[February 28, 2013] CASH AMERICA INTERNATIONAL INC - 10-K - MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS. Tweet (Edgar Glimpses Via Acquire Media NewsEdge) GENERAL Cash America International, Inc. and its subsidiaries (collectively, the "Company") provides specialty financial services to individuals through retail services locations and e-commerce activities. The Company offers secured non-recourse loans, commonly referred to as pawn loans. Pawn loans are short-term loans (generally 30 to 90 days) made on the pledge of tangible personal property. Pawn loan fees and service charges revenue is generated from the Company's pawn loan portfolio. A related activity of the pawn lending operations is the disposition of collateral from unredeemed pawn loans and the liquidation of a smaller volume of merchandise purchased directly from customers or from third parties. The Company originates, guarantees or purchases consumer loans (collectively referred to as "consumer loans" throughout this discussion). Consumer loans provide customers with cash, typically in exchange for an obligation to repay the amount advanced plus fees and any applicable interest. Consumer loans include short-term loans (commonly referred to as payday loans), line of credit accounts and installment loans. Short-term loans include unsecured short-term loans written by the Company or by a third-party lender through the Company's credit services organization programs ("CSO programs" as further described below) that the Company guarantees. Line of credit accounts include draws made through the Company's line of credit product, and, from 2008 through October 2010, included micro line of credit ("MLOC") receivables, which are participation interests in receivables acquired from a third-party lender in connection with MLOC services the Company offered. Installment loans are longer-term multi-payment loans that generally require the pay-down of portions of the outstanding principal balance in multiple installments and include unsecured loans and auto equity loans, which are secured by a customer's vehicle, that are written by the Company or by a third-party lender through the Company's CSO programs that the Company guarantees. The Company offers consumer loans over the Internet under the names "CashNetUSA" and "NetCredit" in the United States, under the names "QuickQuid" and "Pounds to Pocket" in the United Kingdom and under the name "DollarsDirect" in Australia and Canada. The Company also offers a line of credit product, which is similar to the MLOC product for which the Company previously provided services, under the name "Debit Plus" in Mexico. Through the Company's CSO programs the Company provides services related to a third-party lender's consumer loan products in some markets by acting as a credit services organization or credit access business on behalf of consumers in accordance with applicable state laws. Services offered under the CSO programs include credit-related services such as arranging loans with independent third-party lenders and assisting in the preparation of loan applications and loan documents ("CSO loans"). Under the CSO programs, the Company guarantees consumer loan payment obligations to the third-party lender in the event that the customer defaults on the loan. CSO loans are not included in the Company's financial statements, but the Company has established a liability for the estimated losses in support of the guarantee on these loans in its consolidated balance sheets. In addition, the Company provides check cashing and other ancillary services through many of its retail services locations and through its franchised check cashing centers. The ancillary services provided mainly include money orders, wire transfers, prepaid debit cards, tax filing services and auto insurance. Most of these ancillary services are provided through third-party vendors. The Company has two reportable operating segments: retail services and e-commerce. The retail services segment includes all of the operations of the Company's Retail Services Division, which is composed of both domestic and foreign storefront locations that offer some or all of the following services: pawn loans, consumer loans, the purchase and sale of merchandise, check cashing and other ancillary services such as money orders, wire transfers, prepaid debit cards, tax filing services and auto insurance. Most of these ancillary services offered in the retail services 42-------------------------------------------------------------------------------- Table of Contents segment are provided through third-party vendors. See "Recent Developments-Reorganization of Mexico-based Pawn Operations and Purchase of Noncontrolling Interest" section below for information related to the reorganization of the Company's Mexico-based pawn operations during 2012, which are included in the retail services segment. The e-commerce segment includes the operations of the Company's E-Commerce Division, which is composed of the Company's domestic and foreign online lending channels through which the Company offers consumer loans. During the first quarter of 2012, the Company changed the presentation of its operating segment information to report corporate operations separately from its retail services and e-commerce segment information. Corporate administrative expense, which was previously allocated to each segment based on personnel expense, is included under the "Corporate" heading in the tables throughout the "Management's Discussion and Analysis of Financial Condition and Results of Operations." For comparison purposes, operations and administration expenses for prior years have been conformed to the current presentation. Corporate operations primarily include corporate expenses, such as legal, occupancy, and other costs related to corporate service functions, such as executive oversight, insurance and risk management, public and government relations, internal audit, treasury, payroll, compliance and licensing, finance, accounting, tax and information systems (except for online lending systems, which are included in the e-commerce segment). Corporate income includes miscellaneous income not directly attributable to the Company's segments. Corporate assets primarily include: corporate property and equipment, nonqualified savings plan assets, marketable securities, foreign exchange forward contracts and prepaid insurance. 43 -------------------------------------------------------------------------------- Table of Contents Retail Services Segment The following table sets forth the number of domestic and foreign Company-owned and franchised locations in the Company's retail services segment offering pawn lending, consumer lending, and other services as of December 31, 2012, 2011 and 2010. The Company's domestic retail services locations operate under the names "Cash America Pawn," "SuperPawn," "Cash America Payday Advance," "Cashland" and "Mr. Payroll." In addition, certain recently acquired domestic retail services locations operate under various names that are expected to be changed to "Cash America Pawn" or "SuperPawn" during 2013. In January 2013, the Company's foreign retail services locations began operating exclusively under the name "Cash America casa de empeño" (and previously operated under the name "Prenda Fácil"). As of December 31, 2012 2011 2010 Domestic(a) Foreign Total Domestic(a)(b) Foreign Total Domestic(a)(b) Foreign Total Retail services locations offering: Both pawn and consumer lending 581 - 581 572 - 572 567 - 567 Pawn lending only 167 47 214 126 190 316 124 180 304 Consumer lending only 83 - 83 86 - 86 88 - 88 Other (c) 91 - 91 110 - 110 122 - 122 Total retail services 922 47 969 894 190 1,084 901 180 1,081 (a) Except as described in (c) below, includes locations that operate in 22 states in the United States as of December 31, 2012, and 23 states as of both December 31, 2011 and 2010. In 2011, includes five retail services locations that the Company operated under management agreements with a former franchisee. (b) Includes unconsolidated franchised locations as follows: one location operating under the name "Cash America Pawn" as of December 31, 2011, and nine locations operating under the names "Cash America Pawn" and SuperPawn" as of December 31, 2010. (c) As of December 31, 2012, 2011 and 2010, includes zero, six and six consolidated Company-owned check cashing locations and 91, 104 and 116 unconsolidated franchised check cashing locations, respectively. As of December 31, 2012, 2011 and 2010, includes locations that operate in 15, 18 and 17 states in the United States, respectively. E-Commerce Segment As of December 31, 2012, 2011 and 2010, the Company's e-commerce segment operated in 32 states in the United States and in three other foreign countries: • in the United States at http://www.cashnetusa.com and http://www.netcredit.com, • in the United Kingdom at http://www.quickquid.co.uk and http://www.poundstopocket.co.uk, • in Australia at http://www.dollarsdirect.com.au, and • in Canada at http://www.dollarsdirect.ca. As of December 31, 2012, the Company also offered a line of credit product in Mexico, which is similar to the MLOC product for which the Company previously provided services, under the trade name "Debit Plus." The Company's internet websites and the information contained therein or connected thereto are not intended to be incorporated by reference into this the Annual Report on Form 10-K. 44 -------------------------------------------------------------------------------- Table of Contents Recent Developments Business Developments Newly Appointed Chief Executive Officer of E-Commerce Division On January 29, 2013, David A. Fisher was appointed Chief Executive Officer of Enova International, Inc. ("Enova"), a wholly-owned subsidiary of the Company that comprises its e-commerce segment (which includes the operations of the E-Commerce Division). Mr. Fisher will succeed Timothy S. Ho as the senior executive officer of Enova, who will step down as the President of Enova on March 29, 2013. Voluntary Reimbursements to Ohio Customers On December 4, 2012, the Company announced a voluntary program to fully reimburse approximately 14,000 Ohio customers for all funds collected, plus interest accrued from the date collected, in connection with legal collections proceedings initiated by the Company in Ohio from January 1, 2008 through December 4, 2012 (the "Ohio Reimbursements"). In 2012, the Company determined that a small number of employees did not prepare certain court documents in many of its Ohio legal collections proceedings in accordance with court rules. In connection with the reimbursement program, for all trial court collections proceedings filed by the Company in Ohio from January 1, 2008 through December 4, 2012, with the exception of one appellate matter, the Company is in the process of filing dismissals, terminating all existing post-judgment collections activities, and requesting to vacate each judgment entered and/or notifying credit reporting bureaus of the vacated judgments, as necessary, for each case. The Company estimates the cost of the reimbursement program and related expenses will be approximately $13.4 million before taxes and has recorded this amount in "Accounts payable and accrued expenses" in the consolidated balance sheets and in "Operations and administration expense" in the consolidated statements of income for the year ended December 31, 2012. Acquisition of Nine-Store Chain of Pawn Lending Locations in Arizona On October 8, 2012, the Company's wholly-owned subsidiary, Cash America, Inc. of Nevada, entered into an agreement to acquire substantially all of the assets of a nine-store chain of pawn lending locations in Arizona owned by Ca$h Corporation, Pawn Corp #1, Inc., Pawncorp #2, Inc. and Pawncorp #4, Inc. The aggregate cash consideration paid in 2012 for this transaction, which was funded with borrowings under the Company's line of credit, was approximately $15.4 million. The closing for the transaction occurred on October 25, 2012. The Company incurred an immaterial amount of acquisition costs related to the acquisition. The goodwill of $7.7 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and these pawn lending locations. The activities and goodwill related to this acquisition are included in the results of the Company's retail services segment. Reorganization of Mexico-based Pawn Operations and Purchase of Noncontrolling Interest On September 24, 2012, the Company's Board of Directors approved a plan to significantly modify the business plan and strategy of the Company's Mexico-based pawn operations, which comprise the foreign component of its retail services segment. The Company reorganized these operations to include only full-service pawn locations that offer pawn loans based on the pledge of general merchandise and jewelry-based collateral and discontinued the operations of 148 of its Mexico-based pawn locations that primarily offered pawn loans based on the pledge of jewelry-based collateral ("the Mexico Reorganization"). The Mexico Reorganization was substantially completed as of December 31, 2012. As of December 31, 2012, the Company was operating 47 full-service pawn locations in Mexico. The Mexico Reorganization reflects management's decision to modify its strategy in Mexico to achieve profitability in its Mexico-based pawn operations and to evaluate the potential to expand its services to customers in Latin American markets. 45 -------------------------------------------------------------------------------- Table of Contents In connection with the Mexico Reorganization, the Company incurred charges for employee termination costs, lease termination costs, asset impairments, loss on sale of assets, the recognition of a deferred tax asset valuation allowance, uncollectible receivables and other charges. The Company recognized $28.9 million of charges related to the Mexico Reorganization during the year ended December 31, 2012. The following table summarizes the charges recognized for the year ended December 31, 2012 related to the Mexico Reorganization (dollars in thousands): Type of expense Description Amount Depreciation and amortization expenses Impairment and losses on property and equipment $ 7,478 Provision for income taxes Deferred tax asset valuation allowance 7,161Depreciation and amortization expenses Impairment of intangible assets 5,086 Operations and administration expenses Employee termination costs 2,424 Operations and administration expenses Inventory shrinkage and loss on sale of assets 2,395 Operations and administration expenses Lease termination costs 1,628 Operations and administration expenses Impairment of other assets 1,211 Operations and administration expenses Other restructuring charges 798 Revenue Uncollectible receivables 692 Total charges related to the Mexico Reorganization $ 28,873 As of December 31, 2012, the Company's Mexico-based pawn operations were owned by Creazione Estilo, S.A. de C.V., a Mexican sociedad anónima de capital variable ("Creazione"). Prior to September 26, 2012, the Company owned 80% of the outstanding stock of Creazione. On September 26, 2012, the Company acquired all outstanding shares of Creazione that were held by minority shareholders (approximately 20% of the outstanding shares), and, as a result, Creazione became a wholly-owned subsidiary of the Company as of that date. The Company paid approximately $5.6 million in cash and released the minority shareholders from certain contingent obligations estimated at approximately $2.8 million. The Company accounted for this transaction as an acquisition of the remaining interest of a majority-owned subsidiary. The purchase resulted in a reduction to additional paid in capital of $7.7 million, representing the excess of the cash amount paid and the released contingent obligations (totaling $8.4 million) less the carrying amount of the noncontrolling interest of $0.7 million. In January 2013, the Company's remaining Mexico-based pawn operations were sold by Creazione to another wholly-owned subsidiary, CA Empeños Mexico, S. de R.L. de C.V., and began operating exclusively under the name "Cash America casa de empeño." In connection with the Mexico Reorganization, the Company intends to liquidate the remaining assets of Creazione, which are insignificant, in 2013. The Mexico Reorganization was considered a triggering event for purposes of impairment testing of the retail services segment. As a result, the Company tested goodwill, indefinite-lived intangible assets, other intangible assets and long-lived assets for impairment following the approval of the Mexico Reorganization as described below. The Company tested goodwill for the retail services segment following the approval of the Mexico Reorganization and noted no impairment. Although no goodwill impairment was noted, there can be no assurance that future goodwill impairments will not occur. In addition, a 10% decrease in the estimated fair values of the Company's retail services segment for the assessment completed for September 2012 would not have resulted in a goodwill impairment charge. The Company also tested indefinite-lived intangible assets and other intangible assets following the approval of the Mexico Reorganization. As a result, during the year ended December 31, 2012, the Company recognized impairment charges of $5.1 million related to indefinite-lived intangible assets and other intangible assets, which is included in "Depreciation and amortization expense" in the consolidated statements of income. The Company also tested property and equipment following the approval of the Mexico Reorganization. As a result, during the year ended December 31, 2012, the Company recognized impairment charges and losses on property and equipment related to its Mexico operations of $7.5 million (consisting of $6.0 million of impairment charges recognized in the third quarter of 2012 and 46 -------------------------------------------------------------------------------- Table of Contents $1.5 million of losses on disposition incurred in the fourth quarter of 2012), which is included in "Depreciation and amortization expenses" in the consolidated statements of income. The fair value measurements of intangible assets and property and equipment are considered Level 3 in the fair value hierarchy as they are based on management's judgment about future cash flows. Acquisition of 25-Store Chain of Pawn Lending Locations in Kentucky, North Carolina and Tennessee On September 27, 2012, the Company and three of its wholly-owned subsidiaries, Cash America, Inc. of Tennessee, Cash America, Inc. of North Carolina and Cash America, Inc. of Kentucky, entered into an agreement to acquire substantially all of the assets of a 25-store chain of pawn lending locations located in Kentucky, North Carolina, and Tennessee owned by Standon, Inc., Casa Credit, Inc., Classic Credit, Inc. and Falcon Credit, Inc. As of that date, the Company assumed the economic benefits of all of these pawnshops by operating them under management agreements that commenced on September 27, 2012, and the final agreement terminated on December 16, 2012. The aggregate cash consideration for the transaction, which was funded with borrowings under the Company's line of credit, was approximately $55.1 million, of which $52.0 million was paid in September 2012. The remaining $3.1 million of consideration was paid during the fourth quarter of 2012. The Company incurred an immaterial amount of acquisition costs related to the acquisition. The goodwill of $31.5 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and these pawn lending locations. The activities and goodwill related to this acquisition are included in the results of the Company's retail services segment. Withdrawal of Proposed Initial Public Offering of Enova International, Inc. On September 15, 2011, Enova filed a registration statement on Form S-1 ("Registration Statement") with the Securities and Exchange Commission (the "SEC") in connection with a proposed initial public offering ("IPO") of its common stock. On July 25, 2012, Enova filed an Application for Withdrawal of Registration Statement with the SEC to withdraw its Registration Statement, together with all exhibits and amendments. The Registration Statement had not been declared effective by the SEC, and no securities have been sold in connection with the offering pursuant to the Registration Statement. During the year ended December 31, 2012, expenses that were previously capitalized totaling $3.9 million were recognized in earnings due to the withdrawal of the Registration Statement and are included in "Operations and administration expenses" in the consolidated statements of income. Recent Regulatory and Other Developments Ohio Court Decision On May 28, 2009, a subsidiary of the Company, Ohio Neighborhood Finance, Inc., doing business as Cashland ("Cashland"), filed a standard collections suit in an Elyria Municipal Court in Ohio against Rodney Scott seeking judgment against Mr. Scott in the amount of $570.16, which was the amount due under his loan agreement. Cashland's loan was offered under the Ohio Mortgage Loan Act ("OMLA"), which allows for interest at a rate of 25% per annum plus certain loan fees allowed by the statute. The Municipal Court held that short-term, single-payment consumer loans made by Cashland are not authorized under the OMLA, and instead should have been offered under the Ohio Short-Term Lender Law, which was passed by the Ohio legislature in 2008 for consumer loans with similar terms. Due to a cap on interest and loan fees at an amount that is less than permitted under OMLA, the Company does not offer loans under the Ohio Short-Term Lender Law. On December 3, 2012, the Ohio Ninth District Court of Appeals affirmed the Municipal Court's ruling in a 2-1 decision. Although this court decision is only legally binding in the Ninth District of Ohio, which includes four counties in northern Ohio where Cashland operates seven stores, other Ohio courts may consider this decision. The Company filed an appeal of the Ninth District Court's decision with the Ohio Supreme Court on January 17, 2013 because it believes that this decision is contrary to the language of the OMLA, and the Ohio Supreme Court has not yet determined whether it will hear the appeal. If the Ninth District Court's decision is upheld by the Ohio Supreme Court on appeal, the Company's Ohio operations may be adversely affected. The Company relies on the OMLA to make short-term loans in its retail services locations in Ohio, and if the Company is unable to continue making short-term loans under this law, it will have to alter its short-term loan product in Ohio. 47-------------------------------------------------------------------------------- Table of Contents Delaware Legislation In June 2012, the State of Delaware passed a bill, which took effect on January 1, 2013, to amend its short-term consumer loan law to, among other things, limit the number of loans a borrower may have in any twelve-month period and establish a statewide database to track these loans. The bill only affects the Company's short-term loan product in Delaware (and does not affect its installment loan product in that state). The impact of this bill will not have a material effect on the Company, including its consolidated revenue or operations. Australia National Consumer Credit Protection Act Amendment In Australia the Company acts as a finance broker, offering the lending products of unaffiliated third-party lenders, which is similar to the Company's CSO programs in the United States. In Australia, the Company follows the responsible lending guidelines under the National Consumer Credit Protection Act (2010) (the "NCCPA"), which has been recently amended. Part of the amendment will become effective on March 1, 2013, and the remainder will become effective on July 1, 2013. The amendment includes limitations on permissible fees charged on certain consumer loans, including consumer loans arranged by the Company. The Company is still assessing the impact of this amendment on the product offered in Australia, but the Company expects that the product will be modified as a result of this amendment, which could make the product less profitable or could eliminate the Company's ability to offer lending products in Australia. The Company may even need to exit Australia if the product cannot be modified in a way that retains its profitability in that country. If the Company has to exit Australia, it will not have a material effect on the Company, including its consolidated revenues or operations. UK Office of Fair Trading The Company offers consumer loans over the internet in the United Kingdom where the Company must follow the Irresponsible Lending Guidance of the Office of Fair Trading (the "OFT") and the Consumer Credit Act of 1974 that was amended by the Consumer Credit Act of 2006 (collectively, the "CCA"), among other rules and regulations. In December 2012, the U.K. Parliament passed the Financial Services Act of 2012 (the "Act"), certain provisions of which take effect on April 1, 2013 and April 1, 2014. The Act makes changes to the CCA and the Financial Services and Markets Act of 2000 (the "FSMA") and gives the OFT the power to suspend consumer credit licenses with immediate effect or from a date specified. The Act also creates the Financial Conduct Authority (the "FCA"), which will take over responsibility for regulating consumer credit from the OFT in April 2014. The FCA may regulate consumer credit pursuant to the guidance of the FSMA, which includes prescriptive regulations that currently govern the secured credit market and could possibly call for the repeal of the CCA or for enabling legislation in the United Kingdom. Prescriptive regulations, as contrasted with principles-based regulations that currently regulate the lending process in the United Kingdom, define what a lender may and may not do with a specific product, similar to U.S. law. However, the U.K. coalition government has reserved the option to retain the principles-based CCA provisions should it conclude that a regulatory model for unsecured consumer credit under the FSMA and FCA cannot be delivered in an effective regulatory manner. During the period of transition of regulatory responsibility over consumer credit from the OFT to the FCA, the OFT will continue to fully and rigorously regulate consumer credit, including the short-term consumer loan market. If prescriptive regulations are adopted, the Company's compliance costs will be significantly increased. In addition, in October 2011, the OFT issued debt collection guidance that was revised in November 2012. This debt collection guidance allows consumer lenders such as the Company to debit a customer's account, which includes debits to both bank accounts and debit cards, in a "reasonable and non-excessive manner." The Company has not experienced a material adverse impact on its business as a result of this guidance. In February 2012, the OFT also announced that it had launched a review of the payday lending sector in the United Kingdom to assess the sector's compliance with the CCA, the OFT's Irresponsible Lending Guidelines and other relevant guidance and legal obligations. The OFT has announced that these inspections could be used to assess a licensee's fitness to hold a consumer credit license and could result in formal enforcement action where appropriate. The OFT is expected to announce its findings during the first quarter of 2013. It is unknown if the OFT's findings will result in significant changes to the Company's operations, business, and prospects. 48-------------------------------------------------------------------------------- Table of Contents Consumer Financial Protection Bureau In July 2010, the U.S. Congress passed the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 (the "Dodd-Frank Act"), and Title X of the Dodd-Frank Act created the Consumer Financial Protection Bureau (the "CFPB"), which regulates consumer financial products and services, including certain short-term loans offered by the Company. On January 4, 2012, President Obama appointed a Director of the CFPB in a recess appointment bypassing Senate confirmation. Although there remain doubts about the legality of this appointment and the appointment is subject to legal challenge, the CFPB has begun exercising supervisory review over certain non-bank providers of consumer financial products and services, including providers of consumer loans such as the Company. The Dodd-Frank Act gave the CFPB, among other things, authority to examine and require registration of providers of consumer financial products and services, including providers of consumer loans such as the Company; the authority to adopt rules describing specified acts and practices as being "unfair," "deceptive" or "abusive," and hence unlawful; and the authority to impose record-keeping obligations. The Company does not currently know the nature and extent of the rules that the CFPB will consider with respect to consumer loan products and services such as those offered by the Company or the timeframe in which the CFPB may consider such rules. Although the CFPB does not have the authority to regulate interest rates, it is possible that at some time in the future the CFPB could propose and adopt rules that require certain changes to short-term consumer lending products and services, including certain short-term loans offered by or through the Company, which could make these products and services materially less profitable or even impractical to offer and could force the Company to modify or terminate certain of its product offerings. The CFPB could also adopt rules imposing new and potentially burdensome requirements and limitations with respect to other consumer loan products and services. Any such rules could have a material adverse effect on the Company's business, results of operations and financial condition or could make the continuance of all or part of its U.S. consumer loan business impractical or unprofitable. In furtherance of its regulatory and supervisory powers, the CFPB has the authority to impose monetary penalties for violations of applicable federal consumer financial laws, require remediation of practices and pursue enforcement actions. For further discussion of the CFPB see "Item 1A. Risk Factors-Risks Related to the Company's Business and Industry-The Consumer Financial Protection Bureau could have a significant impact on the Company's U.S. consumer loan business." CRITICAL ACCOUNTING POLICIES Management's Discussion and Analysis of Financial Condition and Results of Operations is based on the Company's consolidated financial statements, which have been prepared in accordance with generally accepted accounting principles in the United States ("GAAP"). The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition on pawn loan fees and service charges and consumer loan fees, allowance for losses on merchandise held for disposition and consumer loans, goodwill, long-lived and intangible assets, income taxes, contingencies and litigation. Management bases its estimates on historical experience, empirical data and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates. The development and selection of the critical accounting policies and the related disclosures below have been reviewed with the Audit Committee of the Board of Directors of the Company. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. 49 -------------------------------------------------------------------------------- Table of Contents Change in Accounting Policy In the first quarter of 2012, the Company changed its accounting policy with respect to its foreign pawn operations to reflect pledged collateral underlying delinquent pawn loans as "Merchandise held for disposition, net," the proceeds received from the disposition of this collateral as "Proceeds from disposition of merchandise" and the cost basis for this collateral as "Cost of disposed merchandise" in its consolidated financial statements. The Company believes this change, from one generally accepted accounting principle to another generally accepted accounting principle, is preferable because it enhances comparability of its financial statements by reporting financial results associated with its foreign pawn operations in the same manner as the financial results associated with its domestic pawn operations. The Company did not change its accounting policy with respect to its domestic pawn operations, and the change in the Company's accounting policy with respect to its foreign pawn operations had no impact on the Company's consolidated Net Revenue or Net Income previously reported. The change has been applied retrospectively. The following tables summarize the impact of the accounting change in the Company's consolidated financial statements as of December 31, 2011 and for the years ended December 31, 2011 and 2010, respectively (dollars in thousands): Year Ended Year Ended December 31, 2011 December 31, 2010 As previously As previously reported As Adjusted reported As Adjusted Consolidated Statements of Income Pawn loan fees and service charges $ 291,891 $ 282,197 $ 253,314 $ 243,713 Proceeds from disposition of merchandise 636,728 688,884 534,878 588,190 Total revenue 1,540,602 1,583,064 1,293,339 1,337,050 Disposed merchandise 405,155 447,617 338,756 382,467 Total cost of revenue 630,843 673,305 521,150 564,861 Net revenue 909,759 909,759 772,189 772,189 Consolidated Statement of Cash Flows Merchandise other than forfeited $ (7,238 ) $ (7,150 ) $ (6,914 ) $ (1,869 ) Prepaid expenses and other assets (2,723 ) 2,337 1,337 4,146 Net cash provided by operating activities 448,856 454,004 351,306 359,160 Pawn loans repaid 453,350 408,105 391,440 340,267 Principal recovered through dispositions of forfeited pawn loans 275,547 316,651 248,850 291,163 Net cash used in investing activities (477,903 ) (482,044 ) (368,205 ) (377,065 ) Consolidated Statement of Cash Flows-Supplemental Disclosures Pawn loans forfeited and transferred to merchandise held for disposition $ 299,693 $ 334,869 $ 245,872 $ 297,045 As of December 31, 2011 As previously reported As Adjusted Consolidated Balance Sheet Merchandise held for disposition, net $ 151,274 $ 161,884 Prepaid expenses and other assets 41,911 31,301 50 -------------------------------------------------------------------------------- Table of Contents Pawn Loan Fees and Service Charges Pawn Loans and Pawn Loan Fees and Service Charges Receivable Pawn loans are short-term loans made on the pledge of tangible personal property. The maximum pawn loan amount is generally assessed as a percentage of the personal property's estimated disposition value. The typical loan term is generally 30 to 90 days and, in many cases, an additional grace period (typically 10 to 60 days) may be available to the borrower. A pawn loan is considered delinquent if the customer does not repay or, where allowed by law, renew or extend the loan on or prior to its contractual maturity date plus any applicable grace period. Pawn loan fees and service charges do not accrue on delinquent pawn loans. When a pawn loan is considered delinquent, any accrued pawn loan fees and service charges are reversed and no additional pawn loan fees and service charges are accrued. Pawn loans written during each calendar month are aggregated and tracked for performance. This empirical data allows the Company to analyze the characteristics of its outstanding pawn loan portfolio and assess the collectability of the principal balance in addition to pawn loan fees and service charges. Revenue Recognition Pawn loan fees and service charges revenue are accrued ratably over the term of the loan for the portion of those pawn loans deemed collectible. If the future actual performance of the loan portfolio differs significantly (positively or negatively) from expectations, revenue for the next reporting period would be likewise affected. At the end of the current year and based on the revenue recognition method described above, the Company had accrued $49.0 million of pawn loan fees and service charges receivable. Assuming the year-end accrual of pawn loan fees and service charges revenue was overestimated or underestimated by 10%, pawn loan fees and service charges revenue would decrease or increase by $4.9 million in 2012 and net income attributable to the Company would decrease or increase by $3.1 million, net of taxes. Some or all of the decrease would potentially be mitigated through the profit on the disposition of the related forfeited loan collateral. Any increase would be realized as additional pawn loan fees and service charges revenue. Consumer Loans and Allowance and Liability for Estimated Losses on Consumer Loans Revenue Recognition The Company recognizes consumer loan fees for each of the loan products it offers. "Consumer loan fees" in the consolidated statements of income include: interest income, finance charges, CSO fees, service charges, draw fees, minimum fees, late fees, nonsufficient funds fees and any other fees or charges permitted by applicable laws and pursuant to the agreement with the borrower. For short-term loans that the Company writes, revenue is recognized on an effective yield basis over the term of the loan, and fees are recognized when assessed to the customer. CSO fees, which are fees for services provided through the CSO programs, are recognized on an effective yield basis over the term of the loan. For line of credit accounts, interest is recognized on an effective yield basis over the term of the loan, and fees are recognized when assessed to the customer. For installment loans, revenue is recognized on an effective yield basis over the term of the loan and fees are recognized when assessed to the customer. Unpaid and accrued interest and fees are included in "Consumer loans, net" in the consolidated balance sheets. Current and Delinquent Consumer Loans The Company classifies its consumer loans as either current or delinquent. Short-term loans are considered delinquent when payment of an amount due is not made as of the due date. If a line of credit account or installment loan customer misses one payment, that payment is considered delinquent. If a line of credit account or installment loan customer does not make two consecutive payments, the entire account or loan is classified as delinquent. The Company allows for normal payment processing time before considering a loan delinquent but does not provide for any additional grace period. Where permitted by law, a customer may choose to renew a short-term loan contract or extend the due date on a short-term loan before it is considered delinquent by agreeing to pay the current finance charge for the right to make a later payment of the outstanding principal balance plus an additional finance charge. In addition, in some instances, customers agree to repay a 51-------------------------------------------------------------------------------- Table of Contents new short-term loan in two or three payments, and in these cases the Company considers the obligation to make the first payment a new loan and the obligation to make the second and third payments renewals or extensions of that loan because the customer pays the finance charge due at the time of each payment, similar to a loan that has been renewed or extended. All references to renewals include both renewals and extensions made by customers to their existing short-term loans. If a short-term loan is renewed, but the customer fails to pay that loan's current finance charge as of the due date, the unpaid finance charge is classified as delinquent. The Company generally does not accrue interest on delinquent consumer loans and does not resume accrual of interest unless a loan is returned to current status. Delinquent consumer loans may not be renewed, and if, during its attempt to collect on a delinquent consumer loan, the Company allows additional time for payment through a payment plan or a promise to pay, it is still considered delinquent. All payments received are first applied against accrued but unpaid interest and fees and then against the principal balance of the loan. Allowance and Liability for Estimated Losses on Consumer Loans The Company monitors the performance of its consumer loan portfolio and maintains either an allowance or liability for estimated losses on consumer loans (including fees and interest) at a level estimated to be adequate to absorb credit losses inherent in the portfolio. The allowance for losses on the Company's owned consumer loans reduces the outstanding loan balance in the consolidated balance sheets. The liability for estimated losses related to loans guaranteed under the CSO programs, which approximates the fair value of the liability, is included in "Accounts payable and accrued expenses" in the consolidated balance sheets. In determining the allowance or liability for estimated losses on consumer loans, the Company applies a documented systematic methodology. In calculating the allowance or liability for loan losses, outstanding loans are divided into discrete groups of short-term loans, line of credit accounts and installment loans and are analyzed as current or delinquent. Increases in either the allowance or the liability, net of charge-offs and recoveries, are recorded as a "Consumer loan loss provision" in the consolidated statements of income. The allowance or liability for short-term loans classified as current is based on historical loss rates adjusted for recent default trends for current loans. During the fourth quarter of 2012, in order to better reflect portfolio trends, management revised the estimation process for evaluating the adequacy of the allowance and liability for estimated losses on consumer loans. This change is described below and did not have a material impact on the financial statements. For delinquent short-term loans, the allowance or liability is based on a six-month rolling average of loss rates by stage of collection. For line of credit and installment loan portfolios, the Company generally uses a migration analysis to estimate losses inherent in the portfolio. The allowance or liability calculation under the migration analysis is based on historical charge-off experience and the loss emergence period, which represents the average amount of time between the first occurrence of a loss event to the charge-off of a loan. The factors the Company considers to assess the adequacy of the allowance or liability include past due performance, historical behavior of monthly vintages, underwriting changes and recent trends in delinquency in the migration analysis. The Company fully reserves and generally charges off consumer loans once the loan or a portion of the loan has been classified as delinquent for 60 consecutive days. If a loan is deemed uncollectible before it is fully reserved, it is charged off at that point. Consumer loans classified as delinquent generally have an age of one to 59 days from the date any portion of the loan became delinquent, as defined above. Recoveries on loans previously charged to the allowance are credited to the allowance when collected. 52-------------------------------------------------------------------------------- Table of Contents As of December 31, 2012, the allowance for losses on consumer loans was $85.7 million and the liability for estimated losses on third-party lender-owned consumer loans guaranteed by the Company was $3.5 million, in aggregate representing 20.3% of the combined consumer loan portfolio. For the year ended December 31, 2012, the consumer loan loss provision for the combined consumer loan portfolio was $316.3 million and reflects 9.3% of gross combined consumer loans written and renewed by the Company and third-party lenders. If the loss provision increased or decreased by 10%, or $31.6 million, from 2012 levels (a 0.9% change in the percentage of gross combined consumer loans written and renewed), net income attributable to the Company would decrease or increase by $19.9 million, net of taxes, for 2012, assuming the same volume of consumer loans written and renewed in 2012. Merchandise Held for Disposition Merchandise held for disposition consists primarily of forfeited collateral from pawn loans not repaid and merchandise that is purchased directly from customers or from third parties. The carrying value of the forfeited collateral and other merchandise held for disposition is stated at the lower of cost (which is the cost basis in the loan or the amount paid for purchased merchandise) or fair value. With respect to the Company's foreign pawn operations, collateral underlying unredeemed pawn loans is not owned by the Company; however, the Company assumes the risk of loss on such collateral and is solely responsible for its care and disposition. Accordingly, the Company classifies these domestic and foreign assets as "Merchandise held for disposition, net" in the consolidated balance sheets. The Company provides an allowance for returns and an allowance for valuation based on management's evaluation of the current trends in performance, characteristics of the merchandise and historical shrinkage rates. Because the Company's pawn loans are made without recourse to the borrower, the Company does not investigate or rely upon the borrower's creditworthiness, but instead bases its lending decision on an evaluation of the pledged personal property. The amount financed is typically based on a percentage of the pledged personal property's estimated disposition value. The Company uses numerous sources in determining an item's estimated disposition value, including the Company's automated product valuation system as well as catalogs, "blue books," newspapers, internet research and previous disposition experience. The Company performs a physical count of its merchandise in each location on multiple occasions on a cyclical basis and reviews the composition of inventory by category and age in order to assess the adequacy of the allowance. Goodwill and Other Indefinite-Lived Intangible Assets Goodwill represents the excess of the purchase price over the fair value of the net tangible and identifiable intangible assets acquired in each business combination. In accordance with ASC 350-20-35, Goodwill - Subsequent Measurement, the Company tests goodwill and intangible assets with an indefinite life for potential impairment annually as of June 30 and between annual tests if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of a reporting unit below its carrying amount. The Company uses the income approach to complete its annual goodwill assessment. The income approach uses future cash flows and estimated terminal values for each of the Company's reporting units that are discounted using a market participant perspective to determine the fair value of each reporting unit, which is then compared to the carrying value of that reporting unit to determine if there is impairment. The income approach includes assumptions about revenue growth rates, operating margins and terminal growth rates discounted by an estimated weighted-average cost of capital derived from other publicly-traded companies that are similar but not identical from an operational and economic standpoint. The Company completed its annual assessment of goodwill as of June 30, 2012 and determined that the fair value is significantly in excess of carrying value, and, as a result, no impairment existed at that date. See "Recent Developments-Reorganization of Mexico-based Pawn Operations and Purchase of Noncontrolling Interest" for a discussion of additional impairment testing performed in September 2012. 53 -------------------------------------------------------------------------------- Table of Contents Long-Lived Assets and Other Intangible Assets An evaluation of the recoverability of property and equipment and intangible assets subject to amortization is performed whenever the facts and circumstances indicate that the carrying value may be impaired. An impairment loss is recognized if the future undiscounted cash flows associated with the asset and the estimated fair value of the asset are less than the asset's corresponding carrying value. The amount of the impairment loss, if any, is the excess of the asset's carrying value over its estimated fair value. The Company amortizes intangible assets subject to amortization on the basis of their expected periods of benefit, generally three to ten years. The costs of start-up activities and organization costs are charged to expense as incurred. See "Recent Developments-Reorganization of Mexico-based Pawn Operations and Purchase of Noncontrolling Interest" for a discussion of additional impairment testing performed in September 2012. Equity Securities The Company accounts for its marketable and non-marketable equity securities in accordance with ASC 323-10, Investments-Equity Method and Joint Ventures and ASC 325-20, Investments-Other-Cost Method Investments, respectively. The Company's marketable securities, except for marketable securities related to the Company's Nonqualified Savings Plan, which are described below, are classified as available-for-sale and unrecognized gains and losses, net of tax, are recorded in "Accumulated other comprehensive income (loss)" in the consolidated statements of equity. The Company's non-marketable equity securities are recorded on a cost basis. The Company evaluates marketable and non-marketable equity securities for impairment on a quarterly basis. If an impairment of an equity security is determined to be other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary-impairment is identified. Marketable and non-marketable equity securities are held in "Other assets" in the consolidated balance sheets. The Company also holds marketable securities related to its Nonqualified Savings Plan. See "Item 8. Financial Statements and Supplementary Data-Note 17" for a description of the Nonqualified Savings Plan. The securities are classified as trading securities, and the unrealized gains and losses on these securities are netted with the costs of the plans in "Operations and administration expenses" in the consolidated statements of income. These marketable securities are recorded at fair value and have an offsetting liability of equal amount. The Nonqualified Savings Plan assets are held in "Other Assets," and the offsetting liability is held in "Accounts payable and accrued expenses" in the Company's consolidated balance sheets. Income Taxes As part of the process of preparing its consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax expense together with assessing temporary differences in recognition of income for tax and accounting purposes. These differences result in deferred tax assets and liabilities and are included within the Company's consolidated balance sheets. Management must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is not likely, it must establish a valuation allowance. An expense or benefit is included within the tax provision in the statement of operations for any increase or decrease in the valuation allowance for a given period. The Company performs an evaluation of the recoverability of its deferred tax assets on a quarterly basis. The Company establishes a valuation allowance if it is more-likely-than-not (greater than 50 percent) that all or some portion of the deferred tax asset will not be realized. The Company analyzes several factors, including the nature and frequency of operating losses, the Company's carry-forward period for any losses, the reversal of future taxable temporary differences, the expected occurrence of future income or loss and the feasibility of available tax planning strategies to protect against the loss of deferred tax assets. 54 -------------------------------------------------------------------------------- Table of Contents In 2012, the Company recorded a valuation allowance of $21.8 million, including $12.0 million related to net deferred tax assets at its Mexico-based pawn operations (see "General-Recent Developments-Reorganization of Mexico-based Pawn Operations and Purchase of Noncontrolling Interest" above for further information related to the Mexico Reorganization), $0.5 million related to the net deferred tax assets in Mexico generated by the e-commerce segment, and $9.3 million related to deferred tax assets associated with the Company's excess tax basis over its basis for financial reporting purposes in the stock of Creazione. The Company accounts for uncertainty in income taxes recognized in the consolidated financial statements in accordance with Financial Accounting Standards Board ("FASB") Accounting Standards Codification ("ASC") 740-10-25, Accounting for Uncertainty in Income Taxes ("ASC 740-10-25"). ASC 740-10-25 requires that a more-likely-than-not threshold be met before the benefit of a tax position may be recognized in the consolidated financial statements and prescribes how such benefit should be measured. Management must evaluate tax positions taken on the Company's tax returns for all periods that are open to examination by taxing authorities and make a judgment as to whether and to what extent such positions are more likely than not to be sustained based on merit. Management's judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. Management's judgment is also required in evaluating whether tax benefits meet the more-likely-than-not threshold for recognition under ASC 740-10-25. RECENT ACCOUNTING PRONOUNCEMENTS See "Item 8. Financial Statements and Supplementary Data-Note 2" for a discussion of recent accounting pronouncements. 55-------------------------------------------------------------------------------- Table of Contents RESULTS OF CONTINUING OPERATIONS Highlights The Company's financial results for the year ended December 31, 2012 ("2012") are summarized below. - Consolidated total revenue increased 13.7%, to $1.8 billion for 2012 compared to the year ended December 31, 2011 ("2011"). - Consolidated net revenue increased $96.2 million, or 10.6%, to $1.0 billion, in 2012 compared to $909.8 million in 2011. Consumer loan fees, net of consumer loan loss provision, increased 24.7%, or $92.3 million, for 2012 compared to 2011. Net revenue from pawn related activities, which is the sum of pawn loan fees and service charges and the net proceeds from the disposition of merchandise, increased 0.6%, or $3.1 million, for 2012 compared to 2011. - Income from operations was $215.9 million in 2012, compared to $244.3 million in 2011. Excluding unusual items of $39.0 million, consisting of $3.9 million, $21.7 million and $13.4 million of expenses related to the withdrawal of the proposed Enova IPO, the Mexico Reorganization and the Ohio Reimbursements, respectively, non-GAAP adjusted income from operations would have been $254.9 million, an increase of 4.3% compared to 2011, excluding these amounts. - Net income was $107.5 million in 2012 compared to $136.0 million in 2011. Excluding unusual items of $36.2 million, net of tax and noncontrolling interests, consisting of $2.4 million, $25.4 million and $8.4 million of expenses related to the withdrawal of the proposed Enova IPO, the Mexico Reorganization and the Ohio Reimbursements, respectively, non-GAAP adjusted net income would have been $143.7 million in 2012, an increase of 5.7% from 2011. - Diluted net income per share was $3.42 in 2012 compared to $4.25 in 2011. Excluding the unusual items mentioned above, net of tax and noncontrolling interests, non-GAAP adjusted diluted earnings per share would have been $4.57 in 2012, an increase of 7.5% from 2011. Management believes that the adjustments to the GAAP measures shown above for unusual items related to events that occurred during 2012, including the withdrawal of the proposed Enova IPO, the Mexico Reorganization and the Ohio Reimbursements, are useful to investors in order to allow them to compare the Company's financial results for the current year with previous years and to analyze the Company's operating performance. See "Overview-Non-GAAP Disclosure-Adjusted Earnings and Adjusted Earnings Per Share" for additional information. 56 -------------------------------------------------------------------------------- Table of Contents OVERVIEW Consolidated Net Revenue Consolidated net revenue is composed of total revenue less cost of disposed merchandise and consumer loan loss provision. Net revenue is the income available to satisfy all remaining expenses and is the measure management uses to evaluate top-line performance. The following tables show the components of net revenue for the years ended December 31, 2012, 2011 and 2010 by segment and corporate operations on a consolidated basis (dollars in thousands): Year Ended December 31, 2012 Retail Services E-Commerce Corporate Consolidated % of % of % of % of Amount Total Amount Total Amount Total Amount Total Pawn loan fees and service charges $ 300,929 47.8 % $ - - % $ - - % $ 300,929 29.9 % Proceeds from disposition of merchandise, net of cost of disposed merchandise 225,588 35.9 % - - % - - % 225,588 22.4 % Pawn related $ 526,517 83.7 % $ - - % $ - - % $ 526,517 52.3 % Consumer loan fees, net of loss provision $ 92,667 14.7 % $ 372,559 99.6 % $ - - % $ 465,226 46.3 % Other revenue 10,237 1.6 % 1,359 0.4 % 2,618 100.0 % 14,214 1.4 % Net revenue $ 629,421 100.0 % $ 373,918 100.0 % $ 2,618 100.0 % $ 1,005,957 100.0 % Year Ended December 31, 2011 Retail Services E-Commerce Corporate Consolidated % of % of % of % of Amount Total Amount Total Amount Total Amount Total Pawn loan fees and service charges $ 282,197 44.8 % $ - - % $ - - % $ 282,197 31.0 % Proceeds from disposition of merchandise net of cost of disposed merchandise 241,260 38.2 % 7 - % - - % 241,267 26.5 % Pawn related $ 523,457 83.0 % $ 7 - % $ - - % $ 523,464 57.5 % Consumer loan fees, net of loss provision $ 95,191 15.1 % $ 277,767 99.7 % $ - - % $ 372,958 41.0 % Other revenue 11,715 1.9 % 879 0.3 % 743 100.0 % 13,337 1.5 % Net revenue $ 630,363 100.0 % $ 278,653 100.0 % $ 743 100.0 % $ 909,759 100.0 % Year Ended December 31, 2010 Retail Services E-Commerce Corporate Consolidated % of % of % of % of Amount Total Amount Total Amount Total Amount Total Pawn loan fees and service charges $ 243,713 43.8 % $ - - % $ - - % $ 243,713 31.6 % Proceeds from disposition of merchandise net of cost of disposed merchandise 205,723 36.9 % - - % - - % 205,723 26.6 % Pawn related $ 449,436 80.7 % $ - - % $ - - % $ 449,436 58.2 % Consumer loan fees, net of loss provision $ 96,536 17.3 % $ 212,022 99.4 % $ - - % $ 308,558 40.0 % Other revenue 11,178 2.0 % 1,338 0.6 % 1,679 100.0 % 14,195 1.8 % Net revenue $ 557,150 100.0 % $ 213,360 100.0 % $ 1,679 100.0 % $ 772,189 100.0 % 57 -------------------------------------------------------------------------------- Table of Contents For 2012, net revenue increased $96.2 million, or 10.6%, to $1.0 billion from $909.8 million in 2011. Net revenue from pawn lending activities accounted for 52.3% and 57.5% of total net revenue in 2012 and 2011, respectively. Net revenue from pawn lending activities increased $3.0 million to $526.5 million in 2012 from $523.5 million in 2011, which accounted for 3.2% of the increase in consolidated net revenue. The increase in the pawn-related net revenue was primarily due to an $18.7 million increase in pawn loan fees and service charges that resulted from higher average domestic pawn loan balances as a result of new locations and higher average pawn loan yields in domestic retail operations. This increase was partially offset by a decrease in pawn loan fees and service charges from foreign markets and a decrease of $15.7 million in gross profit on the disposition of merchandise on commercial sales during 2012 compared to 2011, which was primarily due to a decrease in gross profit margin on commercial goods and a decrease in commercial goods available for sale as a result of lower forfeitures and purchases. Consumer loan activities accounted for 46.3% and 41.0% of total consolidated net revenue in 2012 and 2011, respectively. Net revenue from consumer loan activities increased $92.3 million, to $465.2 million during 2012 from $373.0 million in 2011. This increase accounted for 95.9% of the overall increase in consolidated net revenue, mainly due to an increase in consumer loan fees that resulted from higher average consumer loan balances in the e-commerce segment. Non-GAAP Disclosure In addition to the financial information prepared in conformity with GAAP the Company provides historical non-GAAP financial information. Management believes that presentation of non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of the Company's operations. Management believes that these non-GAAP financial measures reflect an additional way of viewing aspects of the Company's business that, when viewed with its GAAP results, provide a more complete understanding of factors and trends affecting its business. Management provides non-GAAP financial information for informational purposes and to enhance understanding of the Company's GAAP consolidated financial statements. Readers should consider the information in addition to, but not instead of or superior to, its financial statements prepared in accordance with GAAP. This non-GAAP financial information may be determined or calculated differently by other companies, limiting the usefulness of those measures for comparative purposes. 58 -------------------------------------------------------------------------------- Table of Contents Adjusted Earnings and Adjusted Earnings Per Share In addition to reporting financial results in accordance with GAAP, the Company has provided adjusted earnings and adjusted earnings per share, which are non-GAAP measures. Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments and amortization methods, which provides a more complete understanding of the Company's financial performance, competitive position and prospects for the future. Management also believes that investors regularly rely on non-GAAP financial measures, such as adjusted earnings and adjusted earnings per share, to assess operating performance and that such measures may highlight trends in the Company's business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. In addition, management believes that the adjustments shown below, especially the adjustments for charges related to events that occurred during 2012, such as the Mexico Reorganization, the withdrawal of the proposed Enova IPO, and the charges related to the Ohio Reimbursements, are useful to investors in order to allow them to compare the Company's financial results for the current year with the previous years shown. The following table provides a reconciliation between net income attributable to the Company and diluted earnings per share calculated in accordance with GAAP to adjusted earnings and adjusted earnings per share, respectively, which are shown net of tax (dollars in thousands, except per share data): Year Ended December 31, 2012 2011 2010 Per Per Per Diluted Diluted Diluted $ Share $ Share $ Share Net income and diluted earnings per share attributable to Cash America International, Inc. $ 107,470 $ 3.42 $ 135,963 $ 4.25 $ 115,538 $ 3.67 Adjustments: Charges related to withdrawn proposed Enova IPO(a) 2,424 0.07 - - - - Charges related to the Mexico Reorganization(b) 25,421 0.81 - - - - Charges related to Ohio Reimbursements(c) 8,442 0.27 - - - - Subtotal 143,757 4.57 135,963 4.25 115,538 3.67 Other adjustments (net of tax): Intangible asset amortization 2,791 0.09 3,905 0.12 2,993 0.09 Non-cash equity-based compensation 3,007 0.10 3,064 0.10 2,384 0.08 Convertible debt non-cash interest and issuance cost amortization 2,386 0.07 2,214 0.07 2,088 0.06 Foreign currency transaction loss 196 0.01 786 0.02 289 0.01 Adjusted earnings and adjusted earnings per share $ 152,137 $ 4.84 $ 145,932 $ 4.56 $ 123,292 $ 3.91 (a) Represents charges directly related to the proposed Enova IPO that was withdrawn in July 2012. For the year ended December 31, 2012, represents $3.9 million of charges, net of tax benefit of $1.5 million. (b) Represents charges related to the Mexico Reorganization. For the year ended December 31, 2012, represents $28.9 million of charges, net of tax benefit of $1.2 million and noncontrolling interest of $2.3 million. (c) Represents charges related to the Ohio Reimbursements. For the year ended December 31, 2012, represents $13.4 million of charges, net of tax benefit of $5.0 million. 59 -------------------------------------------------------------------------------- Table of Contents Adjusted EBITDA The table below shows adjusted EBITDA, a non-GAAP measure that the Company defines as earnings excluding depreciation, amortization, interest, foreign currency transaction gains or losses, equity in earnings or loss of unconsolidated subsidiary, taxes and including the net income or loss attributable to noncontrolling interests. Management believes adjusted EBITDA is used by investors to analyze operating performance and evaluate the Company's ability to incur and service debt and its capacity for making capital expenditures. Adjusted EBITDA is also useful to investors to help assess the Company's liquidity and estimated enterprise value. In addition, management believes that the adjustments shown below, especially the adjustments for charges related to events that occurred during 2012, such as the Mexico Reorganization, the withdrawal of the proposed Enova IPO, and the charges related to the Ohio Reimbursements, are useful to investors in order to allow them to compare the Company's financial results for the current year with the previous years shown. The computation of adjusted EBITDA as presented below may differ from the computation of similarly-titled measures provided by other companies (dollars in thousands): Year Ended December 31, 2012 2011 2010 Net income attributable to Cash America International, Inc. $ 107,470 $ 135,963 $ 115,538 Adjustments: Charges related to withdrawn proposed Enova IPO(a) 3,879 - - Charges related to Mexico Reorganization(b) 28,873 - - Charges related to Ohio Reimbursements(c) 13,400 - - Depreciation and amortization expenses 62,864 (d) 54,149 43,923 Interest expense, net 28,987 25,447 22,020 Foreign currency transaction loss 313 1,265 463 Equity in loss of unconsolidated subsidiary 295 104 136 Provision for income taxes 77,495 (e) 82,360 69,269 Net loss attributable to the noncontrolling interest (5,806 ) (f) (797 ) (294 ) Adjusted EBITDA $ 317,770 $ 298,491 $ 251,055 Adjusted EBITDA margin calculated as follows: Total revenue $ 1,800,430 $ 1,583,064 $ 1,337,050 Adjusted EBITDA 317,770 298,491 251,055 Adjusted EBITDA as a percentage of total revenue 17.6 % 18.9 % 18.8 % (a) Represents charges directly related to the proposed Enova IPO that was withdrawn in July 2012, before tax benefit of $1.5 million. (b) Represents charges related to the Mexico Reorganization, before tax benefit of $1.2 million and noncontrolling interest of $2.3 million. Includes $12.6 million and $7.2 million of depreciation and amortization expenses and charges for the recognition of a deferred tax asset valuation allowance, respectively, as noted in (d) and (e) below. (c) Represents charges related to the Ohio Reimbursements, before tax benefit of $5.0 million. (d) Excludes $12.6 million of depreciation and amortization expenses, which are included in "Charges related to the Mexico Reorganization" in the table above. (e) Excludes a $7.2 million charge for the recognition of a deferred tax asset valuation allowance, which is included in "Charges related to the Mexico Reorganization" in the table above. Includes an income tax benefit related to the Mexico Reorganization of $1.2 million. (f) Includes $2.3 million of noncontrolling interests related to the Mexico Reorganization. 60 -------------------------------------------------------------------------------- Table of Contents YEAR ENDED 2012 COMPARED TO YEAR ENDED 2011 Pawn Lending Activities Pawn lending activities consist of pawn loan fees and service charges from the retail services segment during the period and the profit on disposition of collateral from unredeemed pawn loans, as well as the sale of merchandise acquired from customers directly or from third parties. The following table sets forth selected data related to the Company's pawn lending activities as of and for the years ended December 31, 2012 and 2011 (dollars in thousands): 2012 2011 Year Ended December 31, Domestic Foreign Total Domestic Foreign TotalPawn loan fees and service charges $ 288,161 $ 12,768 $ 300,929 $ 261,829 $ 20,368 $ 282,197 Average pawn loan balance outstanding $ 225,066 $ 12,055 $ 237,121 $ 205,610 $ 20,037 $ 225,647 Amount of pawn loans written and renewed $ 916,215 $ 60,476 $ 976,691 $ 869,203 $ 118,126 $ 987,329 Annualized yield on pawn loans 128.0 % 105.9 % 126.9 % 127.3 % 101.7 % 125.1 % Average amount per pawn loan (in ones) $ 131 $ 88 $ 124 $ 127 $ 103 $ 124 Gross profit margin on disposition of merchandise 33.5 % 12.0 % 32.1 % 36.4 % 18.6 % 35.0 % Merchandise turnover 2.9 3.9 3.0 3.0 5.0 3.1 As of December 31, Ending pawn loan balances $ 240,573 $ 4,067 $ 244,640 $ 238,399 $ 15,120 $ 253,519 Ending merchandise balance, net $ 161,655 $ 5,754 $ 167,409 $ 151,274 $ 10,610 $ 161,884 Pawn Loan Fees and Service Charges Consolidated pawn loan balances as of December 31, 2012 were $244.6 million, which was $8.9 million, or 3.5%, lower than as of December 31, 2011, due primarily to the reduction in business activities in the Company's foreign pawn operations in 2012. Despite the decrease in the balance at the end of the period, the average consolidated balance of pawn loans outstanding increased by $11.5 million, or 5.1%, in 2012 compared to 2011. Domestic Pawn Loan Balances The average balance of domestic pawn loans outstanding increased by $19.5 million, or 9.5%, in 2012 compared to 2011, primarily due to the acquisition of 41 domestic retail services locations in late 2011 and in 2012. Higher collateral values from higher average gold prices in preceding periods contributed to the increase in the average amount per loan to $131 for 2012 compared to $127 in 2011. The increase in average domestic pawn loan balances was partially offset by lower pawn loan balances in same-store domestic retail services locations in 2012 and a decrease in the length of the loan period in certain markets, as described below. Domestic pawn loan fees and service charges increased $26.4 million, or 10.1%, to $288.2 million in 2012 from $261.8 million in 2011. The increase was mainly due to the addition of retail services locations, which resulted in higher average pawn loan balances during most of 2012 and contributed $24.8 million of the increase. The increase was also due to a higher average pawn loan yield due to a decrease in forfeitures, which resulted in better pawn loan performance, and an increase in the statutorily permitted rate in some markets. In addition, pawn loan balances throughout 2012 were lower due to a shortening of the maximum loan term from 90 to 60 days in certain locations in late 2011. This change contributed to the higher annualized loan yields as customer payments of pawn loan fees and service charges occur in higher frequency on the reduced loan balance. 61 -------------------------------------------------------------------------------- Table of Contents Foreign Pawn Loan Balances The average balance of foreign pawn loans outstanding during 2012 decreased by $8.0 million, or 39.8%, compared to 2011, primarily due to the closure of 148 pawn lending locations associated with the Mexico Reorganization. In addition, there was a decrease in demand for gold-based pawn loans that was partially offset by an increase in demand for loans on general merchandise, which were introduced in certain of the Company's foreign retail services locations beginning in 2011. Also, during 2012, the Company reduced the loan period from 60 to 45 days, causing a decrease in loans outstanding. The preceding factors led to lower average foreign pawn loan balances, which resulted in a decrease in pawn loan fees and service charges of $7.6 million, or 37.3%, to $12.8 million in 2012 from $20.4 million in 2011. The annualized yield on foreign pawn loan balances increased to 105.9% in 2012 compared to 101.7% in 2011, primarily due to a change in the rates charged on these loans during 2012, a decrease in the maximum loan term from 60 days to 45 days during 2012 and a higher mix of general merchandise loans, which have a higher pawn loan yield than jewelry loans. The average amount per loan decreased to $88 in 2012 compared to $103 in 2011, primarily due to the modification of lending rates and the effect of the change in foreign exchange rates. Proceeds From Disposition of Merchandise Profit from the disposition of merchandise represents the proceeds received from the disposition of merchandise in excess of the cost of disposed merchandise, which is the Company's cost basis in the loan or the amount paid for purchased merchandise. The following table summarizes the proceeds from the disposition of merchandise and the related profit for the years ended December 31, 2012 and 2011 (dollars in thousands): Year Ended December 31, 2012 2011 Retail Commercial Total Retail Commercial Total Proceeds from disposition $ 391,566 $ 312,201 $ 703,767 $ 358,695 $ 330,189 $ 688,884 Gross profit on disposition $ 144,095 $ 81,493 $ 225,588 $ 137,620 $ 103,647 $ 241,267 Gross profit margin 36.8 % 26.1 % 32.1 % 38.4 % 31.4 % 35.0 % Percentage of total gross profit 63.9 % 36.1 % 100.0 % 57.0 % 43.0 % 100.0 % The total proceeds from disposition of merchandise increased $14.9 million, or 2.2%, during 2012 from 2011. The total gross profit from the disposition of merchandise decreased $15.7 million, or 6.5%, during 2012 from 2011, primarily due to lower gross profit on commercial sales. The overall profit margin percentage decreased to 32.1% in 2012 from 35.0% in 2011, due mainly to a higher cost of goods sold on commercial sales compared to 2011, and to a lesser extent, a decrease in gross profit percentage on retail sales in 2012 compared to 2011. The consolidated merchandise turnover rate decreased slightly to 3.0 times during 2012 compared to 3.1 times in 2011. Proceeds from retail dispositions of merchandise increased $32.9 million, or 9.2%, during 2012 from 2011. Domestic retail operations contributed $21.7 million of the increase, primarily due to the net addition of new retail services locations through organic growth and acquisitions. Foreign retail operations contributed $11.2 million of the increase, primarily due to increased sales of general merchandise in 2012 compared to 2011. The Company's domestic and foreign operations both experienced a decrease in retail gross profit margin, as the consolidated gross profit margin on the retail disposition of merchandise decreased to 36.8% in 2012 from 38.4% in 2011. The decrease was primarily due to the continued discounting of merchandise prices to encourage retail sales activity. Proceeds from commercial dispositions decreased $18.0 million, or 5.4%, during 2012 over 2011. Proceeds from dispositions decreased $16.7 million and $1.3 million, respectively, in foreign and domestic markets. The $16.7 million decrease in foreign proceeds was due mostly to lower volumes of gold sold in 2012 as compared to 2011. The $1.3 million decrease in domestic markets was composed of a $5.1 million decrease due to lower volumes of gold sold, primarily as a result of lower purchases of gold from customers during 2012, and, to a lesser extent lower forfeitures of jewelry items during 2012 compared to 2011. This decrease was partially offset by a $3.9 million increase in proceeds from commercial dispositions from higher sales of diamonds in 2012 as compared to 2011. 62 -------------------------------------------------------------------------------- Table of Contents Consolidated gross profit from commercial dispositions decreased $22.2 million to $81.5 million, of which domestic operations contributed $16.2 million and foreign operations contributed $6.0 million. The gross profit margin on commercial sales decreased to 26.1% in 2012 from 31.4% in 2011. The decrease in gross profit from commercial dispositions was mainly due to lower volumes of gold sold and a higher average cost of gold sold relative to a smaller increase in the market price per ounce of gold sold in both domestic and foreign operations. The table below summarizes the age of merchandise held for disposition related to the Company's pawn operations before valuation allowance of $0.9 million and $0.7 million as of December 31, 2012 and 2011, respectively (dollars in thousands): As of December 31, 2012 2011 Amount % Amount % Jewelry - held for one year or less $ 99,466 59.1 $ 99,683 61.3 Other merchandise - held for one year or less 59,914 35.6 56,483 34.8 Total merchandise held for one year or less 159,380 94.7 156,166 96.1 Jewelry - held for more than one year 3,283 2.0 2,626 1.6 Other merchandise - held for more than one year 5,597 3.3 3,792 2.3 Total merchandise held for more than one year 8,880 5.3 6,418 3.9 Total merchandise held for disposition $ 168,260 100.0 $ 162,584 100.0 Consumer Loan Activities Consumer Loan Fees Consumer loan fees increased $182.9 million, or 30.5%, to $781.5 million in 2012 compared to $598.6 million in 2011. The increase in consumer loan fees is due to growth in the e-commerce segment. The percentage of consumer loan fees from foreign operations to consumer loan fees from the e-commerce segment and total consolidated consumer loan fees increased in 2012 compared to 2011 as the Company's e-commerce business continued to experience growth in the United Kingdom and other foreign markets. In 2012, consumer loan fees from the foreign component of the e-commerce segment were 49.6% of consumer loan fees for the e-commerce segment and 41.8% of consolidated consumer loan fees, up from 47.0% and 37.6% of the e-commerce segment and consolidated consumer loan fees in 2011, respectively. Consumer Loan Loss Provision The consumer loan loss provision increased by $90.6 million, to $316.3 million in 2012 from $225.7 million in 2011. The loss provision as a percentage of consumer loan fees increased to 40.5% in 2012 from 37.7% in 2011. The loss provision as a percentage of consumer loan fees increased in both the Company's retail services and e-commerce segments, primarily due to a greater mix of installment loans and line of credit accounts as a percentage of the total consumer loan portfolio. Installment loans and line of credit account portfolios have higher loss rates because they are less seasoned than the Company's short-term loan portfolios. Also contributing to the increase was the expansion of the Company's line of credit and installment loan products in the United States, which has resulted in an increase in new customers. New customers tend to have a higher risk of default than customers with a history of successfully repaying loans. The loss provision as a percentage of consumer loan fees decreased in the Company's foreign e-commerce operations, mainly because the portfolio is beginning to have a higher percentage of customers with established payment 63 -------------------------------------------------------------------------------- Table of Contents histories. Despite the decrease in foreign loss provision as a percentage of consumer loan fees in 2012 compared to 2011, because the foreign e-commerce operations experienced higher loss rates than domestic operations, and due to the greater mix of foreign consumer loans in 2012 compared to 2011, the foreign e-commerce operations contributed to the increase in loss provision as a percentage of consumer loan fees in 2012. Future loss rates will continue to be influenced by the mix of new customers to existing customers, the mix of short-term, line of credit and longer-term consumer loan products in the Company's domestic and foreign operations and the mix of foreign consumer loans as a percentage of consolidated consumer loans. The following table sets forth consumer loan fees by segment, adjusted for the deduction of the loan loss provision for the years ended December 31, 2012 and 2011 (dollars in thousands): Year Ended December 31, 2012 2011 Retail Retail Services E-Commerce Total Services E-Commerce Total Interest and fees on short-term loans $ 109,972 $ 459,793 $ 569,765 $ 110,071 $ 400,810 $ 510,881 Interest and fees on line of credit accounts - 73,572 73,572 - 30,590 30,590 Interest and fees on installment loans 11,920 126,263 138,183 9,121 48,054 57,175 Consumer loan fees $ 121,892 $ 659,628 $ 781,520 $ 119,192 $ 479,454 $ 598,646 Consumer loan loss provision 29,225 287,069 316,294 24,001 201,687 225,688 Consumer loan fees, net of loss provision $ 92,667 $ 372,559 $ 465,226 $ 95,191 $ 277,767 $ 372,958 Year-over-year change-$ $ (2,524 ) $ 94,792 $ 92,268 $ (1,345 ) $ 65,745 $ 64,400 Year-over-year change-% (2.7 )% 34.1 % 24.7 % (1.4 )% 31.0 % 20.9 % Consumer loan loss provision as a % of consumer loan fees 24.0 % 43.5 % 40.5 % 20.1 % 42.1 % 37.7 % Combined Consumer Loans In addition to reporting consumer loans owned by the Company and consumer loans guaranteed by the Company, which are either GAAP items or disclosures required by GAAP, the Company has provided combined consumer loans, which is a non-GAAP measure. In addition, the Company has reported consumer loans written and renewed, which is statistical data that is not included in the Company's financial statements. The Company also reports allowances and liabilities for estimated losses on consumer loans individually and on a combined basis, which are GAAP measures that are included in the Company's financial statements. Management believes these measures provide investors with important information needed to evaluate the magnitude of potential loan losses and the opportunity for revenue performance of the consumer loan portfolio on an aggregate basis. The comparison of the aggregate amounts from period to period is more meaningful than comparing only the residual amount on the Company's balance sheet since both revenue and the loss provision for loans are impacted by the aggregate amount of loans owned by the Company and those guaranteed by the Company as reflected in its financial statements. Consumer Loan Balances The outstanding combined portfolio balance of consumer loans, net of allowances and liability for estimated losses, increased $71.6 million, or 25.6%, to $350.7 million at December 31, 2012 from $279.1 million at December 31, 2011, primarily due to increased demand for all consumer loan products from the e-commerce segment in both domestic and foreign markets. 64-------------------------------------------------------------------------------- Table of Contents The combined loan balance includes $375.1 million and $285.9 million at December 31, 2012 and 2011, respectively, of Company-owned consumer loan balances before the allowance for losses of $85.7 million and $63.1 million provided in the consolidated financial statements for December 31, 2012 and 2011, respectively. The combined loan balance also includes $64.7 million and $59.4 million at December 31, 2012 and 2011, respectively, of consumer loan balances that are guaranteed by the Company, which are not included in the Company's financial statements, before the liability for estimated losses of $3.5 million and $3.1 million provided in the consolidated financial statements for December 31, 2012 and 2011, respectively. The following table summarizes consumer loan balances outstanding as of December 31, 2012 and 2011 (dollars in thousands): As of December 31, 2012 2011 Guaranteed Guaranteed Company by the Company by the Owned(a) Company(a) Combined(b) Owned(a) Company(a) Combined(b) Ending consumer loan balances: Retail Services Short-term loans $ 52,171 $ 7,134 $ 59,305 $ 53,601 $ 9,237 $ 62,838 Installment loans 11,246 9,395 20,641 9,262 7,425 16,687 Total Retail Services, gross 63,417 16,529 79,946 62,863 16,662 79,525 E-Commerce Domestic Short-term loans 38,227 44,261 82,488 39,232 39,341 78,573 Line of credit accounts 42,700 - 42,700 21,648 - 21,648 Installment loans 45,996 - 45,996 24,582 - 24,582 Total Domestic, gross 126,923 44,261 171,184 85,462 39,341 124,803 Foreign Short-term loans 108,899 3,946 112,845 101,723 3,420 105,143 Installment loans 75,882 - 75,882 35,802 - 35,802 Total Foreign, gross 184,781 3,946 188,727 137,525 3,420 140,945 Total E-Commerce, gross 311,704 48,207 359,911 222,987 42,761 265,748 Total ending loan balance, gross 375,121 64,736 439,857 285,850 59,423 345,273 Less: Allowance and liabilities for losses (85,703 ) (3,498 ) (89,201 ) (63,072 ) (3,062 ) (66,134 ) Total ending loan balance, net $ 289,418 $ 61,238 $ 350,656 $ 222,778 $ 56,361 $ 279,139 Allowance and liability for losses as a % of combined consumer loan balances, gross(b) 22.8 % 5.4 % 20.3 % 22.1 % 5.2 % 19.2 % (a) GAAP measure. The consumer loan balances guaranteed by the Company represent loans originated by third-party lenders through the CSO programs, so these balances are not recorded in the Company's financial statements. However, the Company has established a liability for estimated losses in support of its guarantee of these loans, which is reflected in the table above and included in its consolidated balance sheets. (b) Except for allowance and liability for estimated losses, amounts represent non-GAAP measures. Consumer Loans Written and Renewed Where permitted by law, a customer may choose to renew a short-term loan contract or extend the due date on a short-term loan before it is considered delinquent by agreeing to pay the current finance charge for the right to make a later payment of the outstanding principal balance plus an additional finance charge. In addition, in some instances, customers agree to repay a new short-term loan in two or three payments, and in these cases the Company considers the obligation to make the first payment a new loan and the obligation to make the second and third payments renewals or extensions of that loan because the customer pays the finance charge due at the time of each payment, similar to a loan that has been renewed or extended. All references to renewals include both renewals and extensions made by customers to their existing short-term loans. 65 -------------------------------------------------------------------------------- Table of Contents The amount of combined consumer loans written and renewed was $3.42 billion in 2012 and increased $384.5 million, or 12.7%, from $3.03 billion in 2011, mainly due to an increase in demand for all consumer loan products from the e-commerce segment in domestic and foreign markets. The average amount per consumer loan increased to $528 from $514 during 2012 compared to 2011, due largely to an increase in longer-term installment loans, which typically have a larger average loan amount than short-term loans, and an increase in the average amount of short-term loans. Management expects the average amount per consumer loan to increase in 2013 due to the continued growth in installment lending. 66 -------------------------------------------------------------------------------- Table of Contents The following table summarizes the consumer loans written and renewed for the years ended December 31, 2012 and 2011: Year Ended December 31, 2012 2011 Guaranteed Guaranteed Company by the Company by the Owned(a) Company(a)(b) Combined(a) Owned(a) Company(a)(b) Combined(a) Amount of consumer loans written and renewed (dollars in thousands): Retail Services Short-term loans $ 743,575 $ 145,221 $ 888,796 $ 736,964 $ 174,510 $ 911,474 Installment loans 7,723 17,902 25,625 8,256 15,781 24,037 Total Retail Services 751,298 163,123 914,421 745,220 190,291 935,511 E-Commerce Domestic Short-term loans 331,754 747,533 1,079,287 376,041 681,009 1,057,050 Line of credit accounts 116,360 - 116,360 57,012 - 57,012 Installment loans 89,598 - 89,598 42,532 - 42,532 Total Domestic 537,712 747,533 1,285,245 475,585 681,009 1,156,594 Foreign Short-term loans 1,010,334 72,592 1,082,926 820,841 56,917 877,758 Installment loans 133,109 - 133,109 61,307 - 61,307 Total Foreign 1,143,443 72,592 1,216,035 882,148 56,917 939,065 Total E-Commerce 1,681,155 820,125 2,501,280 1,357,733 737,926 2,095,659 Total amount of consumer loans written and renewed $ 2,432,453 $ 983,248 $ 3,415,701 $ 2,102,953 $ 928,217 $ 3,031,170 Number of consumer loans written and renewed (in ones): Retail Services Short-term loans 1,574,163 269,144 1,843,307 1,586,551 309,003 1,895,554 Installment loans 7,088 2,845 9,933 6,858 2,863 9,721 Total Retail Services 1,581,251 271,989 1,853,240 1,593,409 311,866 1,905,275 E-Commerce Domestic Short-term loans 1,062,105 1,021,057 2,083,162 1,115,549 958,821 2,074,370Line of credit accounts 417,171 - 417,171 201,934 - 201,934 Installment loans 87,272 - 87,272 36,151 - 36,151 Total Domestic 1,566,548 1,021,057 2,587,605 1,353,634 958,821 2,312,455 Foreign Short-term loans 1,815,420 95,630 1,911,050 1,543,453 84,897 1,628,350 Installment loans 115,250 - 115,250 53,567 - 53,567 Total Foreign 1,930,670 95,630 2,026,300 1,597,020 84,897 1,681,917 Total E-Commerce 3,497,218 1,116,687 4,613,905 2,950,654 1,043,718 3,994,372 Total number of consumer loans written and renewed 5,078,469 1,388,676 6,467,145 4,544,063 1,355,584 5,899,647 (a) The disclosure regarding the amount and number of consumer loans written and renewed is statistical data that is not included in the Company's financial statements. (b) Loans guaranteed by the Company represent loans originated by third-party lenders through the CSO programs. 67 -------------------------------------------------------------------------------- Table of Contents Consumer Loans Written to New and Existing Customers in the E-commerce Segment For its e-commerce segment, the Company measures the amount and number of consumer loans written and renewed that are Company-owned or guaranteed by the Company, as well as the mix between transactions with new customers and existing customers with whom it has a previous relationship. The amount and number of loans written to new customers reflect the Company's ability to acquire customers through its marketing programs and by providing new products, in addition to its ability to enter new markets. The amount and number of loans written to existing customers reflect the Company's ability to retain its customer base through high levels of customer service and customer satisfaction with the products offered by the Company. Loans written to existing customers include both new loans with customers who have borrowed from the Company's e-commerce segment before, either in the current year or in prior years (including customers who may have borrowed through different consumer loan products or brands offered by the e-commerce segment), and loan renewals. The following table shows, for the e-commerce segment, the amount of consumer loans written and renewed to new customers and to existing customers for the years ended December 31, 2012 and 2011 (dollars in thousands): For the year ended December 31, 2012 2011 Guaranteed Guaranteed Company by the Company by the Owned(a) Company(a)(b) Combined(a) Owned(a) Company(a)(b) Combined(a) Amount of consumer loans written and renewed to: New customers $ 236,030 $ 64,613 $ 300,643 $ 173,564 $ 60,295 $ 233,859 % of total 9.4 % 2.6 % 12.0 % 8.3 % 2.9 % 11.2 % Existing customers 1,445,125 755,512 2,200,637 1,184,169 677,631 1,861,800 % of total 57.8 % 30.2 % 88.0 % 56.5 % 32.3 % 88.8 % Total amount of consumer loans written and renewed $ 1,681,155 $ 820,125 $ 2,501,280 $ 1,357,733 $ 737,926 $ 2,095,659 (a) The disclosure regarding the amount and number of consumer loans written and renewed is statistical data that is not included in the Company's financial statements. (b) Loans guaranteed by the Company represent loans originated by third-party lenders through the CSO programs. 68 -------------------------------------------------------------------------------- Table of Contents The following table shows, for the e-commerce segment, the number of consumer loans written and renewed to new customers and to existing customers for the years ended December 31, 2012 and 2011: For the year ended December 31, 2012 2011 Guaranteed Guaranteed Company by the Company by the Owned(a) Company(a)(b) Combined(a) Owned(a) Company(a)(b) Combined(a) Number of consumer loans written and renewed to (in ones): New customers 504,076 115,292 619,368 426,883 104,861 531,744 % of total 10.9 % 2.5 % 13.4 % 10.7 % 2.6 % 13.3 % Existing customers 2,993,142 1,001,395 3,994,537 2,523,771 938,857 3,462,628 % of total 64.9 % 21.7 % 86.6 % 63.2 % 23.5 % 86.7 % Total number of consumer loans written and renewed 3,497,218 1,116,687 4,613,905 2,950,654 1,043,718 3,994,372 (a) The disclosure regarding the amount and number of consumer loans written and renewed is statistical data that is not included in the Company's financial statements. (b) Loans guaranteed by the Company represent loans originated by third-party lenders through the CSO programs. Consumer Loan Loss Experience The Company monitors the performance of its consumer loan portfolio and maintains either an allowance or liability for estimated losses on consumer loans (including fees and interest) at a level estimated to be adequate to absorb credit losses inherent in the portfolio. The allowance for losses on the Company's owned consumer loans reduces the outstanding loan balance in the consolidated balance sheets. The liability for estimated losses related to loans guaranteed under the CSO programs, which approximates the fair value of the liability, is included in "Accounts payable and accrued expenses" in the consolidated balance sheets. The combined allowance and liability for estimated losses as a percentage of combined consumer loans and fees receivable increased to 20.3% in 2012 from 19.2% in 2011, primarily due to the change in the mix of loans in the e-commerce segment, as discussed in the "Consumer loan loss provision" section above. The consumer loan loss provision in 2012 and 2011 was $316.3 million and $225.7 million, respectively, and included $0.4 million and $0.2 million related to loans guaranteed by the Company through the CSO programs. Consolidated charge-offs, net recoveries, were $293.2 million and $201.3 million in 2012 and 2011, respectively. 69 -------------------------------------------------------------------------------- Table of Contents The following tables show consumer loan balances and fees and the relationship of the allowance for losses to the combined balances of consumer loans by quarter and for the years ended December 31, 2012 and 2011 (dollars in thousands): 2012 First Second Third Fourth Quarter Quarter Quarter Quarter Consumer loan balances and fees receivable: Gross-Company owned $ 259,078 $ 296,938 $ 336,071 $ 375,121 Gross-Guaranteed by the Company(a) 44,503 53,985 55,271 64,736 Combined consumer loans and fees receivable, gross(b) $ 303,581 $ 350,923 $ 391,342 $ 439,857 Allowance and liability for losses on consumer loans 60,706 73,366 82,683 89,201 Combined consumer loans and fees receivable, net(b) $ 242,875 $ 277,557 $ 308,659 $ 350,656 Allowance and liability for losses as a % of combined consumer loans and fees receivable, gross(b) 20.0% 20.9% 21.1% 20.3% (a) Represents loans originated by third-party lenders through the CSO programs, which are not included in the Company's financial statements. (b) Non-GAAP measure. 2011 First Second Third Fourth Quarter Quarter Quarter Quarter Consumer loan balances and fees receivable: Gross-Company owned $ 161,145 $ 197,582 $ 238,977 $ 285,850 Gross-Guaranteed by the Company(a) 38,750 47,259 51,218 59,423 Combined consumer loans and fees receivable, gross(b) $ 199,895 $ 244,841 $ 290,195 $ 345,273 Allowance and liability for losses on consumer loans 36,721 39,348 49,822 66,134 Combined consumer loans and fees receivable, net(b) $ 163,174 $ 205,493 $ 240,373 $ 279,139 Allowance and liability for losses as a % of combined consumer loans and fees receivable, gross(b) 18.4% 16.1% 17.2% 19.2% (a) Represents loans originated by third-party lenders through the CSO programs, which are not included in the Company's financial statements. (b) Non-GAAP measure. Due to the nature of the short-term loan product and the high velocity of loans written and renewed, seasonal trends are evidenced in quarter-to-quarter performance. In the typical business cycle, the combined consumer loan loss provision as a percent of combined consumer loans written and renewed is usually lowest in the first quarter and increases throughout the year, with the final two quarters generally combining for the peak levels of loss provision expense. The loss provision as a percentage of combined consumer loans written and renewed increased to 9.3% in 2012 compared to 7.4% in 2011, primarily due to growth of installment loans and line of credit accounts in the United States, both of which have a higher percentage of new customers. 70-------------------------------------------------------------------------------- Table of Contents The following tables show the Company's loss experience relative to the volume of consumer loans by quarter and for the years ended December 31, 2012 and 2011 (dollars in thousands): 2012 First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal Year Consumer loans written and renewed:(a) Company owned $ 553,713 $ 588,422 $ 627,297 $ 663,021 $ 2,432,453 Guaranteed by the Company(b) 219,306 237,962 256,438 269,542 983,248 Combined consumer loans written and renewed $ 773,019 $ 826,384 $ 883,735 $ 932,563 $ 3,415,701 Combined consumer loan loss provision as a % of combined consumer loans written and renewed(a) 8.1 % 8.8 % 9.5 % 10.4 % 9.3 % Charge-offs (net of recoveries) as a % of combined consumer loans written and renewed(a) 8.8 % 7.2 % 8.5 % 9.7 % 8.6 % Combined consumer loan loss provision as a % of consumer loan fees 36.1 % 40.1 % 41.1 % 43.6 % 40.5 % (a) The disclosure regarding the amount of consumer loans written and renewed is statistical data that is not included in the Company's financial statements. (b) Represents loans originated by third-party lenders through the CSO programs, which are not included in the Company's financial statements. 2011 First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal Year Consumer loans written and renewed:(a) Company owned $ 429,810 $ 489,332 $ 570,658 $ 613,153 $ 2,102,953 Guaranteed by the Company(b) 208,963 214,220 247,341 257,693 928,217 Combined consumer loans written and renewed $ 638,773 $ 703,552 $ 817,999 $ 870,846 $ 3,031,170 Combined consumer loan loss provision as a % of combined consumer loans written and renewed(a) 6.2 % 6.4 % 7.4 % 9.2 % 7.4 % Charge-offs (net of recoveries) as a % of combined consumer loans written and renewed(a) 7.0 % 6.0 % 6.1 % 7.4 % 6.6 % Combined consumer loan loss provision as a % of consumer loan fees 32.1 % 34.1 % 37.2 % 44.7 % 37.7 % (a) The disclosure regarding the amount of consumer loans written and renewed is statistical data that is not included in the Company's financial statements. (b) Represents loans originated by third-party lenders through the CSO programs, which are not included in the Company's financial statements. 71 -------------------------------------------------------------------------------- Table of Contents Total Expenses The table below shows total expenses by segment, for corporate operations and by significant category for the years ended December 31, 2012 and 2011 (dollars in thousands): Year Ended December 31, 2012 2011 Retail Retail Services E-Commerce Corporate Total Services E-Commerce Corporate Total Operations and administration: Personnel $ 221,841 $ 79,494 $ 42,302 $ 343,637 $ 212,098 $ 64,668 $ 45,257 $ 322,023 Occupancy 111,378 8,670 4,111 124,159 95,483 6,939 3,382 105,804 Marketing 12,884 108,810 192 121,886 13,963 73,330 129 87,422 Other 67,358 37,384 20,190 124,932 51,307 28,184 16,528 96,019 Total operations and administration 413,461 234,358 66,795 714,614 372,851 173,121 65,296 611,268 Depreciation and amortization 47,612 13,272 14,544 75,428 32,036 11,263 10,850 54,149 Total expenses $ 461,073 $ 247,630 $ 81,339 $ 790,042 $ 404,887 $ 184,384 $ 76,146 $ 665,417 Year-over-year change-$ Operations and administration $ 40,610 $ 61,237 $ 1,499 $ 103,346 $ 43,089 $ 36,951 $ 10,094 $ 90,134 Depreciation and amortization 15,576 2,009 3,694 21,279 4,740 2,704 2,782 10,226 Total $ 56,186 $ 63,246 $ 5,193 $ 124,625 $ 47,829 $ 39,655 $ 12,876 $ 100,360 Year-over-year change-% 13.9 % 34.3 % 6.8 % 18.7 % 13.4 % 27.4 % 20.4 % 17.8 % Consolidated total expenses increased $124.6 million, or 18.7%, to $790.0 million in 2012 compared to $665.4 million in 2011. Total expenses for the retail services segment increased $56.2 million, or 13.9%, to $461.1 million during 2012 compared to $404.9 million in 2011. Expenses of $21.1 million related to the Mexico Reorganization are included in the retail services segment total expenses in 2012, which is comprised of operations and administration expenses of $8.5 million and depreciation and amortization expenses of $12.6 million. See "General-Recent Developments-Reorganization of Mexico-based Pawn Operations and Purchase of Noncontrolling Interest" above for information regarding the Mexico Reorganization. Additionally, in the Retail Services segment, the Company incurred $13.4 million of charges related to the Ohio Reimbursements in 2012. See "General-Recent Developments-Voluntary Reimbursements to Ohio Customers" above for further discussion. Total expenses for the e-commerce segment increased $63.2 million, or 34.3%, to $247.6 million in 2012. Charges of $3.9 million related to activities associated with the proposed Enova IPO, which was withdrawn in July 2012, are included in the e-commerce segment in the third quarter. See "General-Recent Developments-Withdrawal of Proposed Initial Public Offering of Enova International, Inc." section above for information regarding the withdrawal of this proposed IPO. Operations and Administration Expenses Operations and administration expenses for the retail services segment increased $40.6 million, or 10.9%, to $413.5 million during 2012 compared to 2011. Personnel expense for the retail services segment increased $9.7 million, or 4.6%, during 2012, primarily due to normal personnel additions and merit increases due to additional personnel resulting from organic growth and acquisitions and $2.4 million of employee termination costs related to the Mexico Reorganization. Occupancy expense increased $15.9 million, or 16.6%, during 2012, primarily due to normal rent increases, organic growth, the locations acquired in late 2011 and 2012 and lease termination costs related to the Mexico Reorganization of approximately $1.6 million. Other expenses increased $16.1 million during 2012, primarily due to the Ohio Reimbursements of $13.4 million and $4.4 million of charges related to the Mexico Reorganization, consisting of impairment on other assets, inventory shrinkage, loss on sales of assets and other restructuring charges. 72-------------------------------------------------------------------------------- Table of Contents Operations and administration expenses for the e-commerce segment increased $61.2 million, or 35.4%, to $234.4 million during 2012. Personnel expense increased $14.8 million, or 22.9%, primarily due to the addition of new personnel to support the e-commerce segment's growth. Marketing expense increased $35.5 million, or 48.4%, mainly due to the online lending channel's efforts to expand the Company's customer base in both domestic and foreign markets. Online and other marketing costs, excluding lead purchase costs, increased $29.2 million, primarily due to higher expenses for television marketing and sponsored search expenses. In addition, lead purchase expenses increased $6.3 million. The increase in other expenses was primarily due to costs related to the proposed Enova IPO and associated activities, including $3.9 million of deferred expenses directly related to the proposed IPO, which were expensed during 2012 due to the withdrawal of the Registration Statement on July 25, 2012. Corporate administration expense increased $1.5 million, or 2.3%, to $66.8 million in 2012, primarily due to expenses for due diligence conducted on an abandoned acquisition opportunity in a foreign market, which were $2.3 million in 2012, partially offset by decreased personnel expense due to lower expenses related to incentives. Depreciation and Amortization Expenses Consolidated depreciation and amortization expenses increased $21.3 million, or 39.3%, primarily due to increased expenses in the retail services segment. Depreciation and amortization expenses at the retail services segment increased $15.6 million, or 48.6%, to $47.6 million primarily due to impairment charges and losses in the Company's Mexico operations on property and equipment, indefinite-lived assets and other intangible assets of $7.5 million (consisting of $6.0 million of impairment charges recognized in the third quarter of 2012 and $1.5 million of losses on disposition incurred in the fourth quarter of 2012), $2.5 million and $2.6 million, respectively. The remaining increase was mainly due to additional depreciation expenses associated with the Company's new proprietary domestic point-of-sale system, locations acquired in late 2011 and 2012, and normal facility upgrades and remodels. Depreciation and amortization expenses at the e-commerce segment increased $2.0 million, or 17.8%, to $13.3 million. Depreciation and amortization expenses for corporate operations increased $3.7 million, or 34.0%, to $14.5 million, primarily related to additional depreciation expenses associated with the Company's new proprietary domestic point-of-sale system. Expenses related to the Reorganization of Mexico-based Pawn Operations As discussed in "Operations and administration expenses" and "Depreciation and amortization expenses" above, in connection with the Mexico Reorganization, the Company recognized $28.9 million in reorganization charges during 2012. The following table summarizes the charges recognized for the year ended December 31, 2012 related to the Mexico Reorganization (dollars in thousands): Type of expense Description Amount Depreciation and amortization Impairment and losses on property expenses and equipment $ 7,478 Provision for income taxes Deferred tax asset valuation allowance 7,161 Depreciation and amortization expenses Impairment of intangible assets 5,086 Operations and administration expenses Employee termination costs 2,424 Operations and administration Inventory shrinkage and loss on sale expenses of assets 2,395 Operations and administration expenses Lease termination costs 1,628 Operations and administration expenses Impairment of other assets 1,211 Operations and administration expenses Other restructuring charges 798 Revenue Uncollectible receivables 692 Total charges related to the Mexico Reorganization $ 28,873 73 -------------------------------------------------------------------------------- Table of Contents Interest Expense Interest expense increased $3.6 million, or 14.1%, to $29.1 million in 2012 compared to $25.5 million in 2011. The average amount of debt outstanding increased $53.4 million to $519.8 million during 2012 from $466.4 million in 2011, primarily due to borrowings associated with two acquisitions in the second half of 2012. The Company's effective blended borrowing rate decreased to 4.8% in 2012 from 4.9% in 2011. The Company incurred non-cash interest expense of $3.8 million in 2012 compared to $3.6 million in 2011 from the 2009 Convertible Notes due 2029 (the "2009 Convertible Notes") and debt issuance costs. See "Item 8. Financial Statements and Supplementary Data-Note 13" for further discussion of the 2009 Convertible Notes. Income Taxes The Company's effective tax rate was 45.4% in 2012 compared to 37.9% in 2011. During 2012, the Company recorded a deferred tax asset of $9.3 million related to the Company's excess tax basis over its basis for financial reporting purposes in the stock of Creazione. The Company expects the basis difference will reverse in the foreseeable future as a result of the liquidation of the remaining assets of Creazione. In addition, the Company recorded a valuation allowance of $21.8 million, including $12.0 million related to the net deferred tax assets at its Mexico-based pawn operations (see "General-Recent Developments-Reorganization of Mexico-based Pawn Operations and Purchase of Noncontrolling Interest" above for further information related to the Mexico Reorganization), $0.5 million related to the net deferred tax assets in Mexico generated by the e-commerce segment, and $9.3 million related to the deferred tax asset associated with the Creazione stock basis difference. Without the effect of these items the Company's effective tax rate for 2012 would have been 38.6%. The increase of 0.7% over the 2011 rate was primarily due to increased losses from foreign operations subject to lower foreign statutory tax rates. Net Loss Attributable to the Noncontrolling Interest Net loss attributable to the noncontrolling interest increased by $5.0 million from 2011 to 2012, primarily due to increased losses in foreign retail services operations and expenses related to the Mexico Reorganization. Prior to 2012, the Company had a contractual relationship with a third-party entity, Huminal, S.A. de C.V., a Mexican sociedad anónima de capital variable ("Huminal"), to compensate and maintain the labor force of its Mexico pawn operations. On January 1, 2012, the labor force of the Mexico pawn operations was transferred from Huminal to a wholly-owned subsidiary of Creazione. However, Prenda Fácil qualifies as the primary beneficiary of Huminal in accordance with FASB ASC 810. Therefore, the results and balances of Huminal are consolidated and allocated to net income attributable to noncontrolling interests. Upon completing the purchase of the noncontrolling interest in Creazione in September 2012, Huminal became the only remaining noncontrolling interest reported by the Company. 74 -------------------------------------------------------------------------------- Table of Contents YEAR ENDED 2011 COMPARED TO YEAR ENDED 2010 Pawn Lending Activities The following table sets forth selected data related to the Company's pawn lending activities as of and for the years ended December 31, 2011 and 2010 (dollars in thousands): 2011 2010 Year Ended December 31, Domestic Foreign Total Domestic Foreign TotalPawn loan fees and service charges $ 261,829 $ 20,368 $ 282,197 $ 221,335 $ 22,378 $ 243,713 Average pawn loan balance outstanding $ 205,610 $ 20,037 $ 225,647 $ 166,163 $ 21,783 $ 187,946 Amount of pawn loans written and renewed $ 869,203 $ 118,126 $ 987,329 $ 689,476 $ 89,746 $ 779,222 Annualized yield on pawn loans 127.3 % 101.7 % 125.1 % 133.2 % 102.7 % 129.7 % Average amount per pawn loan (in ones) $ 127 $ 103 $ 124 $ 118 $ 112 $ 117 Gross profit margin on disposition of merchandise 36.4 % 18.6 % 35.0 % 36.7 % 18.0 % 35.0 % Merchandise turnover 3.0 5.0 3.1 3.0 7.7 3.2 As of December 31, Ending pawn loan balances $ 238,399 $ 15,120 $ 253,519 $ 197,301 $ 20,101 $ 217,402 Ending merchandise balance, net $ 151,274 $ 10,610 $ 161,884 $ 124,399 $ 6,557 $ 130,956 Pawn Loan Fees and Service Charges Consolidated pawn loan balances at December 31, 2011 were $253.5 million, which was $36.1 million, or 16.6%, higher than at December 31, 2010. The average consolidated balance of pawn loans outstanding increased by $37.7 million, or 20.1%, for 2011 compared to the year ended December 31, 2010 ("2010"). Domestic Pawn Loan Balances The average balance of domestic pawn loans outstanding during 2011 increased by $39.4 million, or 23.7%, compared to 2010, primarily due to pawn loan growth in existing domestic retail services locations and additional pawn loan balances resulting from the net addition of new retail services locations as a result of acquisitions in the fourth quarters of 2011 and 2010, respectively. In late 2011, the Company acquired a seven-store chain of pawn lending locations, and in the fourth quarter of 2010, the Company acquired a 39-store chain of pawn lending locations. Higher average gold prices contributed to the growth in pawn loan balances in domestic markets, as increased collateral values supported customer demand, resulting in an increase in the average amount per loan, to $127 for 2011 compared to $118 in 2010. Domestic pawn loan fees and service charges increased $40.5 million, or 18.3%, to $261.8 million in 2011 from $221.3 million in 2010. The increase was mainly due to higher average pawn loan balances during 2011, partially offset by lower annualized yield on pawn loans. The lower pawn loan yield in the domestic portfolio was mainly due to a higher concentration of pawn loans in states with lower statutory loan yields. Foreign Pawn Loan Balances The average balance of foreign pawn loans outstanding during 2011 decreased by $1.7 million, or 8.0%, compared to 2010. Foreign pawn loan fees and service charges decreased $2.0 million, or 9.0%, to $20.4 million in 2011 from $22.4 million in 2010. The decrease in the average balance of foreign pawn loan balances outstanding was mainly due to lower amounts of loans secured by jewelry and increased forfeiture rates. 75-------------------------------------------------------------------------------- Table of Contents Proceeds From Disposition of Merchandise The following table summarizes the proceeds from the disposition of merchandise and the related profit for the years ended December 31, 2011 and 2010 (dollars in thousands): Year Ended December 31, 2011 2010 Retail Commercial Total Retail Commercial Total Proceeds from disposition $ 358,695 $ 330,189 $ 688,884 $ 313,206 $ 274,984 $ 588,190 Gross profit on disposition $ 137,620 $ 103,647 $ 241,267 $ 123,701 $ 82,022 $ 205,723 Gross profit margin 38.4 % 31.4 % 35.0 % 39.5 % 29.8 % 35.0 % Percentage of total gross profit 57.0 % 43.0 % 100.0 % 60.1 % 39.9 % 100.0 % The total proceeds from disposition of merchandise increased $100.7 million, or 17.1%, during 2011 from 2010, and the total profit from the disposition of merchandise increased $35.5 million, or 17.3%, during 2011 from 2010. The increase in proceeds and profit was mainly due to an increase in merchandise available for sale generated from forfeitures from the Company's higher pawn loan balances and an increase in merchandise purchased from customers and third parties. The consolidated merchandise turnover rate decreased slightly to 3.1 times in 2011 from 3.2 times in 2010. Proceeds from retail sales, including jewelry, increased $45.5 million, or 14.5%, during 2011 compared to 2010. The increase was primarily due to organic growth in the Company's domestic retail operations and the acquisition of retail services locations in late 2010 and 2011. However, the profit margin on retail sales decreased slightly to 38.4% in 2011 from 39.5% in 2010, due primarily to discounting of merchandise prices to encourage retail sales activity. Proceeds from commercial dispositions increased $55.2 million, or 20.1%, in 2011 compared to 2010. The profit margin on commercial sales increased to 31.4% in 2011 from 29.8% in 2010. These increases were mainly due to a higher average market price of gold and diamonds sold, which more than offset a lower volume of gold sold during 2011 compared to 2010 as a result of lower forfeiture rates on the Company's pawn loan portfolio secured by jewelry. The table below summarizes the age of merchandise held for disposition related to the Company's pawn operations before valuation allowance of $0.7 million as of both December 31, 2011 and 2010 (dollars in thousands): As of December 31, 2011 2010 Amount % Amount % Jewelry - held for one year or less $ 99,683 61.3 $ 85,117 64.7 Other merchandise - held for one year or less 56,483 34.8 40,815 31.0 Total merchandise held for one year or less 156,166 96.1 125,932 95.7 Jewelry - held for more than one year 2,626 1.6 2,685 2.0 Other merchandise - held for more than one year 3,792 2.3 3,039 2.3 Total merchandise held for more than one year 6,418 3.9 5,724 4.3 Total merchandise held for disposition $ 162,584 100.0 $ 131,656 100.0 76 -------------------------------------------------------------------------------- Table of Contents Consumer Loan Activities Consumer Loan Fees Consumer loan fees increased $107.6 million, or 21.9%, to $598.6 million in 2011 compared to $491.0 million in 2010. The increase in consumer loan fees was primarily due to growth in the e-commerce segment from lending in the foreign markets in which the Company operates and, to a lesser extent, the expansion of the Company's installment loan and line of credit products in the United States, offset by a decrease in revenue from domestic markets in which consumer loans are no longer offered due to changes in laws and the absence of fees from the Company's MLOC services business. The Company stopped providing MLOC services in the United States on behalf of a third-party lender in October 2010 when the lender discontinued offering MLOC advances. Consumer Loan Loss Provision The consumer loan loss provision increased by $43.3 million to $225.7 million in 2011 from $182.4 million in 2010, primarily due to higher consumer loan balances in 2011 compared to 2010. The loss provision as a percentage of consumer loan fees increased to 37.7% in 2011 from 37.2% in 2010, primarily due to increased charge-offs in the Company's retail services segment as a result of growth in loans to new customers that have less established payments histories. The loss provision as a percentage of consumer loan fees in the e-commerce segment was slightly lower in 2011 as compared to 2010, primarily due to a slightly lower loss provision in domestic markets, which was attributed to the maturing of the short-term loan portfolio in 2011, leading to lower losses, partially offset by a higher loss provision as a percentage of consumer loan fees in foreign markets due to growth in loans written and a higher percentage of new customers. The following table sets forth consumer loan fees by segment, adjusted for the deduction of the loan loss provision for the years ended December 31, 2011 and 2010 (dollars in thousands): Year Ended December 31, 2011 2010 Retail Retail Services E-Commerce Total Services E-Commerce Total Interest and fees on short-term loans $ 110,071 $ 400,810 $ 510,881 $ 112,679 $ 332,541 $ 445,220 Interest and fees on line of credit accounts - 30,590 30,590 - 33,655 33,655 Interest and fees on installment loans 9,121 48,054 57,175 1,294 10,783 12,077 Consumer loan fees $ 119,192 $ 479,454 $ 598,646 $ 113,973 $ 376,979 $ 490,952 Consumer loan loss provision 24,001 201,687 225,688 17,437 164,957 182,394 Consumer loan fees, net of loss provision $ 95,191 $ 277,767 $ 372,958 $ 96,536 $ 212,022 $ 308,558 Year-over-year change - $ $ (1,345 ) $ 65,745 $ 64,400 $ 181 $ 67,337 $ 67,518 Year-over-year change - % (1.4 )% 31.0 % 20.9 % 0.2 % 46.5 % 28.0 % Consumer loan loss provision as a % of consumer loan fees 20.1 % 42.1 % 37.7 % 15.3 % 43.8 % 37.2 % Combined Consumer Loans Consumer Loan Balances The outstanding combined portfolio balance of consumer loans, net of allowances and liability for estimated losses, increased $90.0 million, or 47.6%, to $279.1 million at December 31, 2011 from $189.1 million at December 31, 2010, primarily due to increased demand for consumer loan products in domestic and foreign markets in both the retail services and e-commerce segments, the expansion of the Company's installment loan product in the domestic and 77-------------------------------------------------------------------------------- Table of Contents United Kingdom markets and the expansion of the Company's line of credit products in the United States. The combined loan balance includes $285.9 million and $178.3 million at December 31, 2011 and 2010, respectively, of Company-owned consumer loan balances, before the allowance for losses of $63.1 million and $38.9 million, which has been provided in the consolidated financial statements for December 31, 2011 and 2010, respectively. The combined loan balance also includes $59.4 million and $52.6 million at December 31, 2011 and 2010, respectively, of consumer loan balances that are guaranteed by the Company, which are not included in the Company's financial statements, before the liability for estimated losses of $3.1 million and $2.8 million, which has been provided in the consolidated financial statements for December 31, 2011 and 2010, respectively. The following table summarizes consumer loan balances outstanding as of December 31, 2011 and 2010 (dollars in thousands): As of December 31, 2011 2010 Guaranteed Guaranteed Company by the Company by the Owned(a) Company(a) Combined(b) Owned(a) Company(a) Combined(b) Ending consumer loan balances: Retail Services Short-term loans $ 53,601 $ 9,237 $ 62,838 $ 49,267 $ 9,819 $ 59,086 Installment loans 9,262 7,425 16,687 2,686 3,800 6,486 Total Retail Services, gross 62,863 16,662 79,525 51,953 13,619 65,572 E-Commerce Domestic Short-term loans 39,232 39,341 78,573 41,054 37,082 78,136 Line of credit accounts 21,648 - 21,648 12,475 - 12,475 Installment loans 24,582 - 24,582 11,023 - 11,023 Total Domestic, gross 85,462 39,341 124,803 64,552 37,082 101,634 Foreign Short-term loans 101,723 3,420 105,143 57,848 1,867 59,715 Installment loans 35,802 - 35,802 3,977 - 3,977 Total Foreign, gross 137,525 3,420 140,945 61,825 1,867 63,692 Total E-Commerce, gross 222,987 42,761 265,748 126,377 38,949 165,326 Total ending loan balance, gross 285,850 59,423 345,273 178,330 52,568 230,898 Less: Allowance and liabilities for losses (63,072 ) (3,062 ) (66,134 ) (38,953 ) (2,838 ) (41,791 ) Total ending loan balance, net $ 222,778 $ 56,361 $ 279,139 $ 139,377 $ 49,730 $ 189,107 Allowance and liability for losses as a % of combined consumer loan balances, gross (b) 22.1 % 5.2 % 19.2 % 21.8 % 5.4 % 18.1 % (a) GAAP measure. The consumer loan balances guaranteed by the Company represent loans originated by third-party lenders through the CSO programs, so these balances are not recorded in the Company's financial statements. However, the Company has established a liability for estimated losses in support of its guarantee of these loans, which is reflected in the table above and included in its consolidated balance sheets. (b) Except for allowance and liability for estimated losses, amounts represent non-GAAP measures. 78 -------------------------------------------------------------------------------- Table of Contents Consumer Loans Written and Renewed The amount of combined consumer loans written and renewed increased $108.9 million, or 3.7%, to $3.03 billion in 2011, from $2.92 billion in 2010, due primarily to growth in consumer loans written and renewed from the e-commerce segment in foreign markets, growth in installment loans in the domestic and United Kingdom markets, and, to a lesser extent, the expansion of the Company's line of credit product in the United States. These increases more than offset a decrease in loans written and renewed in domestic markets in which consumer loans are no longer offered due to changes in laws and the absence of consumer loans written and renewed in the MLOC services business. The average amount per consumer loan increased to $514 from $431 during 2011 over 2010, due to the absence of loans purchased through the MLOC services business, which generally have a lower average loan amount per loan, and an increase in longer-term installment loans, which typically have a higher average loan amount than short-term loans. 79-------------------------------------------------------------------------------- Table of Contents The following table summarizes the consumer loans written and renewed for the years ended December 31, 2011 and 2010: 2011 2010 Guaranteed Guaranteed Company by the Company by the Owned(a) Company(a)(b) Combined(a) Owned(a) Company(a)(b) Combined(a) Amount of consumer loans written and renewed (dollars in thousands): Retail Services Short-term loans $ 736,964 $ 174,510 $ 911,474 $ 702,422 $ 199,155 $ 901,577 Installment loans 8,256 15,781 24,037 739 6,905 7,644 Total Retail Services 745,220 190,291 935,511 703,161 206,060 909,221 E-Commerce Domestic Short-term loans 376,041 681,009 1,057,050 444,036 782,290 1,226,326 Line of credit accounts(c) 57,012 - 57,012 304,303 - 304,303 Installment loans 42,532 - 42,532 23,656 - 23,656 Total Domestic 475,585 681,009 1,156,594 771,995 782,290 1,554,285 Foreign Short-term loans 820,841 56,917 877,758 429,853 24,797 454,650 Installment loans 61,307 - 61,307 4,161 - 4,161 Total Foreign 882,148 56,917 939,065 434,014 24,797 458,811 Total E-Commerce 1,357,733 737,926 2,095,659 1,206,009 807,087 2,013,096 Total amount of consumer loans written and renewed $ 2,102,953 $ 928,217 $ 3,031,170 $ 1,909,170 $ 1,013,147 $ 2,922,317 Number of consumer loans written and renewed (in ones): Retail Services Short-term loans 1,586,551 309,003 1,895,554 1,602,914 347,008 1,949,922 Installment loans 6,858 2,863 9,721 2,034 1,187 3,221 Total Retail Services 1,593,409 311,866 1,905,275 1,604,948 348,195 1,953,143 E-Commerce Domestic Short-term loans 1,115,549 958,821 2,074,370 1,248,482 1,135,762 2,384,244 Line of credit accounts(c) 201,934 - 201,934 1,487,147 - 1,487,147 Installment loans 36,151 - 36,151 34,305 - 34,305 Total Domestic 1,353,634 958,821 2,312,455 2,769,934 1,135,762 3,905,696 Foreign Short-term loans 1,543,453 84,897 1,628,350 865,996 52,460 918,456 Installment loans 53,567 - 53,567 5,018 - 5,018 Total Foreign 1,597,020 84,897 1,681,917 871,014 52,460 923,474 Total E-Commerce 2,950,654 1,043,718 3,994,372 3,640,948 1,188,222 4,829,170 Total number of consumer loans written and renewed 4,544,063 1,355,584 5,899,647 5,245,896 1,536,417 6,782,313 (a) The disclosure regarding the amount and number of consumer loans written and renewed is statistical data that is not included in the Company's financial statements. (b) Loans guaranteed by the Company represent loans originated by third-party lenders through the CSO programs. (c) 2010 amounts include MLOC receivables, which are participation interests in receivables acquired from a third-party lender in connection with the MLOC services the Company offered. The Company stopped providing MLOC services in the United States on behalf of a third-party lender in October 2010. 80 -------------------------------------------------------------------------------- Table of Contents Consumer Loans Written to New and Existing Customers in the E-commerce Segment The following table shows, for the e-commerce segment, the amount of consumer loans written and renewed to new customers and to existing customers for the years ended December 31, 2011 and 2010 (dollars in thousands): For the year ended December 31, 2011 2010 Guaranteed Guaranteed Company by the Company by the Owned(a) Company(a)(b) Combined(a) Owned(a) Company(a)(b) Combined(a) Amount of consumer loans written and renewed to: New customers (c) $ 173,564 $ 60,295 $ 233,859 $ 97,991 $ 70,712 $ 168,703 % of total 8.3 % 2.9 % 11.2 % 4.9 % 3.5 % 8.4 % Existing customers(d) 1,184,169 677,631 1,861,800 819,295 736,375 1,555,670 % of total 56.5 % 32.3 % 88.8 % 40.7 % 36.6 % 77.3 % MLOC customers(e) - - - 288,723 - 288,723 % of total - - - 14.3 % - 14.3 % Total amount of consumer loans written and renewed $ 1,357,733 $ 737,926 $ 2,095,659 $ 1,206,009 $ 807,087 $ 2,013,096 (a) The disclosure regarding the amount and number of consumer loans written and renewed is statistical data that is not included in the Company's financial statements. (b) Loans guaranteed by the Company represent loans originated by third-party lenders through the CSO programs. (c) Reflects consumer loans written to first-time customers excluding customers described in footnote (e). (d) Reflects both loan renewals and new loans with customers who have borrowed from the Company's e-commerce segment before through different consumer loan products or brands offered by the e-commerce segment other than the customers described in footnote (e). (e) Reflects customers who took out MLOC advances in which the Company acquired participation interest through its MLOC services. 81 -------------------------------------------------------------------------------- Table of Contents The following table shows, for the e-commerce segment, the number of consumer loans written and renewed to new customers and to existing customers for the years ended December 31, 2011 and 2010: For the year ended December 31, 2011 2010 Guaranteed Guaranteed Company by the Company by the Owned(a) Company(a)(b) Combined(a) Owned(a) Company(a)(b) Combined(a) Number of consumer loans written and renewed to (in ones): New customers (c) 426,883 104,861 531,744 313,945 146,696 460,641 % of total 10.7 % 2.6 % 13.3 % 6.5 % 3.0 % 9.5 % Existing customers(d) 2,523,771 938,857 3,462,628 1,875,673 1,041,526 2,917,199 % of total 63.2 % 23.5 % 86.7 % 38.8 % 21.6 % 60.4 % MLOC customers(e) - - - 1,451,330 - 1,451,330 % of total - - - 30.1 % - 30.1 % Total number of consumer loans written and renewed 2,950,654 1,043,718 3,994,372 3,640,948 1,188,222 4,829,170 (a) The disclosure regarding the amount and number of consumer loans written and renewed is statistical data that is not included in the Company's financial statements. (b) Loans guaranteed by the Company represent loans originated by third-party lenders through the CSO programs. (c) Reflects consumer loans written to first time customers excluding customers described in footnote (e). (d) Reflects both loan renewals and new loans with customers who have borrowed from the Company's e-commerce segment before through different consumer loan products or brands offered by the e-commerce segment other than the customers described in footnote (e). (e) Reflects customers who took out MLOC advances in which the Company acquired participation interests through its MLOC services. Consumer Loan Loss Experience The combined allowance and liability for estimated losses as a percentage of combined consumer loans and fees receivable increased in 2011 to 19.2% from 18.1% in 2010, predominately due to the change in the mix of loans in the e-commerce segment, as discussed in the "Consumer loan loss provision" section above. The consumer loan loss provision in 2011 was $225.7 million, which was composed of $225.5 million related to Company-owned consumer loans and $0.2 million related to loans guaranteed by the Company through CSO programs. The consumer loan loss provision in 2010 was $182.4 million, which was composed of $182.5 million related to Company-owned consumer loans, offset by $0.1 million related to loans guaranteed by the Company through CSO programs. Charge-offs, net of recoveries, were $201.3 million and $170.9 million in 2011 and 2010, respectively. Due to the nature of the short-term loan product and the high velocity of loans written and renewed, seasonal trends are evidenced in quarter-to-quarter performance. In the typical business cycle, the combined consumer loan loss provision as a percent of combined consumer loans written and renewed is usually lowest in the first quarter and increases throughout the year, with the final two quarters generally combining for the peak levels of loss provision expense. The loss provision as a percentage of combined loans written and renewed increased to 7.4% in 2011, compared to 6.2% in 2010, due to growth in loans written and renewed in foreign e-commerce markets and the growth of the installment loan and line of credit products, which have a higher percentage of new customers, as discussed in the "Consumer loan loss provision" section above. 82 -------------------------------------------------------------------------------- Table of Contents The following tables show consumer loan balances and fees and the relationship of the allowance for losses to the combined balances of consumer loans by quarter and for the years ended December 31, 2011 and 2010 (dollars in thousands): 2011 First Second Third Fourth Quarter Quarter Quarter Quarter Consumer loan balances and fees receivable: Gross - Company owned $ 161,145 $ 197,582 $ 238,977 $ 285,850 Gross - Guaranteed by the Company(a) 38,750 47,259 51,218 59,423 Combined consumer loans and fees receivable, gross(b) $ 199,895 $ 244,841 $ 290,195 $ 345,273 Allowance and liability for losses on consumer loans 36,721 39,348 49,822 66,134 Combined consumer loans and fees receivable, net(b) $ 163,174 $ 205,493 $ 240,373 $ 279,139 Allowance and liability for losses as a % of combined consumer loans and fees receivable, gross(b) 18.4 % 16.1 % 17.2 % 19.2 % (a) Represents loans originated by third-party lenders through the CSO programs, which are not included in the Company's financial statements. (b) Non-GAAP measure. 2010 First Second Third Fourth Quarter Quarter Quarter Quarter Consumer loan balances and fees receivable: Gross - Company owned $ 124,844 $ 152,018 $ 175,066 $ 178,330 Gross - Guaranteed by the Company(a) 40,999 51,141 48,416 52,568 Combined consumer loans and fees receivable, gross(b) $ 165,843 $ 203,159 $ 223,482 $ 230,898 Allowance and liability for losses on consumer loans 28,116 40,048 48,376 41,791 Combined consumer loans and fees receivable, net(b) $ 137,727 $ 163,111 $ 175,106 $ 189,107 Allowance and liability for losses as a % of combined consumer loans and fees receivable, gross(b) 17.0 % 19.7 % 21.6 % 18.1 % (a) Represents loans originated by third-party lenders through the CSO programs, which are not included in the Company's financial statements. (b) Non-GAAP measure. 83 -------------------------------------------------------------------------------- Table of Contents The following tables show the Company's loss experience relative to the volume of consumer loans by quarter and for the years ended December 31, 2011 and 2010 (dollars in thousands): 2011 First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal Year Consumer loans written and renewed:(a) Company owned $ 429,810 $ 489,332 $ 570,658 $ 613,153 $ 2,102,953 Guaranteed by the Company(b) 208,963 214,220 247,341 257,693 928,217 Combined consumer loans written and renewed $ 638,773 $ 703,552 $ 817,999 $ 870,846 $ 3,031,170 Combined consumer loan loss provision as a % of combined consumer loans written and renewed(a) 6.2 % 6.4 % 7.4 % 9.2 % 7.4 % Charge-offs (net of recoveries) as a % of combined consumer loans written and renewed(a) 7.0 % 6.0 % 6.1 % 7.4 % 6.6 % Combined consumer loan loss provision as a % of consumer loan fees 32.1 % 34.1 % 37.2 % 44.7 % 37.7 % (a) The disclosure regarding the amount of consumer loans written and renewed is statistical data that is not included in the Company's financial statements. (b) Represents loans originated by third-party lenders through the CSO programs, which are not included in the Company's financial statements. 2010 First Second Third Fourth Quarter Quarter Quarter Quarter Fiscal Year Consumer loans written and renewed:(a) Company owned $ 419,694 $ 470,072 $ 533,298 $ 486,106 $ 1,909,170 Guaranteed by the Company(b) 225,568 248,603 289,267 249,709 1,013,147 Combined consumer loans written and renewed $ 645,262 $ 718,675 $ 822,565 $ 735,815 $ 2,922,317 Combined consumer loan loss provision as a % of combined consumer loans written and renewed(a) 5.3 % 6.3 % 6.2 % 7.1 % 6.2 % Charge-offs (net of recoveries) as a % of combined consumer loans written and renewed(a) 5.6 % 4.6 % 5.2 % 8.0 % 5.8 % Combined consumer loan loss provision as a % of consumer loan fees 31.3 % 38.8 % 37.9 % 39.8 % 37.2 % (a) The disclosure regarding the amount of consumer loans written and renewed is statistical data that is not included in the Company's financial statements. (b) Represents loans originated by third-party lenders through the CSO programs, which are not included in the Company's financial statements. 84 -------------------------------------------------------------------------------- Table of Contents Total Expenses The table below shows total expense by segment, for corporate operations and by significant category for the years ended December 31, 2011 and 2010 (dollars in thousands): Year Ended December 31, 2011 2010 Retail Retail Services E-Commerce Corporate Total Services E-Commerce Corporate Total Operations and administration: Personnel $ 212,098 $ 64,668 $ 45,257 $ 322,023 $ 189,785 $ 55,412 $ 39,067 $ 284,264 Occupancy 95,483 6,939 3,382 105,804 87,008 6,025 2,523 95,556 Marketing 13,963 73,330 129 87,422 13,639 59,197 51 72,887 Other 51,307 28,184 16,528 96,019 39,330 15,536 13,561 68,427 Total operations and administration 372,851 173,121 65,296 611,268 329,762 136,170 55,202 521,134 Depreciation and amortization 32,036 11,263 10,850 54,149 27,296 8,559 8,068 43,923 Total expenses $ 404,887 $ 184,384 $ 76,146 $ 665,417 $ 357,058 $ 144,729 $ 63,270 $ 565,057 Year-over-year change-$ Operations and administration $ 43,089 $ 36,951 $ 10,094 $ 90,134 $ 23,870 $ 47,889 $ 1,319 $ 73,078 Depreciation and amortization 4,740 2,704 2,782 10,226 300 1,262 772 2,334 Total $ 47,829 $ 39,655 $ 12,876 $ 100,360 $ 24,170 $ 49,151 $ 2,091 $ 75,412 Year-over-year change-% 13.4 % 27.4 % 20.4 % 17.8 % 7.3 % 51.4 % 3.4 % 15.4 % Total expenses increased $100.4 million, or 17.8%, to $665.4 million in 2011 compared to 2010. Total expenses at the retail services segment increased $47.8 million, or 13.4%, to $404.9 million during 2011 compared to $357.1 million in 2010. Total expenses for the e-commerce segment increased $39.7 million, or 27.4%, to $184.4 million in 2011 compared to $144.7 million in 2010. Operations and Administration Expenses Operations and administration expenses for the retail services segment increased $43.1 million, or 13.1%, to $372.9 million during 2011 compared to 2010. Personnel expense for the retail services segment increased $22.3 million, or 11.8%, during 2011, which was primarily related to increased personnel expense as a result of the addition of 45 retail services locations, net of closures, from October 1, 2010 to December 31, 2011, and to normal personnel additions and merit increases. Occupancy expense increased $8.5 million, or 9.7%, during 2011, which mainly related to additional locations and to normal rent increases. The increase in other operating expenses was due in part to adjustments made by the Company during 2011 totaling $2.5 million in the foreign operations that are included in the retail services segment, predominately related to the impairment of the existing point-of-sale system, which the Company replaced in 2011, as well as adjustments for other impaired assets, severance and miscellaneous operating expenses. In addition, other operating expenses increased due to increased maintenance, travel and office expenses and general expense increases. Operations and administration expenses for the e-commerce segment increased $37.0 million, or 27.1%, to $173.1 million during 2011 compared to $136.2 million in 2010. Personnel expense increased $9.3 million, or 16.7%, primarily due to the addition of new personnel to support the e-commerce segment's growth in foreign markets. Marketing expense increased $14.1 million, or 23.9%, mainly due to the online lending channel's efforts to expand the Company's customer base in both domestic and foreign markets. The increase in other expenses was primarily due to increased legal expenses and costs related to the proposed Enova IPO and associated activities. See "General - Recent Developments-Withdrawal of Proposed Initial Public Offering of Enova International, Inc." section above for information regarding the withdrawal of this proposed IPO. 85 -------------------------------------------------------------------------------- Table of Contents Corporate administration expenses increased $10.1 million, or 18.3%, to $65.3 million 2011 compared to $55.2 million in 2010, primarily due to increased personnel expense. Depreciation and Amortization Expenses Consolidated depreciation and amortization expenses increased $10.2 million, or 23.3%, primarily due to increased expenses in the retail services segment and in corporate operations. Depreciation and amortization expense at the retail services segment increased $4.7 million, or 17.4%, to $32.0 million mainly due to additional depreciation expenses associated with new and acquired locations and investments in facility upgrades, relocations and remodels. Depreciation and amortization expenses at the e-commerce segment increased $2.7 million, or 31.6%, to $11.3 million primarily related to systems development in support of new products, as well as normal system upgrades. Depreciation and amortization expenses for corporate operations increased $2.8 million or 34.5%, to $10.9 million, primarily related to additional depreciation expenses associated with the Company's new proprietary domestic point-of-sale system, which was placed in service in July 2011. Interest Expense Interest expense increased $3.2 million, or 14.2%, to $25.5 million in 2011, compared to $22.3 million in 2010, primarily due to an increase of $47.0 million in the average amount of debt outstanding, to $466.4 million in 2011 from $419.4 million during 2010. The increase in the average amount of debt outstanding was primarily due to additional funding under the Company's line of credit to support growth in the Company's pawn loan and consumer loan balances. In addition, an acquisition in the fourth quarter of 2010 was funded by borrowings under the Company's line of credit of approximately $59.6 million. The Company's effective blended borrowing cost was 4.9% for both the years ended December 31, 2011 and 2010. The Company incurred non-cash interest expense of $3.6 million in 2011 compared to $3.3 million in 2010, from the 2009 Convertible Notes due 2029 (the "2009 Convertible Notes") and debt issuance costs. See "Item 8. Financial Statements and Supplementary Data-Note 13" for further discussion of the 2009 Convertible Notes. Foreign Currency Transaction Gain/Loss The Company is impacted by foreign currency transactions due to certain of its subsidiaries conducting business in currencies other than the U.S. dollar. In 2011, the Company recorded a foreign currency transaction loss of approximately $1.3 million related to its operations in foreign countries compared to a $0.5 million loss in 2010. Income Taxes The Company's effective tax rate was 37.9% for 2011 compared to 37.5% for 2010. The increase in the Company's effective tax rate for 2011 was mainly attributable to an increase in state taxes. 86-------------------------------------------------------------------------------- Table of Contents LIQUIDITY AND CAPITAL RESOURCES The Company manages its liquidity and capital positions to satisfy three primary objectives. First, near-term liquidity is managed to ensure that adequate resources are available to fund the Company's seasonal working capital growth, which is driven by demand for the Company's loan products. Second, longer-term refinancing strategies are used to manage the Company's debt refinancing risk, and third, long-term capital strategies are used to provide the capital necessary to fund the Company's long-term strategic growth objectives. Near-term liquidity is provided through operating cash flows and the utilization of borrowings under the Company's unsecured bank line of credit. Long-term liquidity is provided through long-term debt financing and the issuance of debt securities. Long-term capital needs are managed by assessing the growth capital needs of the Company over time and balancing those needs against the internal and external capital resources available. Longer-term refinancing risk is managed by staggering the Company's debt maturities and issuing new long-term debt securities from time to time as market conditions permit. During 2013, the Company's Domestic and Multi-currency Line amount will decrease by $100.0 million, from $380.0 million to $280.0 million. The decrease is scheduled to occur on May 29, 2013. However, the Company is assessing its long-term debt needs with respect to its line of credit and may obtain additional financing, by entering into a new domestic line of credit or otherwise, to preserve this additional debt capacity and accommodate new growth. The Company historically has generated significant cash flow through normal operating activities for funding both long-term and short-term needs. As a result, operating cash flow is expected to meet the needs of near-term operating objectives without reliance on short-term credit instruments such as warehouse lines of credit, asset-backed securities or commercial paper. Management considers additional sources of long-term funding when strategic transactions, such as large scale acquisitions, are necessary or desirable. Historically, funding for long-term strategic transactions has been supplemented by the Company's long-term unsecured bank line of credit or other long-term security issuances. As of December 31, 2012, 2011 and 2010, the Company was in compliance with all financial ratios, covenants and other requirements set forth in its debt agreements. A significant decline in demand for the Company's products and services or other unexpected changes in financial condition may result in a violation of the Company's debt agreements that could result in an acceleration of the Company's debt, increase the Company's borrowing costs, and possibly adversely affect the Company's ability to renew its existing bank line of credit or obtain new credit on favorable terms in the future. The Company does not anticipate a significant decline in demand for its services and has historically been successful in maintaining compliance with, and renewing, its debt agreements. To the extent the Company experiences short-term or long-term funding disruptions; the Company has the ability to address these risks through a variety of adjustments related to the current assets of the business, which predominately have short durations. Such actions could include the immediate liquidation of jewelry inventory, which is comprised primarily of gold items that would be refined into pure gold and sold on the open market and adjustments to short-term lending to consumers that would reduce cash outflow requirements while increasing cash inflows through repayments of consumer loans. Additional alternatives may include the sale of assets, reductions in capital spending and/or the issuance of debt or equity securities, all of which could be expected to generate additional liquidity. 87-------------------------------------------------------------------------------- Table of Contents Cash Flows The Company's cash flows and other key indicators of liquidity are summarized as follows (dollars in thousands): Year Ended December 31, 2012 2011 2010Cash flows provided by operating activities $ 518,281 $ 454,004 $ 359,160 Cash flows used in investing activities Pawn loans $ 2,449 $ (54,912 ) $ (13,253 ) Consumer loans (375,032 ) (297,029 ) (217,022 ) Acquisitions (78,217 ) (49,539 ) (82,263 ) Property and equipment additions (79,399 ) (75,049 ) (59,697 ) Proceeds from sale of assets 5,471 - - Investment in equity securities (1,000 ) (5,000 ) (5,652 ) Other investing (926 ) (515 ) 822 Total cash flows used in investing activities $ (526,654 ) $ (482,044 ) $ (377,065 ) Cash flows provided by financing activities $ 7,028 $ 51,643 $ 10,222 Working capital $ 710,566 $ 644,891 $ 491,298 Current ratio 4.8 x 4.8 x 4.8 x Merchandise turnover 3.0 x 3.1 x 3.2 x Total debt to adjusted EBITDA ratio(a) 1.8 x 1.8 x 1.8 x (a) Non-GAAP measure. See "Overview-Adjusted EBITDA" section for a reconciliation of adjusted EBITDA to net income attributable to the Company. Cash Flows from Operating Activities Net cash provided by operating activities increased $64.3 million, or 14.2%, from $454.0 million in 2011 to $518.3 million in 2012. A significant component of the increase in net cash provided by operating activities during 2012 compared to 2011 was a $90.6 million increase in the consumer loan loss provision, a non-cash expense, primarily as a result of loan growth in the e-commerce segment which is reflected in investing activities. In addition, depreciation and amortization expenses, which are also non-cash expenses, increased $21.3 million, primarily due to the disposition activities related to the Mexico Reorganization, the implementation of the Company's domestic point-of-sale system, which was placed in service in July 2011, and the investments in retail services locations in 2012 and 2011. Also, a decrease in merchandise purchased from customers and other third parties increased cash provided by operating activities by $17.4 million compared to 2011. The increase in cash provided by operating activities was partially offset by decreases in cash provided by current and deferred income taxes. Prior year results were positively impacted by a $12.3 million and $25.6 million current and deferred tax benefit, respectively, which related to lower income tax payments in 2011, resulting from a change in the timing of tax deductions for internally-developed software costs as well as the impact of increased bonus depreciation rules in effect for all of 2011. The increase in cash flows from operating activities was also offset by a decrease of $33.5 million in net income. The Company recognized $28.9 million of charges in 2012 related to the Mexico Reorganization, which did not have a material impact on the Company's cash flows from operations. The primary components of these charges are reflected as a $12.6 million increase in depreciation and amortization and a $7.2 million decrease to deferred income taxes, both of which are non-cash items. The remaining charges are reflected in changes to other operating assets and liabilities in the consolidated statement of cash flows. The Company does not expect to incur material charges or changes in cash flows related to the Mexico Reorganization in 2013. 88 -------------------------------------------------------------------------------- Table of Contents Net cash provided by operating activities increased $94.8 million, or 26.4%, from $359.2 million in 2010 to $454.0 million in 2011. A significant component of the increase in net cash provided by operating activities was a $19.9 million increase in net income during 2011. An additional $43.3 million of net cash provided by operating activities during 2011 was generated by an increase in the consumer loan loss provision, a non-cash expense, primarily as a result of increased loan volume in the e-commerce segment. Increases in current income taxes payable and deferred income taxes provided cash of $34.4 million in 2011 compared to 2010. The increase was primarily due to the implementation in 2011 of a change in the timing of tax deductions related to internally developed software costs as well as the impact of increased bonus depreciation rules in effect for all of 2011. Management believes that its expected cash flows from operations and available cash balances and borrowings will be sufficient to fund the Company's operating liquidity needs. In connection with the final liquidation of Creazione, the Company may take a worthless stock deduction for tax purposes on its 2013 federal income tax return for its tax basis in the stock of Creazione by approximately $30.0 million. Management believes that the deduction may be treated as an ordinary loss, which would reduce its cash taxes paid in 2013. However, if the deduction is determined to be a capital loss, and the Company does not have capital gains to offset the loss, the Company's cash taxes paid will not be reduced. The Company is pursuing a Private Letter Ruling with the Internal Revenue Service to confirm that the deduction should be treated as an ordinary loss. Cash Flows from Investing Activities Net cash used in investing activities increased $44.7 million, or 9.3%, from $482.0 million in 2011 to $526.7 million in 2012. The primary components of this increase were $78.2 million of cash used for acquisition activity as described below, an increase of $28.7 million over 2011, and $78.0 million of additional cash used in consumer loan lending activities, primarily as a result of growth in loans written from the Company's e-commerce business. These uses were offset by a $57.4 million increase in cash provided by pawn lending activities, primarily due to a lower rate of growth in the Company's domestic pawn loan portfolio, an increase in pawn loans repaid and lower balances in the Mexico pawn loan portfolio as a result of the Mexico Reorganization. On September 27, 2012, the Company entered into an agreement to acquire substantially all of the assets of a 25-store chain of pawn lending locations located in Kentucky, North Carolina, and Tennessee. The Company assumed the economic benefits of all of these pawnshops by operating them under management agreements that commenced on September 27, 2012, and the final agreement terminated on December 16, 2012. The aggregate cash consideration for the transaction, which was funded with borrowings under the Company's line of credit, was approximately $55.1 million, of which $52.0 million was paid in September 2012. The remaining $3.1 million of consideration was paid during the fourth quarter of 2012. The goodwill of $31.5 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and these pawn lending locations. On October 25, 2012, the Company completed the acquisition of substantially all of the assets of a nine-store chain of pawn lending locations located in Arizona. The aggregate cash consideration paid in 2012 for this transaction, which was funded with borrowings under the Company's line of credit, was approximately $15.4 million. The goodwill of $7.7 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and these pawn lending locations. Also, during 2012, in addition to the two acquisitions described above, the Company acquired three domestic retail services locations, which primarily operate as pawn lending businesses, for approximately $3.3 million, and the e-commerce segment acquired approximately $0.2 million of intangible assets. Similar acquisition activity in the retail services segment totaled approximately $0.3 million in 2011 for the purchase of one retail services location. 89 -------------------------------------------------------------------------------- Table of Contents Net cash used in investing activities increased $104.9 million, or 27.8%, from $377.1 million for 2010 to $482.0 million for 2011. The combination of consumer loans made or purchased net of consumer loans repaid increased the Company's use of cash by $80.0 million when compared to 2010, primarily due to increases in consumer loans made or purchased in the foreign markets of the Company's e-commerce segment. Cash used in pawn lending activities increased $41.7 million due to growth in the Company's domestic pawn portfolio. During 2011, cash used for acquisition activities decreased by $32.7 million, or 39.8%, to $49.5 million in 2011 due to a lower aggregate amount paid for acquisitions in 2011 compared to $82.3 million in 2010. Details of the acquisitions that occurred in 2011 and 2010 are explained below. During 2011, the Company acquired a seven-store chain of pawn lending locations located in Tucson, Flagstaff and Yuma, Arizona. The Company paid aggregate consideration of $53.6 million, which was funded with borrowings under the Company's line of credit, including $49.3 million that was paid during 2011 and $4.3 million that was paid in 2012 following the receipt of applicable licensing and regulatory approvals. The goodwill related to this acquisition was $26.7 million. During 2010, the Company acquired a 39-store chain of pawn lending locations in Washington and Arizona under the names "Maxit" and "Pawn X-Change." The consideration for the acquisition included cash consideration of approximately $58.2 million, which was funded with borrowings under the Company's line of credit, and 366,097 shares of the Company's common stock, with a fair value of $10.9 million as of the closing date. The goodwill related to this acquisition was $26.2 million. Additionally, in 2010, the Company made supplemental payments of approximately $21.2 million related to the Debit Plus, LLC (formerly known as Primary Innovations) acquisition that occurred in 2008. See "Item 8. Financial Statements and Supplementary Data-Note 3" for further discussion of these acquisitions. During 2011, expenditures for property and equipment used $75.0 million of cash, compared to $59.7 million in 2010. The $15.3 million additional use of cash primarily related to increased expenditures at the Company's retail services locations, including the remodeling of existing locations, the relocation of other retail services locations and point-of-sale system enhancements in the Company's domestic and foreign retail services locations. Management anticipates that expenditures for property and equipment related to its domestic and foreign operations for 2013 will be between $60 million and $70 million, excluding acquisitions or retail services locations, primarily for the remodeling of stores, facility upgrades, technology infrastructure and the establishment of approximately 20 to 25 new retail services locations. Cash Flows from Financing Activities Net cash provided by financing activities decreased $44.6 million, or 86.4%, from $51.6 million of cash provided in 2011 to $7.0 million provided in 2012. This was primarily due to a $41.8 million decrease in the amount of borrowings, net of repayments and debt issuance costs, in 2012 compared to 2011. During 2012, the Company used $4.6 million more in 2012 than 2011 for the repurchase of shares of Company common stock through open market transactions, pursuant to a 2011 authorization by the Board of Directors of the Company. Additionally, the Company used $5.6 million of cash for the purchase of the outstanding shares of minority interest shareholders associated with the Company's Mexico-based pawn operations. See "General-Recent Developments-Reorganization of Mexico-based Pawn Operations and Purchase of Noncontrolling Interest" for additional information. On August 28, 2012, the Company issued and sold a total of $52.0 million in long-term notes in two series, including $47.0 million aggregate principal amount of its 6.00% Series A Senior Notes due August 28, 2019 (the "Series A Notes") and $5.0 million aggregate principal amount of its 6.58% Series B Senior Notes due August 28, 2022 (the "Series B Notes," and together with the Series A Notes, the "Notes"). The Notes were sold in a private placement 90-------------------------------------------------------------------------------- Table of Contents pursuant to a Note Purchase Agreement dated August 28, 2012 by and among the Company and certain purchasers listed therein. The Notes are senior unsecured obligations of the Company. The Series A Notes are payable in five annual installments of $9.4 million beginning August 28, 2015, and the Series B Notes are payable in seven annual installments of approximately $0.7 million beginning August 28, 2016. In addition, the Company may, at its option, prepay all or a minimum portion of $1.0 million of the Notes at a price equal to the principal amount thereof plus a make-whole premium and accrued interest. The Notes are guaranteed by all of the Company's U.S. subsidiaries. The Company used a portion of the net proceeds of the offering to repay existing indebtedness, including outstanding balances under the Domestic and Multi-Currency Line, and used the remaining portion for general corporate purposes. Net cash provided by financing activities increased $41.4 million, or 405.2%, from $10.2 million for 2010 to $51.6 million for 2011. During 2011, the Company's borrowings, net of repayments and debt issuance costs, were $50.2 million greater than in 2010. Net cash provided by financing activities in 2011 included proceeds of $50.0 million for long-term debt issued by the Company in March 2011 (as more fully described below) and $65.8 million of net proceeds drawn under its line of credit. The Company made debt payments of $38.1 million during 2011 based on the terms of certain note obligations. In addition, the Company used $6.0 million more in 2011 than 2010 for the repurchase of shares of Company common stock through open market transactions, pursuant to a 2011 authorization by the Board of Directors of the Company, and through the repurchase of shares of common stock for tax payments related to stock based compensation. On March 30, 2011, the Company entered into a new credit agreement for up to $330.0 million of credit with a group of commercial banks (the "Original Credit Agreement"). On November 29, 2011, the Company amended the Original Credit Agreement to increase the amount available by $100.0 million to $430.0 million (the "Credit Agreement"). The Credit Agreement consists of a $380.0 million line of credit, which includes the ability to borrow up to $50.0 million in specified foreign currencies or U.S. dollars (the "Domestic and Multi-currency Line") and a $50.0 million term loan facility (the "2015 Variable Rate Notes"). The Domestic and Multi-currency Line amount will decrease by $100.0 million to $280.0 million on the earlier of May 29, 2013 or the second business day following the closing of an initial public offering of common stock of Enova that results in Enova no longer being considered a majority-owned subsidiary of the Company. The Domestic and Multi-currency Line matures on March 31, 2015. Beginning March 31, 2012, the 2015 Variable Rate Notes became payable in equal quarterly principal installments of $2.1 million with any outstanding principal remaining due at maturity on March 31, 2015. In conjunction with the entry into the Original Credit Agreement, the Company repaid all outstanding revolving credit loans under its $300.0 million domestic line of credit due 2012 (the "USD Line of Credit") and its variable rate senior unsecured note due 2012 with proceeds of the Original Credit Agreement. On March 30, 2011, in conjunction with the establishment of the Original Credit Agreement, the Company entered into a separate credit agreement for the issuance of up to $20.0 million in letters of credit (the "Letter of Credit Facility"). The Company had outstanding letters of credit of $17.7 million at December 31, 2012. Previously, these letters of credit were provided under the USD Line of Credit by reducing the amount available to the Company. On January 28, 2010, the Company issued and sold $25.0 million aggregate principal amount of its 2017 Notes in a private placement pursuant to a note purchase agreement dated January 28, 2010 by and among the Company and certain purchasers listed therein. The 2017 Notes are senior unsecured obligations of the Company. The 2017 Notes are payable in five annual installments of $5.0 million beginning January 28, 2013. In addition, the Company may, at its option, prepay all or a minimum portion of no less than $1.0 million of the 2017 Notes at a price equal to the principal amount thereof plus a make-whole premium and accrued interest. The 2017 Notes are guaranteed by all of the Company's U.S. subsidiaries. The Company used a portion of the net proceeds of the 2017 Notes to repay existing indebtedness, including outstanding balances under its bank line of credit. The remaining portion was used for general corporate purposes. 91 -------------------------------------------------------------------------------- Table of Contents Each of the Company's credit agreements and senior unsecured notes require the Company to maintain certain financial ratios. As of December 31, 2012, the Company was in compliance with all covenants and other requirements set forth in its debt agreements. Management believes that the $79.0 million of borrowings available under its Domestic and Multi-currency Line at December 31, 2012, cash generated from operations and current working capital of $710.6 million are sufficient to meet the Company's anticipated capital requirements for its businesses. Contractual Obligations and Commitments The following table summarizes the Company's contractual obligations at December 31, 2012, and the effect such obligations are expected to have on its liquidity and cash flow in future periods (dollars in thousands): 2013 2014 2015 2016 2017 Thereafter Total Bank line of credit(a) $ 21,011 $ - $ 280,000 $ - $ - $ - $ 301,011 Other long-term debt (b) 22,606 22,606 48,674 24,387 17,387 141,659 277,319 Interest on other long-term debt (c) 13,795 9,913 5,897 4,403 2,861 8,611 45,480 Non-cancelable leases(d) 52,531 43,774 33,584 26,332 16,913 34,288 207,422 Total $ 109,943 $ 76,293 $ 368,155 $ 55,122 $ 37,161 $ 184,558 $ 831,232 (a) The amount shown in 2013 matures on the earlier of May 29, 2013 or the second business day following the closing of an initial public offering of common stock of Enova. (b) The 2009 Convertible Notes are net of a discount of $4.8 million. The 2009 Convertible Notes have a stated maturity date of May 15, 2029; however, the Company expects to repay the $115.0 million balance owed in cash during 2014. If the balance is paid in 2014 as expected, the 2014 total contractual obligations of the Company would be $191,293, and the total contractual obligations for "Thereafter" would be $69,558. See "Item 8. Financial Statements and Supplementary Data-Note 13." (c) Represents cash payments for interest and excludes interest obligations on all of the Company's variable-rate debt. See "Item 8. Financial Statements and Supplementary Data-Note 13" for further discussion of the Company's long-term debt. (d) Represents obligations due under long-term operating leases. See "Item 8. Financial Statements and Supplementary Data-Note 15" for further discussion of the Company's operating lease obligations. Share Repurchases During 2012, the Company repurchased shares of its common stock pursuant to a share repurchase authorization that was approved by the Board of Directors of the Company on January 26, 2011 for the repurchase of up to 2.5 million shares of common stock of the Company to return equity capital in excess of its business needs to shareholders. These share repurchases both offset the issuance of new shares as part of employee compensation plans and reduce shares outstanding. During the year ended December 31, 2012, the Company purchased 576,064 shares of its common stock on the open market at an average price of $39.07. At December 31, 2012, there were 1,488,936 shares remaining under the 2011 authorization to repurchase shares. Generally, the Company retains the shares upon repurchase in treasury, which are not considered outstanding for earnings per common share computation purposes. For additional information regarding the Company's share repurchases during the year ended December 31, 2012, see "Item 5(c) - Issuer Purchases of Equity Securities" in Part II. On January 24, 2013, the Board of Directors of the Company authorized a new share repurchase program for the repurchase of up to 2.5 million shares of the Company's common stock and cancelled the previous share repurchase authorization from January 2011. Management anticipates that it will continue to periodically purchase shares under this authorization based on its assessment of market characteristics, the liquidity position of the Company and alternative prospects for the investment of capital to expand the business and pursue strategic objectives. 92 -------------------------------------------------------------------------------- Table of Contents Off-Balance Sheet Arrangements In certain markets, the Company arranges for consumers to obtain consumer loan products from one of several independent third-party lenders through its CSO programs. For consumer loan products originated by third-party lenders under the CSO programs, each lender is responsible for providing the criteria by which the consumer's application is underwritten and, if approved, determining the amount of the consumer loan. The Company in turn is responsible for assessing whether or not the Company will guarantee such loans. When a consumer executes an agreement with the Company under the CSO programs, the Company agrees, for a fee payable to the Company by the consumer, to provide certain services to the consumer, one of which is to guarantee the consumer's obligation to repay the loan received by the consumer from the third-party lender if the consumer fails to do so. The guarantee represents an obligation to purchase specific loans that go into default. Short-term loans that are guaranteed generally have terms of less than 90 days. Secured auto equity loans that are guaranteed generally have terms up to 42 months. As of December 31, 2012 and 2011, the outstanding amount of active consumer loans originated by third-party lenders under the CSO programs was $64.7 million and $59.4 million, respectively, which were guaranteed by the Company. The estimated fair value of the liability for estimated losses on consumer loans guaranteed by the Company of $3.5 million and $3.1 million as of December 31, 2012 and 2011, respectively. [ Back To TMCnet.com's Homepage ]