take appropriate steps to enforce our intellectual property rights. Although we endeavor to execute confidentiality agreements with our employees and contractors, we may not be able to enforce these contracts in some jurisdictions or may not be able to detect and enjoin misappropriation of our confidential information before it harms our business. In addition, competitors could, without violating our proprietary rights, develop technologies that are as good as or

 

 

 

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better than ours. Our failure to protect our software and other proprietary intellectual property rights or to develop technologies that are as good as our competitors’ could put us at a disadvantage relative to our competitors. Any such failures could have a material adverse effect on our business.

In addition, effective trademark, copyright and trade secret protection may not be available in every country in which our services are provided. The laws of certain countries do not protect proprietary rights to the same extent as the laws of the United States and, therefore, in certain jurisdictions, we may be unable to protect our proprietary rights adequately against unauthorized third party copying or use, which could adversely affect our competitive position.

We may be subject to intellectual property disputes, which are costly to defend and could harm our business and operating results.

From time to time, we face, and we expect to face in the future, allegations that we have infringed the trademarks, copyrights, patents or other intellectual property rights of third parties, including from our competitors or non-practicing entities. Patent and other intellectual property litigation may be protracted and expensive, and the results are difficult to predict and may require us to stop offering certain features, acquire licenses, which may not be available at a commercially reasonable price or at all, or modify our products and features while we develop non-infringing substitutes.

In addition, we use open source software in our technology platform and plan to use open source software in the future. From time to time, we may face claims from parties claiming ownership of, or demanding release of, the source code, potentially including our valuable proprietary code, or derivative works that were developed using such software, or otherwise seeking to enforce the terms of the applicable open source license. These claims could also result in litigation, require us to purchase a costly license or require us to devote additional research and development resources to change our platform, any of which would have a negative effect on our business and operating results.

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

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

Our U.S. business is seasonal in nature, which causes our revenue and earnings to fluctuate.

Our U.S. business is seasonal due to the impact of fluctuating demand for our products and services and fluctuating collection rates throughout the year. Demand has historically been highest in the third and fourth quarters of each year, corresponding to the holiday season, and lowest in the first quarter of each year, corresponding to our customers’ receipt of income tax refunds. Typically, our cost of revenue, which represents our loan loss provision, is lowest as a percentage of revenue in the first quarter of each year, corresponding to our customers’ receipt of income tax refunds, and increases as a percentage of revenue for the remainder of each year. This seasonality requires us to manage our cash flows over the course of the year. If our revenue or collections were to fall substantially below what we would normally expect during certain periods, our ability to service debt and meet our other liquidity requirements may be adversely affected, which could have a material adverse effect on our business, prospects, results of operations, and financial condition.

 

 

 

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RISKS RELATED TO OUR RELATIONSHIP WITH CASH AMERICA

Following this offering, we will continue to depend on Cash America to provide us with certain services for our business.

Prior to this offering, we have operated as a wholly-owned subsidiary of Cash America. Certain administrative services required by us for the operation of our business are currently provided by Cash America and its subsidiaries, including services related to executive oversight, insurance and risk management, government relations, internal audit, treasury, payroll, legal, finance, accounting, tax, human resources and certain information systems and collections support. Prior to the completion of this offering, we will enter into agreements with Cash America related to the separation of our business operations from Cash America, including a transition services agreement. Under the terms of the transition services agreement, which will be signed immediately prior to the completion of this offering, Cash America will provide us with certain administrative services on a transitional basis for a fee, including, among other things, risk management, treasury, legal, accounting, tax, government relations, internal audit, payroll, human resources, and investor relations and collections support for our Alaska market. While these services are being provided to us by Cash America, our operational flexibility to modify or implement changes with respect to such services or the amounts we pay for them will be limited. We expect the services provided under the transition services agreement will terminate six months following the completion of this offering. We believe it is necessary for Cash America to provide these services for us under the transition services agreement to facilitate the efficient operation of our business as we transition to becoming a public company. We will, as a result, initially depend on Cash America for transition services following this offering. See “Our relationship with Cash America—Agreements Between Us and Cash America—Transition Services Agreement.”

We negotiated these arrangements with Cash America in the context of a parent-subsidiary relationship. They contain terms that may be more or less favorable than terms we might have obtained in arm’s-length negotiations with unaffiliated third parties.

Once the transition period specified in the transition services agreement has expired, or if Cash America does not or is unable to perform its obligations under the transition services agreement, we will be required to provide these services ourselves or to obtain substitute arrangements with third parties. We may be unable to provide these services because of financial or other constraints or be unable to implement substitute arrangements on a timely basis on terms that are favorable to us, or at all.

Following this offering, we will not be able to continue to rely on Cash America to provide us with financing for our business or credit support for our CSO programs.

We have relied on Cash America to provide us with financing to fund the development and operation of our business, and after the completion of this offering, we will not be able to continue to rely on Cash America to fund our business and will be required to utilize other sources of financing to develop and operate our business. Further, Cash America has guaranteed our obligations under our CSO programs, as discussed under “—The failure of third-party lenders to offer loans under our CSO programs could disrupt our operations or result in a loss of revenue,” after the completion of this offering, Cash America intends to no longer extend a guaranty of our obligations to third-party lenders participating in our CSO programs. There is no assurance that third-party lenders will participate in our CSO programs without these guarantees. If third-party lenders are unwilling to continue to participate in our CSO programs, this would have a material adverse effect on our consumer loan business and result in the loss of revenue.

 

 

 

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As long as Cash America holds a substantial amount of our common stock, it will be able to influence the outcome of our corporate matters.

After the completion of this offering, Cash America will own     % of the outstanding shares of our common stock (     % if the underwriters exercise their over-allotment option in full). Cash America has informed us that its objective is to own between 35% and 49% of our outstanding shares of common stock immediately following the offering to permit it to account for its investment in us using the equity method of accounting, and will not continue to consolidate our results of operations with its consolidated results of operations. As a result of its anticipated ownership of our common stock following this offering, Cash America will be our largest stockholder following the offering and will have significant influence in all matters submitted to the vote of our stockholders, including the composition of our board of directors and other matters such as determinations with respect to acquisitions of businesses, mergers and other business combinations.

Cash America’s interests may not be the same as, or may conflict with, the interests of our other stockholders. As a result, actions that Cash America takes with respect to us may not be favorable to us or our other stockholders. In addition, Cash America’s ownership of a significant percentage, though less than a majority, of our shares may discourage transactions involving a change of control of our company, including transactions in which you, as a holder of our common stock, might otherwise receive a premium for your shares over the then-current market price.

We may have potential conflicts of interest with Cash America regarding our past and ongoing relationships, and because of Cash America’s ownership interest in us following this offering, the resolution of these conflicts may not be favorable to us.

Conflicts of interest may arise between Cash America and us in a number of areas relating to our past and ongoing relationships, including:

 

Ø  

labor, tax, employee benefit, indemnification, and other matters arising under the separation agreements;

 

Ø  

employee recruiting and retention;

 

Ø  

sales or distributions by Cash America of all or any portion of its ownership interest in us, which could be to one of our competitors;

 

Ø  

business opportunities that may be attractive to both Cash America and us; and

 

Ø  

competition we may face from Cash America in connection with Cash America’s continuing business of offering alternative financial services to consumers in markets served by us.

We may not be able to resolve any potential conflicts, and even if we do, the resolution may be less favorable to us than if we were dealing with an unaffiliated party.

We do not have a non-competition agreement with Cash America to restrict Cash America from competing with us, and Cash America is not required to offer corporate opportunities to us, and certain of our directors and officers are permitted to offer certain corporate opportunities to Cash America before us.

We do not have any noncompetition agreement or arrangement with Cash America. Following the completion of this offering, Cash America will be free to compete with us in any activity or line of business. Additionally, following completion of this offering, Cash America will continue to offer alternative financial services and other financial services to consumers through its retail locations in

 

 

 

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markets served by us and is not restricted from reentering the online financial services business such as ours. We will not have any interest or expectancy in any business activity, opportunity, transaction or other matter in which Cash America engages or seeks to engage merely because we engage in the same or similar lines of business. In addition, Cash America will have no duty to communicate its knowledge of, or offer, any potential business opportunity, transaction or other matter to us, and Cash America is free to pursue or acquire such business opportunity, including opportunities that would be in direct competition with us. At the completion of this offering, Daniel R. Feehan, Cash America’s President and Chief Executive Officer, will be the Executive Chairman of our board of directors. As a result, Cash America may gain the benefit of corporate opportunities that are presented to him.

Our separation and ancillary agreements with Cash America require us to assume the past, present, and future liabilities related to our business and may be less favorable to us than if they had been negotiated with unaffiliated third parties.

We negotiated our separation and ancillary agreements with Cash America as a wholly-owned subsidiary of Cash America and will enter into these agreements immediately prior to the completion of this offering. If these agreements had been negotiated with unaffiliated third parties, they might have been more favorable to us. Pursuant to these agreements, we have agreed to indemnify Cash America for, among other matters, all past, present, and future liabilities related to our business and our assumed or retained liabilities, other than tax liabilities, which will be governed by a tax sharing agreement, and we have assumed these liabilities under the separation and ancillary agreements. Such liabilities include unknown liabilities that could be significant. The allocation of liabilities between Cash America and us may not reflect the allocation that would have been reached between two unaffiliated parties.

Our prior and continuing relationship with Cash America exposes us to risks attributable to the businesses of Cash America.

Cash America is obligated to indemnify us for losses that a party may seek to impose upon us or our affiliates for liabilities relating to the business of Cash America that are incurred through a breach of the separation or ancillary agreements by Cash America or its affiliates other than us, if losses are attributable to Cash America’s business, other than ours, or are not expressly assumed by us under the separation agreement or any ancillary agreement. Immediately following this offering, any claims made against us that are properly attributable to Cash America in accordance with these arrangements would require us to exercise our rights under the separation agreement or any ancillary agreement to obtain payment from Cash America. We are exposed to the risk that, in these circumstances, Cash America cannot, or will not, make the required payment.

Our historical and pro forma consolidated financial information may not be representative of the results we would have achieved as a stand-alone public company and may not be a reliable indicator of our future results.

The historical and pro forma consolidated financial information that we have included in this prospectus may not necessarily reflect what our financial position, results of operations or cash flows would have been had we been an independent entity during the periods presented or those that we will achieve in the future. The costs and expenses reflected in our historical financial information include an allocation for certain corporate functions historically provided by Cash America, including executive oversight, insurance and risk management, government relations, internal audit, treasury, payroll, legal, finance, accounting, tax, human resources and certain information systems and collections support, that may be different from the comparable expenses that we would have incurred had we operated as a stand-alone company. We have not adjusted our historical or pro forma consolidated financial information to reflect changes that will occur in our cost structure, financing and operations as a result of our transition to

 

 

 

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becoming a stand-alone public company, including changes in our employee base, potential increased costs associated with reduced economies of scale and increased costs associated with Securities and Exchange Commission, or the SEC, reporting and the New York Stock Exchange, or the NYSE, requirements. Therefore, our historical and pro forma consolidated financial information may not necessarily be indicative of what our financial position, results of operations or cash flows will be in the future.

Our directors and executive officers who own shares of common stock of Cash America, who hold options to acquire common stock of Cash America or other Cash America equity-based awards, or who hold positions with Cash America may have actual or potential conflicts of interest.

Ownership of shares of common stock of Cash America, options to acquire shares of common stock of Cash America, and other equity-based securities of Cash America by certain of our directors and officers after this offering, and the presence of directors or officers of Cash America on our board of directors could create, or appear to create, potential conflicts of interest when those directors and officers are faced with decisions that could have different implications for Cash America than they do for us. Certain of our directors will hold director and/or officer positions with Cash America or beneficially own significant amounts of common stock of Cash America.

Under certain circumstances we could be liable for payments to Cash America related to income taxes owed by Cash America.

Following consummation of this offering, we will cease to be a member of Cash America’s consolidated group for U.S. federal income tax purposes. However, pursuant to the terms of the tax sharing agreement between us and Cash America, we may be required to make payments to Cash America in respect of taxes owed by Cash America for periods prior to this offering. For a more detailed description of our tax sharing agreement, see “Our relationship with Cash America—Agreements Between Us and Cash America—Tax Sharing Agreement.” Even if we are not responsible for tax liabilities of Cash America under the tax sharing agreement, we nonetheless could be liable under applicable tax law for such liabilities if Cash America were to fail to pay them.

RISKS RELATED TO THE OFFERING

There currently exists no market for our common stock. An active trading market may not develop for our common stock, and the price of our common stock may be subject to factors beyond our control. If our share price fluctuates after this offering, you could lose all or a significant part of your investment.

Prior to this offering, no public market existed for our common stock. An active and liquid market for the common stock may not develop following the completion of this offering or, if developed, may not be maintained. If an active public market does not develop or is not maintained, you may have difficulty selling your shares. The initial public offering price of our common stock was determined by negotiations between us, Cash America, and the underwriters for this offering and may not be indicative of the price at which the common stock will trade following the completion of this offering.

The market price of our common stock may also be influenced by many other factors, some of which are beyond our control, including, among other things:

 

Ø  

actual or anticipated variations in quarterly and annual operating results;

 

 

 

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Ø  

changes in financial estimates and recommendations by research analysts following our common stock or the failure of research analysts to cover our common stock after this offering;

 

Ø  

actual or anticipated changes in the United States or foreign economies;

 

Ø  

terrorist acts or wars;

 

Ø  

changes in federal, state or foreign laws and regulations affecting our industry;

 

Ø  

announcements by us or our competitors of significant acquisitions, strategic partnerships, divestitures, joint ventures, or other strategic initiatives;

 

Ø  

actual or anticipated sales or distributions of shares of our common stock by Cash America, as well as by our officers and directors, whether in the market or in subsequent public offerings;

 

Ø  

the trading volume of our common stock; and

 

Ø  

the other risks and uncertainties described herein.

As a result of volatility in the price of our common stock from these and other factors, you may not be able to resell your shares at or above the initial public offering price. In addition, the stock markets have experienced price and volume fluctuations that have affected and continue to affect the market price of equity securities of many companies. These fluctuations have often been unrelated or disproportionate to the operating performance of these companies. These broad market fluctuations, as well as general economic, systemic, political, and market conditions, such as recessions, loss of investor confidence, or interest rate changes, may negatively affect the market price of our common stock.

Securities analysts may not initiate coverage of our common stock or may issue negative reports, and this may have a negative impact on the market price of our common stock.

The market price of our common stock will be influenced by the research and reports that industry or securities analysts publish about us, our industry and our competitors. If securities analysts do not cover our common stock, the lack of research coverage may adversely affect the market price of our common stock. Even if analysts elect to cover us, if one or more of the analysts downgrades our stock, our stock price could decline. Additionally, if one or more of those analysts ceases coverage of our company, we could lose visibility in the market, which in turn could cause our stock price to decline.

Investors purchasing common stock in this offering will incur substantial and immediate dilution.

The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our outstanding common stock. Purchasers of our common stock in this offering will incur immediate and substantial dilution of $             per share in the net tangible book value of our common stock from an initial public offering price of $             per share. This means that if we were to be liquidated immediately after this offering, there might be no assets available for distribution to you after satisfaction of all our obligations to creditors. For a further description of the effects of dilution in the net tangible book value of our common stock, see the section entitled “Dilution.”

Our share price may decline because of the ability of Cash America and others to sell our common stock.

Sales of substantial amounts of our common stock after this offering, or the possibility of those sales, could adversely affect the market price of our common stock and impede our ability to raise capital through the issuance of equity securities. See “Shares eligible for future sale” for a discussion of possible future sales of our common stock.

 

 

 

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After this offering, Cash America will own     % of the outstanding shares of our common stock (     % if the underwriters exercise their over-allotment option in full). Cash America has no contractual obligation to retain any of our common stock, except for a limited period, as described under the section entitled “Underwriting,” during which it will not sell any of our common stock without the consent of the representatives of the underwriters to this offering until 180 days after the date of this prospectus. Subject to applicable securities laws, after the expiration of the 180-day lock-up period, or before, with consent of the representatives of the underwriters to this offering, Cash America may sell any or all of our common stock that it beneficially owns. The registration rights agreement we will enter into with Cash America grants Cash America the right to require us to register the shares of our common stock it holds in specified circumstances. See “Our relationship with Cash America—Agreements Between Us and Cash America—Registration Rights Agreement.”

The shares of our common stock sold in this offering will be freely tradable without restriction in the United States, except for any shares acquired by an affiliate of our company, which can be sold under Rule 144 under the U.S. Securities Act of 1933, as amended, or the Securities Act, subject to various volume and other limitations. Subject to certain exceptions, we, our executive officers and directors, and Cash America have agreed not to sell, dispose of, or hedge any shares of our common stock or any securities convertible into, or exchangeable for, our common stock for 180 days after the date of this prospectus without the prior written consent of the representatives of the underwriters to this offering, who may waive this restriction at any time without public notice. After the expiration of the 180-day lock-up period, our executive officers, directors, and Cash America could dispose of all or any part of their shares of our common stock through a public offering, sales under Rule 144, or another transaction.

Your percentage ownership in us may be diluted by future issuances of common stock or securities or instruments that are convertible into our common stock, which could reduce your influence over matters on which stockholders vote.

Our board of directors has the authority, without action or vote of our stockholders, to issue all or any part of our authorized but unissued shares of common stock, including shares issuable upon the exercise of options, shares that may be issued to satisfy our obligations under our incentive plans, shares of our authorized but unissued preferred stock, and securities and instruments that are convertible into our common stock. Issuances of common stock or voting preferred stock would reduce your influence over matters on which our stockholders vote and, in the case of issuances of preferred stock, likely would result in your interest in us being subject to the prior rights of holders of that preferred stock.

We do not anticipate paying any dividends on our common stock in the foreseeable future. As a result, you will need to sell your shares of common stock to receive any income or realize a return on your investment.

We do not anticipate paying any dividends on our common stock in the foreseeable future. Any declaration and payment of future dividends to holders of our common stock may be limited by the provisions of the Delaware General Corporation Law, or DGCL, and we expect will be limited by the terms of our credit agreement. The future payment of dividends will be at the sole discretion of our board of directors and will depend on many factors, including our earnings, capital requirements, financial condition, and other considerations that our board of directors deems relevant. As a result, to receive any income or realize a return on your investment, you will need to sell your shares of common stock. You may not be able to sell your shares of common stock at or above the price you paid for them.

 

 

 

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Our amended and restated certificate of incorporation, amended and restated bylaws and Delaware state law contain provisions that may have the effect of delaying or preventing a change in control of our company.

Our amended and restated certificate of incorporation authorizes our board of directors to issue preferred stock and to determine the designations, powers, preferences, and relative, participating, optional, or other special rights, if any, and the qualifications, limitations, or restrictions of our preferred stock, including the number of shares, in any series, without any further vote or action by the stockholders. The rights of the holders of our common stock will be subject to the rights of the holders of any preferred stock that may be issued in the future. The issuance of preferred stock could delay, deter, or prevent a change in control and could adversely affect the voting power or economic value of your shares.

In addition, some provisions of our amended and restated certificate of incorporation and amended and restated bylaws could make it more difficult for a third party to acquire control of us, even if the change of control would be beneficial to our stockholders, including:

 

Ø  

limitations on the ability of our stockholders to call special meetings;

 

Ø  

limitations on the ability of our stockholders to act by written consent;

 

Ø  

a separate vote of 66 2/3% of the voting power of the outstanding shares of capital stock in order for stockholders to amend the bylaws in certain circumstances; and

 

Ø  

advance notice provisions for stockholder proposals and nominations for elections to the board of directors to be acted upon at meetings of stockholders.

These provisions apply even if the offer may be considered beneficial by some stockholders. Further, these provisions may discourage potential acquisition proposals and may delay, deter, or prevent a change of control of our company, including through unsolicited transactions that some or all of our stockholders might consider to be desirable. As a result, efforts by our stockholders to change our direction or our management may be unsuccessful.

 

 

 

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Special note regarding forward-looking statements

This prospectus includes forward-looking statements. 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 our senior management with respect to our business, financial condition and prospects. When used in this report, terms such as “believes,” “estimates,” “should,” “could,” “would,” “plans,” “expects,” “anticipates,” “may,” “forecast,” “project,” “exploration” and similar expressions or variations as they relate to us or our management are intended to identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties that are beyond our ability to control and, in some cases, predict. Accordingly, there are or will be important factors that could cause our actual results to differ materially from those indicated in these statements. Key factors that could cause our 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:

 

Ø  

changes in consumer credit and other laws and government rules and regulations applicable to our business;

 

Ø  

acceptance by consumers, legislators and regulators of the negative characterization by the media and consumer activists with respect to certain of our products;

 

Ø  

the effect of any current or future litigation proceedings on us;

 

Ø  

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

 

Ø  

changes in demand for our services;

 

Ø  

a decreased demand for or acceptance of our products by online customers;

 

Ø  

changes in competition;

 

Ø  

a prolonged interruption in the operations of our facilities, systems and business functions, including our information technology and other business systems;

 

Ø  

changes in economic conditions;

 

Ø  

interest rate fluctuations;

 

Ø  

changes in foreign currency exchange rates;

 

Ø  

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

 

Ø  

changes in our ability to satisfy our debt obligations or to refinance existing debt obligations or obtain new capital to finance growth;

 

Ø  

the loss of services of any of our executive officers;

 

Ø  

the ability to successfully integrate newly acquired businesses into our operations;

 

Ø  

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

 

Ø  

the effect of any of such changes on our business or the markets in which we operate; and

 

Ø  

other risks and uncertainties described herein.

All forward-looking statements involve risks, assumptions and uncertainties. The occurrence of the events described, and the achievement of the expected results, depend on many events, some or all of which are not predictable or within our control. Actual results may differ materially from expected

 

 

 

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results. See the section titled “Risk factors” and elsewhere in this prospectus for a more complete discussion of these risks, assumptions and uncertainties and for other risks and uncertainties. These risks, assumptions and uncertainties are not necessarily all of the important factors that could cause actual results to differ materially from those expressed in any of our forward-looking statements. Other unknown or unpredictable factors also could harm our results. In light of these risks, uncertainties and assumptions, the forward-looking events discussed in this prospectus might not occur.

The forward-looking statements contained in this prospectus are expressly qualified in their entirety by this cautionary statement. The forward-looking statements included in this prospectus are made as of the date of this prospectus and we undertake no obligation to publicly update or revise any forward-looking statements to reflect new information, future events or otherwise, except as required by applicable securities laws.

 

 

 

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Use of proceeds

We estimate that we will receive net proceeds from this offering of approximately $             million, assuming an offering price of $             per share, the midpoint of the price range reflected on the cover page of this prospectus, and after deducting estimated underwriting discounts and commissions relating to the shares to be sold by us and estimated offering expenses. A $1.00 increase (decrease) in the assumed offering price of $             per share would increase (decrease) the net proceeds to us from this offering by $             million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same and after deducting estimated underwriting discounts and commissions relating to the shares to be sold by us and estimated offering expenses.

We intend to use the net proceeds that we receive from this offering to repay to Cash America all of our outstanding intercompany indebtedness (totaling approximately $353.2 million), including a $75.0 million dividend paid to Cash America in the form of a promissory note dated September 6, 2011. After repayment of the intercompany indebtedness due to Cash America, we do not expect any additional net proceeds of the offering to be available for use in our business.

Additionally, we will not receive any of the proceeds from the sale of shares owned by Cash America to be sold in this offering, including any shares sold by Cash America pursuant to the underwriters’ over-allotment option, although we will bear the costs associated with the sale of these shares, other than underwriting discounts and commissions relating to the shares to be sold by Cash America. Cash America has informed us that it intends to use the proceeds it receives in this offering and from our repayment of intercompany indebtedness owing to Cash America, net of applicable taxes, to repay a portion of the amounts outstanding under its domestic line of credit and for other general corporate purposes, which may include, among other potential uses, funding its strategy of expanding its storefront business and products in the United States and Latin America and possibly its repurchases of Cash America common stock.

The intercompany indebtedness to be repaid by us is represented by three note agreements, one of which had an outstanding principal balance of $239.0 million at June 30, 2011, bears interest at Cash America’s monthly weighted average cost of borrowed funds, which was 5.26% at June 30, 2011, and has a maturity date of June 30, 2018, one of which had an outstanding principal balance of $75.0 million at September 6, 2011 bears interest at Cash America’s monthly weighted average cost of borrowed funds, which was 5.26% at June 30, 2011, and has a maturity date of September 1, 2017, and one of which had an outstanding principal balance of $39.2 million at June 30, 2011, bears interest at a rate of 12% annually and has a maturity date of August 1, 2017.

 

 

Dividend policy

We do not anticipate paying any dividends on our common stock in the foreseeable future. We currently intend to retain our future earnings for use in the operation and expansion of our business. As a result, to receive any income or realize a return on your investment, you will need to sell your shares of common stock. You may not be able to sell your shares of common stock at or above the price you paid for them. Our present or future ability to pay dividends is governed by:

 

Ø  

the provisions of the Delaware General Corporation Law; and

 

Ø  

the terms of a credit facility that we plan to enter into prior to the commencement of this offering.

The future payment of cash dividends, if any, on our common stock is within the discretion of our board of directors and will depend on our earnings, capital requirements, financial condition and other relevant factors.

 

 

 

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Capitalization

The following table sets forth our cash and our capitalization as of June 30, 2011:

 

Ø  

on an actual basis, which reflects Cash America’s contribution to us on September 13, 2011 of the capital stock of the subsidiaries it owned that are engaged in the online financial services business in exchange for 33 million shares of our common stock, which has been retrospectively presented in our consolidated financial statements;

 

Ø  

on a pro forma basis to reflect a $75.0 million dividend paid to Cash America in the form of a promissory note dated September 6, 2011; and

 

Ø  

on a pro forma, as adjusted basis to reflect (i) the pro forma adjustment described above, (ii) the sale by us of              shares of common stock in this offering at an assumed initial public offering price of $             per share, the midpoint of the price range set forth on the cover page of this prospectus, after deducting estimated underwriting discounts and commissions and estimated offering expenses payable by us; and (iii) the application of approximately $353.2 million of the net proceeds from this offering to repay in full our affiliate notes payable.

The pro forma and pro forma, as adjusted, information below is illustrative only and our capitalization following the completion of this offering will be adjusted based on the actual terms of this offering determined at pricing. You should read this table together with “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements and the accompanying notes appearing elsewhere in this prospectus.

 

    As of June 30, 2011  
     Actual     Pro Forma     Pro Forma,
as adjusted
 
    (dollars in thousands)  

Cash

  $ 33,252      $ 33,252      $                
 

 

 

   

 

 

   

 

 

 

Affiliate notes payable

  $ 278,238      $ 353,238      $     
 

 

 

   

 

 

   

 

 

 

Equity:

     

Common stock, $0.00001 par value, 250,000,000 shares authorized actual, 250,000,000 shares authorized pro forma, 250,000,000 shares authorized pro forma, as adjusted, 33,000,000 shares issued and outstanding actual, 33,000,000 shares issued and outstanding pro forma and             shares issued and outstanding, pro forma, as adjusted

               

Preferred stock, $0.00001 par value, 25,000,000 shares authorized actual, 25,000,000 shares authorized pro forma, 25,000,000 shares authorized pro forma, as adjusted, no shares issued and outstanding actual, pro forma, and pro forma, as adjusted

                    

Additional paid-in capital

    595        595     

Retained earnings

    98,742        23,742     

Accumulated other comprehensive loss

    (11     (11  
 

 

 

   

 

 

   

 

 

 

Total Equity

    99,326        24,326     
 

 

 

   

 

 

   

 

 

 

Total Capitalization

  $ 377,564      $ 377,564      $     
 

 

 

   

 

 

   

 

 

 

 

 

 

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Dilution

If you invest in our common stock, your interest will be diluted immediately to the extent of the difference between the initial public offering price of $            per share, which is the midpoint of the price range reflected on the cover page of this prospectus, and the adjusted net tangible book value per share of our common stock after this offering. Dilution results from the fact that the per share offering price of our common stock is substantially in excess of the pro forma as adjusted net tangible book value per share.

At June 30, 2011, the pro forma net tangible book value of our common stock was approximately $(232.2) million, or approximately $(7.04) per share, which reflects Cash America’s contribution to us on September 13, 2011 of the capital stock of the subsidiaries it owned that are engaged in the online financial services business in exchange for 33 million shares of our common stock, which has been retrospectively presented in our consolidated financial statements, and a $75.0 million dividend, on a pro forma basis, paid to Cash America in the form of a promissory note dated September 6, 2011. Pro forma net tangible book value per share is determined by dividing our pro forma tangible net worth (tangible assets less total liabilities) by the total number of outstanding shares of common stock that will be outstanding immediately prior to the closing of this offering.

After giving effect to the sale of              shares of our common stock offered by us at the initial public offering price of $             per share, which is the midpoint of the price range reflected on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses, our pro forma as adjusted net tangible book value at June 30, 2011 would have been approximately $             million, or approximately $             per share. This represents an immediate increase in the pro forma net tangible book value of $             per share to our existing stockholder and an immediate dilution (i.e., the difference between the offering price and the adjusted pro forma net tangible book value after this offering) to new investors purchasing shares in this offering of $             per share. The following table illustrates this pro forma as adjusted per share dilution to new investors, assuming the underwriters do not exercise their over-allotment option:

 

Initial public offering price per share

      $                

Pro forma net tangible book value per share at June 30, 2011, before giving effect to this offering

   $                   

Increase in pro forma net tangible book value per share attributable to new investors

   $                   

Pro forma, as adjusted net tangible book value per share after giving effect to this offering

     
     

 

 

 

Pro forma, as adjusted dilution per share to new investors

      $                
     

 

 

 

 

 

 

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Dilution

 

 

The following table sets forth as of June 30, 2011, the differences between the number of shares of common stock purchased from us, the total consideration paid and the average price per share paid by the existing stockholder, Cash America, and new investors purchasing shares of our common stock in this offering, before deducting underwriting discounts and commissions and estimated offering expenses at the initial public offering price of $             per share.

 

     Shares Purchased     Total Consideration     Average Price
per Share
      Number    Percent   Amount    Percent  

Existing Stockholder

                  %   $                            %   $            

New Investors

            
  

 

  

 

 

 

  

 

 

 

Total

                  %   $                            %  
  

 

  

 

 

 

  

 

 

 

The number of shares of our common stock held by our existing stockholder and to be outstanding following this offering is based on              shares of our common stock outstanding as of                     , 2011 and includes shares of common stock to be issued to our executive officers, non-employee directors and other employees in connection with the completion of this offering, but excludes shares of common stock reserved for future issuance under our incentive plan.

If the underwriters exercise their option to purchase additional shares of common stock in full, the following will occur:

 

Ø  

the percentage of our total outstanding common stock held by the existing stockholder, Cash America, will decrease to approximately     %; and

 

Ø  

the number of shares of common stock held by new investors will increase to             , or approximately     % of our total outstanding common stock.

A $1.00 increase (decrease) in the assumed initial public offering price of $             per share would increase (decrease) total consideration paid by new investors in this offering and by all investors by $             million, and increase dilution per share for new investors by approximately $            .

 

 

 

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Selected historical consolidated financial data

The following tables present selected historical consolidated financial data for our business. You should read this information together with “Management’s discussion and analysis of financial condition and results of operations” and our consolidated financial statements, related notes and other financial information, each included elsewhere in this prospectus. The selected historical consolidated financial data in this section are not intended to replace the financial statements and are qualified in their entirety by the consolidated financial statements and related notes.

The selected consolidated income statement data for the six months ended June 30, 2011 and 2010 and consolidated balance sheet data as of June 30, 2011 have been derived from our unaudited financial statements and related notes appearing elsewhere in this prospectus which, in the opinion of our management, have been prepared on the same basis as the audited financial statements and include all adjustments necessary for fair statement of our operating results and financial position as of those dates and for those periods. The selected consolidated other data for the six months ended June 30, 2011 and 2010 was derived from our unaudited financial and operational records. Additional information on these measurements is contained in “Management’s discussion and analysis of financial condition and results of operations.” The selected financial information for the six months ended June 30, 2011 is not necessarily indicative of the results that may be expected for the year ending December 31, 2011 and our historical results are not necessarily indicative of our results for any future period.

We derived the selected consolidated income statement data for each of the three years in the period ended December 31, 2010 and consolidated balance sheet data as of December 31, 2010 and 2009 from our audited consolidated financial statements and the related notes appearing elsewhere in this prospectus. We derived the selected consolidated income statement data for the year ended December 31, 2007 and consolidated balance sheet data as of December 31, 2008 and 2007 from our unaudited financial statements, which are not included in this prospectus. We derived the selected consolidated income statement data for the period from September 15, 2006 to December 31, 2006 and consolidated balance sheet data as of December 31, 2006 from our unaudited financial statements, which are not included in this prospectus. The selected consolidated statement of income data for the period from January 1, 2006 to September 14, 2006 was derived from the predecessor’s unaudited financial statements, which are not included in this prospectus. The selected consolidated other data for the years ended December 31, 2010, 2009, 2008, 2007 and for the period from September 15, 2006 to December 31, 2006 was derived from our unaudited financial and operational records. Additional information on these measurements is contained in “Management’s discussion and analysis of financial condition and results of operations.”

Our predecessor was acquired by Cash America on September 15, 2006, which was accounted for as a business combination using the purchase method of accounting, which established a new accounting basis for all assets acquired and liabilities assumed based on estimated fair values, and therefore, the selected financial data for the period from January 1, 2006 to September 14, 2006 may not be comparable to other periods presented.

 

 

 

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Table of Contents

Selected historical consolidated financial data

 

 

 

    Six Months Ended
June 30,
    Year Ended December 31,                   

Selected

consolidated

income statement

data:

  2011     2010(1)     2010(1)     2009(1)     2008(1)(2)     2007    

The period

from

9/15/06 to

12/31/06(2)

     

The period

from 1/1/06

to 9/14/06

 
     (Unaudited)     (Audited)     (Unaudited)          Predecessor
(Unaudited)
 
    (dollars in thousands, except per share amounts)             

Revenue

                   

Domestic

  $ 114,272     $ 130,429     $ 276,295     $ 214,479      $ 200,263     $ 183,135     $ 30,483         $ 37,580   

Foreign

    89,000       40,070       102,022       40,498        23,214       1,594                    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total Revenue

    203,272       170,499       378,317       254,977        223,477       184,729       30,483           37,580  

Cost of Revenue

    76,690        70,822       164,957       109,174        107,170       102,870        14,817            21,826   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Gross Profit

  $ 126,582     $ 99,677     $ 213,360     $ 145,803      $ 116,307     $ 81,859     $ 15,666         $ 15,754   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Income from Operations

  $ 38,621     $ 28,188     $ 54,369     $ 39,722      $ 42,212     $ 23,910      $ 5,219         $   

Net Income

    19,157        13,317        24,821       17,703        21,951       12,242        2,866           4,182   

Earnings per share

                   

Basic

  $ 0.58      $ 0.40      $ 0.75      $ 0.54      $ 0.67      $ 0.37      $ 0.09         

Diluted

  $ 0.58      $ 0.40      $ 0.75      $ 0.54      $ 0.67      $ 0.37      $ 0.09         

 

(1)   Results of operations for the years ended 2010, 2009 and 2008 and the six-month period ended June 30, 2010 include revenues and results of operations of our MLOC services business that ended in October 2010. See “Management’s discussion and analysis of financial information and results of operations” for further information concerning our former MLOC services business.

 

(2)   See Note 4 in the Notes to Consolidated Financial Statements for discussion of our acquisitions in 2006 and 2008.

 

    As of June 30,     As of December 31,  
Selected consolidated
balance sheet data:
  2011     2010     2010     2009     2008(1)     2007     2006(1)  
    (Unaudited)     (Audited)     (Unaudited)  
    (dollars in thousands)  

Cash

  $ 33,252     $ 32,911     $ 19,187     $ 27,261     $ 16,496      $ 5,755     $ 3,812   

Consumer loans, net

    108,648       74,559       90,355       60,787       43,320        38,742       26,391   

Total Assets

    454,204       426,631       421,767       375,736       316,924        180,410       93,095   

Affiliate notes payable

    278,238        272,117        270,269        255,799        204,626        120,998        38,813   

Long-term liabilities

    312,032       295,205       293,309        274,086       213,682        122,602       38,813   

Total Liabilities

    354,878       358,664       341,893       320,384       279,232        165,231       90,229   

Total Equity

    99,326       67,967       79,874       55,352       37,692         15,179       2,866    

 

(1)   See Note 4 in the Notes to Consolidated Financial Statements for discussion of our acquisitions in 2006 and 2008.

 

 

 

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Selected historical consolidated financial data

 

 

 

    Six Months Ended
June 30,
    Year Ended December 31,                   

Selected

consolidated

other data:

  2011     2010     2010     2009     2008(1)     2007     The period
from
9/15/06 to
12/31/06(1)
      The period
from
1/1/06 to
9/14/06
 
                               Predecessor  
    (dollars in thousands) (unaudited)          (unaudited)  

Number of Customer Transactions

                   

Domestic(2) 

    1,062,534       1,981,990       3,905,696       2,947,204       2,314,421        2,098,650       389,008            535,588  

Foreign

    702,071       378,518       923,474       413,929       192,691        19,942                    
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total

    1,764,605       2,360,508       4,829,170       3,361,133       2,507,112        2,118,592       389,008            535,588  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Volume of customer transactions

                   

Domestic(2) 

  $ 529,136     $ 759,816     $ 1,554,285     $ 1,230,885     $ 1,099,559      $ 942,429     $ 151,572          $ 189,673  

Foreign

    383,216       178,312       458,811       174,188       97,436        6,460               
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Total

  $ 912,352     $ 938,128     $ 2,013,096     $ 1,405,073     $ 1,196,995      $ 948,889     $ 151,572          $ 189,673  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Adjusted EBITDA(3)

  $ 44,343     $ 32,249     $ 62,928     $ 47,019     $ 47,446      $ 26,918     $ 5,878              

 

(1)   See Note 4 in the Notes to Consolidated Financial Statements for discussion of our acquisitions in 2006 and 2008.

 

(2)  

Includes number of domestic transactions and dollar amounts of domestic customer transactions associated with our MLOC services business which ended in October 2010. See “Management’s discussion and analysis of financial information and results of operations” for further information concerning our former MLOC services business.

 

(3)   The following table presents a reconciliation of net income, the most comparable generally accepted accounting principles, or GAAP, measure to Adjusted EBITDA for each of the periods presented. See “Management’s discussion and analysis of financial condition and results of operations” for a definition of Adjusted EBITDA.

 

   

 

Six Months Ended
June 30,

    Year Ended December 31,          The period
from
9/15/06 to
12/31/06
 
    2011     2010     2010     2009     2008     2007      

Net Income

  $ 19,157     $ 13,317     $ 24,821     $ 17,703     $ 21,951      $ 12,242         $ 2,866   
 

Adjustments:

                 

Depreciation and amortization expenses

    5,722       4,061       8,559       7,297       5,234        3,008           659   

Interest expense, net

    8,034       7,309       15,209       11,852       7,099        4,776           738   

Foreign currency transaction loss (gain)

    94       28       156       (38     79        170             

Provision for income taxes

    11,336       7,534       14,183       10,205       13,083        6,722           1,615   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

Adjusted EBITDA

  $ 44,343      $ 32,249      $ 62,928      $ 47,019      $ 47,446      $ 26,918          $ 5,878   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

       

 

 

 

 

 

 

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Unaudited pro forma consolidated financial information

Our unaudited pro forma consolidated financial information presented below has been derived from our historical consolidated financial statements included in this prospectus. The pro forma adjustments give effect to our separation from Cash America into a stand-alone public company. Our unaudited pro forma financial information should be read in conjunction with “Management’s discussion and analysis of financial condition and results of operations” and our historical consolidated financial statements and the notes to those statements included in this prospectus.

The unaudited pro forma consolidated statements of income for the six months ended June 30, 2011 and the year ended December 31, 2010 have been prepared as though the separation occurred on January 1, 2010, the beginning of the most recent year for which audited financial statements are available. The unaudited pro forma balance sheet at June 30, 2011 has been prepared as though the separation occurred on June 30, 2011. The pro forma adjustments are based on available information and assumptions that our management believes are reasonable; however, such adjustments are subject to change as the actual costs of operating as a stand-alone company are determined. In addition, such adjustments are estimates and may not prove to be accurate.

The pro forma adjustments include, among other things, our use of proceeds of this offering, after deducting estimated underwriting discounts and commissions and estimated offering expenses, to repay in full to Cash America all of our outstanding intercompany indebtedness represented by three affiliate notes payable. All corresponding affiliate interest expense was eliminated in the pro forma statements of income. In addition, the unaudited pro forma consolidated financial information does not reflect indebtedness we expect to incur in connection with our capital funding strategy. See “Management’s discussion and analysis of financial condition and results of operations—Liquidity and Capital Resources” and “Risk factors—Risks Related to Our Relationship with Cash America.”

Cash America assesses us an overhead allocation charge for certain administrative services. These services include executive oversight, insurance and risk management, government relations, internal audit, treasury, payroll, legal, finance, accounting, tax, human resources and certain information systems and collections support and other similar expenses for which we will be responsible after the completion of this offering as a stand-alone company. Our historical and pro forma financial statements include overhead allocation charges related to these services totaling $14.3 million and $8.4 million for the year ended December 31, 2010 and the six months ended June 30, 2011, respectively. Management estimates the actual administrative costs and expenses associated with being a stand-alone public company to be approximately $6.0 million to $7.0 million annually or approximately $7.3 million to $8.3 million less than the 2010 overhead allocation charge. Management believes that the ongoing administrative costs will be less than the allocated amount due to financial, regulatory, compliance and executive oversight efficiencies associated with administering our company in a solely online environment. Despite this, we have not included any of the adjustments described above in the pro forma financial statements provided below.

The unaudited pro forma consolidated financial information set forth below is for illustrative purposes only and does not reflect what our financial position and results of operations would have been had the separation occurred on the dates indicated. Before the separation, we operated as part of Cash America. Therefore, our historical and pro forma consolidated financial information may not be representative of the results we would have achieved as a stand-alone public company and may not be a reliable indicator of our future results.

 

 

 

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Table of Contents

Unaudited pro forma consolidated financial information

 

 

The unaudited pro forma consolidated financial information constitutes forward-looking information and is subject to certain risks and uncertainties that could cause actual results to differ materially from those anticipated. See “Special note regarding forward-looking statements.”

 

 

 

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Unaudited pro forma consolidated financial information

 

 

ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME

Six Months Ended June 30, 2011

 

      Six Months
Ended
June 30, 2011
(As Reported)
    Pro Forma
Adjustments
    Pro Forma  
     (in thousands, except per share data)  

Revenue

   $ 203,272      $      $ 203,272   

Cost of Revenue

     76,690               76,690   
  

 

 

   

 

 

   

 

 

 

Gross Profit

     126,582               126,582   

Expenses

      

Marketing

     28,972          28,972   

Operations and technology

     24,910          24,910   

Administration

     28,357          28,357   

Depreciation and amortization

     5,722          5,722   
  

 

 

   

 

 

   

 

 

 

Total Expenses

     87,961               87,961   
  

 

 

   

 

 

   

 

 

 

Income from Operations

     38,621               38,621   

Affiliate interest expense

     (8,034     8,034 (1)        

Foreign currency transaction loss

     (94       (94
  

 

 

   

 

 

   

 

 

 

Income before Income Taxes

     30,493        8,034        38,527   

Provision for income taxes

     11,336        2,812 (2)      14,148   
  

 

 

   

 

 

   

 

 

 

Net Income

   $ 19,157      $ 5,222      $ 24,379   
  

 

 

   

 

 

   

 

 

 

Earnings per share:

      

Basic

   $ 0.58     $        $     

Diluted

   $ 0.58     $        $     

Weighted average shares outstanding

      

Basic

     33,000       

Diluted

     33,000       

See Notes to Unaudited Pro Forma Consolidated Financial Information

 

 

 

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Unaudited pro forma consolidated financial information

 

 

ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED STATEMENT OF INCOME

Year Ended December 31, 2010

 

      Year Ended
December 31,
2010
(As
Reported)
    Pro Forma
Adjustments
    Pro Forma  
     (in thousands, except per share data)  

Revenue

   $ 378,317      $      $ 378,317   

Cost of Revenue

     164,957               164,957   
  

 

 

   

 

 

   

 

 

 

Gross Profit

     213,360               213,360   

Expenses

      

Marketing

     59,197          59,197   

Operations and technology

     40,983          40,983   

Administration

     50,252          50,252   

Depreciation and amortization

     8,559          8,559   
  

 

 

   

 

 

   

 

 

 

Total Expenses

     158,991               158,991   
  

 

 

   

 

 

   

 

 

 

Income from Operations

     54,369               54,369   

Affiliate interest expense

     (15,505     15,505 (1)        

Investment interest income

     296          296   

Foreign currency transaction loss

     (156       (156
  

 

 

   

 

 

   

 

 

 

Income before Income Taxes

     39,004        15,505        54,509   

Provision for income taxes

     14,183        5,427 (2)      19,610   
  

 

 

   

 

 

   

 

 

 

Net Income

   $ 24,821      $ 10,078      $ 34,899   
  

 

 

   

 

 

   

 

 

 

Earnings per share:

      

Basic

   $ 0.75      $        $     

Diluted

   $ 0.75      $        $     

Weighted average shares outstanding

      

Basic

     33,000       

Diluted

     33,000       

See Notes to Unaudited Pro Forma Consolidated Financial Information

 

 

 

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Unaudited pro forma consolidated financial information

 

 

ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

UNAUDITED PRO FORMA CONSOLIDATED BALANCE SHEET

As of June 30, 2011

 

      As of June 30,
2011
(As Reported)
    Pro Forma
Adjustments
    Pro Forma  
     (in thousands)  

Assets

      

Current assets:

      

Cash

   $ 33,252      $      $ 33,252   

Consumer loans, net

     108,648               108,648   

Prepaid expenses and other assets

     7,644               7,644   

Deferred tax assets

     14,375               14,375   
  

 

 

   

 

 

   

 

 

 

Total current assets

     163,919               163,919   

Property and equipment, net

     32,842               32,842   

Goodwill

     255,786               255,786   

Intangible assets, net

     703               703   

Other assets

     954               954   
  

 

 

   

 

 

   

 

 

 

Total Assets

   $ 454,204      $      $ 454,204   
  

 

 

   

 

 

   

 

 

 

Liabilities and Equity

      

Current liabilities:

      

Accounts payable and accrued expenses

   $ 31,891      $      $ 31,891   

Income taxes currently payable

     10,955               10,955   
  

 

 

   

 

 

   

 

 

 

Total current liabilities

     42,846               42,846   

Deferred tax liabilities

     33,104               33,104   

Other liabilities

     690               690   

Affiliate payable

     278,238        (278,238 )(1),(3)        
  

 

 

   

 

 

   

 

 

 

Total Liabilities

     354,878        (278,238     76,640   
  

 

 

   

 

 

   

 

 

 

Equity:

      

Common stock

            —    (1)        

Additional paid in capital

     595        353,238  (1)      353,833   

Retained earnings

     98,742        (75,000 )(3)      23,742   

Accumulated other comprehensive loss

     (11            (11
  

 

 

   

 

 

   

 

 

 

Total Equity

     99,326        278,238        377,564   
  

 

 

   

 

 

   

 

 

 

Total Liabilities and Equity

   $ 454,204      $      $ 454,204   
  

 

 

   

 

 

   

 

 

 

See Notes to Unaudited Pro Forma Consolidated Financial Information

 

 

 

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Unaudited pro forma consolidated financial information

 

 

ENOVA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO UNAUDITED PRO FORMA CONSOLIDATED FINANCIAL INFORMATION

 

(1)   This adjustment represents the repayment in full to Cash America of the affiliate notes payable using the net proceeds of this offering. A corresponding adjustment to additional paid in capital and common stock related to the offering are reflected in the pro forma statements. In addition, all related affiliate interest expense has been eliminated.

 

(2)   Represents the tax effect of pro forma adjustments to income before income taxes using a statutory rate of 35% for both the six months ended June 30, 2011 and the year ended December 31, 2010.

 

(3)   We paid a $75.0 million dividend to Cash America in the form of a promissory note dated September 6, 2011. This adjustment in the pro forma statements reflects the payment of this dividend.

 

 

 

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Management’s discussion and analysis of financial condition and results of operations

The following discussion should be read in conjunction with the consolidated financial statements and the related notes included elsewhere in this prospectus. This prospectus contains forward-looking statements including, without limitation, statements regarding trends, seasonality and growth in the markets we offer products and services, our strategic direction, expenditures, our liquidity position, our ability to generate cash from operations, our expected growth, our expectations regarding our transition to a stand-alone company, the potential impact of our adopting new accounting pronouncements, our potential future results and the impact of our proprietary technology system. Our actual results may differ materially from those we currently anticipate as a result of many factors, including those we describe under “Risk factors” and elsewhere in this prospectus. We use the term “Cash America” in this prospectus to refer to Cash America International, Inc., our parent company, and its subsidiaries on a consolidated basis, other than us. In this prospectus, when we refer to a “transaction,” we mean any transaction whereby a customer is provided an advance of credit, whether through direct funding of a loan originated by us, through a loan funded by an unaffiliated lender in connection with our credit services organization programs (which includes our finance brokerage activity in Australia) or through a micro line of credit advance originated by a third-party lender if we acquired a participation interest in such advance, and includes new loans, renewals and each advance on a line of credit. All references to $’s in this prospectus represent U.S. dollars, unless expressly stated otherwise.

OVERVIEW

We are a leading provider of online financial services to alternative credit consumers in the United States, United Kingdom, Australia and Canada, with over 60 million website page views and over $2.0 billion in credit extended in 2010. Our customers include the large and growing number of consumers who have bank accounts but use alternative financial credit services because of their limited access to more traditional consumer credit from banks, thrifts, credit card companies and other lenders. We believe our customers highly value our services as an important component of their personal finances because our services are convenient, quick and often less expensive than other available alternatives. We attribute the success of our business to our advanced and innovative technology systems, the proprietary analytical models we use to predict loan performance, our sophisticated customer acquisition programs and our dedication to customer service. We are currently a wholly-owned subsidiary of Cash America.

We use our flexible and scalable technology platform to process and complete customers’ transactions quickly and efficiently. In the first six months of 2011, we processed over 1.7 million transactions, and we continue to grow our loan portfolio and increase the number of customers we serve. Our highly customizable technology platform allows us to increase the variety and number of products and services we offer and to enter new markets quickly.

We provide our customers convenient and quick access to credit. We acquire new customers from a variety of sources, including visits to our own websites, lead providers and relationships with other lenders. Once we secure a potential new customer, we provide a quick credit decision, and if approved, funding of the loan the next day, and in some cases, the same day. After the loan is funded, we provide access to a fully staffed and well-trained customer service department that can answer any questions the customer may have. Should a customer encounter difficulty repaying the loan, our collections department is trained to help the customer understand alternative payment options and make arrangements to repay the loan. All of our operations, from customer acquisition through collections, are structured to build customer satisfaction and loyalty.

 

 

 

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Our marketing activities are tailored to the various markets that we serve and include Internet-based lead providers, media and direct customer marketing. Our message to our customers stresses the electronic convenience of our products and our availability 24 hours per day and seven days per week. We have been able to consistently add new customers and successfully generate repeat business from customers when they need a loan because our services are convenient, quick and often less expensive than other alternatives.

Our loan approval activities are designed to quickly qualify new customer leads and generate a high level of loan approvals while we seek to effectively manage risk and maximize profitability. We have developed a series of sophisticated proprietary scoring models to support loan approval activities. We believe that these models are an integral component of our operations and they allow us to complete a high volume of customer transactions while actively managing risk and the related credit quality of our loan portfolios. Management believes our successful application of these technology innovations differentiates our capabilities relative to competitive platforms as evidenced by our history of financial performance.

OUR PRODUCTS

We offer or arrange single payment consumer loans in the United States, the United Kingdom, Australia and Canada, generally with terms of seven to 45 days and ranging in amounts from $50 to $2,400, depending on applicable law. Through our credit services organization and finance brokerage programs, or our CSO programs, we arrange third-party lenders’ consumer loan products in some markets by acting on behalf of consumers in accordance with applicable laws. We also offer or arrange lines of credit of up to $1,800 in several U.S. states, depending on applicable law, which allow customers to draw on the line of credit in increments of their choosing, up to their credit limit. We offer installment loans in the United Kingdom and in several U.S. states, generally with terms between four and 36 months and ranging in amounts from $75 to $2,700, depending on applicable law.

We also provided a micro line of credit, or MLOC, service during 2008, 2009 and 2010, whereby advances were processed on behalf of, and participation interests in MLOC receivables were purchased from, MetaBank. Our MLOC services generated earnings through loan processing services as well as from fees generated from the participation interests we acquired in MLOC advances made to MetaBank’s customers, or MLOC customers. MetaBank terminated its program as of October 13, 2010. We are pursuing the development of new MLOC opportunities.

MEASUREMENT OF THE BUSINESS

We measure our business using several financial and operating metrics. We use these metrics to assess the progress of our business against strategic and financial goals, make decisions on the allocation of capital and technology investments, and assess long-term business performance. Our key metrics are as follows:

Number of Customer Transactions

We measure the number of customer transactions completed by us or guaranteed by us and the mix between transactions with new customers and existing customers with whom we have a previous relationship. New customers reflect our ability to acquire customers through our marketing programs and by providing new and more innovative products, in addition to our ability to enter new markets. The number of existing customers reflects our ability to retain our customer base through high levels of customer service and effective management of loan defaults.

 

 

 

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The following table shows for the periods presented information regarding the number of our new customer transactions, the number of our transactions with our existing customers and the number of transactions under our terminated MLOC program.

 

     Six Months Ended June 30,      Year Ended December 31,  
              2011                      2010              2010      2009      2008  

Number of new customer transactions(1)

     206,357         203,012         460,641         311,266         263,553   

Number of existing customer transactions(1)

     1,558,248         1,308,936         2,917,199         2,245,072         2,126,804   

Number of MLOC customer transactions

             848,560         1,451,330         804,795         116,755   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total number of customer transactions

     1,764,605         2,360,508         4,829,170         3,361,133         2,507,112   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Non-MLOC customer transactions only.

Customer Transaction Volume

Customer transactions generate revenue through fees collected from loan services and interest income. Customer transactions can take the form of short-term single payment and line of credit loans or multi-payment installment loans. Revenue is directly related to the number and size of the customer transactions. We measure the volume of the customer transactions we process and use this metric to assess the effectiveness of our marketing and customer retention activities, as well as the efficiency of our systems and processes that support our loan decisions. The following table shows for the periods presented information regarding the volume of our new customer transactions, the volume of our transactions with our existing customers and the volume of transactions under our terminated MLOC program (dollars in thousands):

 

     Six Months Ended June 30,      Year Ended December 31,  
              2011                      2010              2010      2009      2008  

New customer transactions(1)

   $ 85,466       $ 73,360       $ 168,703       $ 117,807       $ 103,131   

Existing customer transactions(1)

     826,886         697,879         1,555,670         1,160,796         1,073,869   

MLOC customer transactions

             166,889         288,723         126,470         19,995   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

Total volume of customer transactions

   $ 912,352       $ 938,128       $ 2,013,096       $ 1,405,073       $ 1,196,995   
  

 

 

    

 

 

    

 

 

    

 

 

    

 

 

 

 

(1)   Non-MLOC customer transactions only.

Total Revenue

Our revenue is the key metric that we use to measure overall growth. Continued and sustained top line growth reflects our ability to retain our existing customers and to attract new customers through our marketing, product innovation and market expansion activities. The following table reflects our total revenue for the periods presented (dollars in thousands):

 

     Six Months Ended June 30,      Year Ended December 31,  
              2011                      2010              2010      2009      2008  

Total Revenue

   $ 203,272       $ 170,499       $ 378,317       $ 254,977       $ 223,477   

 

 

 

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Adjusted EBITDA

Adjusted EBITDA, defined as earnings before depreciation, amortization, interest, foreign currency transaction gains or losses and taxes, is a key metric we use. Management believes Adjusted EBITDA is used by investors to analyze operating performance and evaluate our ability to incur and service debt and our capacity for making capital expenditures. In addition, Adjusted EBITDA is also useful to investors to help assess our liquidity and estimated enterprise value.

Management believes that presentation of non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. Management believes that this non-GAAP financial measure reflects an additional way of viewing aspects of our business that, when viewed with our GAAP results, provide a more complete understanding of factors and trends affecting our business.

Management provides non-GAAP financial information for informational purposes and to enhance understanding of our GAAP consolidated financial statements. Readers should consider the information in addition to, but not instead of, our financial statements prepared in accordance with GAAP.

The table below shows Adjusted EBITDA, which is a non-GAAP measure. The computation of Adjusted EBITDA as presented below may differ from the computation of similarly-titled measures provided by other companies (dollars in thousands):

 

     Six Months Ended June 30,     Year Ended December 31,  
              2011                     2010             2010     2009     2008  

Net Income

   $ 19,157      $ 13,317      $ 24,821      $ 17,703      $ 21,951   

Adjustments:

          

Depreciation and amortization expenses

     5,722        4,061        8,559        7,297        5,234   

Interest expense, net

     8,034        7,309        15,209        11,852        7,099   

Foreign currency transaction loss (gain)

     94        28        156        (38     79   

Provision for income taxes

     11,336        7,534        14,183        10,205        13,083   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA

   $ 44,343      $ 32,249      $ 62,928      $ 47,019      $ 47,446   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Adjusted EBITDA margin calculated as follows:

          

Total Revenue

   $ 203,272      $ 170,499      $ 378,317      $ 254,977      $ 223,477   

Adjusted EBITDA

     44,343        32,249        62,928        47,019        47,446   

Adjusted EBITDA as a percentage of total revenue

     21.8     18.9     16.6     18.4     21.2

BASIS OF PRESENTATION AND CRITICAL ACCOUNTING POLICIES

On September 7, 2011, Cash America formed a new company, Enova International, Inc. On September 13, 2011, Cash America contributed to Enova International, Inc. all of the stock of its wholly-owned subsidiary, Enova Online Services, Inc., which offers loans through a number of its subsidiaries to customers in 32 states in the United States, in the United Kingdom, in Australia, and in Canada, and all of the equity interests in Primary Innovations, LLC, which provided services in connection with the MLOC product during 2010, 2009 and 2008, in exchange for 33 million shares of our common stock. The consolidated financial information presented reflects the retrospective application of this contribution.

 

 

 

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Historically, we have operated as part of Cash America and not as a stand-alone company. Financial statements were not previously prepared for us since we have not operated as a separate legal entity. Our historical consolidated financial statements include the assets, liabilities, revenues and expenses directly attributable to our operations carved out of Cash America’s consolidated financial statements. We have historically received certain shared services from Cash America, such as executive oversight, insurance and risk management, government relations, internal audit, treasury, payroll, legal, finance, accounting, tax, human resources and certain information systems and collections support and other services to us. Our consolidated financial statements include an allocation intended to compensate our parent for these shared services. Management believes the assumptions and allocations underlying the consolidated financial statements are reasonable and appropriate under the circumstances. The expenses and cost allocations have been determined on a consistently applied basis that we consider to be reasonable.

The amounts recorded for these transactions and allocations are not, however, necessarily representative of the amounts that would have been incurred had we been a separate, stand-alone entity that operated independently of Cash America. Our future results of operations after our separation from Cash America will include costs and expenses for us to operate as a stand-alone company, and, consequently, these costs may be materially different than as reflected in our historical results of operations. Accordingly, the financial statements for these years may not be indicative of our future results of operations, financial position and cash flows.

We expect to enter into a transition services agreement with Cash America. Under the agreement, we expect that Cash America will provide certain administrative services to us for a period of six months following the completion of this offering for which we will compensate Cash America. In addition, we will reimburse Cash America for all out-of-pocket costs and expenses it pays or incurs in connection with providing such services. For the periods presented, we did not incur any expenses under the transition services agreement. See “Unaudited pro forma consolidated financial information.”

Revenue Recognition

Upon completion of a transaction with a customer, funds are provided to the customer in exchange for an obligation to repay the amount advanced plus fees and any applicable interest, which takes the form of a consumer loan which can be a loan written by us or by a third party. We recognize interest on consumer loans we write and participation interests purchased from third parties on a constant yield basis ratably over the term of the loan. Unpaid and accrued interest and fees are added to the consumer loan balance. Fees generated through our CSO programs are deferred and amortized over the term of the consumer loan arranged by us and recorded as revenue. A short-term loan is considered nonperforming if the customer does not make payments in accordance with the contractual requirements. An installment loan is considered nonperforming if the customer does not make two payments in accordance with the contract. Consumer loan fees and interest do not accrue on nonperforming loans and once a loan is considered nonperforming, we do not resume the accrual of interest on these loans. For nonperforming loans, all payments received are first applied against accrued but unpaid interest and fees and then against the principal balance of the loan. After the principal balance is recovered, we recognize additional payments as revenue.

Loan Loss Reserves and Cost of Revenue

We monitor the performance of the portfolio and maintain either an allowance or liability for losses on consumer loans (including fees and interest) at a level estimated to be adequate to absorb future credit losses inherent in the portfolio. The allowance for losses on our owned consumer loans offsets the outstanding loan amounts in the consolidated balance sheets. In addition, we maintain a liability for losses related to loans guaranteed under CSO programs. The liability for losses related to guaranteed

 

 

 

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loans which approximates the fair value of the liability is included in accounts payable and accrued expenses on the consolidated balance sheets.

Consumer loans include balances outstanding from all consumer loans we originate or purchase, including short-term loans, participation interests in receivables acquired through our MLOC services and multi-payment installment loans. We stratify the outstanding combined consumer loan portfolio by age, delinquency and stage of collection when assessing the adequacy of the allowance or liability for losses. We use historical collection performance adjusted for recent portfolio performance trends to develop the expected loss rates used to establish either the allowance or liability. Increases in either the allowance or liability, net of charge-offs and recoveries, are recorded as a cost of revenue in the consolidated statements of income and represents the loss provision expense on consumer loans. We fully reserve all consumer loans once they have been in default for 60 consecutive days, or sooner if deemed uncollectible. Recoveries on losses previously charged to the allowance are credited to the allowance when collected.

Property and Equipment

Property and equipment are recorded at cost. The cost of property retired or sold and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in the consolidated statements of income. Depreciation expense is generally provided on a straight-line basis, using the following estimated useful lives:

 

Leasehold improvements(1)

     2 to 10 years   

Furniture, fixtures and equipment

     3 to 7 years   

Computer hardware and software

     3 to 5 years   

 

(1)   Leasehold improvements are depreciated over the terms of the lease agreements with a maximum of 10 years.

Software Development Costs

We have adopted Accounting Standard Codification, or ASC, 350-40, Internal Use Software (“ASC 350-40”) and apply this statement to our software purchase and development activities. Under ASC 350-40, eligible internal and external costs incurred for the development of computer applications, as well as for upgrades and enhancements that result in additional functionality of the applications, are capitalized. Internal and external training and maintenance costs are charged to expense as incurred. When a software application is placed in service, we begin amortizing the related capitalized software costs using the straight-line method based on its estimated useful life, which currently ranges from three to five years.

Goodwill

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 350-20-35, Goodwill—Subsequent Measurement (“ASC 350-20-35”), we test goodwill 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 below its carrying amount.

Our impairment evaluation of goodwill is based on comparing the fair value to our carrying value. The fair value was determined based on the income approach and then compared to the results of the market approach for reasonableness. The income approach establishes fair value based on estimated future cash

 

 

 

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flows discounted by an estimated weighted-average cost of capital developed using the capital asset pricing model, which reflects the overall level of inherent risk. The income approach uses our projections of financial performance for a five-year period and includes assumptions about future revenue growth rates, operating margins and terminal growth rates. The market approach establishes fair value by applying cash flow multiples to operating performance. The multiples are derived from other publicly traded companies that are similar but not identical from an operational and economic standpoint.

As of June 30, 2011, the annual assessment date, we had combined fair values that exceeded carrying value by 298%. Based on the results of this test, no impairment of goodwill was observed. We also performed a sensitivity analysis on our estimated fair value using the income approach. A key assumption in our fair value estimate is the weighted-average cost of capital utilized for discounting our cash flow estimates in our income approach. Holding all other assumptions constant at the annual assessment date, a 100 basis point increase in the discount rates would reduce the combined fair value by $48.2 million, which would exceed the carrying value by 250%.

The ending of the MLOC product, also known as the iAdvance program, by MetaBank in October 2010, was considered a triggering event for purposes of goodwill impairment testing. In accordance with ASC 350-20-35, Intangibles—Goodwill and Other, we tested goodwill for impairment following the ending of this program and noted no impairment.

Inherent in such fair value determination are certain judgments and estimates relating to future cash flows, including our interpretation of current economic indicators and market valuations, and assumptions about our strategic plans with regard to our operations. To the extent additional information arises, market conditions change or our strategies change, it is possible that our conclusions regarding whether existing goodwill is impaired could change and result in a material effect on our consolidated financial position or results of operations.

All of the amounts of goodwill recorded for acquisitions are expected to be deductible for tax purposes.

Long-lived Assets Other Than Goodwill

We amortize finite-lived intangible assets on the basis of their expected periods of benefit, generally one to five years. The costs of start-up activities and organization costs are charged to expense as incurred.

An evaluation of the recoverability of property and equipment and amortized intangible assets 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.

Income Taxes

We account for income taxes under ASC 740, Income Taxes. Accordingly, income tax expense and the current and deferred income tax balances in the consolidated financial statements have been calculated as though we had been taxed separately from Cash America and had prepared separate tax returns.

We account for uncertainty in income taxes in accordance with ASC 740-10-25, Accounting for Uncertainty in Income Taxes (“ASC 740-10-25”). ASC 740-10-25 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.

 

 

 

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Hedging and Derivatives Activity

Cash America periodically uses foreign currency forward contracts, which are considered derivative instruments, to minimize the effects of foreign currency risk related to our operations in the United Kingdom and Australia. We participate in Cash America’s derivative and hedging programs, which are coordinated through a centralized treasury function; therefore, the assets and liabilities related to derivative instruments are not recorded in our financial statements. Cash America does not use foreign currency forward contracts in Canada due to the size of the operations. The forward contracts are not designated as hedges as defined by ASC 815-20-25, Derivatives and Hedging—Recognition, therefore, any changes in the fair value of the forward contracts were recognized in Foreign currency transaction gain (loss) in the consolidated statements of income.

Marketing Expenses

Marketing expense consists of online marketing costs such as sponsored search and advertising on social networking sites, and offline marketing costs such as television, radio and print advertising. In addition, marketing expense includes lead purchase costs paid to marketers in exchange for providing leads to potential customers interested in using our services. Online marketing and lead purchase costs are expensed as incurred. The production costs associated with offline marketing are expensed as incurred. Other offline marketing costs are expensed over the media campaign period. We also have an agreement with an independent third party pursuant to which we pay a portion of the revenue received on the customers referred to us by such third party. We also have an arrangement with Cash America pursuant to which we pay either a lead purchase fee or a portion of the revenue received on loans made to or arranged for the customers referred to us by Cash America. The expenses for these agreements are expensed as incurred and included in marketing expense.

Operations and Technology Expenses

Operations and technology expenses include all expenses related to the direct operations and technology infrastructure related to loan underwriting and processing. This includes labor, software expense, verification vendors, and telephony costs.

Administration Expenses

Administration expenses primarily include corporate personnel costs and also includes legal, occupancy, and other related costs. In addition, administration expenses also include allocations of costs relating to certain corporate functions historically provided by Cash America, including executive oversight, insurance and risk management, government relations, internal audit, treasury, payroll, legal, finance, accounting, tax, human resources and certain information systems and collections support and other similar services. Cash America has historically allocated these expenses to us based on our pro rata share of Cash America’s consolidated personnel expenses.

Affiliate Transactions

We have entered into affiliate transactions with Cash America for, among other things, the daily coordination of cash management activities, including treasury operations, allocations of corporate charges and cash borrowings to be used in operations as necessary, and credits for taxes or other items paid by Cash America on our income. These transactions are governed by note agreements between Cash

 

 

 

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America and certain of our subsidiaries. The amount due to Cash America at the end of each reporting period has been classified as “Affiliate notes payable” in the consolidated balance sheets.

We also have an arrangement with Cash America pursuant to which we pay either a lead purchase fee or a portion of the revenue received on loans made to or arranged for the customers referred to us by Cash America. The expenses for this arrangement are included in marketing expense.

RESULTS OF OPERATIONS FOR THE SIX MONTHS ENDED JUNE 30, 2011 AND 2010

The following tables reflect our results of operations for the periods indicated, both in dollars and as a percentage of total revenue (dollars in thousands):

 

     Six Months Ended June 30,  
              2011             2010          

Revenue

   $ 203,272     $ 170,499  

Cost of Revenue

     76,690       70,822  
  

 

 

   

 

 

 

Gross Profit

     126,582       99,677  

Expenses

    

Marketing

     28,972        25,358  

Operations and technology

     24,910        18,466  

Administration

     28,357        23,604  

Depreciation and amortization

     5,722       4,061  
  

 

 

   

 

 

 

Total Expenses

     87,961       71,489  
  

 

 

   

 

 

 

Income from Operations

     38,621       28,188  

Affiliate interest expense

     (8,034     (7,454

Investment interest income

            145  

Foreign currency transaction (loss) gain

     (94     (28
  

 

 

   

 

 

 

Income before Income Taxes

     30,493       20,851  

Provision for income taxes

     11,336       7,534  
  

 

 

   

 

 

 

Net Income

   $ 19,157     $ 13,317  
  

 

 

   

 

 

 

 

 

 

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     Six Months Ended June 30,  
              2011             2010          

Revenue

     100.0      100.0 

Cost of Revenue

     37.7       41.5  
  

 

 

   

 

 

 

Gross Profit

     62.3       58.5  

Expenses

    

Marketing

     14.3       14.9  

Operations and technology

     12.2       10.8  

Administration

     14.0       13.9  

Depreciation and amortization

     2.8       2.4  
  

 

 

   

 

 

 

Total Expenses

     43.3       42.0  
  

 

 

   

 

 

 

Income from Operations

     19.0       16.5  

Affiliate interest expense

     (4.0     (4.4

Investment interest income

            0.1  

Foreign currency transaction (loss) gain

              
  

 

 

   

 

 

 

Income before Income Taxes

     15.0       12.2  

Provision for income taxes

     5.6       4.4  
  

 

 

   

 

 

 

Net Income

     9.4      7.8 
  

 

 

   

 

 

 

SIX MONTHS ENDED JUNE 30, 2011 COMPARED TO SIX MONTHS ENDED JUNE 30, 2010

Revenue and Gross Profit

Revenue increased $32.8 million, or 19.2%, to $203.3 million for the six months ended June 30, 2011 as compared to $170.5 million for the six months ended June 30, 2010, referred to as the prior year six-month period. The increase in revenue is primarily due to growth in our U.K. lending activities and, to a lesser extent, the expansion of our installment loan product into new markets. These increases offset the loss of revenue from certain domestic markets in which we either no longer offer consumer loans or have reduced our product offerings.

In addition, fees generated by the MLOC services activities during 2010 were not available in 2011. MetaBank, whose program had generated revenue for us, ended its program as of October 13, 2010. We intend to develop new opportunities to offer MLOC services to other parties; however, until a replacement product is offered, the MLOC services will not provide revenue for us.

Our cost of revenue increased by $5.9 million to $76.7 million for the six-month period ended June 30, 2011 from $70.8 million for the prior year six-month period, primarily due to higher loan balances. Our cost of revenue as a percentage of customer transaction fees decreased to 37.7% for the six-month period ended June 30, 2011, from 41.5% for the prior year six-month period, due primarily to modifications in our underwriting models that have contributed to lower default rates and improved collectability of the loan portfolio. This improvement was partially offset by higher loan balances in foreign markets, which have a higher percentage of new customers who tend to have a higher risk of default than customers with a history of successfully repaying loans.

 

 

 

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The following table sets forth the components of revenue and gross profit, separated between domestic and foreign, for the six months ended June 30, 2011 and 2010 (dollars in thousands):

 

     Six Months Ended June 30,  
     2011     2010  
      Total     Domestic     Foreign     Total     Domestic     Foreign  

Short-term loans

   $ 187,070     $ 105,257     $ 81,813     $ 151,009     $ 110,939     $ 40,070  

Installment loans

     15,316       8,665       6,651       3,524       3,524         

MLOC

                          15,448       15,448         

Other

     886       350       536       518       518         
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total Revenue

     203,272       114,272       89,000       170,499       130,429       40,070  

Cost of Revenue

     76,690       33,662       43,028       70,822       52,879       17,943  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Gross Profit

   $ 126,582     $ 80,610     $ 45,972     $ 99,677     $ 77,550     $ 22,127  
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Year-over-year change—$

   $ 26,905     $ 3,060     $ 23,845                       

Year-over-year change—%

     27.0 %     3.9 %     107.8 %                     

Gross profit as % of revenue

     62.3 %     70.5 %     51.7 %     58.5 %     59.5 %     55.2 %

 

 

 

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Customer Transactions

Number of customer transactions

The number of customer transactions totaled 1,764,605 in the six-month period ended June 30, 2011, which is a decrease of 595,903 or 25.2%, from 2,360,508 in the prior year six-month period. This decrease was related to lower domestic customer transactions primarily related to the ending of the MLOC services business. Mitigating the decrease in customer transactions was continued growth in foreign markets. Excluding the number of customer transactions related to our MLOC service during 2011 and 2010, the number of customer transactions increased 252,657, or 16.7%, in the six-month period ended June 30, 2011 as compared to the prior year six-month period.

The following table summarizes the combined number of customer transactions for the six-month period ended June 30, 2011 and the prior year six-month period:

 

    Six Months Ended June 30,  
    2011     2010  
     Company
Owned(1)
    Guaranteed
by the
Company(1)
    Combined(2)     Company
Owned(1)
    Guaranteed
by the
Company(1)
    Combined(2)  

Number of customer transactions:

           

Domestic

           

Short-term loans

    614,594        435,109        1,049,703        594,690        526,298        1,120,988   

Installment loans

    12,831               12,831        12,442               12,442   

MLOC

                         848,560               848,560   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total domestic

    627,425        435,109        1,062,534        1,455,692        526,298        1,981,990   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           

Foreign

           

Short-term loans

    644,764        39,089        683,853        355,313        23,205        378,518   

Installment loans

    18,218               18,218                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total foreign

    662,982        39,089        702,071        355,313        23,205        378,518   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           

Total customer transactions

    1,290,407        474,198        1,764,605        1,811,005        549,503        2,360,508   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 
           

New customer transactions(3)

    165,642        40,715        206,357        133,828        69,184        203,012   

% of total

    9.4     2.3     11.7     5.7     2.9     8.6

Existing customer transactions(3)

    1,124,765        433,483        1,558,248        828,617        480,319        1,308,936   

% of total

    63.7     24.6     88.3     35.1     20.4     55.5

Total MLOC customer transactions

                         848,560               848,560   

% of total

                         35.9            35.9

 

(1)   GAAP measure.

 

(2)   Amounts represent non-GAAP measures.

 

(3)   Non-MLOC customer transactions only.

 

 

 

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Volume of customer transactions

The volume of combined customer transactions was $912.4 million in the six-month period ended June 30, 2011, which is a decrease of $25.7 million, or 2.7%, from $938.1 million in the prior year six-month period, mainly due to the absence of customer transactions in the MLOC services business. Mitigating the decrease in combined customer transactions volume was continued growth in foreign markets and an increase in installment loans. Excluding the customer transactions in 2011 and 2010 related to our MLOC services, combined customer transactions increased $141.1 million, or 18.3%, in the six-month period ended June 30, 2011 as compared to the prior year six-month period.

The following table summarizes the volume of combined customer transactions for the six-month period ended June 30, 2011 and the prior year six-month period, respectively (dollars in thousands):

 

    Six Months Ended June 30,  
    2011      2010  
     Company
Owned(1)
    Guaranteed
by the
Company(1)
    Combined(2)     Company
Owned(1)
    Guaranteed
by the
Company(1)
    Combined(2)  

Domestic

           

Short-term loans

  $ 205,562      $ 310,535      $ 516,097      $ 217,555      $ 368,179      $ 585,734  

Installment loans

    13,039               13,039        7,193               7,193  

MLOC

                         166,889               166,889  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total domestic

    218,601        310,535        529,136        391,637        368,179        759,816  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign

           

Short-term loans

    337,197        25,066        362,263        168,754        9,558        178,312  

Installment loans

    20,953               20,953                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total foreign

    358,150        25,066        383,216        168,754        9,558        178,312  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total customer transactions

  $ 576,751      $ 335,601      $ 912,352      $ 560,391      $ 377,737      $ 938,128  
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

New customer transactions(3)

  $ 64,810      $ 20,656      $ 85,466      $ 40,428      $ 32,932      $ 73,360   

% of total

    7.1     2.3     9.4     4.3     3.5     7.8

Existing customer transactions(3)

  $ 511,941      $ 314,945      $ 826,886      $ 353,074      $ 344,805      $ 697,879   

% of total

    56.1     34.5     90.6     37.6     36.8     74.4

Total MLOC customer transactions

                       $ 166,889             $ 166,889   

% of total

                         17.8            17.8

 

(1)   GAAP measure.

 

(2)   Amounts represent non-GAAP measures.

 

(3)   Non-MLOC customer transactions only.

Consumer Loan Balances

Each customer transaction provides customers with funds, typically in exchange for a fee and an agreement to repay the amount advanced. These customer transactions result in a receivable or a loan, owed to us or a third-party lender. This amount fluctuates but represents the results of funded

 

 

 

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transactions, the combined consumer loan portfolio, at any one time. This asset must be evaluated for the risk of loss at the initiation of each customer transaction and over the life of the loan. Therefore, we maintain reserves for losses against the consumer loan balance, which includes fees receivable, at all times. The outstanding combined portfolio balance of consumer loans, net of allowances and liabilities for losses, increased $28.0 million, or 24.8%, to $141.1 million at June 30, 2011 from $113.1 million at June 30, 2010, primarily due to increased demand for consumer loan products. We have experienced growth in consumer loan balances in foreign markets and expect that foreign consumer loan balances will continue to comprise a greater percentage of the total consumer loan balances in the future.

The combined consumer loan balance includes $142.1 million and $107.0 million of our owned consumer loan balances at June 30, 2011 and 2010, respectively, before the allowance for losses of $33.5 million and $32.5 million, respectively, which has been provided in the consolidated financial statements as of June 30, 2011 and 2010, respectively. The combined consumer loan balance also includes $34.1 million and $41.5 million of consumer loan balances which are guaranteed by us at June 30, 2011 and 2010, respectively, before the liability for losses of $1.6 million and $3.0 million, respectively, which has been provided in the consolidated financial statements for June 30, 2011 and 2010, respectively.

The following table summarizes the combined consumer loan balances as of June 30, 2011 and 2010, respectively (dollars in thousands):

 

     As of June 30,  
    2011     2010  
     Company
Owned(1)
    Guaranteed
by the
Company(1)
    Combined(2)     Company
Owned(1)
    Guaranteed
by the
Company(1)
    Combined(2)  

Ending consumer loan balances:

           

Domestic

           

Short-term loans

  $ 43,157      $ 31,127      $ 74,284      $ 46,143      $ 40,407      $ 86,550   

Installment loans

    10,131               10,131        4,199               4,199   

MLOC

                         18,192               18,192   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total domestic, gross

    53,288        31,127        84,415        68,534        40,407        108,941   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Foreign

           

Short-term loans

    72,655        2,946        75,601        38,476        1,070        39,546   

Installment loans

    16,159               16,159                        
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total foreign, gross

    88,814        2,946        91,760        38,476        1,070        39,546   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loan balance, gross

    142,102        34,073        176,175        107,010        41,477        148,487   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Less: Allowance and liabilities for losses(1)

    (33,454     (1,639     (35,093     (32,451     (2,969     (35,420
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total ending loan balance, net

  $ 108,648      $ 32,434      $ 141,082      $ 74,559      $ 38,508      $ 113,067   
 

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(1)   GAAP measure.

 

(2)   Except for allowance and liability for losses, amounts represent non-GAAP measure.

 

 

 

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Total Expenses

Total expenses increased $16.5 million, or 23.0%, to $88.0 million in the six-month period ended June 30, 2011, compared to $71.5 million in the prior year six-month period, as shown in the table below (dollars in thousands):

 

     Six Months Ended June 30,  
      2011      % of Total     2010      % of Total  

Marketing

          

Direct marketing

   $ 25,934        29.5   $ 23,221        32.5

Referral fee expenses

     3,038        3.5       2,137        3.0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Marketing

     28,972        33.0        25,358        35.5   
  

 

 

    

 

 

   

 

 

    

 

 

 

Operations and technology

          

Personnel

     17,304        19.7        13,793        19.3   

Technology and underwriting

     5,225        5.9        3,931        5.5  

Other

     2,381        2.7        742        1.0  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Operations and technology

     24,910        28.3        18,466        25.8   
  

 

 

    

 

 

   

 

 

    

 

 

 

Administration

          

Company

     19,973        22.7        17,054         23.8   

Allocated from Cash America

     8,384        9.5        6,550        9.2  
  

 

 

    

 

 

   

 

 

    

 

 

 

Total Administration

     28,357        32.2        23,604        33.0