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Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended March 31, 2012

OR

 

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

for the transition period from                     to                     

Commission File Number 000-50840

 

 

QC HOLDINGS, INC.

(Exact name of registrant as specified in its charter)

 

 

 

Kansas   48-1209939

(State or other jurisdiction of

incorporation or organization)

 

(I.R.S. Employer

Identification No.)

9401 Indian Creek Parkway, Suite 1500

Overland Park, Kansas

  66210
(Address of principal executive offices)   (Zip Code)

(913) 234-5000

(Registrant’s telephone number, including area code)

Not applicable

(Former name, former address and former fiscal year, if changed since last report)

 

 

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the Company was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.     Yes  x     No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    Yes  x     No  ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, non-accelerated filer or a smaller reporting company (as defined in Rule 12b-2 of the Exchange Act).

 

Large accelerated filer   ¨    Accelerated filer   ¨
Non-accelerated filer   ¨    Smaller reporting company   x

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

The number of shares outstanding of the registrant’s common stock, as of April 30, 2012:

Common Stock $0.01 per share par value – 17,195,529 Shares

 

 

 


Table of Contents

QC HOLDINGS, INC.

Form 10-Q

March 31, 2012

Index

 

      Page  

PART I—FINANCIAL INFORMATION

  

Item 1. Financial Statements

  

Introductory Comments

     1   

Consolidated Balance Sheets - December 31, 2011 and March 31, 2012

     2   

Consolidated Statements of Income—Three Months Ended March 31, 2011 and 2012

     3   

Consolidated Statements of Comprehensive Income—Three Months Ended March 31, 2011 and 2012

     4   

Consolidated Statements of Cash Flows—Three Months Ended March 31, 2011 and 2012

     5   

Consolidated Statement of Changes in Stockholders’ Equity—Three Months Ended March 31, 2012

     6   

Notes to Consolidated Financial Statements

     7   

Computation of Basic and Diluted Earnings per Share

     15   

Item  2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

     28   

Item 3. Quantitative and Qualitative Disclosures About Market Risk

     42   

Item 4. Controls and Procedures

     42   

PART II—OTHER INFORMATION

  

Item 1. Legal Proceedings

     43   

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

     43   

Item 6. Exhibits

     44   

SIGNATURES

     45   


Table of Contents

QC HOLDINGS, INC.

FORM 10-Q

MARCH 31, 2012

PART I—FINANCIAL INFORMATION

Item 1. Financial Statements

INTRODUCTORY COMMENTS

 

The consolidated financial statements included in this report have been prepared by QC Holdings, Inc. (the Company or QC), without audit, under the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted under those rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011. Results for the three months ended March 31, 2012 are not necessarily indicative of the results expected for the full year 2012.


Table of Contents

QC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

     December 31,     March 31,  
     2011     2012  
           Unaudited  

ASSETS

    

Current assets:

    

Cash and cash equivalents

   $ 17,738      $ 19,617   

Restricted cash

     2,175        1,090   

Loans receivable, less allowance for losses of $6,008 at December 31, 2011 and $4,640 at March 31, 2012

     67,357        53,895   

Deferred income taxes

     5,113        4,113   

Prepaid expenses and other current assets

     7,741        6,856   
  

 

 

   

 

 

 

Total current assets

     100,124        85,571   

Non-current loans receivable, less allowance for losses of $2,100 at December 31, 2011 and $1,905 at March 31, 2012

     6,939        7,731   

Property and equipment, net

     11,761        11,858   

Goodwill

     23,958        24,149   

Intangible assets, net

     5,535        5,214   

Deferred income taxes

     485        405   

Other assets, net

     4,427        4,742   
  

 

 

   

 

 

 

Total assets

   $ 153,229      $ 139,670   
  

 

 

   

 

 

 

LIABILITIES AND STOCKHOLDERS’ EQUITY

    

Current liabilities:

    

Accounts payable

   $ 224      $ 725   

Accrued expenses and other current liabilities

     5,399        2,628   

Accrued compensation and benefits

     8,051        5,228   

Deferred revenue

     4,953        4,042   

Income taxes payable

     637        1,821   

Revolving credit facility

     14,500        5,000   

Debt due within one year

     20,490        18,650   
  

 

 

   

 

 

 

Total current liabilities

     54,254        38,094   

Long-term debt

     11,194        9,377   

Subordinated debt

     3,030        3,060   

Other non-current liabilities

     5,519        5,807   
  

 

 

   

 

 

 

Total liabilities

     73,997        56,338   
  

 

 

   

 

 

 

Commitments and contingencies

    

Stockholders’ equity:

    

Common stock, $0.01 par value: 75,000,000 shares authorized; 20,700,250 shares issued and 16,998,986 outstanding at December 31, 2011; 20,700,250 shares issued and 17,214,726 outstanding at March 31, 2012

     207        207   

Additional paid-in capital

     66,623        63,811   

Retained earnings

     45,282        49,318   

Treasury stock, at cost

     (32,623     (29,944

Accumulated other comprehensive loss

     (257     (60
  

 

 

   

 

 

 

Total stockholders’ equity

     79,232        83,332   
  

 

 

   

 

 

 

Total liabilities and stockholders’ equity

   $ 153,229      $ 139,670   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 2


Table of Contents

QC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Income

(in thousands, except per share amounts)

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2011     2012  

Revenues

    

Payday loan fees

   $ 28,989      $ 30,682   

Automotive sales, interest and fees

     6,975        6,407   

Installment interest and fees

     4,639        5,364   

Other

     5,198        4,525   
  

 

 

   

 

 

 

Total revenues

     45,801        46,978   
  

 

 

   

 

 

 

Operating expenses

    

Salaries and benefits

     10,012        10,464   

Provision for losses

     4,895        6,466   

Occupancy

     5,043        5,318   

Cost of sales - automotive

     3,807        3,178   

Depreciation and amortization

     695        618   

Other

     2,939        3,573   
  

 

 

   

 

 

 

Total operating expenses

     27,391        29,617   
  

 

 

   

 

 

 

Gross profit

     18,410        17,361   

Regional expenses

     3,308        3,083   

Corporate expenses

     5,053        5,615   

Depreciation and amortization

     703        541   

Interest expense

     594        1,020   

Other expense (income), net

     4        (950
  

 

 

   

 

 

 

Income from continuing operations before income taxes

     8,748        8,052   

Provision for income taxes

     3,465        3,083   
  

 

 

   

 

 

 

Income from continuing operations

     5,283        4,969   

Loss (gain) from discontinued operations, net of income tax

     (7     40   
  

 

 

   

 

 

 

Net income

   $ 5,290      $ 4,929   
  

 

 

   

 

 

 

Weighted average number of common shares outstanding:

    

Basic

     17,056        17,142   

Diluted

     17,077        17,150   

Earnings per share:

    

Basic

    

Continuing operations

   $ 0.29      $ 0.28   

Discontinued operations

    
  

 

 

   

 

 

 

Net income

   $ 0.29      $ 0.28   
  

 

 

   

 

 

 

Diluted

    

Continuing operations

   $ 0.29      $ 0.28   

Discontinued operations

    
  

 

 

   

 

 

 

Net income

   $ 0.29      $ 0.28   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 3


Table of Contents

QC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income

(in thousands)

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2011     2012  

Net income

   $ 5,290      $ 4,929   

Other comprehensive income:

    

Unrealized loss on derivative instrument

     (17  

Reclassification adjustment for amounts included in net income related to derivative instrument

     207        69   

Foreign currency translation

       128   
  

 

 

   

 

 

 

Other comprehensive income before income taxes

     5,480        5,126   

Income tax expense related to items of other comprehensive income

     72     
  

 

 

   

 

 

 

Total comprehensive income

   $ 5,408      $ 5,126   
  

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 4


Table of Contents

QC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

     Three Months Ended  
     March 31,  
     2011     2012  

Cash flows from operating activities

    

Net income

   $ 5,290      $ 4,929   

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

    

Depreciation and amortization

     1,432        1,159   

Provision for losses

     5,003        6,516   

Deferred income taxes

     763        1,071   

Non-cash interest expense

       349   

Gain from non-cash adjustment to contingent consideration

       (753

Gain from foreign currency transaction

       (221

Gain on cash surrender value of life insurance

     (107     (308

Loss on disposal of property and equipment

     50        30   

Gain on sale of branch

     (377  

Stock-based compensation

     672        612   

Changes in operating assets and liabilities

    

Loans, interest and fees receivable, net

     5,165        6,200   

Prepaid expenses and other current assets

     856        887   

Other assets

     (4     (7

Accounts payable

     (84     498   

Accrued expenses, other liabilities, accrued compensation and benefits and deferred revenue

     (5,054     (5,763

Income taxes

     2,701        1,003   

Other non-current liabilities

     167        275   
  

 

 

   

 

 

 

Net operating

     16,473        16,477   
  

 

 

   

 

 

 

Cash flows from investing activities

    

Purchase of property and equipment

     (706     (1,020

Proceeds from sale of branch

     666     

Changes in restricted cash

       1,085   

Payments for premiums on life insurance

     (292  

Other

     4        2   
  

 

 

   

 

 

 

Net investing

     (328     67   
  

 

 

   

 

 

 

Cash flows from financing activities

    

Borrowings under credit facility

     1,000        2,800   

Payments on credit facility

     (10,500     (12,300

Repayments of long-term debt

     (7,051     (3,750

Dividends to stockholders

     (904     (893

Repurchase of common stock

     (992     (551

Exercise of stock options

     195     
  

 

 

   

 

 

 

Net financing

     (18,252     (14,694
  

 

 

   

 

 

 

Effect of exchange rate changes on cash and cash equivalents

       29   
  

 

 

   

 

 

 

Cash and cash equivalents

    

Net increase (decrease)

     (2,107     1,879   

At beginning of year

     16,288        17,738   
  

 

 

   

 

 

 

At end of period

   $ 14,181      $ 19,617   
  

 

 

   

 

 

 

Supplementary schedule of cash flow information

    

Cash paid during the period for

    

Interest

   $ 596      $ 502   

Income taxes

     1        1,135   

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 5


Table of Contents

QC HOLDINGS, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands)

(Unaudited)

 

                                    Accumulated        
                  Additional                 other     Total  
     Outstanding     Common      paid-in     Retained     Treasury     comprehensive     stockholders’  
     shares     stock      capital     earnings     stock     loss     equity  

Balance, December 31, 2011

     16,999      $ 207       $ 66,623      $ 45,282      $ (32,623   $ (257   $ 79,232   

Net income

            4,929            4,929   

Common stock repurchases

     (154            (551       (551

Dividends to stockholders

            (893         (893

Issuance of restricted stock awards

     370           (3,230       3,230          —     

Stock-based compensation expense

          612              612   

Tax impact of stock-based compensation

          (194           (194

Reclassification of amount included in net income

                69        69   

Foreign currency translation

                128        128   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, March 31, 2012

     17,215      $ 207       $ 63,811      $ 49,318      $ (29,944   $ (60   $ 83,332   
  

 

 

   

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

The accompanying notes are an integral part of these consolidated financial statements.

 

Page 6


Table of Contents

QC HOLDINGS, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

(Unaudited)

Note 1 – The Company and Significant Accounting Policies

Business. The accompanying consolidated financial statements include the accounts of QC Holdings, Inc. and its wholly-owned subsidiaries, QC Financial Services, Inc., QC Auto Services, Inc., QC Loan Services, Inc., QC E-Services, Inc., QC Canada Holdings Inc. and QC Capital, Inc. (collectively, the Company). QC Financial Services, Inc. is the 100% owner of QC Financial Services of California, Inc., Financial Services of North Carolina, Inc., QC Financial Services of Texas, Inc., Express Check Advance of South Carolina, LLC, QC Advance, Inc., Cash Title Loans, Inc. and QC Properties, LLC. QC Canada Holdings Inc. is the 100% owner of Direct Credit Holdings Inc. and its wholly owned subsidiaries (collectively, Direct Credit). QC Holdings, Inc., incorporated in 1998 under the laws of the State of Kansas, was founded in 1984, and has provided various retail consumer financial products and services throughout its 28-year history. The Company’s common stock trades on the NASDAQ Global Market exchange under the symbol “QCCO.”

Since 1998, the Company has been primarily engaged in the business of providing short-term consumer loans, known as payday loans, with principal values that typically range from $100 to $500. Payday loans provide customers with cash in exchange for a promissory note with a maturity of generally two to three weeks and supported by that customer’s personal check for the aggregate amount of the cash advanced plus a fee. The fee varies from state to state, based on applicable regulations and generally ranges from $15 to $20 per $100 borrowed. To repay the cash advance, customers may redeem their check by paying cash or they may allow the check to be presented to the bank for collection.

The Company also provides other consumer financial products and services, such as installment loans, credit services, check cashing services, title loans, open-end credit, debit cards, money transfers and money orders. All of the Company’s loans and other services are subject to state regulation, which vary from state to state, as well as to federal and local regulation, where applicable. As of March 31, 2012, the Company operated 483 branches with locations in Alabama, Arizona, California, Colorado, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Nebraska, Nevada, New Mexico, Ohio, Oklahoma, South Carolina, Tennessee, Texas, Utah, Virginia, Washington and Wisconsin.

As of March 31, 2012, the Company offers the installment loan product to its customers in Arizona, California, Colorado, Idaho, Illinois, Missouri, New Mexico, South Carolina, Utah and Wisconsin. The installment loans are payable in monthly installments (principal plus accrued interest) with terms typically ranging from four months to 18 months, and all loans are pre-payable at any time without penalty. The fee for the installment loan varies based on the amount borrowed and the term of the loan. Generally, the amount that the Company advances under an installment loan ranges from $750 to $3,000. The average principal amount for installment loans originated during three months ended March 31, 2012 was approximately $571.

In September 2007, the Company entered into the buy here, pay here segment of the used automotive market in connection with ongoing efforts to evaluate alternative products that serve the Company’s customer base. In January 2009, the Company purchased two buy here, pay here locations in Missouri for approximately $4.2 million. In May 2009, the Company opened a service center to provide reconditioning services on its inventory of vehicles and repair services for its customers. As of March 31, 2012, the Company operated five buy here, pay here lots, which are located in Missouri and Kansas. These locations sell used vehicles and earn finance charges from the related vehicle financing contracts. The average principal amount for buy here, pay here loans originated during the three months ended March 31, 2012 was approximately $9,984 and the average term of the loan was 33 months.

 

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Table of Contents

On September 30, 2011, QC Canada Holdings Inc., a wholly-owned subsidiary of the Company acquired 100% of the outstanding stock of Direct Credit Holdings Inc., a British Columbia company engaged in short-term, consumer Internet lending in certain Canadian provinces. Direct Credit was founded in 1999 and has developed and grown a proprietary Internet-based model into a leading platform in Canada. The acquisition of Direct Credit is part of the implementation of the Company’s strategy to diversify by increasing its product offerings and distribution, as well as by expanding its presence into international markets. See additional information in Note 3.

Basis of Presentation. The consolidated financial statements of QC Holdings, Inc. included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with accounting principles generally accepted in the United States of America (US GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. The Consolidated Balance Sheet as of December 31, 2011 was derived from the audited financial statements of the Company, but does not include all disclosures required by US GAAP. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2011.

In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal closing procedures) necessary to present fairly the financial position of the Company and its subsidiary companies as of March 31, 2012, and the results of operations for the three months ended March 31, 2011 and 2012 and cash flows for the three months ended March 31, 2011 and 2012, in conformity with US GAAP. The results of operations for the three months ended March 31, 2012 are not necessarily indicative of the results to be expected for the full year 2012.

Use of Estimates. In preparing financial statements in conformity with accounting principles generally accepted in the United States of America, management is required to make estimates and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities at the date of the financial statements, and the reported amounts of revenues and expenses during the reporting period. On an on-going basis, management evaluates its estimates and judgments, including those related to allowance for losses on loans, fair value measurements used in goodwill impairment tests, long-lived assets, income taxes, contingencies and litigation. Management bases its estimates on historical experience, empirical data and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results could differ from those estimates.

Accounting reclassifications. Certain reclassifications have been made to prior period financial information to conform to the current presentation. On the Consolidated Income Statements, amounts associated with installment loan fees have been reclassified from other revenues to be separately presented.

Inventory. Inventory primarily consists of vehicles acquired from auctions and trade-ins. Vehicle transportation and reconditioning costs are capitalized as a component of inventory. The cost of vehicle inventory is determined on the specific identification method. Vehicle inventories are stated at the lower of cost or market. Valuation allowances are established when the inventory carrying values are in excess of estimated selling prices, net of direct costs of disposal. As of December 31, 2011 and March 31, 2012, the Company had inventory of used vehicles and automotive parts totaling $3.0 million and $2.7 million, respectively, which is included in other current assets in the consolidated balance sheets. Management has determined that a valuation allowance is not necessary as of December 31, 2011 and March 31, 2012.

Loans Receivable, Provision for Losses and Allowance for Loan Losses. When the Company enters into a payday or title loan with a customer, the Company records a loan receivable for the amount loaned to the customer plus the fee charged by the Company, which varies from state to state based on applicable regulations.

 

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The following table summarizes certain data with respect to the Company’s payday loans:

 

    

Three Months Ended

 
     March 31,  
     2011      2012  

Average amount of cash provided to customer

   $ 319.76       $ 325.56   

Average fee received by the Company

   $ 57.00       $ 57.84   

Average term of the loan (days)

     17.5         17.8   

When the Company enters into an installment loan with a customer, the Company records a loan receivable for the amount loaned to the customer. At each period end, the Company records a receivable for any accrued fees and interest, which vary from state to state based on applicable regulations.

The Company records a receivable in connection with the sale of an automobile or other vehicle at the face amount of the loan. At each period end, the Company records a receivable for any accrued fees and interest, which vary from state to state based on applicable regulations.

When checks are presented to the bank for payment of loans and returned as uncollected, all accrued fees, interest and outstanding principal are charged-off as uncollectible, generally within 14 days after the due date. Accordingly, payday loans included in the receivable balance at any given point in time are typically not older than 30 days. These charge-offs are recorded as expense through the provision for losses. Any recoveries on losses previously charged to expense are recorded as a reduction to the provision for losses in the period recovered. With respect to title loans, no additional fees or interest are charged after the loan has defaulted, which generally occurs after attempts to contact the customer have been unsuccessful. Based on state regulations and operating procedures, the Company stops accruing interest on installment loans between 60 to 90 days after the last payment. On automotive loans, the Company stops accruing interest on 60 days after the last payment.

With respect to the loans receivable at the end of each reporting period, the Company maintains an aggregate allowance for loan losses (including fees and interest) for payday loans, title loans, installment loans and auto loans at levels estimated to be adequate to absorb estimated incurred losses in the respective outstanding loan portfolios. The Company does not specifically reserve for any individual loan.

The methodology for estimating the allowance for payday and title loan losses utilizes a four-step approach, which reflects the short-term nature of the loan portfolio at each period-end, the historical collection experience in the month following each reporting period-end and any fluctuations in recent general economic conditions. First, the Company computes the loss/volume ratio for the last month of each reporting period. The loss/volume ratio represents the percentage of aggregate net payday and title loan charge-offs to total payday and title loan volumes during a given period. Second, the Company computes an adjustment to this percentage to reflect the collections experience in the month immediately following the reporting period-end. To estimate collections experience, the Company computes an average of the change in the loss/volume ratio from the last month of each reporting period to the immediate subsequent month-end for each of the last three years (excluding the current year). This change is then added to, or subtracted from, the loss/volume ratio computed for the last month of the current reporting period to derive an experience-adjusted loss/volume ratio. Third, the period-end gross payday and title loans receivable balance is multiplied by the experience-adjusted loss/volume ratio to determine the initial estimate of the allowance for loan losses. Fourth, the Company reviews and evaluates various qualitative factors that may or may not affect the computed initial estimate of the allowance for loan losses, including, among others, known changes in state regulations or laws, changes to the Company’s business and operating structure, and geographic or demographic developments. As of December 31, 2011 and March 31, 2012, the Company determined that no qualitative adjustment to the allowance for payday loan losses was necessary.

 

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The Company maintains an allowance for installment loans at a level it considers sufficient to cover estimated losses in the collection of its installment loans. The allowance calculation for installment loans is based upon historical charge-off experience (primarily a six-month trailing average of charge-offs to total volume) and qualitative factors, with consideration given to recent credit loss trends and economic factors. As of December 31, 2011 and March 31, 2012, the Company reviewed the qualitative factors and determined that no qualitative adjustment was needed.

The allowance calculation for auto loans is determined on an aggregate basis and is based upon the Company’s review of the loan portfolio by period of origination, industry loss experience and qualitative factors, with consideration given to changes in loan characteristics, delinquency levels, collateral values and other general economic conditions. This estimate of probable losses is primarily determined using static pool analyses prepared for various segments of the portfolio using estimated loss experience, adjusted for consideration of any current economic factors. As of December 31, 2011 and March 31, 2012, the Company reviewed various qualitative factors with respect to its automotive loans receivable and determined that no qualitative adjustment was needed.

The Company records an allowance for other receivables based upon an analysis that gives consideration to payment recency, delinquency levels and other general economic conditions.

Based on the information discussed above, the Company records an adjustment to the allowance for loan losses through the provision for losses. The overall allowance represents the Company’s best estimate of probable losses inherent in the outstanding loan portfolio at the end of each reporting period.

During the three months ended March 31, 2011 and 2012, the Company received cash of approximately $205,000 and $115,000, respectively from the sales of certain payday loan receivables that the Company had previously charged off. The sales were recorded as a credit to the overall loss provision, which is consistent with the Company’s policy for recording recoveries noted above.

Note 2 – Accounting Developments

In May 2011, the FASB issued an update to the authoritative guidance, which establishes common requirements for measuring fair value and for disclosing information about fair value measurements in accordance with US GAAP. The Company adopted this guidance effective January 1, 2012. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

In June 2011, the FASB issued guidance on the presentation of comprehensive income. The Company adopted this guidance effective January 1, 2012. The adoption of this guidance did not have a material effect on the Company’s consolidated financial statements.

Note 3 – Significant Business Transactions

Acquisition of Direct Credit Holdings. On September 30, 2011, QC Canada Holdings Inc, a wholly-owned subsidiary the Company acquired 100% of the outstanding stock of Direct Credit Holdings Inc. and its wholly-owned subsidiaries (collectively, Direct Credit), a British Columbia company engaged in short-term, consumer Internet lending in certain Canadian provinces. The Company paid an aggregate initial consideration of $12.4 million. The Company also agreed to pay a supplemental earn-out payment to the extent Direct Credit’s EBITDA as specifically defined in the Stock Purchase Agreement (generally earnings before interest, income taxes, depreciation and amortization expenses) exceeds a defined target for the twelve-month period ending September 30, 2012.

The Company hired an independent appraiser to evaluate the fair value of the contingent consideration and the assets acquired and liabilities assumed. The contingent consideration and the estimated fair values of intangible assets acquired are fair value estimates obtained from an independent appraiser and are based on the information that was available to the Company as of the acquisition date. The Company believes that the current information provides a reasonable basis for estimating the fair values of contingent consideration and of assets acquired and liabilities assumed, and the Company will continue to monitor during the measurement period (one

 

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year from the acquisition date) any new information obtained about facts and circumstances that were present at the acquisition date (including consideration of legal matters as discussed in Note 18). The Company has not provided pro forma information because the Company believes that the acquisition of Direct Credit is not material to the Company’s consolidated financial statements. The operating results of Direct Credit are included in the Company’s Consolidated Statements of Income as of the date of acquisition. The costs incurred for the acquisition of Direct Credit were expensed as incurred and these costs were not material to the Company’s consolidated financial statements.

The following table summarizes the estimated fair values of the assets acquired at the date of acquisition (in thousands):

 

Fair value of consideration transferred:

  

Cash

   $ 12,401   

Contingent consideration

     1,100   
  

 

 

 

Total

   $ 13,501   
  

 

 

 

Recognized amounts of identifiable assets acquired and liabilities assumed:

  

Current assets (a)

   $ 3,021   

Goodwill (b)

     7,557   

Customer relationships

     2,562   

Trade name

     1,408   

Software

     455   
  

 

 

 

Total identifiable assets acquired

     15,003   

Current liabilities assumed

     (546

Deferred tax liability (c)

     (956
  

 

 

 

Net assets acquired

   $ 13,501   
  

 

 

 

 

(a) Includes cash acquired of approximately $866,000.
(b) The goodwill is currently assigned to a reporting unit for goodwill testing purposes. The goodwill recognized is attributable primarily to the potential additional applications for software, expected corporate synergies, the assembled workforce of Direct Credit and other factors. None of the goodwill is expected to be deductible for income tax purposes.
(c) The deferred tax liability represents the net deferred income taxes recorded as an increase to goodwill primarily for the tax basis differences of intangible assets acquired in connection with the acquisition of Direct Credit. To the extent of any change to the provisional fair values of the intangible assets or other items, the Company would also expect to change the related deferred tax assets and liabilities that have been recorded at the acquisition date.

The Company believes the acquisition of Direct Credit broadens its product platform and distribution, as well as expands its presence by entering into international markets. Prior to completion of the transaction the Company amended and restated its credit agreement. The acquisition was funded with borrowings from the amended and restated credit agreement. See additional information in Note 12.

The fair value of the contingent consideration arrangement at the acquisition date was $1.1 million, which was recorded in current liabilities. As of December 31, 2011 and March 31, 2012, the fair value of the contingent consideration liability was $1.1 million and $379,000, respectively. The fair value estimate at December 31, 2011 and March 31, 2012 was determined using a probability-weighted income approach to estimate fair value at each reporting date. During the three months ended March 31, 2012, the Company recorded a reduction to the contingent consideration liability of approximately $753,000, which is included as a gain in the other income component of the Consolidated Statements of Income.

Closure of Branches. During 2012, the Company closed one branch that was consolidated into a nearby a branch. The costs associated with closing the branch were not material to the Company’s consolidated financial statements.

 

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During first quarter 2011, the Company closed three of its lower performing branches in various states (which included one branch that was consolidated into a nearby branch). The Company recorded approximately $100,000 in pre-tax charges during the three months ended March 31, 2011 associated with these closures. The charges included a $54,000 loss for the disposition of fixed assets, $44,000 for lease terminations and other related occupancy costs and $2,000 for other costs.

The following table summarizes the accrued costs associated with the closure of branches and the activity related to those charges as of March 31, 2012 (in thousands):

 

     Balance at
December 31,
2011
     Additions      Reductions     Balance at
March 31,
2012
 

Lease and related occupancy costs

   $ 90       $ 12       $ (31   $ 71   
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 90       $ 12       $ (31   $ 71   
  

 

 

    

 

 

    

 

 

   

 

 

 

As of March 31, 2012, the balance of $71,000 for accrued costs associated with the closure of branches is included as a current liability on the Consolidated Balance Sheets as the Company expects that the liabilities for these costs will be settled within one year.

Sale of Branch. In March 2011, the Company sold a branch located in California for approximately $666,000. The carrying value of the payday loan receivables, fixed assets and other assets sold was approximately $137,000, $15,000 and $2,000, respectively. The Company also recorded a disposition of goodwill totaling $135,000 due to the sale of this location. The gain from the sale of the branch, which was approximately $377,000, and its related operations are included in discontinued operations in the Consolidated Statements of Income.

Note 4 – Fair Value Measurements

Fair Value Hierarchy Tables. The fair value measurement accounting guidance establishes a three-tier fair value hierarchy, which prioritizes the inputs used in measuring fair value. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability.

The following table presents financial assets measured at fair value on a recurring basis as of March 31, 2012 (in thousands):

 

     Fair Value Measurements      Liability at  
     Level 1      Level 2      Level 3      Fair Value  

Acquisition-related contingent consideration

   $ —         $ —         $ 379       $ 379   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 379       $ 379   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

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The following table presents financial assets measured at fair value on a recurring basis as of December 31, 2011 (in thousands):

 

     Fair Value Measurements      Liability at  
     Level 1      Level 2      Level 3      Fair Value  

Acquisition-related contingent consideration

   $ —         $ —         $ 1,106       $ 1,106   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

   $ —         $ —         $ 1,106       $ 1,106   
  

 

 

    

 

 

    

 

 

    

 

 

 

As discussed in Note 3 above, the Company agreed to pay a supplemental earn-out payment to the extent the EBITDA of Direct Credit’s operations exceeds a defined target for the twelve-month period ending September 30, 2012. The acquisition-related contingent consideration was initially measured and recorded at fair value as an element of consideration paid in connection with an acquisition with subsequent adjustments recognized as a gain or loss in the other income component of the Consolidated Statements of Income. The liability for this payment was classified as a Level 3 liability because the related fair value measurement, which is determined using a discounted probability-weighted approach, includes significant inputs not observable in the market. These unobservable inputs include internally-developed assumptions of the probabilities of achieving specified targets, which are used to estimate the resulting EBITDA, and the applicable discount rate. When assessing the fair value of this contingent consideration on a quarterly basis, the Company evaluates the performance of the business during the period compared to previous expectations, along with any changes to our future projections, and updates the estimated EBITDA accordingly. In addition, the Company considers changes to our cost of capital and changes to the probability of achieving the earn-out payment targets when updating the discount rate on a quarterly basis. The analysis utilized weighted average inputs, including a risk-based discount rate of 29.5%, determined using a mix of cost of debt and risk-adjusted cost of capital reasonable for the company, and EBITDA growth year-to-year ranging from 9% to 42%, determined using various scenarios for the business.

The acquisition-related contingent consideration liability categorized as Level 3 for purposes of fair value determination is not material to the Company’s financial statements, and the sensitivity of such valuation to unobservable inputs is also believed to not be material.

The following table presents changes to the Company’s financial liabilities measured at fair value on a recurring basis using significant unobservable inputs (Level 3) for the three months ended March 31, 2012 (in thousands):

 

     Acquisition-
related
Contingent
Consideration
 

Balance, beginning of period

   $ 1,106   

Adjustment

     (753

Effect of foreign currency translation

     26   
  

 

 

 

Balance, end of period

   $ 379   
  

 

 

 

Fair Value Measurements on a Non-Recurring Basis. The Company also measures the fair value of certain assets on a non-recurring basis when events or changes in circumstances indicate that the carrying amount of the assets may not be recoverable. Non-financial assets such as property, plant, land, goodwill and intangible assets are also subject to non-recurring fair value measurements if they are deemed to be impaired. The impairment models used for nonfinancial assets depend on the type of asset. When the carrying amount of these assets cannot be recovered by the undiscounted net cash flows they will generate, impairment is recognized in an amount by which the carrying amount of the assets exceeds the fair value. There were no material impairments of non-financial assets for the three months ended March 31, 2011 and 2012, respectively.

 

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Financial Assets Not Measured at Fair Value. The fair value of cash and cash equivalents and restricted cash, approximates carrying value.

The fair value of short-term payday, title and installment loans receivable, borrowings under the credit facility, accounts payable and certain other current liabilities that are short-term in nature approximates carrying value. If measured at fair value in the financial statements, these financial instruments would be classified as Level 3 in the fair value hierarchy.

The Company estimates the fair value of its automotive loan receivables at what a third party purchaser might be willing to pay. The Company has had discussions with third parties that indicate a 35% discount to face value would be a reasonable fair value in a negotiated third party transaction. Since the Company does not intend to offer the receivables for sale to an outside third party, the expectation is that the carrying value at December 31, 2011 and March 31, 2012 will be ultimately collected. By collecting the accounts internally, the Company expects to realize more than a third party purchaser would expect to collect with a servicing requirement and a profit margin included. As of December 31, 2011 and March 31, 2012, the fair value of the automotive loan receivables was $11.7 million and $12.3 million, respectively. If measured at fair value in the financial statements, these financial instruments would be classified as Level 2 in the fair value hierarchy.

The Company estimates the fair value of long-term debt based upon borrowing rates available at the reporting date for indebtedness with similar terms and average maturities. On September 30, 2011, the Company entered into an amendment of its credit facility whereby a $50 million term loan maturing December 2012 was replaced with a $32 million term loan that matures on September 30, 2014. As of December 31, 2011 and March 31, 2012, the balance of the three-year term loan was $31.7 million and $28.0 million, respectively. As of December 31, 2011 and March 31, 2012, the fair value of the three-year term loan was approximately $30.3 million and $28.7 million, respectively. In connection with entering into a new credit agreement in September 2011, the Company was required to issue $3.0 million of senior subordinated notes (see Note 12). The fair value of the subordinated notes as of December 31, 2011 and March 31, 2012 approximated the carrying value. If measured at fair value in the financial statements, long-term debt (including the current portion) and the subordinated debt would be classified as Level 2 in the fair value hierarchy.

Note 5 – Discontinued Operations

The Company closed 38 branches during 2011 that were not consolidated into nearby branches and sold one branch. These branches are reported as discontinued operations in the Consolidated Statements of Income and related disclosures in the accompanying notes for all periods presented. With respect to the Consolidated Balance Sheets, the Consolidated Statements of Cash Flows and related disclosures in the accompanying notes, the items associated with the discontinued operations are included with the continuing operations for all periods presented.

Summarized financial information for discontinued operations during the three months ended March 31, 2011 and 2012 is presented below (in thousands):

 

     Three Months Ended  
     March 31,  
     2011     2012  

Total revenues

   $ 817      $ 19   

Provision for losses

     108        50   

Other operating expenses

     1,033        34   
  

 

 

   

 

 

 

Gross loss

     (324     (65

Other, net

     335        —     
  

 

 

   

 

 

 

Gain (loss) before income taxes

     11        (65

Income tax benefit (expense)

     (4     25   
  

 

 

   

 

 

 

Gain (loss) from discontinued operations

   $ 7      $ (40
  

 

 

   

 

 

 

 

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Note 6 – Earnings Per Share

The Company computes basic and diluted earnings per share using a two-class method because the Company has participating securities in the form of unvested share-based payment awards with rights to receive non-forfeitable dividends. Basic and diluted earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the period. The effect of stock options and unvested restricted stock represent the only differences between the weighted average shares used for the basic earnings per share computation compared to the diluted earnings per share computation for each period presented.

The following table presents the computations of basic and diluted earnings per share for each of the periods indicated (in thousands, except per share data):

 

     Three Months Ended  
     March 31,  
     2011      2012  

Income available to common stockholders:

     

Income from continuing operations

   $ 5,283       $ 4,969   

Discontinued operations, net of income tax

     7         (40
  

 

 

    

 

 

 

Net income

   $ 5,290       $ 4,929   
  

 

 

    

 

 

 

Weighted average shares outstanding:

     

Weighted average basic common shares outstanding

     17,056         17,142   

Dilutive effect of stock options and unvested restricted stock

     21         8   
  

 

 

    

 

 

 

Weighted average diluted common shares outstanding

     17,077         17,150   
  

 

 

    

 

 

 

Basic earnings per share:

     

Continuing operations

   $ 0.29       $ 0.28   

Discontinued operations

     
  

 

 

    

 

 

 

Net income

   $ 0.29       $ 0.28   
  

 

 

    

 

 

 

Diluted earnings per share:

     

Continuing operations

   $ 0.29       $ 0.28   

Discontinued operations

     
  

 

 

    

 

 

 

Net income

   $ 0.29       $ 0.28   
  

 

 

    

 

 

 

Anti-dilutive securities. For the three months ended March 31, 2011 and March 31, 2012, options to purchase 2.6 million shares were excluded from the diluted earnings per share calculation for each period because they were anti-dilutive.

 

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Note 7 – Segment Information

The Company’s operating business units offer various financial services and sell used vehicles and earn finance charges from the related vehicle financing contracts. The Company has elected to organize and report on these business units as three operating segments (Financial Services, Automotive and E-Lending). The Financial Services segment includes branches that offer payday loans, installment loans, credit services, check cashing services, title loans, open-end credit, debit cards, money transfers and money orders. The Automotive segment consists of the buy here, pay here operations. The E-Lending segment includes the Internet lending operations in Canada. The Company evaluates the performance of its segments based on, among other things, gross profit, income from continuing operations before income taxes and return on invested capital.

The following tables present summarized financial information for the Company’s segments (in thousands):

 

     Three Months Ended March 31, 2012  
     Financial                  Consolidated  
     Services     Automotive     E-Lending      Total  

Total revenues

   $ 38,554      $ 6,407      $ 2,017       $ 46,978   

Provision for losses

     4,967        889        610         6,466   

Other expenses

     18,153        4,261        737         23,151   
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

     15,434        1,257        670         17,361   

Other, net (a)

     (9,204     (644     539         (9,309
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from continuing operations before income taxes

   $ 6,230      $ 613      $ 1,209       $ 8,052   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

     Three Months Ended March 31, 2011  
     Financial                  Consolidated  
     Services     Automotive     E-Lending      Total  

Total revenues

   $ 38,826      $ 6,975      $ —         $ 45,801   

Provision for losses

     3,965        930           4,895   

Other expenses

     17,754        4,742           22,496   
  

 

 

   

 

 

   

 

 

    

 

 

 

Gross profit

     17,107        1,303        —           18,410   

Other, net (a)

     (8,905     (757        (9,662
  

 

 

   

 

 

   

 

 

    

 

 

 

Income from continuing operations before income taxes

   $ 8,202      $ 546      $ —         $ 8,748   
  

 

 

   

 

 

   

 

 

    

 

 

 

 

(a) Represents expenses not associated with branch operations, which includes regional expenses, corporate expenses, depreciation and amortization, interest, other income and other expenses. In addition, the E-Lending segment includes a gain of $753,000 for the three months ended March 31, 2012 due to recording a reduction in the contingent consideration liability.

Information concerning total assets by reporting segment is as follows (in thousands):

 

     December 31,      March 31,  
     2011      2012  

Financial Services

   $ 118,812       $ 103,926   

Automotive

     19,791         20,536   

E-Lending

     14,626         15,208   
  

 

 

    

 

 

 

Balance at end of year

   $ 153,229       $ 139,670   
  

 

 

    

 

 

 

The operations of the Financial Services and Automotive segments are all located in the United States. The operations of the E-Lending segment are located in Canada.

 

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Note 8 – Customer Receivables and Allowance for Loan Losses

Customer receivables consisted of the following (in thousands):

 

     Payday                          
     and Title     Automotive     Installment     Open-end        
March 31, 2012:    Loans     Loans     Loans     Credit     Total  

Current portion:

          

Total loans, interest and fees receivable

   $ 40,765      $ 9,383      $ 8,063      $ 324      $ 58,535   

Less: allowance for losses.

     (820     (1,870     (1,790     (160     (4,640
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans, interest and fees receivable, net

   $ 39,945      $ 7,513      $ 6,273      $ 164      $ 53,895   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-current portion:

          

Total loans, interest and fees receivable

   $ —        $ 9,470      $ 166      $ —        $ 9,636   

Less: allowance for losses

       (1,890     (15       (1,905
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans, interest and fees receivable, net

   $ —        $ 7,580      $ 151      $ —        $ 7,731   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

     Payday                          
     and Title     Automotive     Installment     Open-end        
December 31, 2011:    Loans     Loans     Loans     Credit     Total  

Current portion:

          

Total loans, interest and fees receivable

   $ 55,706      $ 9,037      $ 8,426      $ 196      $ 73,365   

Less: allowance for losses

     (1,548     (2,100     (2,260     (100     (6,008
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans, interest and fees receivable, net

   $ 54,158      $ 6,937      $ 6,166      $ 96      $ 67,357   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Non-current portion:

          

Total loans, interest and fees receivable

   $ —        $ 9,039      $ —        $ —        $ 9,039   

Less: allowance for losses

       (2,100         (2,100
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Loans, interest and fees receivable, net

   $ —        $ 6,939      $ —        $ —        $ 6,939   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Credit quality information. In order to manage the portfolios of consumer loans effectively, the Company utilizes a variety of proprietary underwriting criteria, monitors the performance of the portfolio and maintains either an allowance or accrual for losses on consumer loans (including fees and interest) at a level estimated to be adequate to absorb credit losses inherent in the portfolio. The portfolio includes balances outstanding from all consumer loans, including short-term payday and title loans, automotive loans and multi-payment installment loans. The allowance for losses on consumer loans offsets the outstanding loan amounts in the consolidated balance sheets.

The Company had $5.8 million in automotive loans receivable past due as of March 31, 2012 and approximately 10.2% of this amount was more than 60 days past due. In addition, the Company had automotive loans receivable totaling $588,000 on non-accrual status as of March 31, 2012. With respect to installment loans, the Company had approximately $1.3 million in installment loans receivable past due as of March 31, 2012 and approximately 13.0% of this amount was more than 60 days past due.

The Company had $6.9 million in automotive loans receivable past due as of December 31, 2011 and approximately 12.0% of this amount was more than 60 days past due. In addition, the Company had automotive loans receivable totaling $824,000 on non-accrual status as of December 31, 2011. With respect to installment loans, the Company had approximately $1.5 million in installment loans receivable past due as of December 31, 2011 and approximately 7.4% of this amount was more than 60 days past due.

 

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Allowance for loan losses. The following table summarizes the activity in the allowance for loan losses during the three months ended March 31, 2011 and 2012 (in thousands):

 

     Three Months Ended  
     March 31,  
     2011     2012  

Allowance for loan losses

    

Balance, beginning of period

   $ 7,150      $ 8,108   

Charge-offs

     (15,566     (16,499

Recoveries

     9,484        8,853   

Provision for losses

     4,622        6,083   
  

 

 

   

 

 

 

Balance, end of period

   $ 5,690      $ 6,545   
  

 

 

   

 

 

 

The provision for losses in the Consolidated Statements of Income includes losses associated with the credit service organization (see note 15 for additional information) and excludes loss activity related to discontinued operations (see note 5 for additional information).

The following table summarizes the activity in the allowance for loan losses by product type during the three months ended March 31, 2012 (in thousands):

 

     Payday                          
     and Title     Automotive     Installment              
     Loans     Loans     Loans     Other     Total  

Balance, beginning of period

   $ 1,548      $ 4,200      $ 2,260      $ 100      $ 8,108   

Charge-offs (a)

     (12,057     (1,330     (2,986     (126     (16,499

Recoveries

     8,084          703        66        8,853   

Provision for losses

     3,245        890        1,828        120        6,083   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Balance, end of period

   $ 820      $ 3,760      $ 1,805      $ 160      $ 6,545   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) The charge-offs for automotive loans are net of recovered collateral.

Note 9 – Other Revenues

The components of “Other” revenues as reported in the statements of income are as follows (in thousands):

 

     Three Months Ended  
     March 31,  
     2011      2012  

Credit services fees

   $ 1,936       $ 1,910   

Check cashing fees

     1,301         1,078   

Title loan fees

     1,287         672   

Open-end credit fees

        136   

Other fees

     674         729   
  

 

 

    

 

 

 

Total

   $ 5,198       $ 4,525   
  

 

 

    

 

 

 

 

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Note 10 – Property and Equipment

Property and equipment consisted of the following (in thousands):

 

     December 31,     March 31,  
     2011     2012  

Buildings

   $ 3,262      $ 3,262   

Leasehold improvements

     19,635        19,616   

Furniture and equipment

     23,517        24,488   

Land

     512        512   

Vehicles

     1,031        1,017   
  

 

 

   

 

 

 
     47,957        48,895   

Less: Accumulated depreciation and amortization

     (36,196     (37,037
  

 

 

   

 

 

 

Total

   $ 11,761      $ 11,858   
  

 

 

   

 

 

 

In February 2005, the Company entered into a seven-year lease for a new corporate headquarters in Overland Park, Kansas. In January 2011, the Company amended its lease agreement to extend the lease term and modify the lease payments. The lease was extended with a new landlord through October 31, 2017 and includes a renewal option for an additional five years. As part of the original lease agreement and the amendment to the lease agreement, the Company received tenant allowances from the landlord for leasehold improvements totaling $1.4 million. The tenant allowances are recorded by the Company as a deferred liability and are being amortized as a reduction of rent expense over the life of the lease. As of December 31, 2011, the balance of the deferred liability was approximately $325,000, which consisted of $269,000 classified as a non-current liability. As of March 31, 2012, the balance of the deferred liability was approximately $311,000, which consisted of $256,000 classified as a non-current liability.

Note 11 – Goodwill and Intangible Assets

Goodwill. The following table summarizes the changes in the carrying amount of goodwill (in thousands):

 

     December 31,     March 31,  
     2011     2012  

Balance at beginning of period

   $ 16,491      $ 23,958   

Acquisition of Direct Credit

     7,557     

Adjustment to purchase price allocation of Direct Credit

       14   

Effect of foreign currency translation

     45        177   

Sale of branch

     (135  
  

 

 

   

 

 

 

Balance at end of period

   $ 23,958      $ 24,149   
  

 

 

   

 

 

 

 

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Intangible Assets. The following table summarizes intangible assets (in thousands):

 

     December 31,     March 31,  
     2011     2012  

Amortized intangible assets:

    

Customer relationships

   $ 3,173      $ 3,173   

Non-compete agreements

     1,093        1,093   

Debt issue costs

     1,510        1,510   
  

 

 

   

 

 

 
     5,776        5,776   

Non-amortized intangible assets:

    

Trade names

     2,016        2,016   
  

 

 

   

 

 

 

Gross carrying amount

     7,792        7,792   

Effect of foreign currency translation

       88   

Less: Accumulated amortization

     (2,257     (2,666
  

 

 

   

 

 

 

Net intangible assets

   $ 5,535      $ 5,214   
  

 

 

   

 

 

 

Intangible assets at December 31, 2011 and March 31, 2012 include customer relationships, non-compete agreements, trade names and debt issue costs. Customer relationships are amortized using the straight-line method over the weighted average useful lives ranging from three to five years. Non-compete agreements are currently amortized using the straight-line method over the term of the agreements, ranging from three to five years. The amount recorded for trade names are considered an indefinite life intangible and not subject to amortization. Costs paid to obtain debt financing are amortized to interest expense over the term of each related debt agreement using the effective interest method for term debt and the straight-line method for the revolving credit facility.

Amortization of intangible assets for the three months ended March 31, 2011 and March 31, 2012 was approximately $212,000 and $409,000, respectively. Annual amortization expense for intangible assets recorded as of December 31, 2011 is estimated to be $1.1 million for 2012, $1.2 million for 2013, $847,000 for 2014 and $6,000 for 2015.

Note 12 – Indebtedness

The following table summarizes long-term debt at December 31, 2011 and March 31, 2012 (in thousands):

 

     December 31,     March 31,  
     2011     2012  

Term loan

   $ 31,684      $ 28,027   

Subordinated debt

     3,030        3,060   

Revolving credit facility

     14,500        5,000   
  

 

 

   

 

 

 

Total debt

     49,214        36,087   

Less: debt due within one year

     (34,990     (23,650
  

 

 

   

 

 

 

Total non-current debt

   $ 14,224      $ 12,437   
  

 

 

   

 

 

 

On September 30, 2011, the Company entered into an amended and restated credit agreement (current credit agreement) with a syndicate of banks to replace its prior credit agreement, which was previously amended on December 7, 2007. The current credit agreement provides for a term loan of $32 million and a revolving line of credit (including provisions permitting the issuance of letters of credit and swingline loans) in the aggregate principal amount of up to $27 million.

 

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Borrowings under the term loan and the facility are available based on two types of loans, Base Rate loans or LIBOR Rate loans. Base Rate term loans bear interest at a rate of 2.25% plus the higher of the Prime Rate, the Federal Funds Rate plus 0.50% or the one-month LIBOR rate in effect plus 2.00%. Base Rate revolving loans bear interest at a rate ranging from 1.25% to 2.25% depending on the Company’s leverage ratio (as defined in the agreement), plus the higher of the Prime Rate, the Federal Funds Rate plus 0.50% or the one-month LIBOR rate in effect plus 2.00%. LIBOR Rate term loans bear interest at rates based on the LIBOR rate for the applicable loan period (unless the rate is less than 1.50%, in which case the agreement established a LIBOR rate floor of 1.50%) with a maximum margin over LIBOR of 4.25%. LIBOR Rate revolving loans bear interest at rates based on the LIBOR rate for the applicable loan period with a margin over LIBOR ranging from 3.25% to 4.25% depending on the Company’s leverage ratio (as defined in the agreement). The loan period for a LIBOR Rate loan may be one month, two months, three months or six months and the loan may be renewed upon notice to the agent provided that no default has occurred. As a result, the revolving credit facility is classified as debt due within one year, although the revolving credit facility, by its terms, does not mature until September 30, 2014. The credit facility also includes a non-use fee ranging from 0.375% to 0.625%, which is based upon the Company’s leverage ratio.

In addition to scheduled repayments, the term loan contains mandatory principal prepayment provisions whereby the Company is required to reduce the outstanding principal amount of the term loan based on the Company’s excess cash flow (as defined in the agreement) and the Company’s leverage ratio as of the most recent completed fiscal year. To the extent that the Company’s leverage ratio is greater than one, the Company is required to pay 75% of excess cash flow. When the leverage ratio falls below one, the mandatory payment is 50% of excess cash flow. Under the previous credit agreement, the Company made a $7.1 million principal payment on the term loan in March 2011, which included $5.3 million required under the mandatory prepayment provisions and the $1.8 million scheduled principal payment. In April 2012, the Company made a $10.7 million principal payment on the term loan, which was required under the mandatory prepayment provisions of the current credit agreement.

Under the current credit agreement, the lenders required that the Company issue $3.0 million of senior subordinated notes. On September 30, 2011, the Company issued $2.5 million initial principal amount of senior subordinated notes to the Chairman of the Board and Chief Executive Officer of the Company. The remaining $500,000 principal amount of subordinated notes was issued to another stockholder of the Company, who is not an officer or director of the Company. The subordinated notes bear interest at the rate of 16% per annum, payable quarterly, 75% of which is payable in cash and 25% of which is payable-in-kind (PIK) through the issuance of additional senior subordinated PIK notes. The subordinated notes mature on September 30, 2015, are subject to prepayment at the option of the Company, without penalty or premium, on or after September 30, 2014, and are subject to mandatory prepayment, without premium, upon a change of control. The subordinated notes contain events of default tied to the Company’s total debt to total capitalization ratio and total debt to EBITDA ratio. The subordinated notes further provide that upon occurrence of an event of default on the subordinated notes, the Company may not declare or pay any cash dividend or distribution of cash or other property (other than equity securities of the Company) on its capital stock. As of December 31, 2011 and March 31, 2012, the balance of the subordinated notes was approximately $3.0 million and $3.1 million, respectively.

Note 13 – Derivative Instruments

Derivative instruments are accounted for at fair value. The accounting for changes in the fair value of a derivative depends on the intended use and designation of the derivative instrument. For a derivative instrument designated as a fair value hedge, the gain or loss on the derivative is recognized in earnings in the period of change in fair value together with the offsetting gain or loss on the hedged item. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Other Comprehensive Income (OCI) and is subsequently recognized in earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized in earnings. Gains or losses from changes in fair values of derivatives that are not designated as hedges for accounting purposes are recognized currently in earnings.

 

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Prior to amending and restating its credit agreement on September 30, 2011, the Company was exposed to certain risks relating to adverse changes in interest rates on its long-term debt and managed that risk with the use of a derivative. The Company did not enter into the derivative instrument for trading or speculative purposes.

Interest rate swap. The Company entered into an interest rate swap agreement during first quarter 2008 for $49 million of its outstanding debt as a cash flow hedge to interest rate fluctuations under its prior credit facility. The swap agreement was designated as a cash flow hedge, and effectively changed the floating rate interest obligation associated with the $50 million term loan into a fixed rate. For the three months ended March 31, 2011, the Company recorded unrealized gain of $190,000 on the interest rate swap agreement in other comprehensive income. Because the term debt associated with the swap was refinanced on September 30, 2011, the hedge no longer met the criteria for accounting of a cash flow hedge. On October 3, 2011, the Company terminated the swap agreement. In connection with the termination of the swap agreement, the Company paid a net cash settlement of approximately $343,000. The Company’s net loss on this transaction was deferred in accumulated other comprehensive income and will be amortized into earnings as an increase to interest expense over the original term of the hedged transaction, which was scheduled to terminate in December 2012. For the three months ended March 31, 2012, the Company has recorded interest expense totaling approximately $69,000 related to the termination of the swap.

The following table summarizes the pre-tax gains (losses) recognized in Other Comprehensive Income related to the interest rate swap agreement for the three months ended March 31, 2011 and 2012 (in thousands).

 

Derivatives Designated as Hedging    Gain (Loss) Recognized in
OCI
 
   Three Months Ended
March 31,
 

Instruments under ASC Topic 815

   2011     2012  

Interest rate swap:

    

Loss recognized in other comprehensive income

   $ (17   $ —     

Amount reclassified from accumulated other comprehensive loss to interest expense

     207        69   
  

 

 

   

 

 

 

Total

   $ 190      $ 69   
  

 

 

   

 

 

 

Note 14 – Income taxes

Effective Tax Rate. The Company’s effective tax rate was 38.3% for the three months ended March 31, 2012 compared to 39.6% for the three months ended March 31, 2011.

Uncertain Tax Positions. The Company had unrecognized tax benefits of approximately $193,000 and $206,000 as of December 31, 2011 and March 31, 2012, respectively.

The Company records accruals for interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively. Interest and penalties and associated accruals were not material as of March 31, 2012.

The Company does not anticipate any material changes in the amount of unrecognized tax benefits in the next twelve months.

 

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The Company is subject to income taxes in the U.S. federal jurisdiction and various state and foreign jurisdictions. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the ordinary course of business, transactions occur for which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit the Company’s income tax returns. These audits examine the Company’s significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. The following table outlines the tax years that generally remain subject to examination as of March 31, 2012:

 

     Federal    State and
Foreign

Statute remains open

   2008-2011    2007-2011

Tax years currently under examination

   N/A    N/A

Note 15 – Credit Services Organization

For the Company’s locations in Texas, the Company began operating as a CSO, through one of its subsidiaries, in September 2005. As a CSO, the Company acts as a credit services organization on behalf of consumers in accordance with Texas laws. The Company charges the consumer a fee for arranging for an unrelated third-party to make a loan to the consumer and for providing related services to the consumer, including a guarantee of the consumer’s obligation to the third-party lender. The Company also services the loan for the lender. The CSO fee is recognized ratably over the term of the loan. The Company is not involved in the loan approval process or in determining the loan approval procedures or criteria. As a result, loans made by the lender are not included in the Company’s loans receivable balance and are not reflected in the Consolidated Balance Sheets. As noted above, however, the Company absorbs all risk of loss through its guarantee of the consumer’s loan from the lender. As of December 31, 2011 and March 31, 2012, the consumers had total loans outstanding with the lender of approximately $3.1 million and $1.9 million, respectively. Because of the economic exposure for potential losses related to the guarantee of these loans, the Company records a payable at fair value to reflect the anticipated losses related to uncollected loans. The balance of the liability for estimated losses reported in accrued liabilities was approximately $90,000 as of December 31, 2011 and $40,000 as of March 31, 2012.

The following tables summarize the activity in the CSO liability (in thousands):

 

     Three Months Ended  
     March 31,  
     2011     2012  

Allowance for loan losses

    

Balance, beginning of period

   $ 100      $ 90   

Charge-offs

     (703     (747

Recoveries

     272        264   

Provision for losses

     381        433   
  

 

 

   

 

 

 

Balance, end of period

   $ 50      $ 40   
  

 

 

   

 

 

 

Note 16 – Stockholders Equity

Stock Repurchases. The board of directors has authorized the Company to repurchase up to $60 million of its common stock in the open market and through private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in stock-based compensation programs. As of March 31, 2012, the Company had repurchased 5.6 million shares at a total cost of approximately $55.8 million, which leaves approximately $4.2 million that may yet be purchased under the current program, which expires June 30, 2012.

 

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Dividends. On February 7, 2012, the Company’s board of directors declared a regular quarterly cash dividend of $0.05 per common share. The dividends were paid on March 6, 2012 to stockholders of record as of February 21, 2012. The total amount of the dividend paid was approximately $893,000.

Note 17 – Stock-Based Compensation and Other Long-Term Incentive Compensation

The following table summarizes the stock-based compensation expense reported in net income (in thousands):

 

     Three Months Ended  
     March 31,  
     2011      2012  

Employee stock-based compensation:

  

Stock options

   $ 96       $ 63   

Restricted stock awards

     393         368   
  

 

 

    

 

 

 
     489         431   

Non-employee director stock-based compensation:

     

Restricted stock awards

     183         181   
  

 

 

    

 

 

 

Total

   $ 672       $ 612   
  

 

 

    

 

 

 

Stock option grants. The Company did not grant stock options during first three months of 2012. As of March 31, 2012, the Company had 2.7 million stock options outstanding with a weighted average exercise price of $9.83 and 2.5 million stock options exercisable with a weighted average exercise price of $10.37.

Restricted stock. During first quarter 2012, the Company granted 52,500 shares of restricted stock to non-employee directors under the 2004 Equity Incentive Plan pursuant to restricted stock agreements. The shares granted to the non-employee directors vested immediately upon grant and are subject to an agreed-upon six-month holding period. The Company estimated that the fair market value of these restricted stock grants was approximately $181,000, which the Company recognized as stock-based compensation expense in the three months ended March 31, 2012.

A summary of all restricted stock activity under the equity compensation plans for the three months ended March 31, 2012 is as follows:

 

     Restricted Stock  
     Number of
Shares
    Weighted
Average Grant
Date Fair Value
 

Non-vested balance, January 1, 2012

     928,061      $ 4.76   

Granted

     52,500        3.45   

Vested

     (369,807     4.93   

Forfeited

     (2,883     4.27   
  

 

 

   

 

 

 

Non-vested balance, March 31, 2012

     607,871      $ 4.76   
  

 

 

   

 

 

 

As of March 31, 2012, there was $2.5 million of total unrecognized compensation costs related to the nonvested restricted stock grants. The Company estimates that these costs will be amortized over a weighted average period of 2.3 years.

Other long-term incentive compensation. In 2012, the Company adopted a new Long-Term Incentive Plan, which covers all executive officers, other than our Chairman of the Board and Chief Executive Officer and our Vice Chairman of the Board. The annual long-term incentive awards (LTI Awards) are made at targeted dollar levels and consist of Performance Units comprising 75% of the target value and cash-based Restricted Stock Units (RSUs) comprising 25% of the target value. The ultimate value of the Performance Units and RSUs can only be settled in cash.

 

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Effective as of January 1, 2012, the Company granted Performance Units to various officers under the new Long-Term Incentive Plan. The value of the Performance Units will be based upon a performance measure established by our compensation committee. The performance measure for 2012 is the annual average return on assets for a three-year performance period (e.g., 2012 – 2014) at a targeted percentage return. Performance Units will be paid in cash at the end of the performance period subject to continued employment by the covered officer throughout the performance period and vest upon the occurrence of certain change in control events. As of March 31, 2012, the balance of the non-current liability for the Performance Units was approximately $83,000. For the three months ended March 31, 2012, the Company recognized $83,000 in compensation expense related to the Performance Units. Compensation expense is recognized over the performance period and is estimated based on the probability of achieving performance goals outlined in the plan. As of March 31, 2012, the total unrecognized compensation costs related to the Performance Units was approximately $918,000. The Company expects that these costs will be amortized to compensation expense over a weighted average period of 2.75 years.

Effective as of January 1, 2012, the Company granted 92,452 cash-based RSUs to various officers under the new Long-Term Incentive Plan. The RSUs vest at end of the performance period subject to continued employment by the covered officer throughout the performance period (i.e., 3-year cliff vesting as of close of business on December 31 of the third year of the performance period) and vest upon the occurrence of certain change in control events. The payout of the RSUs will be made in cash at the end of the performance period based on number of RSUs times the average weighted trailing 3-month stock price of the Company as of December 31 of the third year of the performance period. As of March 31, 2012, the balance of the non-current liability for RSUs was approximately $34,000. For the three months ended March 31, 2012, the Company recognized $34,000 in compensation expense related to the RSUs. As of March 31, 2012, the total unrecognized compensation costs related to the RSUs was $368,000. The Company expects that these costs will be amortized to compensation expense over a weighted average period of 2.75 years.

Note 18 – Commitments and Contingencies

Litigation. The Company is subject to various asserted and unasserted claims during the course of business. Due to the uncertainty surrounding the litigation process, except for those matters for which an accrual is described below, the Company is unable to reasonably estimate the range of loss, if any, in connection with the asserted and unasserted legal actions against it. Although the outcome of many of these matters is currently not determinable, the Company believes that it has meritorious defenses and that the ultimate cost to resolve these matters will not have a material adverse effect on the Company’s consolidated financial statements. In addition to the legal proceedings discussed below, the Company is subject to various legal proceedings arising from normal business operations.

The Company assesses the materiality of litigation by reviewing a range of qualitative and quantitative factors. These factors include the size of the potential claims, the merits of the Company’s defenses and the likelihood of plaintiffs’ success on the merits, the regulatory environment that could impact such claims and the potential impact of the litigation on its business. The Company evaluates the likelihood of an unfavorable outcome of the legal or regulatory proceedings to which it is a party in accordance with accounting guidance. This assessment is subjective based on the status of the legal proceedings and is based on consultation with in-house and external legal counsel. The actual outcomes of these proceedings may differ from the Company’s assessments.

Missouri. On October 13, 2006, one of the Company’s Missouri customers sued the Company in the Circuit Court of St. Louis County, Missouri in a purported class action. The lawsuit alleges violations of the Missouri statute pertaining to unsecured loans under $500 and the Missouri Merchandising Practices Act. The lawsuit seeks monetary damages and a declaratory judgment that the arbitration agreement with the plaintiff is not enforceable on a variety of theories. The Company moved to compel arbitration of this matter. In December 2007, the court refused to enforce the class action waiver provision in the Company’s customer arbitration agreement, ordered the case to arbitration and dismissed the lawsuit filed in Circuit Court. In September 2009, the plaintiff filed her action in arbitration. In August 2011, the Company and plaintiff reached a tentative agreement to settle this purported class action arbitration for approximately $1.9 million. In second quarter 2011, the Company recorded a $2.0 million liability in accrued expenses and other liabilities in connection with this tentative settlement and anticipated additional legal expenses to effect the settlement. In January 2012, the arbitration panel approved the parties’ settlement. In March 2012, the class administrator issued settlement checks to class participants, and in April 2012, the Company adjusted debt for qualifying class participants. It is expected that the settlement will be completed by June 30, 2012.

 

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North Carolina. On February 8, 2005, the Company, two of its subsidiaries, including its subsidiary doing business in North Carolina, and Mr. Don Early, the Company’s Chairman of the Board and Chief Executive Officer, were sued in Superior Court of New Hanover County, North Carolina in a putative class action lawsuit filed by James B. Torrence, Sr. and Ben Hubert Cline, who were customers of a Delaware state-chartered bank for whom the Company provided certain services in connection with the bank’s origination of payday loans in North Carolina, prior to the closing of the Company’s North Carolina branches in fourth quarter 2005. The lawsuit alleges that the Company violated various North Carolina laws, including the North Carolina Consumer Finance Act, the North Carolina Check Cashers Act, the North Carolina Loan Brokers Act, the state unfair trade practices statute and the state usury statute, in connection with payday loans made by the bank to the two plaintiffs through the Company’s retail locations in North Carolina. The lawsuit alleges that the Company made the payday loans to the plaintiffs in violation of various state statutes, and that if the Company is not viewed as the “actual lenders or makers” of the payday loans, its services to the bank that made the loans violated various North Carolina statutes. Plaintiffs are seeking certification as a class, unspecified monetary damages, and treble damages and attorney fees under specified North Carolina statutes. Plaintiffs have not sued the bank in this matter and have specifically stated in the complaint that plaintiffs do not challenge the right of out-of-state banks to enter into loans with North Carolina residents at such rates as the bank’s home state may permit, all as authorized by North Carolina and federal law.

In July 2011, the parties completed a weeklong hearing on the Company’s motion to enforce its class action waiver provision and its arbitration provision. In January 2012, the trial court denied the Company’s motion to enforce its class action and arbitration provisions. The Company has appealed that ruling.

There were three similar purported class action lawsuits filed in North Carolina against three other companies unrelated to the Company. The plaintiffs in those three cases were represented by the same law firms as the plaintiffs in the case filed against the Company. Settlements in each of the three companion cases were reached by the end of 2010, however the settlements do not provide reasonable guidance on settlements in the Company’s case.

Canada. On September 30, 2011, the Company acquired all the outstanding shares of Direct Credit, a British Columbia company engaged in short-term, consumer Internet lending in certain Canadian provinces. On October 18, 2011, Matthew Lee, an alleged Alberta, Canada resident sued Direct Credit, all of its subsidiaries and three former directors of those subsidiaries in the Supreme Court of British Columbia in a purported class action. The plaintiff alleges that Direct Credit and its subsidiaries violated Canada’s criminal usury laws by charging interest on its loans at rates higher than 60%. The plaintiff purports to represent all Canadian borrowers of the subsidiary who resided outside of British Columbia.

Plaintiff seeks (i) class certification for the class described above, (ii) a declaration that loan fees collected in excess of the 60% limit in the cited usury statute are held by the defendants in constructive trust for the benefit of the class members, (iii) an accounting and restitution to plaintiff and class members of all loan fees received by the defendants, (iv) a declaration that the collection of the loan fees in excess of 60% per annum constitutes an unconscionable trade act or practice under the Canadian Business Practices Consumer Protection Act, (v) an order to restore to the class members the loan fees collected by defendants in excess of 60% per annum, and (vi) interest thereon. Direct Credit has not yet responded to the civil claim of the plaintiff, but intends to defend itself, its subsidiaries and its former directors vigorously.

Other Matters. The Company is also currently involved in ordinary, routine litigation and administrative proceedings incidental to its business, including customer bankruptcies and employment-related matters from time to time. The Company believes the likely outcome of any other pending cases and proceedings will not be material to its business or its financial condition.

 

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Note 19 – Certain Concentrations of Risk

The Company is subject to regulation by federal and state governments in the United States that affect the products and services provided by the Company, particularly payday loans. The Company currently operates in 24 states throughout the United States and is engaged in consumer Internet lending in certain Canadian provinces. The level and type of regulation of payday loans varies greatly from state to state, ranging from states with no regulations or legislation to other states with very strict guidelines and requirements. The Company is also subject to foreign regulation in Canada where certain provinces have proposed substantive regulation of the payday loan industry.

Company short-term lending branches located in the states of Missouri, California and Kansas represented approximately 21%, 14%, 5%, respectively, of total revenues for the three months ended March 31, 2012. Company short-term lending branches located in the states of Missouri, California and Kansas represented approximately 29%, 15% and 7%, respectively, of total branch gross profit for the three months ended March 31, 2012. To the extent that laws and regulations are passed that affect the Company’s ability to offer loans or the manner in which the Company offers its loans in any one of those states, the Company’s financial position, results of operations and cash flows could be adversely affected. In recent years, the Company has experienced several negative effects resulting from law changes, for example:

 

   

The Arizona payday loan statutory authority expired by its terms on June 30, 2010, and the expiration of this law had a significant adverse effect on the revenues and profitability of the Company’s Arizona branches. For the year ended December 31, 2011, revenues and gross profit from the Arizona branches declined by $1.5 million and $1.4 million respectively, from the same period in the prior year. Prior to the expiration of the Arizona payday loan law, branches in Arizona accounted for more than 5% of the Company’s revenues and gross profits.

 

   

In March 2011, a new payday law became effective in Illinois that imposes customer usage restrictions that will negatively affect revenues and profitability. This type of customer restriction, when passed in other states such as Washington, South Carolina and Kentucky, has resulted in a 30% to 60% decline in annual revenues and a more significant decline in gross profit, depending on the types of alternative products that competitors may offer within the state. The Illinois law provides for an overlap of the previous lending approach with loans issued under the new law for a period of one year, which will likely extend the time period over which the negative effects of the new law will occur. During 2011, revenues from branches in Illinois declined by $2.4 million and gross profit declined by $2.2 million. The Company anticipates that revenues and gross profit from Illinois in 2012 will decline by approximately $3.0 million and $2.0 million, respectively, compared to 2011 as a result of this law change. For the three months ended March 31, 2012, revenues and gross profit from Illinois declined by $1.4 million and $812,000 from the prior year’s first quarter. Prior to the change in Illinois payday loan law, branches in Illinois accounted for more than 5% of the Company’s revenues and gross profits.

There is an effort in Missouri to place a voter initiative on the statewide ballot in November 2012, which ballot initiative effort is intended to preclude any lending in the state with an annual rate over 36%. On May 6, 2012, supporters of this voter initiative submitted signatures to the Missouri Secretary of State. These supporters claim that they have submitted a sufficient number of valid signatures to require the Missouri Secretary of State to include the initiative on the November statewide ballot. The validation process is expected to occur over the next two to three months, and the outcome of this process is uncertain. There are various legal proceedings that are pending or expected with respect to the validity of the proposed ballot initiative, including expected appeals of a court ruling that the ballot language was misleading.

If this voter initiative is placed on the ballot and the measure passes, the Company would be unable to operate its payday loan branches in Missouri and would be forced to close those locations in the state, which would have a material adverse effect on its results of operations. In 2011, Missouri branches accounted for approximately 23% and 35% of revenues and gross profits, respectively. The loss of revenues and gross profit would likely cause the Company to violate one or more of the financial covenants under its current credit agreement and subordinated notes and would likely result in an immediate termination of the regular cash dividend on the Company’s common stock.

Note 20 – Subsequent Events

Dividends. On April 26, 2012, the Company’s board of directors declared a quarterly dividend of $0.05 per common share. The dividend is payable on May 29, 2012 to stockholders of record as of May 15, 2012. The Company estimates that the total amount of the dividend will be approximately $900,000.

 

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Item 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

The discussion below includes forward-looking statements within the meaning of the Private Securities Litigation Reform Act of 1995 regarding, among other things, our plans, strategies and prospects, both business and financial. All statements other than statements of current or historical fact contained in this discussion are forward-looking statements. The words “believe,” “expect,” “anticipate,” “should,” “would,” “could,” “plan,” “will,” “may,” “intend,” “estimate,” “potential,” “objective”, “continue” or similar expressions or the negative of these terms are intended to identify forward-looking statements.

These forward-looking statements are based on our current expectations and are subject to a number of risks and uncertainties, which could cause actual results to differ materially from those forward-looking statements. These risks include (1) changes in laws or regulations or governmental interpretations of existing laws and regulations governing consumer protection or payday lending practices, including particularly changes in Washington, South Carolina, Virginia, Illinois and Arizona, (2) uncertainties relating to the interpretation, application and promulgation of regulations under the Dodd-Frank Wall Street Reform and Consumer Protection Act, including the impact of future regulations proposed or adopted by the Bureau of Consumer Financial Protection, which was created by that Act, (3) ballot referendum initiatives by industry opponents to cap the rates and fees that can be charged to customers, including a referendum effort underway in Missouri to preclude any consumer lending in the state with an annual rate in excess of 36%, (4) litigation or regulatory action directed towards us or the payday loan industry, (5) volatility in our earnings, primarily as a result of fluctuations in loan loss experience and the rate of growth in or closure of branches, (6) risks associated with the leverage of the Company, (7) negative media reports and public perception of the payday loan industry and the impact on federal and state legislatures and federal and state regulators, (8) changes in our key management personnel, (9) integration risks and costs associated with acquisitions, including our recent Canadian acquisition, and (10) the other risks detailed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2011 filed with the Securities and Exchange Commission.

In light of these risks, uncertainties and assumptions, the forward-looking statements in this report may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements. When investors consider these forward-looking statements, they should keep in mind the risk factors and other cautionary statements in this discussion.

Our forward-looking statements speak only as of the date they are made. We undertake no obligation to update or revise any forward-looking statements, whether as a result of new information, future events or otherwise.

The discussion in this item is intended to clarify and focus on our results of operations, certain changes in financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included under Item 1 of this Form 10-Q. This discussion should be read in conjunction with these consolidated financial statements, the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2011, and the related notes thereto and is qualified by reference thereto.

EXECUTIVE SUMMARY

We operate primarily through our wholly-owned subsidiaries, QC Financial Services, Inc., QC Auto Services, Inc., QC Loan Services, Inc., QC E-Services, Inc., QC Canada Holdings Inc. and QC Capital, Inc. QC Financial Services, Inc. is the 100% owner of QC Financial Services of California, Inc., Financial Services of North Carolina, Inc., QC Financial Services of Texas, Inc., Express Check Advance of South Carolina, LLC, QC Advance, Inc., Cash Title Loans, Inc. and QC Properties, LLC. QC Canada Holdings Inc. is the 100% owner of Direct Credit Holdings Inc. and its wholly owned subsidiaries (collectively, Direct Credit).

 

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We derive our revenues largely by providing short-term consumer loans, known as payday loans, which represented approximately 65.3% of our total revenues for the three months ended March 31, 2012. We earn fees for various other financial services, such as installment loans, credit services, check cashing services, title loans, open-end credit, debit cards, money transfers and money orders. We operated 483 branches in 24 states at March 31, 2012. In all states in which we offer payday loans, we fund our payday loans directly to the customer and receive a fee. Fees charged to customers vary from state to state, generally ranging from $15 to $20 per $100 borrowed, and in most cases, are limited by state law.

We currently offer installment loans to customers in Arizona, California, Colorado, Idaho, Illinois, Missouri, New Mexico, South Carolina, Utah and Wisconsin. The installment loans are payable in monthly installments (principal plus accrued interest) with terms ranging from four months to 18 months, and all loans are pre-payable at any time without penalty. The fee for an installment loan varies based on the amount borrowed and the term of the loan. Generally, the amounts that we advance under an installment loan range from $750 to $3,000. The average principal amount for installment loans originated during first quarter 2012 was approximately $571.

In Texas, through one of our subsidiaries, we operate as a credit service organization (CSO) on behalf of consumers in accordance with Texas laws. We charge the consumer a CSO fee for arranging for an unrelated third-party to make a loan to the consumer and for providing related services to the consumer, including a guarantee of the consumer’s obligation to the third-party lender.

In September 2007, we entered into the buy here, pay here segment of the used automotive market in connection with ongoing efforts to evaluate alternative products that serve our customer base. In January 2009, we purchased two buy here, pay here locations in Missouri for approximately $4.2 million. In May 2009, we opened a service center to provide reconditioning services on our inventory of vehicles and repair services for our customers. As of March 31, 2012, we operated five buy here, pay here lots, which are located in Missouri and Kansas. These locations sell used vehicles and earn finance charges from the related vehicle financing contracts. The average principal amount for buy here, pay here loans originated during first quarter 2012 was approximately $9,984 and the average term of the loan was 33 months.

On September 30, 2011, QC Canada Holdings Inc, our wholly-owned subsidiary acquired 100% of the outstanding stock of Direct Credit Holdings Inc. (Direct Credit), a British Columbia company engaged in short-term, consumer Internet lending in certain Canadian provinces. Direct Credit was founded in 1999 and has developed and grown a proprietary Internet-based platform in Canada. The acquisition of Direct Credit is part of the implementation of our strategy to diversify by increasing our product offerings and distribution, as well as expanding our presence into international markets.

We have elected to organize and report on our business units as three operating segments (Financial Services, Automotive and E-Lending). The Financial Services segment includes branches that offer payday loans, installment loans, credit services, check cashing services, title loans, debit cards, money transfers and money orders. The Automotive segment consists of our buy here, pay here operations. The E-Lending segment includes the Internet lending operations in Canada. We evaluate the performance of our segments based on, among other things, gross profit, income from continuing operations before income taxes and return on invested capital.

Our expenses primarily relate to the operations of our branch network. The most significant expenses include salaries and benefits for our branch employees, provisions for losses and occupancy expense for our leased real estate. Regional and corporate expenses, which include compensation of employees, professional fees and equity award charges, are our other primary costs.

We evaluate our Financial Services branches, automotive locations, and our Direct Credit operations based on revenue growth, gross profit contributions and loss ratio (which is losses as a percentage of revenues). With respect to our branch network, we also consider the length of time the branch has been open and its geographic location. We monitor newer branches for their progress to profitability and rate of loan growth.

 

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With respect to our cost structure, salaries and benefits are one of our largest costs and are generally driven by changes in number of branches and loan volumes. Our provision for losses is also a significant expense. If a customer’s check is returned by the bank as uncollected, we make an immediate charge-off to the provision for losses for the amount of the customer’s loan, which includes accrued fees and interest. Any recoveries on amounts previously charged off are recorded as a reduction to the provision for losses in the period recovered.

We have experienced seasonality in our Financial Services segment, with the first and fourth quarters typically being our strongest periods as a result of broader economic factors, such as holiday spending habits at the end of each year and income tax refunds during the first quarter. Our Automotive locations experience seasonality as automobile sales peak during the first quarter of each year, primarily as a result of the receipt by customers of their income tax refunds, which are used as down payments for a vehicle. Automobile sales in the final three quarters are generally lower than the first quarter. In addition, vehicle acquisition costs tend to increase in the second half of the year as companies build inventories for the expected first quarter volumes.

In response to changes in the overall market, we have closed a significant number of branches over the past five years. The following table sets forth our de novo branch openings, branch acquisitions and branch closings since January 1, 2007.

 

                                   March 31,  
     2007     2008     2009     2010     2011     2012  

Beginning branch locations

     613        596        585        556        523        482   

De novo branches opened during period

     20        12        3        1        2        2   

Acquired branches during period

     13        1           

Branches closed/sold during period

     (50     (24     (32     (34     (43     (1
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Ending branch locations

     596        585        556        523        482        483   
  

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

We intend to evaluate opportunities for new branch development to complement existing branches within a given state or market. Additionally, we utilize a disciplined acquisition strategy for both the payday and the buy here, pay here businesses. During 2012, we expect to open approximately 10 branches providing short-term loan products.

The payday loan industry began its rapid growth in 1996, when there were an estimated 2,000 payday loan branches in the United States. According to Community Financial Services Association, industry analysts estimate that the industry has approximately 20,600 payday loan branches in the United States and approximately 1,400 payday loan and check cashing retail locations in Canada. During 2011, the branches in the United States extended approximately $30 billion in short-term credit to millions of middle-class households that experienced cash-flow shortfalls between paydays. As the branch count grew over the last decade, a greater number of Internet-based payday loan providers emerged. Industry analysts estimated that Internet-based payday loan providers extended approximately $14.8 billion to their customers during 2011. In the last few years, the rate of growth for these Internet providers has exceeded that of the branch-based lenders. We believe this trend will continue into the foreseeable future as consumers become more comfortable transacting electronically.

We believe our industry is highly fragmented, with the larger companies operating approximately 50% of the total industry branches. After a number of years of growth, the industry has contracted slightly in the past few years, primarily due to changes in laws that govern the payday product. Absent changes in regulations and laws, we do not expect significant fluctuations in the industry’s number of branches in the foreseeable future.

The payday loan industry has followed, and continues to be significantly affected by, payday lending legislation and regulation in the various states and on a national level. We actively monitor and evaluate legislative and regulatory initiatives in each of the states and nationally, and are closely involved with the efforts of the CFSA. To the extent that states enact legislation or regulations that negatively impacts payday lending, whether through preclusion, fee reduction or loan caps, our business has been adversely affected in the past and could be further adversely affected in the future. Over the past few years, legislatures in certain states (and voter initiatives in a few states) have enacted interest rate caps from 28% to 36% per annum on payday lending. A 36% per annum interest rate translates to approximately $1.38 per $100 loaned, which effectively precludes us from offering payday loans in those states unless other transaction fees may be charged to the customer.

 

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In the last several years, changes in laws governing payday loans have negatively affected our revenues and gross profit.

 

   

During 2009, payday loan-related legislation that severely restricts customer access to payday loans was passed in South Carolina, Washington, Virginia and Kentucky. These law changes adversely affected our revenues and operating income during 2010. During 2010, the results from the states in which we have experienced law changes were more negative than we expected, with revenue declines and loss rates exceeding our forecasts. For the year ended December 31, 2010, revenues and gross profit from South Carolina, Washington, Virginia and Kentucky declined by $14.1 million and $9.0 million, respectively, compared to the prior year. During 2011, as a group, these states were not yet breakeven in profitability, indicative of the challenges inherent with a transition to a new law and new products.

 

   

In Arizona, the existing payday lending law expired on June 30, 2010. While we are currently offering installment loans to our Arizona customers, our customers have not embraced this product as they did the payday loan product. For the year ended December 31, 2011, revenues and gross profit from our Arizona branches declined by $1.5 million and $1.4 million, respectively, from the prior year.

 

   

In March 2011, a new payday law became effective in Illinois that imposes customer usage restrictions that will negatively affect revenues and profitability. This type of customer restriction, when passed in other states such as Washington, South Carolina and Kentucky, has resulted in a 30% to 60% decline in annual revenues and a more significant decline in gross profit, depending on the types of alternative products that competitors may offer within the state. The Illinois law provides for an overlap of the previous lending approach with loans issued under the new law for a period of one year, which will likely extend the time period over which the negative effects of the new law will occur. During 2011, our revenues declined by $2.4 million and our gross profit declined by $2.2 million. We expect the net impact of the Illinois law change to reduce revenues by $3.0 million and to reduce branch gross profit by $2.0 million during 2012 compared to 2011.

There is an effort in Missouri to place a voter initiative on the statewide ballot in November 2012, which ballot initiative effort is intended to preclude any lending in the state with an annual rate over 36%. On May 6, 2012, supporters of this voter initiative submitted signatures to the Missouri Secretary of State. These supporters claim that they have submitted a sufficient number of valid signatures to require the Missouri Secretary of State to include the initiative on the November statewide ballot. The validation process is expected to occur over the next two to three months, and the outcome of this process is uncertain. There are various legal proceedings that are pending or expected with respect to the validity of the proposed ballot initiative, including expected appeals of a court ruling that the ballot language was misleading.

If this voter initiative is placed on the ballot and the measure passes, we would be unable to operate our payday loan branches in Missouri and would be forced to close those locations in the state, which would have a material adverse effect on our results of operations. In 2011, our Missouri branches accounted for approximately 23% and 35% of our revenues and gross profits, respectively. The loss of revenues and gross profit would likely cause us to violate one or more of the financial covenants under our current credit agreement and subordinated notes and would likely result in an immediate termination of our regular cash dividend on our common stock.

 

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Three Months Ended March 31, 2012 Compared with the Three Months Ended March 31, 2011

The following table sets forth our results of operations for the three months ended March 31, 2012 compared to the three months ended March 31, 2011:

 

     Three Months Ended     Three Months Ended  
     March 31,     March 31,  
     2011     2012     2011     2012  
     (in thousands)     (percentage of revenues)  

Revenues

        

Payday loan fees

   $ 28,989      $ 30,682        63.3     65.3

Automotive sales, interest and fees

     6,975        6,407        15.2     13.6

Installment interest and fees

     4,639        5,364        10.1     11.4

Other

     5,198        4,525        11.4     9.7
  

 

 

   

 

 

   

 

 

   

 

 

 

Total revenues

     45,801        46,978        100.0     100.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Operating expenses

        

Salaries and benefits

     10,012        10,464        21.9     22.3

Provision for losses

     4,895        6,466        10.7     13.8

Occupancy

     5,043        5,318        11.0     11.3

Cost of automotive sales

     3,807        3,178        8.3     6.8

Depreciation and amortization

     695        618        1.5     1.3

Other

     2,939        3,573        6.4     7.5
  

 

 

   

 

 

   

 

 

   

 

 

 

Total operating expenses

     27,391        29,617        59.8     63.0
  

 

 

   

 

 

   

 

 

   

 

 

 

Gross profit

     18,410        17,361        40.2     37.0

Regional expenses

     3,308        3,083        7.2     6.6

Corporate expenses

     5,053        5,615        11.0     12.0

Depreciation and amortization

     703        541        1.5     1.1

Interest expense

     594        1,020        1.4     2.2

Other expense (income), net

     4        (950     0.0     (2.1 )% 
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations before income taxes

     8,748        8,052        19.1     17.2

Provision for income taxes

     3,465        3,083        7.6     6.6
  

 

 

   

 

 

   

 

 

   

 

 

 

Income from continuing operations

     5,283        4,969        11.5     10.6

Loss (gain) from discontinued operations, net of income tax

     (7     40        (0.0 )%      0.1
  

 

 

   

 

 

   

 

 

   

 

 

 

Net income

   $ 5,290      $ 4,929        11.5     10.5
  

 

 

   

 

 

   

 

 

   

 

 

 

 

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The following table sets forth selected financial and statistical information for the three months ended March 31, 2011 and 2012:

 

     Three Months Ended  
     March 31,  
     2011     2012  

Financial Services Branch Information:

    

Number of branches, beginning of period

     523        482   

De novo branches opened

       2   

Branches closed

     (22     (1
  

 

 

   

 

 

 

Number of branches, end of period

     501        483   
  

 

 

   

 

 

 

Average number of branches open during period (excluding branches reported as discontinued operations)

     481        482   
  

 

 

   

 

 

 

Average revenue per branch (in thousands)

   $ 81      $ 80   

Other Information:

    

Payday Loans:

    

Payday loan volume (in thousands)

   $ 189,349      $ 204,646   

Average loan (principal plus fee)

     376.76        383.40   

Average fees per loan

     57.00        57.84   

Average fee rate per $100

     17.83        17.77   

Installment Loans:

    

Installment loan volume (in thousands)

   $ 7,970      $ 8,970   

Average loan (principal)

     530.09        571.00   

Average term (days)

     265        185   

Automotive Loans:

    

Automotive loan volume (in thousands)

   $ 5,552      $ 5,042   

Average loan (principal)

     9,827        9,984   

Average term (months)

     34        33   

Locations, end of period

     5        5   

Income from continuing operations. For the three months ended March 31, 2012, income from continuing operations was $5.0 million compared to $5.3 million for the same period in 2011. A discussion of the various components of net income follows.

Revenues. For the three months ended March 31, 2012, revenues were $47.0 million, an increase of 2.6% from $45.8 million during the three months ended March 31, 2011. The improvement is due to the inclusion of fees and interest of approximately $2.0 million from our Canadian online lending subsidiary (Direct Credit) which was acquired on September 30, 2011. The revenue increase attributable to Direct Credit was partially offset by a $568,000 decline in revenues from our automotive division compared to prior year’s first quarter. Payday and installment revenues from our branch locations were essentially even compared to the prior year’s first quarter.

Revenues from our payday loan product represent our largest source of revenues and were approximately 65.3% of total revenues for the three months ended March 31, 2012. With respect to payday loan volume, we originated approximately $204.6 million in loans during first quarter 2012, which was an increase of 8.1% from the $189.3 million during 2011. This increase is primarily attributable to the inclusion of volume from Direct Credit. The average payday loan (including fee) totaled $383.40 in first quarter 2012 versus $376.76 during first quarter 2011. Average fees received from customers per loan increased from $57.00 in first quarter 2011 to $57.84 in first quarter 2012. In our Financial Services branches, our average fee rate per $100 for first quarter 2012 was $17.77 compared to $17.83 in 2011.

 

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The following table summarizes other revenues:

 

     Three Months Ended
March 31,
     Three Months Ended
March 31,
 
     2011      2012      2011     2012  
     (in thousands)      (percentage of
revenues)
 

Credit services fees

   $ 1,936       $ 1,910         4.2     4.1

Check cashing fees

     1,301         1,078         2.8     2.3

Title loan fees

     1,287         672         2.8     1.4

Open-end credit fees

        136           0.3

Other fees

     674         729         1.6     1.6
  

 

 

    

 

 

    

 

 

   

 

 

 

Total

   $ 5,198       $ 4,525         11.4     9.7
  

 

 

    

 

 

    

 

 

   

 

 

 

Revenues from credit service fees, check cashing, title loans and other sources totaled $4.5 million during first quarter 2012, down approximately $673,000 from $5.2 million in the comparable prior year quarter. The decline was primarily due to less demand for check cashing and title loans.

We evaluate our branches based on revenue growth, with consideration given to the length of time a branch has been open and its geographic location. The following table summarizes our revenues and average revenue per short-term lending branch per month for the three months ended March 31, 2011 and 2012 based on the year that a branch was opened or acquired.

 

            Year

Opened/Acquired

          Revenues     Average
Revenue/Branch/Month
 
   Branches      2011      2012      % Change     2011      2012  
            (in thousands)            (in thousands)  

Financial Services Branches:

  

             

Pre - 1999

     32       $ 4,697       $ 4,350         (7.4 )%    $ 49       $ 45   

1999

     36         3,892         4,010         3.0     36         37   

2000

     45         4,424         3,923         (11.3 )%      33         29   

2001

     28         2,358         2,391         1.4     28         28   

2002

     44         3,670         3,172         (13.6 )%      28         24   

2003

     37         2,556         2,671         4.5     23         24   

2004

     55         3,748         3,795         1.3     23         23   

2005

     118         8,332         8,653         3.8     24         24   

2006

     62         3,180         3,729         17.3     17         20   

2007

     12         996         1,009         1.3     28         28   

2008

     8         422         459         8.7     18         19   

2009

     1         63         52         (16.7 )%      21         17   

2010

     1         62         73         17.7     21         24   

2011

     2            205         (b        34   

2012

     2            6         (b        1   
  

 

 

    

 

 

    

 

 

    

 

 

   

 

 

    

 

 

 

Sub-total

     483         38,400         38,498         0.3   $ 27       $ 27   
  

 

 

            

 

 

    

 

 

 

Consolidated branches (a)

        395              

Automotive branches

     5         6,975         6,407         $ 465       $ 427   

Direct Credit

           2,017           

Other

        31         56           
     

 

 

    

 

 

    

 

 

      

Total

      $ 45,801       $ 46,978         2.6     
     

 

 

    

 

 

    

 

 

      

 

(a) Amounts represent branches that were consolidated into nearby branches and therefore were not reported as discontinued operations.
(b) Not meaningful.

 

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We anticipate that customer demand will continue to remain soft during 2012 due to high unemployment rates, low consumer spending and weak consumer confidence. In addition, a new payday law became effective in Illinois in March 2011 that imposes customer usage restrictions and will negatively affect revenues and profitability. This type of customer restriction, when passed in other states such as Washington, South Carolina and Kentucky, has resulted in a 30% to 60% decline in annual revenues and a more significant decline in gross profit, depending on the types of alternative products that competitors may offer within the state. The Illinois law provides for an overlap of the previous lending approach with loans issued under the new law for a period of one year, which will likely extend the time period over which the negative effects of the new law will occur. Absent other changes in payday lending laws or dramatic fluctuations in the broader economy and markets, we expect the net impact of the Illinois law change as discussed above to reduce revenues by $3.0 million and reduce branch gross profit by $2.0 million during the year ending December 31, 2012 compared to 2011. For the three months ended March 31, 2012, revenues and gross profit from Illinois declined by $1.4 million and $812,000 from the prior year’s first quarter. The inclusion of Direct Credit for a full year and continued diversification efforts within our Financial Services branches are expected to help offset the declines from the negative legislative changes.

Operating Expenses. Total operating expenses increased $2.2 million, from $27.4 million during first quarter 2011 to $29.6 million in first quarter 2012. Total operating costs, exclusive of loan losses, increased from $22.5 million during first quarter 2011 to $23.2 million in first quarter 2012. The increase was primarily due to the inclusion of Direct Credit, as well as typical annual rent increases.

The provision for losses increased from $4.9 million in first quarter 2011 to $6.5 million during first quarter 2012. Our loss ratio was 10.7% in first quarter 2011 versus 13.8% in first quarter 2012. The increase in the loss ratio from 2011 to 2012 was primarily attributable to the inclusion of Direct Credit, as well as to loss experience in South Carolina, where customers continue to adjust to a new product offering. Our charge-offs as a percentage of revenue were 36.5% during first quarter 2012 compared to 34.6% during first quarter 2011. Our collections as a percentage of charge-offs were 53.0% during first quarter 2012 compared to 60.2% during first quarter 2011. In addition, we received cash of approximately $115,000 from the sale of certain payday loan receivables during first quarter 2012 that had previously been written off compared to $205,000 during first quarter 2011.

 

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Gross Profit. The following table summarizes our gross profit (loss), gross margin (gross profit as a percentage of revenues) and loss ratio (losses as a percentage of revenues) of branches for the three months ended March 31, 2011 and 2012 based on the year that a branch was opened or acquired.

 

Year           Gross Profit (Loss)     Gross Margin %     Loss Ratio  

Opened/Acquired

   Branches      2011     2012     2011     2012     2011     2012  
            (in thousands)                          

Financial Services Branches:

               

Pre - 1999

     32       $ 2,698      $ 2,443        57.5     56.2     8.3     8.6

1999

     36         1,667        1,744        42.8     43.5     10.8     12.2

2000

     45         2,126        1,768        48.1     45.1     13.5     12.1

2001

     28         1,051        1,012        44.6     42.3     12.4     13.1

2002

     44         1,520        1,139        41.4     35.9     15.3     14.3

2003

     37         1,053        995        41.2     37.2     8.4     14.2

2004

     55         1,677        1,540        44.7     40.6     5.8     10.6

2005

     118         3,179        3,235        38.2     37.4     13.0     14.1

2006

     62         869        779        27.3     20.9     10.5     24.5

2007

     12         390        350        39.1     34.7     14.4     16.6

2008

     8         165        172        39.0     37.4     1.2     5.2

2009

     1         27        16        43.3     30.2     12.2     13.4

2010

     1         21        29        34.4     39.0     10.2     10.4

2011

     2         (10     84        (c     41.1       13.4

2012

     2           (91     (c     (c       37.2
  

 

 

    

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Sub-total

     483         16,433        15,215        42.8     39.5     11.1     13.7
  

 

 

              

Consolidated branches (a)

        173        (19        

Automotive branches

     5         1,303        1,257        18.6     19.6     13.3     13.9

Direct Credit

          669           

Other (b)

        501        239           
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

Total

      $ 18,410      $ 17,361        40.2     37.0     10.7     13.8
     

 

 

   

 

 

   

 

 

   

 

 

   

 

 

   

 

 

 

 

(a) Amounts represent branches that were consolidated into nearby branches and therefore were not reported as discontinued operations.
(b) Includes the sale of older debt for approximately $115,000 and $205,000 for the three months ended March 31, 2012 and 2011, respectively.
(c) Not meaningful.

Gross profit was $17.4 million in first quarter 2012 versus $18.4 million in first quarter 2011. Branch gross margin, which is branch gross profit as a percentage of revenues, was 39.5% during first quarter 2012 compared to 42.8% during first quarter 2011. The decrease quarter-to-quarter was primarily attributable to the changes in the Illinois law. The gross margin for Financial Services comparable branches in 2011 was 40.0% in first quarter 2012 compared to 44.1% in 2011.

Regional and Corporate Expenses. Regional and corporate expenses increased from $8.4 million in first quarter 2011 to $8.7 million in first quarter 2012.

Interest Expense. Interest expense increased by approximately $426,000 from $594,000 during first quarter 2011 to $1.0 million during first quarter 2012. The increase was a result of higher average debt balances, a higher blended borrowing rate and amortization of debt issue costs resulting from the restatement and amendment of our credit agreement in third quarter 2011.

Other expense (income), net. For the three months ended March 31, 2012, other income included a gain of $753,000 due to the reduction of the contingent consideration liability associated with the acquisition of Direct Credit.

Income Tax Provision. The effective income tax rate for the first quarter 2012 was 38.3% compared to 39.6% in the prior year’s first quarter. We expect our effective tax rate for 2012 to be in the range of 38.0% to 40.0%.

 

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Discontinued Operations. We closed 38 branches during 2011 that were not consolidated into nearby branches and sold one branch. These branches are reported as discontinued operations in the Consolidated Statements of Income and related disclosures in the accompanying notes for all periods presented. With respect to the Consolidated Balance Sheets, the Consolidated Statements of Cash Flows and related disclosures in the accompanying notes, the items associated with the discontinued operations are included with the continuing operations for all periods presented.

Summarized financial information for discontinued operations during the three months ended March 31, 2011 and 2012 is presented below (in thousands):

 

     Three Months Ended  
     March 31,  
     2011     2012  

Total revenues

   $ 817      $ 19   

Provision for losses

     108        50   

Other branch expenses

     1,033        34   
  

 

 

   

 

 

 

Branch gross loss

     (324     (65

Other, net

     335        —     
  

 

 

   

 

 

 

Gain (loss) before income taxes

     11        (65

Income tax benefit (expense)

     (4     25   
  

 

 

   

 

 

 

Gain (loss) from discontinued operations

   $ 7      $ (40
  

 

 

   

 

 

 

LIQUIDITY AND CAPITAL RESOURCES

Summary cash flow data is as follows (in thousands):

 

     Three Months Ended  
     March 31,  
     2011     2012  

Cash flows provided by (used for):

    

Operating activities

   $ 16,473      $ 16,477   

Investing activities

     (328     67   

Financing activities

     (18,252     (14,694

Effect of exchange rate on cash and cash equivalents

       29   
  

 

 

   

 

 

 

Net increase (decrease) in cash and cash equivalents

     (2,107     1,879   

Cash and cash equivalents, beginning of year

     16,288        17,738   
  

 

 

   

 

 

 

Cash and cash equivalents, end of period

   $ 14,181      $ 19,617   
  

 

 

   

 

 

 

Cash Flow Discussion. Our primary source of liquidity is cash provided by operations. On September 30, 2011, we entered into an amended and restated credit agreement with a syndicate of banks that provides for a term loan of $32 million and a revolving line of credit (including provisions permitting the issuance of letters of credit and swingline loans) in the aggregate principal amount of up to $27 million. The credit facility matures on September 30, 2014. In connection with this refinancing transaction, we issued a total of $3 million in subordinated notes to our two largest shareholders.

 

 

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Since fourth quarter 2008, the capital and credit markets have been volatile, with fluctuating receptivity to lending based on underlying macroeconomic factors. If the capital and credit markets continue to experience volatility and the availability of funds remains limited, it is possible that our ability to access the capital and credit markets may be limited at a time when we would like or need to do so, which could have an impact on our ability to fund our operations, refinance maturing debt or react to changing economic and business conditions. At this time, we believe that our available short-term and long-term capital resources are sufficient to fund our working capital requirements, scheduled debt payments, interest payments, capital expenditures, income tax obligations, anticipated dividends to our stockholders, and anticipated share repurchases for the foreseeable future.

In accordance with accounting principles generally accepted in the United States of America, amounts drawn on our revolving credit facility are shown as debt due within one year. Under the terms of our credit agreement, however, our revolving credit facility does not mature until September 2014, and no principal amounts are due thereon prior to the maturity of the credit facility. Accordingly, so long as we are in compliance with our financial and other covenants in the credit facility, we do not face a refinancing risk until the term loan and the revolving credit facility mature on September 30, 2014.

Net cash provided by operating activities for the three months ended March 31, 2012 was $16.5 million in both first quarter 2011 and first quarter 2012. The decline in net income quarter-to-quarter was offset by changes in working capital items.

Investing activities for each period were as follows:

 

   

Net cash provided by investing activities for the three months ended March 31, 2012 was $67,000 which included a $1.1 million change in the restricted cash balance partially offset by capital expenditures of $1.0 million. The capital expenditures primarily included $631,000 for technology and other furnishings at the corporate office and $367,000 for technology improvements with respect to Direct Credit.

 

   

Net cash used by investing activities for the three months ended March 31, 2011 was $328,000, which included $706,000 for capital expenditures and $292,000 in payments of premiums on life insurance. The capital expenditures primarily included $679,000 for technology and furnishings at the corporate office. These items were partially offset by proceeds received from the sale of a branch in California totaling $666,000.

Financing activities for each period were as follows:

 

   

Net cash used for financing activities for the three months ended March 31, 2012 was $14.7 million, which primarily consisted of $12.3 million in repayments of indebtedness under the revolving credit facility, $3.8 million in repayments on the term loan, $893,000 in dividend payments to stockholders and $551,000 for the repurchase of 154,000 shares of common stock. These items were partially offset by proceeds received from the borrowing of $2.8 million under the revolving credit facility.

 

   

Net cash used for financing activities for the three months ended March 31, 2011 was $18.3 million, which primarily consisted of $10.5 million in repayments of indebtedness under the revolving credit facility, $7.1 million in repayments on the previous term loan, $904,000 in dividend payments to stockholders and $1.0 million for the repurchase of 243,000 shares of common stock. These items were partially offset by proceeds received from the borrowing of $1.0 million under the revolving credit facility.

The normal seasonality of our business results in a substantial decrease in loans receivable in the first quarter of each calendar year and a corresponding increase in cash or reduction of our revolving credit facility. Throughout the rest of the year, the loans receivable balance typically grows in accordance with increasing customer demand. This growth is funded either with operating cash or borrowings under the revolving credit facility.

 

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Future Capital Requirements. We believe that our available cash, expected cash flow from operations, and borrowings available under our credit facility will be sufficient to fund our liquidity and capital expenditure requirements during 2012. Expected short-term uses of cash include funding of any increases in short-term and automotive loans, debt repayments, interest payments on outstanding debt, dividend payments (to the extent approved by the board of directors), repurchases of company stock, and financing of new branch expansion and small acquisitions, if any. We expect that the majority of our cash requirements will be satisfied through internally generated cash flows, with any shortfall being funded through borrowing under our revolving credit facility. We believe that any acquisition-related capital requirements would be satisfied by draws on our current revolving credit facility or an additional term loan under an amended credit facility. As noted above, under our current credit agreement, we are required to make mandatory repayments on the term loan. We expect the amounts of mandatory repayments will be at higher levels than under the prior credit agreement. In addition, the revolving portion of the credit agreement was reduced from $45 million to $27 million. As a result, our ability to pursue business opportunities may be more constrained than in previous years.

As discussed above, there is an effort in Missouri to place a voter initiative on the statewide ballot in November 2012, which ballot initiative effort is intended to preclude any lending in the state with an annual rate over 36%. On May 6, 2012, supporters of this voter initiative submitted signatures to the Missouri Secretary of State. These supporters claim that they have submitted a sufficient number of valid signatures to require the Missouri Secretary of State to include the initiative on the November statewide ballot. The validation process is expected to occur over the next two to three months, and the outcome of this process is uncertain. There are various legal proceedings that are pending or expected with respect to the validity of the proposed ballot initiative, including expected appeals of a court ruling that the ballot language was misleading.

If this voter initiative is placed on the ballot and the measure passes, we would be unable to operate our payday loan branches in Missouri and would be forced to close those locations in the state, which would have a material adverse effect on our results of operations. In 2011, our Missouri branches accounted for approximately 23% and 35% of our revenues and gross profits, respectively. The loss of revenues and gross profit would likely cause us to violate one or more of the financial covenants under our current credit agreement and subordinated notes and would likely result in an immediate termination of our regular cash dividend on our common stock.

In connection with our acquisition of Direct Credit, we agreed to pay a supplemental earn-out payment to the extent the EBITDA of Direct Credit’s operations as specifically defined in the Stock Purchase Agreement (generally Direct Credit’s earnings before interest, income taxes, depreciation and amortization expenses) exceeds a defined target for the twelve month period ending September 30, 2012. As of December 31, 2011 and March 31, 2012, the fair value of the contingent consideration liability was $1.1 million and $379,000, respectively. For the three months ended March 31, 2012, we recorded a reduction to the contingent consideration liability of approximately $753,000, which is included as part of other income in the Consolidated Statements of Income.

In November 2008, our board of directors established a regular quarterly dividend of $0.05 per common share. The declaration of dividends is subject to the discretion of our board of directors and will depend on our operating results, financial condition, cash and capital requirements and other factors that the board of directors deems relevant. Our board of directors has also approved special cash dividends from time to time, including a special cash dividend in November 2009 and February 2010. On April 26, 2012, our board of directors declared a regular quarterly dividend of $0.05 per common share. The dividend is payable May 29, 2012, to stockholders of record as of May 15, 2012, and the total amount of the dividend to be paid is approximately $900,000.

Our current credit agreement requires us to maintain a fixed charge coverage ratio (computed in accordance with the credit agreement) of not less than 1.25 to 1. Under our credit agreement, we are required to subtract any cash dividends paid on our common stock from our Operating Cash Flow (as defined in the agreement) used in computing our fixed charge coverage ratio. Thus, our credit agreement may restrict our ability to pay cash dividends in the future.

 

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Our board of directors has authorized us to repurchase up to $60 million of our common stock in the open market and through private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in stock-based compensation programs. As of March 31, 2012, we have repurchased a total of 5.6 million shares at a total cost of approximately $55.8 million, which leaves approximately $4.2 million that may yet be purchased under the current program.

As part of our business strategy, we consider acquisitions and strategic business expansion opportunities from time to time. We believe our current cash position, the availability under the credit facility and our expected cash flow from operations should provide the capital needed to fund internal growth opportunities, assuming no material acquisitions in 2012.

In response to changes in the overall market, over the past three years we have substantially reduced our branch expansion efforts. Since January 1, 2007, we have opened 40 branches with the majority (32) of those opened during 2007 and 2008. The capital costs of opening a de novo branch include leasehold improvements, signage, computer equipment and security systems, and the costs vary depending on the branch size, location and the services being offered. The average cost of capital expenditures for branches opened during 2007 and 2008 was approximately $44,000 per branch. Existing branches require minimal ongoing capital expenditure, with the majority of any expenditures related to discretionary renovation or relocation projects.

As of March 31, 2012, we operated five buy here, pay here locations. During the start-up of these operations, capital requirements are not material. As the business grows, however, the business requires ongoing replenishment of automobile inventory. Sales of automobiles are typically completed through a small down payment and an installment loan. As a result, the initial phase of a buy here, pay here operation is cash flow negative. Based on initial information and industry research, it appears that a typical location requires approximately $2.5 million to $4.0 million of capital availability over a two to four year period. As this business progresses, we will evaluate the capital requirements and the associated return on investment. We have the ability to manage the capital needs of the business through reduction of the number of automobiles held at each location, although reduced inventory levels may limit sales because of the appearance of limited vehicle selection for the customer.

On September 30, 2011, we acquired Direct Credit. Historically, the operations of Direct Credit have generated sufficient cash flows to fund its growth. In connection with growth plans as a result of the acquisition, it is anticipated that Direct Credit may require capital to maximize market opportunities. Pursuant to the current credit agreement, we may provide up to $3.0 million in working capital financing to support this growth. As we intend to indefinitely reinvest the earnings of our foreign affiliates, those earnings will not be available for repatriation.

Beginning in late 2011, we began offering longer-term, higher-dollar installment loans in certain branches in New Mexico and California and during first quarter 2012, we expanded these products into Missouri, Idaho and Utah. The new installment loan product carries a maximum advance amount of approximately $3,000 and a term of 12 months or 18 months. To the extent that our customers embrace these products, we will be learning the risks and challenges associated with lending larger amounts over a longer period, which is different than the products we have provided historically.

 

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Concentration of Risk. Our Financial Services branches located in the states of Missouri, California and Kansas represented approximately 21%, 14% and 5%, respectively, of total revenues for the three months ended March 31, 2012. Our Financial Services branches located in the states of Missouri, California and Kansas represented approximately 29%, 15% and 7%, respectively, of total branch gross profit for the three months ended March 31, 2012. To the extent that laws and regulations are passed that affect our ability to offer payday loans or the manner in which we offer payday loans in any one of those states, our financial position, results of operations and cash flows could be adversely affected. In recent years, we have experienced several negative effects resulting from law changes, for example:

 

   

The Arizona payday loan statutory authority expired by its terms on June 30, 2010, and the expiration of this law had a significant adverse effect on the revenues and profitability of our Arizona branches. For the year ended December 31, 2011, revenues and gross profit from our Arizona branches declined by $1.5 million and $1.4 million respectively, from the same period in the prior year. Prior to the expiration of the Arizona payday loan law, branches in Arizona accounted for more than 5% of our revenues and gross profits.

 

   

In March 2011, a new payday law became effective in Illinois that imposes customer usage restrictions that will negatively affect revenues and profitability. This type of customer restriction, when passed in other states such as Washington, South Carolina and Kentucky, has resulted in a 30% to 60% decline in annual revenues and a more significant decline in gross profit, depending on the types of alternative products that competitors may offer within the state. The Illinois law provides for an overlap of the previous lending approach with loans issued under the new law for a period of one year, which will likely extend the time period over which the negative effects of the new law will occur. During 2011, our revenues declined by $2.4 million and our gross profit declined by $2.2 million. We anticipate that our revenues and gross profit from Illinois in 2012 will decline by approximately $3.0 million and $2.0 million, respectively, compared to 2011 as a result of this law change. For the three months ended March 31, 2012, revenues and gross profit from Illinois declined by $1.4 million and $812,000 from the prior year’s first quarter. Prior to the change in Illinois payday loan law, branches in Illinois accounted for more than 5% of our revenues and gross profits.

 

   

There is an effort in Missouri to place a voter initiative on the statewide ballot in November 2012, which ballot initiative effort is intended to preclude any lending in the state with an annual rate over 36%. If this initiative is placed on the ballot and the measure passes, we would be unable to operate our payday loan branches in Missouri and be forced to close those locations in the state.

Seasonality

Our Financial Services and E-Lending businesses are seasonal due to fluctuating demand for short-term loans during the year. Historically, we have experienced our highest demand for short-term loans in January and in the fourth calendar quarter. As a result, to the extent that internally generated cash flows are not sufficient to fund the growth in loans receivable, fourth quarter and the month of January are the most likely periods of time for utilization or increase in borrowings under our credit facility. Due to the receipt by customers of their income tax refunds, demand for short-term loans has historically declined in the balance of the first quarter of each calendar year and the first month of the second quarter. Accordingly, this period is typically when any outstanding borrowings under the credit facility would be repaid (exclusive of any other capital-usage activity, such as acquisitions, significant stock repurchases, etc.). Our loss ratio historically fluctuates with these changes in short-term loan demand, with a higher loss ratio in the second and third quarters of each calendar year and a lower loss ratio in the first and fourth quarters of each calendar year. During mid-second quarter through third quarter, periodic utilization of our credit facility is not unusual, based on the level of loan losses and other capital-usage activities. Due to the seasonality of our business, results of operations for any quarter are not necessarily indicative of the results of operations that may be achieved for the full year.

 

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Similarly, our Automotive segment experiences seasonality as automobile sales peak during the first quarter of each year, primarily as a result of the receipt by customers of their income tax refunds, which are used as down payments for a vehicle. Automobile sales in the final three quarters are generally lower than the first quarter. In addition, vehicle acquisition costs tend to increase in the second half of the year as companies build inventories for the expected first quarter volumes.

Off-Balance Sheet Arrangements

In September 2005, we began operating through a subsidiary as a CSO in our Texas branches. As a CSO, we act as a credit services organization on behalf of consumers in accordance with Texas laws. We charge the consumer a fee for arranging for an unrelated third-party lender to make a loan to the consumer and for providing related services to the consumer, including a guarantee of the consumer’s obligation to the third-party lender. We also service the loan for the lender. We are not involved in the loan approval process or in determining the loan approval procedures or criteria, and we do not acquire or own any participation interest in the loans. Consequently, loans made by the lender will not be included in our loans receivable balance and will not be reflected in the Consolidated Balance Sheets. Under the agreement with the current lender, however, we absorb all risk of loss through our guarantee of the consumer’s loan from the lender. As of December 31, 2011 and March 31, 2012, the consumers had total loans outstanding with the lender of approximately $3.1 million and $1.9 million, respectively. Because of the economic exposure for potential losses related to the guarantee of these loans, we record a payable at fair value to reflect the anticipated losses related to uncollected loans. The balance of the liability for estimated losses reported in accrued liabilities was $90,000 as of December 31, 2011 and $40,000 as of March 31, 2012. The following table summarizes the activity in the CSO liability (in thousands):

 

     Three Months Ended  
     March 31,  
     2011     2012  

Allowance for loan losses

    

Balance, beginning of period

   $ 100      $ 90   

Charge-offs

     (703     (747

Recoveries

     272        264   

Provision for losses

     381        433   
  

 

 

   

 

 

 

Balance, end of period

   $ 50      $ 40   
  

 

 

   

 

 

 

Item 3. Quantitative and Qualitative Disclosures About Market Risk

We have had no significant changes in our Quantitative and Qualitative Disclosures About Market Risk from that previously reported in our Annual Report on Form 10-K for the year ended December 31, 2011.

Item 4. Controls and Procedures

We maintain a system of disclosure controls and procedures that are designed to provide reasonable assurance that information, which is required to be timely disclosed, is accumulated and communicated to management in a timely fashion. A control system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance that the objectives of the control system are met. Our Chief Executive Officer and Chief Financial Officer, after evaluating the effectiveness of our disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) of the Securities Exchange Act of 1934, as amended (the Exchange Act) as of the end of the period covered by this report, have concluded that our disclosure controls and procedures are effective to provide reasonable assurance that information required to be disclosed by us in the reports that we file or submit under the Exchange Act is accumulated and communicated to our management, including our principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding required disclosure and are effective to provide reasonable assurance that such information is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms.

 

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On September 30, 2011, we acquired 100% of the outstanding stock of Direct Credit Holdings Inc., a British Columbia company engaged in short-term, consumer Internet lending in certain Canadian provinces. We acknowledge that we are responsible for establishing and maintaining a system of internal controls over financial reporting for Direct Credit. We are in the process of integrating Direct Credit, and we therefore excluded Direct Credit from our December 31, 2011 assessment of the effectiveness of internal control over financial reporting. Direct Credit had total assets of $15.2 million at March 31, 2012 and revenues of $2.0 million for the three months ended March 31, 2012 that are included in our accompanying consolidated financial statements as of and for the three months ended March 31, 2012. The impact of the acquisition of Direct Credit has not materially affected and is not expected to materially affect our internal control over financial reporting. As a result of these integration activities, certain controls will be evaluated and may be changed. We believe, however, that we will be able to maintain sufficient controls over the substantive results of our financial reporting throughout this integration process.

Our internal control over financial reporting (as defined in Exchange Act Rule 13a-15(f)) is designed to provide reasonable assurances regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. There were no changes in our internal control over financial reporting that occurred during our most recent fiscal quarter that have materially affected, or are reasonably likely to materially affect, our internal control over financial reporting. However, because of the inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, within the Company have been detected.

PART II—OTHER INFORMATION

Item 1. Legal Proceedings

There have been no material developments in the first quarter 2012 in any cases material to the Company as reported in our 2011 Annual Report on Form 10-K.

Item 2. Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities. The following table sets forth certain information about the shares of common stock we repurchased during the first quarter 2012.

 

Period (a)

   Total
Number of
Shares
Purchased
     Average
Price Paid
Per Share
     Total Number
of Shares
Purchased as
Part of Publicly
Announced
Program
     Maximum
Approximate
Dollar Value of
Shares that May
Yet Be
Purchased Under
the Program
 

January 1 – January 31

     9,000       $ 3.53         9,000       $ 4,388,549   

February 1 – February 29

     116,701         3.49         8,476         4,357,271   

March 1 – March 31

     28,366         3.94         28,366         4,244,921   
  

 

 

    

 

 

    

 

 

    

 

 

 

Total

     154,067       $ 3.57         45,842       $ 4,224,921   
  

 

 

    

 

 

    

 

 

    

 

 

 

 

(a) Stock repurchase of 108,225 shares in in February 2012 were made in connection with the funding of employee income tax withholding obligations arising from the vesting of restricted shares.

On June 3, 2009, our board of directors extended our common stock repurchase program through June 30, 2012. The board of directors has previously authorized us to repurchase up to $60 million of our common stock in the open market and through private purchases. As of March 31, 2012, we have repurchased 5.6 million shares at a total cost of approximately $55.8 million, which leaves approximately $4.2 million that may yet be purchased under the current program.

 

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Item 6. Exhibits

 

31.1    Certification of Chief Executive Officer under Rule 13-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2    Certification of Chief Financial Officer under Rule 13-14(a), as adopted pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32.1    Certification of Chief Executive Officer pursuant to Section 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
32.2    Certification of Chief Financial Officer pursuant to Section 18 U.S.C Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

 

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacities indicated on May 9, 2012.

QC Holdings, Inc.

        /s/ Darrin J. Andersen                

Darrin J. Andersen

President and Chief Operating Officer

    /s/ Douglas E. Nickerson                

Douglas E. Nickerson

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

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