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Cash America International 10-Q 2011
Form 10-Q
Table of Contents

 

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

FORM 10-Q

  (Mark One)

 

þ  

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

  
  For the quarterly period ended June 30, 2011   
  OR   
¨  

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE

SECURITIES EXCHANGE ACT OF 1934

  
  For the transition period from                                  to                                    
  Commission File Number 1-9733   
  LOGO   
  (Exact name of registrant as specified in its charter)   

 

Texas   75-2018239

(State or other jurisdiction of

Incorporation or organization)

 

(I.R.S. Employer

Identification No.)

 

1600 West 7th Street

Fort Worth, Texas

(Address of principal executive offices)

 

 

76102

(Zip Code)

(817) 335-1100

(Registrant’s telephone number, including area code)

NONE

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

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.

Yes    þ        No  ¨

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).

Yes    þ        No  ¨

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

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

                                     (Do not check if a smaller reporting company)

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  ¨        No  þ

APPLICABLE ONLY TO CORPORATE ISSUERS:

29,324,933 of the Registrants’ common shares, $.10 par value, were issued and outstanding as of July 14, 2011.

 

 

 

 


Table of Contents

CASH AMERICA INTERNATIONAL, INC.

INDEX TO FORM 10-Q

 

PART I. FINANCIAL INFORMATION   
       Page   
    Item 1.   Financial Statements (Unaudited)   
  Consolidated Balance Sheets – June 30, 2011 and 2010 and December 31, 2010      1   
  Consolidated Statements of Income – Three and Six Months Ended June 30, 2011 and 2010      2   
  Consolidated Statements of Equity – June 30, 2011 and 2010      3   
  Consolidated Statements of Comprehensive Income – Three and Six Months Ended June 30, 2011 and 2010      4   
  Consolidated Statements of Cash Flows – Six Months Ended June 30 , 2011 and 2010      5   
  Notes to Consolidated Financial Statements      6   
    Item 2.   Management’s Discussion and Analysis of Financial Condition and Results of Operations      21   
    Item 3.   Quantitative and Qualitative Disclosures About Market Risk      45   
    Item 4.   Controls and Procedures      45   
PART II. OTHER INFORMATION   
    Item 1.   Legal Proceedings      46   
    Item 1A.   Risk Factors      46   
    Item 2.   Unregistered Sales of Equity Securities and Use of Proceeds      47   
    Item 3.   Defaults upon Senior Securities      47   
    Item 4.   (Removed and Reserved)      47   
    Item 5.   Other Information      47   
    Item 6.   Exhibits      48   
SIGNATURE      49   


Table of Contents

CAUTIONARY NOTE CONCERNING FACTORS THAT MAY AFFECT FUTURE RESULTS

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

 

 

changes in pawn, consumer credit, tax and other laws and government rules and regulations applicable to the Company’s business,

 

 

changes in demand for the Company’s services,

 

 

acceptance by consumers, legislators and regulators of the negative characterization by the media and consumer activists with respect to certain of the Company’s loan products,

 

 

the continued acceptance of the online channel by the Company’s online loan customers,

 

 

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

 

 

fluctuations in the price of gold,

 

 

changes in competition,

 

 

the ability of the Company to open new locations in accordance with its plans,

 

 

changes in economic conditions,

 

 

real estate market fluctuations,

 

 

interest rate fluctuations,

 

 

changes in foreign currency exchange rates,

 

 

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

 

 

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

 

 

the ability to successfully integrate newly acquired businesses into the Company’s operations,

 

 

the loss of services of any of the Company’s executive officers,

 

 

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

 

 

the effect of any current or future litigation proceedings on the Company,

 

 

the implementation of new, or changes in the interpretation of existing, accounting principles or financial reporting requirements,

 

 

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

 

 

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

 

 

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

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


Table of Contents

PART I. FINANCIAL INFORMATION

Item 1. Financial Statements

CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED BALANCE SHEETS

(in thousands, except per share data)

(Unaudited)

 

     June 30,     December 31,  
     2011     2010     2010  

Assets

      

Current assets:

      

Cash and cash equivalents

   $ 48,375     $ 46,708     $ 38,324  

Pawn loans

     229,343       184,104       218,408  

Consumer loans, net

     160,371       115,295       139,377  

Merchandise held for disposition, net

     124,054       100,215       124,399  

Pawn loan fees and service charges receivable

     41,757       35,077       41,216  

Income taxes receivable

     3,598       -        -   

Prepaid expenses and other assets

     41,973       50,639       32,490  

Deferred tax assets

     32,560       25,035       28,016  

Total current assets

     682,031       557,073       622,230  

Property and equipment, net

     232,715       196,559       222,320  

Goodwill

     546,674       513,758       543,324  

Intangible assets, net

     28,638       25,853       31,188  

Other assets

     14,179       7,244       8,124  

Total assets

   $ 1,504,237     $ 1,300,487     $ 1,427,186  

Liabilities and Equity

      

Current liabilities:

      

Accounts payable and accrued expenses

   $ 86,565     $ 75,058     $ 96,465  

Accrued supplemental acquisition payment

     -        18,858       -   

Customer deposits

     10,440       9,535       9,146  

Income taxes currently payable

     -        9,150       888  

Current portion of long-term debt

     19,773       25,493       24,433  

Total current liabilities

     116,778       138,094       130,932  

Deferred tax liabilities

     92,979       46,016       56,792  

Noncurrent income tax payable

     2,638       2,166       2,408  

Other liabilities

     1,711       7,591       2,052  

Long-term debt

     431,734       374,044       432,271  

Total liabilities

   $ 645,840     $ 567,911     $ 624,455  

Equity:

      

Cash America International, Inc. equity:

      

Common stock, $0.10 par value per share, 80,000,000 shares authorized, 30,235,164 shares issued

     3,024       3,024       3,024  

Additional paid-in capital

     165,840       164,770       165,658  

Retained earnings

     705,502       583,660       644,208  

Accumulated other comprehensive income

     11,195       1,785       4,797  

Treasury shares, at cost (942,722 shares, 881,003 shares and 685,315 shares at June 30, 2011 and 2010, and at December 31, 2010, respectively)

     (33,492     (27,031     (21,283

Total Cash America International, Inc. shareholders’ equity

     852,069       726,208       796,404  

Noncontrolling interest

     6,328       6,368       6,327  

Total equity

     858,397       732,576       802,731  

Total liabilities and equity

   $   1,504,237     $   1,300,487     $   1,427,186  

See notes to consolidated financial statements.

 

1


Table of Contents

CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF INCOME

(in thousands, except per share data)

(Unaudited)

 

     Three Months Ended
June 30,
    Six Months Ended
June  30,
 
     2011     2010     2011     2010  

Revenue

        

Pawn loan fees and service charges

   $     68,348     $     59,507     $ 135,237     $ 117,788  

Proceeds from disposition of merchandise

     130,293       113,850       290,954       255,733  

Consumer loan fees

     132,414       115,865       255,541       224,307  

Other

     3,197       2,859       7,725       7,315  

Total Revenue

     334,252       292,081       689,457       605,143  

Cost of Revenue

        

Disposed merchandise

     79,275       70,417       178,852       160,362  

Consumer loan loss provision

     45,129       44,934       84,629       78,827  

Total Cost of Revenue

     124,404       115,351       263,481       239,189  

Net Revenue

     209,848       176,730       425,976       365,954  

Expenses

        

Operations

     115,076       101,931       228,477       198,450  

Administration

     32,640       25,446       59,697       50,994  

Depreciation and amortization

     12,308       10,215       24,750       20,933  

Total Expenses

     160,024       137,592       312,924       270,377  

Income from Operations

     49,824       39,138       113,052       95,577  

Interest expense

     (5,831     (5,406     (11,442     (10,863

Interest income

     20       151       42       159  

Foreign currency transaction loss

     (185     (37     (281     (174

Equity in loss of unconsolidated subsidiary

     (32     -        (36     -   

Income before Income Taxes

     43,796       33,846       101,335       84,699  

Provision for income taxes

     16,551       12,935       38,303       31,737  

Net Income

     27,245       20,911       63,032       52,962  

Net (income) loss attributable to the noncontrolling interest

     (264     (22     327       (40

Net Income Attributable to Cash America International, Inc.

   $ 26,981     $ 20,889     $ 63,359     $ 52,922  

Earnings Per Share:

        

Net Income attributable to Cash America International, Inc. common shareholders:

        

Basic

   $ 0.91     $ 0.70     $ 2.14     $ 1.78  

Diluted

   $ 0.84     $ 0.66     $ 1.99     $ 1.67  

Weighted average common shares outstanding:

        

Basic

     29,593       29,655       29,673       29,671  

Diluted

     31,994       31,665       31,828       31,701  

Dividends declared per common share

   $ 0.035     $ 0.035     $ 0.070     $ 0.070  

See notes to consolidated financial statements.

 

2


Table of Contents

CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF EQUITY

(in thousands, except per share data)

(Unaudited)

 

    Common Stock     Additional
paid-in
capital
    Retained
earnings
    Accumulated
other
comprehensive
income
    Treasury shares, at cost     Total
share-
holders’
equity
    Non-controlling
interest
    Total
Equity
 
    Shares     Amount                       Shares     Amount                    

Balance at January 1, 2010

    30,235,164     $ 3,024     $ 166,761     $ 532,805     $ 1,181       (933,082   $ (26,836   $ 676,935     $ 6,264     $ 683,199  

Shares issued under stock-based plans

        (5,969         270,148       7,857       1,888         1,888  

Stock-based compensation expense

        1,885               1,885         1,885  

Income tax benefit from stock-based compensation

        2,093               2,093         2,093  

Net income attributable to Cash

America International, Inc.

          52,922             52,922         52,922  

Dividends paid

          (2,067           (2,067       (2,067

Unrealized derivatives loss, net of tax

            (118         (118       (118

Foreign currency translation gain (loss), net of tax

            (771         (771     64       (707

Marketable securities unrealized gain, net of tax

            1,493           1,493         1,493  

Purchases of treasury shares

              (218,069     (8,052     (8,052       (8,052

Income attributable to noncontrolling interests

                                                            -        40       40  

Balance at June 30, 2010

    30,235,164     $ 3,024     $ 164,770     $ 583,660     $ 1,785       (881,003   $ (27,031   $ 726,208     $ 6,368     $ 732,576  

Balance at January 1, 2011

    30,235,164     $ 3,024     $ 165,658     $ 644,208     $ 4,797       (685,315   $ (21,283   $ 796,404     $ 6,327     $ 802,731  

Shares issued under stock-based plans

        (2,904         94,982       3,008       104         104  

Stock-based compensation expense

        2,583               2,583         2,583  

Income tax benefit from stock-based compensation

        503               503         503  

Net income attributable to Cash

America International, Inc.

          63,359             63,359         63,359  

Dividends paid

          (2,065           (2,065       (2,065

Unrealized derivatives gain, net of tax

            39           39         39  

Foreign currency translation gain, net of tax

            5,451           5,451       328       5,779  

Marketable securities unrealized gain, net of tax

            908           908         908  

Purchases of treasury shares

              (352,389     (15,217     (15,217       (15,217

Loss from noncontrolling interests

                                                            -        (327     (327

Balance at June 30, 2011

    30,235,164     $ 3,024     $ 165,840     $ 705,502     $ 11,195       (942,722   $ (33,492   $ 852,069     $ 6,328     $ 858,397  

See notes to consolidated financial statements.

 

3


Table of Contents

CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(in thousands)

(Unaudited)

 

         Three Months Ended
June 30,
    Six Months Ended
June 30,
 
         2011     2010     2011     2010  
  Net income    $     27,245     $     20,911     $     63,032     $     52,962  
  Other comprehensive gain (loss), net of tax:         
      Unrealized derivatives gain (loss)(a)      24       (11     39       (118
      Foreign currency translation gain (loss)(b)      1,148       (5,126     5,779       (707
      Marketable securities unrealized gain(c)      442       818       908       1,493  
     
  Total other comprehensive gain (loss), net of tax      1,614       (4,319     6,726       668  
     
  Comprehensive income    $ 28,859     $ 16,592     $ 69,758     $ 53,630  
      Net loss (income) attributable to the noncontrolling
        interest
     (264     (22     327       (40
      Foreign currency translation (gain) loss, net of tax,
        attributable to the noncontrolling interest
     (96     297       (328     (64
     
 

Comprehensive loss (income) attributable to the noncontrolling interest

     (360     275       (1     (104
     
  Comprehensive Income attributable to Cash America
    International, Inc.
   $ 28,499     $ 16,867     $ 69,757     $ 53,526  
     

(a)

  Net of tax (provision)/benefit of $(12) and $5 for the three months ended June 30, 2011 and 2010 respectively, and $(20) and $63 for the six months ended June 30, 2011 and 2010.    

(b)

  Net of tax (provision)/benefit of $(298) and $(70) for the three months ended June 30, 2011 and 2010 respectively, and $(151) and $556 for the six months ended June 30, 2011 and 2010.    

(c)

  Net of tax provision of $237 and $441 for the three months ended June 30, 2011 and 2010 respectively, and $489 and $804 for the six months ended June 30, 2011 and 2010.    

See notes to consolidated financial statements.

 

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Table of Contents

CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES

CONSOLIDATED STATEMENTS OF CASH FLOWS

(in thousands)

(Unaudited)

 

     Six Months Ended
June 30,
 
     2011     2010  

Cash Flows from Operating Activities

    

Net Income

   $ 63,032     $ 52,962  

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

    

Depreciation and amortization

     24,750       20,933  

Amortization of discount on convertible debt

     1,753       1,643  

Consumer loan loss provision

     84,629       78,827  

Stock-based compensation

     2,583       1,885  

Deferred income taxes, net

     31,138       (218

Other

     1,964       231  

Changes in operating assets and liabilities

    

Merchandise held for disposition

     (8,930     (8,324

Pawn loan fees and service charges receivable

     (366     1,562  

Finance and service charges on consumer loans

     (2,065     (2,935

Prepaid expenses and other assets

     (6,960     (10,682

Accounts payable and accrued expenses

     (9,044     (10,888

Excess income tax benefit from stock-based compensation

     (503     (2,093

Current income taxes

     (3,793     2,539  

Other operating assets and liabilities

     1,391       824  

Net cash provided by operating activities

     179,579       126,266  

Cash Flows from Investing Activities

    

Pawn loans made

     (363,361     (299,142

Pawn loans repaid

     230,532       197,426  

Principal recovered through dispositions of forfeited pawn loans

     132,292       128,840  

Consumer loans made or purchased

     (702,609     (753,903

Consumer loans repaid

     597,608       671,884  

Acquisitions, net of cash acquired

     -        (3,911

Purchases of property and equipment

     (33,032     (21,489

Investments in equity securities

     (5,000     (5,652

Other investing activities

     (347     38  

Net cash used in investing activities

     (143,917     (85,909

Cash Flows from Financing Activities

    

Net repayments under bank lines of credit

     (30,769     (49,864

Issuance of long-term debt

     50,000       25,000  

Net proceeds from re-issuance of treasury shares

     104       1,888  

Loan costs paid

     (2,584     (290

Payments on notes payable and other obligations

     (25,840     (6,080

Excess income tax benefit from stock-based compensation

     503       2,093  

Treasury shares purchased

     (15,217     (8,052

Dividends paid

     (2,065     (2,067

Net cash used in financing activities

     (25,868     (37,372

Effect of exchange rates on cash

     257       (2,281

Net increase in cash and cash equivalents

     10,051       704  

Cash and cash equivalents at beginning of year

     38,324       46,004  

Cash and cash equivalents at end of period

   $ 48,375     $ 46,708  

Supplemental Disclosures

    

Non-cash investing and financing activities

    

Pawn loans forfeited and transferred to merchandise held for disposition

   $ 125,426     $ 106,636  

Pawn loans renewed

   $ 84,236     $ 56,582  

Consumer loans renewed

   $ 239,311     $ 186,437  

See notes to consolidated financial statements.

 

 

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Table of Contents

CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited)

 

 

1. Significant Accounting Policies

Basis of Presentation

The consolidated financial statements include all of the accounts of Cash America International, Inc. and its majority-owned subsidiaries (the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

The financial statements as of June 30, 2011 and 2010 and for the three- and six-month periods then ended are unaudited but, in management’s opinion, include all adjustments, consisting only of normal recurring adjustments, necessary for a fair statement of the results for such interim periods. The year-end condensed balance sheet data was derived from audited financial statements, but does not include all disclosures required by Generally Accepted Accounting Principles in the United States of America (“GAAP”). Operating results for the three- and six-month periods are not necessarily indicative of the results that may be expected for the full fiscal year.

The presentation of the consolidated statements of income has been modified to include the consumer loan loss provision as a component of total cost of revenue, rather than as a component of total expenses. The information presented in the consolidated statements of income for the three and six-month periods ended June 30, 2010 has been updated to conform to this presentation. These changes have no impact on consolidated results previously reported.

The Company has 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, of which the Company is a majority owner due to the December 16, 2008 acquisition by the Company of 80% of the outstanding stock of Creazione Estilo, S.A. de C.V., a Mexican sociedad anónima de capital variable (“Creazione”), operating under the name “Prenda Fácil” (referred to as “Prenda Fácil”). The Company has no ownership interest in Huminal; however, Prenda Fácil qualifies as the primary beneficiary of Huminal in accordance with Financial Accounting Standards Board (“FASB”) Accounting Standards Codification (“ASC”) 810, Consolidation. Therefore, the results and balances of Huminal are consolidated and allocated to net income attributable to noncontrolling interests.

These financial statements and related notes should be read in conjunction with the consolidated financial statements and notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

Recently Issued Accounting Pronouncements

In June 2011, the FASB issued Accounting Standards Update (“ASU”) No. 2011-05, Presentation of Comprehensive Income (“ASU 2011-05”), which will enhance comparability between entities that report under GAAP and those that report under International Financial Reporting Standards (“IFRS”). ASU 2011-05 requires companies to present the components of net income and other comprehensive income either as one continuous statement or as two consecutive statements. It eliminates the option to present components of other comprehensive income as part of the statement of equity. ASU 2011-05 is effective for the Company’s interim and annual periods beginning after December 15, 2011 and must be applied retrospectively. Early adoption is permitted. The Company does not anticipate that the adoption of ASU 2011-05 will have a material effect on its financial position or results of operations.

In May 2011, the FASB issued ASU No. 2011-04, Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and International Financial Reporting Standards (“ASU 2011-04”), which amends ASC 820, Fair Value Measurement (“ASC 820”). ASU 2011-04 provides a consistent

 

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definition and measurement of fair value, as well as similar disclosure requirements between U.S. GAAP and IFRS. ASU 2011–04 changes certain fair value measurement principles, clarifies the application of existing fair value measurement and expands the ASC 820 disclosure requirements, particularly for Level 3 fair value measurements. ASU 2011-04 is effective for the Company prospectively for interim and annual periods beginning after December 15, 2011. The Company does not anticipate that the adoption of ASU 2011-04 will have a material effect on its financial position or results of operations.

Recently Adopted Accounting Pronouncements

In December 2010, the FASB issued Accounting Standards Update (“ASU”) No. 2010-29, Disclosure of Supplementary Pro Forma Information for Business Combinations (“ASU 2010-29”). This standard update clarifies that, when presenting comparative financial statements, the Company should disclose revenue and earnings of the combined entity as though the current period business combinations had occurred as of the beginning of the comparable prior annual reporting period only. The update also expands the supplemental pro forma disclosures to include a description of the nature and amount of material, nonrecurring pro forma adjustments directly attributable to the business combination included in the reported pro forma revenue and earnings. ASU 2010-29 is effective prospectively for material (either on an individual or aggregate basis) business combinations entered into in fiscal years beginning on or after December 15, 2010 with early adoption permitted. The adoption of ASU 2010-29 did not have a material effect on the Company’s financial position or results of operations.

 

2. Acquisitions

Prenda Fácil

Pursuant to its business strategy of expanding storefront operations for the pawn business in Latin America, the Company, through its wholly-owned subsidiary, Cash America of Mexico, Inc., completed the acquisition of 80% of the outstanding stock of Creazione, which operates retail services locations under the name “Prenda Facil,” in December 2008. In conjunction with the acquisition, the Company agreed to pay a supplemental earn-out payment in an amount based on a five times multiple of the consolidated earnings of Prenda Fácil’s business as specifically defined in the Stock Purchase Agreement (generally Prenda Fácil’s earnings before interest, income taxes, depreciation and amortization expenses denominated in its local currency) for the twelve-month period ending June 30, 2011, reduced by amounts previously paid. Based on earnings for the twelve-month period ending June 30, 2011, no supplemental payment was due. As a result, the final purchase price for the Company’s interest in Creazione was $90.8 million, of which $82.9 million was paid in cash, with the remainder paid in the form of 391,236 shares of the Company’s common stock with a fair value of $7.9 million as of the closing date.

Maxit

Pursuant to its business strategy of expanding storefront operations in the United States, the Company’s wholly-owned subsidiary, Cash America, Inc. of Nevada, completed the purchase of substantially all of the assets of Maxit Financial, LLC (“Maxit”) on October 4, 2010. Maxit owned and operated a 39-store chain of pawn lending locations that operate in Washington and Arizona under the names “Maxit” and “Pawn X-Change.” Per the terms of the Asset Purchase Agreement, the acquisition consideration consisted of a cash payment 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. In addition, the Company incurred acquisition costs of $1.5 million related to the acquisition, which were reflected in “Operations expenses” in the consolidated statements of income during the fourth quarter of 2010. The goodwill of $26.2 million arising from the acquisition consists largely of the synergies and economies of scale expected from combining the operations of the Company and Maxit. As further described in Note 7, the activities and goodwill of Maxit are included in the results of the Company’s retail services segment.

 

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3. Credit Quality Information on Pawn Loans

The Company manages the pawn loan portfolio by monitoring the type and adequacy of collateral compared to historical gross profit margins. If a pawn loan defaults, the Company must rely on the disposition of pawned property to recover the principal amount of an unpaid pawn loan, plus a yield on the investment, because pawn loans are non-recourse against the customer. As a result, the customer’s creditworthiness is not a significant factor in the loan decision, and a decision to redeem pawned property does not affect the customer’s personal credit status. In addition, the customer’s creditworthiness does not affect the Company’s financial position or results of operations, because generally, forfeited merchandise has historically sold for an amount in excess of the cost of goods sold (which is the lower of cash amount loaned or market value). Goods pledged to secure pawn loans are tangible personal property items such as jewelry, tools, televisions and other electronics, musical instruments, and other miscellaneous items. A pawn loan is considered nonperforming if the customer does not make a payment in accordance with the contractual requirements. Any accrued pawn loan fees and service charges are reversed on nonperforming loans. As of June 30, 2011 and 2010, and December 31, 2010, the Company had performing pawn loans outstanding of $223.6 million, $179.9 million, and $213.5 million, respectively, and nonperforming pawn loans outstanding of $5.7 million, $4.2 million, and $4.9 million, respectively.

 

4. Credit Quality Information and Allowances and Accruals for Losses on Consumer Loans

In order to manage the portfolios of consumer loans effectively, the Company utilizes a variety of proprietary underwriting criteria, monitors the performance of the portfolio and maintains either an allowance or accrual for losses on consumer loans (including fees and interest) at a level estimated to be adequate to absorb credit losses inherent in the portfolio. The portfolio includes balances outstanding from all Company-owned consumer loans. In addition, the Company maintains an accrual for losses related to loans guaranteed under the Company’s Credit Services Organization program. The allowance for losses on Company-owned consumer loans offsets the outstanding loan amounts in the consolidated balance sheets. The accrual for losses is included in “Accounts payable and accrued expenses” in the Company’s consolidated balance sheets.

A consumer loan is considered nonperforming if the customer does not make payments in accordance with the contractual requirements. Generally, consumer loan fees do not accrue on nonperforming loans. Once a loan is considered non-performing and placed on non-accrual status, the Company does not resume accrual of interest. For nonperforming loans, all cash received is first applied against the principal balance of the loan. After the principal balance is recovered, the Company recognizes additional payments as consumer loan fee revenue.

The Company stratifies the outstanding combined consumer loan portfolio by age, delinquency, and stage of collection when assessing the adequacy of the allowance or accrual for losses. It uses historical collection performance adjusted for recent portfolio performance trends to develop the expected loss rates used to establish either the allowance or accrual. Increases in either the allowance or accrual are recorded as a consumer loan loss provision expense in the consolidated statements of income. The Company generally charges off all consumer loans, including accrued interest, once they have been in default for 60 consecutive days, or sooner if deemed uncollectible. Recoveries on losses previously charged to the allowance are credited to the allowance when collected.

The allowance deducted from the carrying value of consumer loans was $37.2 million, $36.7 million, and $38.9 million at June 30, 2011 and 2010, and December 31, 2010, respectively. In addition, $47.3 million, $51.0 million, and $48.8 million, respectively, of active consumer loans owned by third-party lenders were guaranteed by the Company as of those dates. The accrual for losses on consumer loan guaranty obligations was $2.1 million, $3.3 million and $2.8 million at June 30, 2011 and 2010, and December 31, 2010, respectively.

 

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The components of Company-owned consumer loan portfolio and receivables at June 30, 2011 and 2010, and December 31, 2010 was as follows (in thousands):

 

     Balance at  
     June 30,     December 31,  
     2011     2010     2010  

Current

   $     150,061     $ 106,771     $     129,419  

Nonperforming loans

     47,521       45,247       48,911  

Total consumer loans, gross

     197,582       152,018       178,330  

Less: Allowance for losses

     (37,211     (36,723     (38,953

Consumer loans, net

   $ 160,371     $     115,295     $ 139,377  

Changes in the allowance for losses for the Company-owned portfolio and the accrued loss for third-party lender-owned portfolios during the three and six months ended June 30, 2011 and 2010 was as follows (in thousands):

 

     Three Months Ended
June 30,
    Six Months Ended
June 30,
 
     2011     2010     2011     2010  

Allowance for losses for Company-owned consumer loans:

        

Balance at beginning of period

   $         35,010     $         25,823     $         38,953     $         27,350  

Consumer loan loss provision

     44,703       43,902       85,330       78,446  

Charge-offs

     (49,952     (38,591     (102,628     (82,833

Recoveries

     7,450       5,589       15,556       13,760  

Balance at end of period

   $ 37,211     $ 36,723     $ 37,211     $ 36,723  

Accrual for third-party lender-owned consumer loans:

        

Balance at beginning of period

   $ 1,711     $ 2,293     $ 2,838     $ 2,944  

Consumer loan loss provision

     426       1,032       (701     381  

Balance at end of period

   $ 2,137     $ 3,325     $ 2,137     $ 3,325  

 

5. Earnings Per Share Computation

Basic earnings per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted earnings per share is calculated by giving effect to the potential dilution that could occur if securities or other contracts to issue common shares were exercised and converted into common shares during the period.

 

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The following table sets forth the reconciliation of numerators and denominators for the basic and diluted earnings per share computation for the three and six months ended June 30, 2011 and 2010 (in thousands, except per share amounts):

 

         Three Months Ended
June 30,
     Six Months Ended
June 30,
 
         2011      2010      2011      2010  
  Numerator:            
      Net income attributable to Cash America International, Inc.    $     26,981      $     20,889      $     63,359      $     52,922  
     
  Denominator:            
  Total weighted average basic shares (a)      29,593        29,655        29,673        29,671  
 

    Shares applicable to stock-based
    compensation
(b)

     245        550        217        557  
      Convertible debt(c)      2,156        1,460        1,938        1,473  
     
          Total weighted average diluted shares (d)      31,994        31,665        31,828        31,701  
     
      Net income – basic    $ 0.91      $ 0.70      $ 2.14      $ 1.78  
     
      Net income – diluted    $ 0.84      $ 0.66      $ 1.99      $ 1.67  
     

(a)

  Includes vested restricted stock units of 230 and 194, as well as shares in the Company’s non-qualified savings plan of 32 and 33 for the three months ended June 30, 2011 and 2010, respectively, and vested restricted stock units of 224 and 187, as well as shares in the Company’s non-qualified savings plan of 32 and 33 for the six months ended June 30, 2011 and 2010.      

(b)

  Includes shares related to outstanding option award agreements and shares related to unvested or deferred restricted stock unit awards. For the three and six month periods ended June 30, 2011, there are 5 and 10, respectively, unvested or deferred restricted stock units that are excluded from shares applicable to stock-based compensation because their impact would be anti-dilutive.      

(c)

  The shares issuable with respect to the Company’s 2009 Convertible Notes due 2029 (the “2009 Convertible Notes”) have been calculated using the treasury stock method. The Company intends to settle the principal portion of the convertible debt in cash; therefore, only the shares related to the conversion spread have been included in weighted average diluted shares.      

(d)

  Except as described in footnote (b), there are no anti-dilutive shares.   

 

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6. Long-Term Debt

The Company’s long-term debt instruments and balances outstanding at June 30, 2011 and 2010, and December 31, 2010 were as follows (in thousands):

 

     Balance at  
     June 30,      December 31,  
     2011      2010      2010  

Domestic and multi-currency line of credit up to $280,000 due 2015

   $ 184,256      $ -       $ -   

USD line of credit up to $300,000 due 2012

     -         139,799        215,025  

6.21% senior unsecured notes due 2021

     25,000        25,000        25,000  

6.09% senior unsecured notes due 2016

     35,000        35,000        35,000  

6.12% senior unsecured notes due 2012

     26,667        40,000        26,667  

7.26% senior unsecured notes due 2017

     25,000        25,000        25,000  

Variable rate senior unsecured note due 2015

     50,000        -         -   

Variable rate senior unsecured note due 2012

     -         31,920        25,840  

5.25% convertible senior unsecured notes due 2029

     105,584        102,818        104,172  

Total debt

   $ 451,507      $         399,537      $         456,704  

Less current portion

     19,773        25,493        24,433  

Total long-term debt

   $         431,734      $ 374,044      $ 432,271  

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 “Credit Agreement”). The Credit Agreement matures on March 31, 2015 and consists of a $280.0 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”). Interest on the Domestic and Multi-currency Line is charged, at the Company’s option, at either the London Interbank Offered Rate (“LIBOR”) plus a margin varying from 2.00% to 3.25%, or at the agent’s base rate plus a margin varying from 0.50% to 1.75%. Interest on the 2015 Variable Rate Notes is charged, at the Company’s option, at either LIBOR plus a margin of 3.50% or at the agent’s base rate plus a margin of 2.00%. The margin for the Domestic and Multi-currency Line is dependent on the Company’s cash flow leverage ratios as defined in the Credit Agreement. The Company also pays a fee on the unused portion of the Domestic and Multi-currency Line ranging from 0.25% to 0.50% (0.38% at June 30, 2011) based on the Company’s cash flow leverage ratios. The weighted average interest rate (including margin) on the Domestic and Multi-currency Line and the 2015 Variable Rate Notes, respectively, was 2.72% and 3.69% at June 30, 2011. Beginning on March 31, 2012, the 2015 Variable Rate Notes require quarterly principal payments of $2.1 million with any outstanding principal remaining due at maturity on March 31, 2015.

In conjunction with the entry into the 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 (the “2012 Variable Rate Notes”) with proceeds of the Credit Agreement.

At June 30, 2011, borrowings under the Company’s Domestic and Multi-currency Line consisted of multiple pricing tranches with maturity dates ranging from one to 29 days, and at June 30, 2010, borrowings under the Company’s USD Line of Credit consisted of three pricing tranches with maturity dates ranging from one to 30 days. However, the Company refinances borrowings pursuant to the terms of its Domestic and Multi-currency Line, and it also routinely refinanced borrowings under its USD Line of Credit before it was repaid on March 30, 2011. Therefore, these borrowings are reported as part of the applicable line of credit and as long-term debt.

 

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In connection with the Domestic and Multi-currency Line and the 2015 Variable Rate Notes, the Company incurred approximately $2.6 million for issuance costs, which primarily consisted of underwriting fees, legal and other professional expenses. These costs are being amortized over a period of three years and are included in “Other assets” in the Company’s consolidated balance sheets.

On March 30, 2011, in conjunction with the establishment of the Credit Agreement, the Company entered into a separate credit agreement for the issuance of $20.0 million in letters of credit (the “Letter of Credit Facility”). The Company had standby letters of credit of $16.1 million issued under the Letter of Credit Facility at June 30, 2011. Previously, these letters of credit were provided under the USD Line of Credit by reducing the amount available to the Company.

See Note 10 for a discussion of the Company’s interest rate cap agreements.

Each of the Company’s credit agreements and senior unsecured notes require the Company to maintain certain financial ratios. As of June 30, 2011, the Company was in compliance with all covenants or other requirements set forth in its debt agreements.

 

7. Operating Segment Information

The Company has two 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 lending, consumer loans, the purchase and sale of merchandise, check cashing and other ancillary services such as money orders, wire transfers and pre-paid debit cards. Most of these ancillary services offered in the retail services segment are provided through third party vendors. The e-commerce segment includes the operations of the Company’s E-Commerce Division, which is composed of the Company’s domestic and foreign online channel (and includes the Company’s internet lending activities and other ancillary services) and the Company’s micro line of credit services channel.

 

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The Company allocates corporate administrative expenses to each operating segment based on personnel expenses at each segment. In the e-commerce segment, certain administrative expenses are allocated between the domestic and foreign components based on the amount of loans written.

 

    Retail Services     E-Commerce        
    Domestic     Foreign     Total     Domestic     Foreign     Total     Consolidated  
                       
             

Three Months Ended June 30, 2011

             

Revenue

             

Pawn loan fees and service charges

  $ 61,158     $ 7,190     $ 68,348      $     $ -      $ -      $ 68,348  

Proceeds from disposition of merchandise

    130,264       -        130,264        29       -        29        130,293  

Consumer loan fees

    27,320       -        27,320        55,212       49,882       105,094        132,414  

Other

    2,684       174       2,858        110       229       339        3,197  

Total revenue

    221,426       7,364       228,790        55,351       50,111       105,462        334,252  

Disposed merchandise

    79,252       -        79,252        23       -        23        79,275  

Consumer loan loss provision

    4,756       -        4,756        16,504       23,869       40,373        45,129  

Total cost of revenue

    84,008       -        84,008        16,527       23,869       40,396        124,404  
             

Net revenue

    137,418       7,364       144,782        38,824       26,242       65,066        209,848  

Expenses

             

Operations

    81,013       5,458       86,471        13,363       15,242       28,605        115,076  

Administration

    14,793       2,478       17,271        9,368       6,001       15,369        32,640  

Depreciation and amortization

    8,066       1,460       9,526        2,574       208       2,782        12,308  

Total expenses

    103,872       9,396       113,268        25,305       21,451       46,756        160,024  

Income (loss) from operations

  $ 33,546     $ (2,032   $ 31,514      $ 13,519     $ 4,791     $ 18,310      $ 49,824  

As of June 30, 2011

             

Total assets

  $ 971,457     $ 135,852     $ 1,107,309      $ 304,586     $ 92,342     $ 396,928      $ 1,504,237  

Goodwill

      $ 336,392          $ 210,282      $ 546,674  
             
             
    Retail Services     E-Commerce        
    Domestic     Foreign     Total     Domestic     Foreign     Total     Consolidated  
                       
             

Three Months Ended June 30, 2010

             

Revenue

             

Pawn loan fees and service charges

  $ 51,080     $ 8,427     $ 59,507      $ -      $ -      $ -      $ 59,507  

Proceeds from disposition of merchandise

    113,850       -        113,850        -        -        -        113,850  

Consumer loan fees

    26,782       -        26,782        67,277       21,806       89,083         115,865  

Other

    2,616       41       2,657        202       -        202         2,859  

Total revenue

    194,328       8,468       202,796        67,479       21,806       89,285         292,081  

Disposed merchandise

    70,417       -        70,417        -        -        -        70,417  

Consumer loan loss provision

    5,019       -        5,019        29,466       10,449       39,915        44,934  

Total cost of revenue

    75,436       -        75,436        29,466       10,449       39,915        115,351  
             

Net revenue

    118,892       8,468       127,360        38,013       11,357       49,370        176,730  

Expenses

             

Operations

    72,955       4,665       77,620        16,634       7,677       24,311        101,931  

Administration

    10,926       2,194       13,120        8,948       3,378       12,326        25,446  

Depreciation and amortization

    6,954       1,231       8,185        1,959       71       2,030        10,215  

Total expenses

    90,835       8,090       98,925        27,541       11,126       38,667        137,592  

Income from operations

  $ 28,057     $ 378     $ 28,435      $ 10,472     $ 231     $ 10,703      $ 39,138  

As of June 30, 2010

             

Total assets

  $ 800,774     $ 119,137     $ 919,911      $ 332,809     $ 47,767     $ 380,576      $ 1,300,487  

Goodwill

      $ 303,476          $ 210,282      $ 513,758  

 

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     Retail Services     E-Commerce        
     Domestic      Foreign     Total     Domestic      Foreign      Total     Consolidated  
                        
                 

Six Months Ended June 30, 2011

                 

Revenue

                 

Pawn loan fees and service charges

   $ 121,384      $ 13,853     $ 135,237      $ -       $ -       $ -      $ 135,237  

Proceeds from disposition of merchandise

     290,925        -        290,925        29        -         29        290,954  

Consumer loan fees

     53,155        -        53,155        113,923        88,463        202,386        255,541  

Other

     6,569        276       6,845        343        537        880        7,725  

Total revenue

     472,033        14,129       486,162        114,295        89,000        203,295        689,457  

Disposed merchandise

     178,829        -        178,829        23        -         23        178,852  

Consumer loan loss provision

     7,939        -        7,939        33,662        43,028        76,690        84,629  

Total cost of revenue

     186,768        -        186,768        33,685        43,028        76,713        263,481  
                 

Net revenue

     285,265        14,129       299,394        80,610        45,972        126,582        425,976  

Expenses

                 

Operations

     162,744        12,243       174,987        27,211        26,279        53,490        228,477  

Administration

     25,994        4,954       30,948        17,681        11,068        28,749        59,697  

Depreciation and amortization

     16,057        2,971       19,028        5,322        400        5,722        24,750  

Total expenses

     204,795        20,168       224,963        50,214        37,747        87,961        312,924  

Income (loss) from operations

   $ 80,470      $ (6,039   $ 74,431      $ 30,396      $ 8,225      $ 38,621      $ 113,052  
                 
                 
     Retail Services     E-Commerce        
     Domestic      Foreign     Total     Domestic      Foreign      Total     Consolidated  
                        
                 

Six Months Ended June 30, 2010

                 

Revenue

                 

Pawn loan fees and service charges

   $ 101,942      $ 15,846     $ 117,788      $ -       $ -       $ -      $ 117,788  

Proceeds from disposition of merchandise

     255,733        -        255,733        -         -         -        255,733  

Consumer loan fees

     54,326        -        54,326        129,911        40,070        169,981         224,307  

Other

     6,723        74       6,797        518        -         518         7,315  

Total revenue

     418,724        15,920       434,644        130,429        40,070        170,499         605,143  

Disposed merchandise

     160,362        -        160,362        -         -         -        160,362  

Consumer loan loss provision

     8,005        -        8,005        52,879        17,943        70,822         78,827  

Total cost of revenue

     168,367        -        168,367        52,879        17,943        70,822         239,189  
                 

Net revenue

     250,357        15,920       266,277        77,550        22,127        99,677         365,954  

Expenses

                 

Operations

     146,053        8,408       154,461        30,413        13,576        43,989         198,450  

Administration

     23,382        4,173       27,555        17,200        6,239        23,439         50,994  

Depreciation and amortization

     14,498        2,374       16,872        3,931        130        4,061         20,933  

Total expenses

     183,933        14,955       198,888        51,544        19,945        71,489         270,377  

Income from operations

   $ 66,424      $ 965     $ 67,389      $ 26,006      $ 2,182      $ 28,188       $ 95,577  

 

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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

8. Litigation

On August 6, 2004, James E. Strong filed a purported class action lawsuit in the State Court of Cobb County, Georgia against Georgia Cash America, Inc., Cash America International, Inc. (together with Georgia Cash America, Inc., “Cash America”), Daniel R. Feehan, and several unnamed officers, directors, owners and “stakeholders” of Cash America. The lawsuit alleges many different causes of action, among the most significant of which is that Cash America made illegal short-term loans in Georgia in violation of Georgia’s usury law, the Georgia Industrial Loan Act and Georgia’s Racketeer Influenced and Corrupt Organizations Act. Community State Bank (“CSB”) for some time made loans to Georgia residents through Cash America’s Georgia operating locations. The complaint in this lawsuit claims that Cash America was the true lender with respect to the loans made to Georgia borrowers and that CSB’s involvement in the process is “a mere subterfuge.” Based on this claim, the suit alleges that Cash America was the “de facto” lender and was illegally operating in Georgia. The complaint seeks unspecified compensatory damages, attorney’s fees, punitive damages and the trebling of any compensatory damages. In November 2009, the trial court certified the case as a class action lawsuit, and after an appeal by Cash America, the Supreme Court of Georgia upheld the class certification in March 2011. This case is currently set for jury trial on October 3, 2011. Cash America believes that the Plaintiffs’ claims in this suit are without merit and is vigorously defending this lawsuit.

Cash America and CSB also commenced a federal lawsuit on September 7, 2004 in the U.S. District Court for the Northern District of Georgia seeking to compel Mr. Strong to arbitrate his claims against Cash America and CSB. The U.S. District Court dismissed the federal action for lack of subject matter jurisdiction, and Cash America and CSB appealed the dismissal of their complaint to the U.S. Court of Appeals for the 11th Circuit. The 11th Circuit issued a panel decision in April 2007 reversing the district court’s dismissal of the action and remanding the action to the district court for a determination of the issue of the enforceability of the parties’ arbitration agreements. Plaintiff requested the 11th Circuit to review this decision en banc and this request was granted. The en banc rehearing took place in February 2008, and at the request of the 11th Circuit panel, the parties provided additional briefing in the summer of 2009 following a ruling by the United States Supreme Court that federal courts can compel arbitration of a state court action in certain instances. The parties are awaiting the 11th Circuit court’s decision. The Strong litigation is still at an early stage, and neither the likelihood of an unfavorable outcome nor the ultimate liability, if any, with respect to this litigation can be determined at this time.

On March 5, 2009, Peter Alfeche filed a purported class action lawsuit in the United States District Court for the Eastern District of Pennsylvania against Cash America International, Inc., Cash America Net of Nevada, LLC (“CashNet Nevada”), Cash America Net of Pennsylvania, LLC and Cash America of PA, LLC, d/b/a CashNetUSA.com (collectively, “CashNetUSA”). The lawsuit alleges, among other things, that CashNetUSA’s online consumer loan activities in Pennsylvania were illegal and not in accordance with the Pennsylvania Loan Interest Protection Law or the licensing requirements of the Pennsylvania Consumer Discount Company Act (the “CDCA”). The lawsuit also seeks declaratory judgment that several of CashNetUSA’s contractual provisions, including choice of law and arbitration provisions, are not authorized by Pennsylvania law. The complaint seeks unspecified compensatory damages, attorney’s fees and the trebling of any compensatory damages. CashNetUSA filed a motion to enforce the arbitration provision located in the agreements governing the lending activities, and the court has not yet ruled on this motion. The Alfeche litigation is still at an early stage, and neither the likelihood of an unfavorable outcome nor the ultimate liability, if any, with respect to this litigation can be determined at this time. CashNetUSA believes that the Plaintiffs’ claims in this suit are without merit and will vigorously defend this lawsuit.

On April 21, 2009, Yulon Clerk filed a purported class action lawsuit in the Court of Common Pleas of Philadelphia County, Pennsylvania, against CashNet Nevada and several other unrelated third-party lenders. The lawsuit alleges, among other things, that the defendants’ lending activities in Pennsylvania, including CashNet Nevada’s online consumer loan lending activities in Pennsylvania, were illegal and in violation of various

 

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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

Pennsylvania laws, including the Loan Interest Protection Law, the CDCA and the Unfair Trade Practices and Consumer Protection Laws. The complaint seeks payment of potential fines, unspecified damages, attorney’s fees and the trebling of certain damages. The defendants removed the case to the United States District Court for the Eastern District of Pennsylvania where the lawsuit now resides. The case was subsequently reassigned to the same judge presiding in the Alfeche litigation. In August 2009, the Court severed the claims against the other defendants originally named in the litigation. CashNet Nevada filed a motion with the federal court to enforce the arbitration provision located in the agreements governing the lending activities, and the Court has not yet ruled on this motion. The Clerk litigation is still at an early stage, and neither the likelihood of an unfavorable outcome nor the ultimate liability, if any, with respect to this litigation can be determined at this time. CashNet Nevada believes that the Plaintiffs’ claims in this suit are without merit and will vigorously defend this lawsuit.

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

 

9. Fair Value Measurements

Recurring Fair Value Measurements

In accordance with ASC 820-10, Fair Value Measurements and Disclosures (“ASC 820-10”), certain of the Company’s assets and liabilities, which are carried at fair value, are classified in one of the following three categories:

Level 1: Quoted market prices in active markets for identical assets or liabilities.

Level 2: Observable market based inputs or unobservable inputs that are corroborated by market data.

Level 3: Unobservable inputs that are not corroborated by market data.

The Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2011 and 2010 and December 31, 2010 are as follows (in thousands):

 

     June 30,     Fair Value Measurements Using  
     2011     Level 1      Level 2     Level 3  

Financial assets (liabilities):

         

Forward currency exchange contracts

   $ (295   $ -       $ (295   $ -   

Nonqualified savings plan assets (a)

     8,530       8,530        -        -   

Available for sale securities(b)

     5,048       5,048        -        -   

Total

   $ 13,283     $ 13,578      $ (295   $ -   
     June 30,     Fair Value Measurements Using  
     2010     Level 1      Level 2     Level 3  

Financial assets (liabilities):

         

Interest rate contracts

   $ 15     $ -       $ 15     $ -   

Forward currency exchange contracts

     66       -         66       -   

Nonqualified savings plan assets (a)

     5,995       5,995        -        -   

Available for sale securities(b)

     7,950       7,950        -        -   

Total

   $ 14,026     $ 13,945      $ 81     $ -   

 

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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

     December 31,     Fair Value Measurements Using  
     2010     Level 1      Level 2     Level 3  

Financial assets (liabilities):

         

Interest rate contracts

   $ 7     $ -       $ 7     $ -   

Forward currency exchange contracts

     (577     -         (577     -   

Nonqualified savings plan assets (a)

     7,073       7,073        -        -   

Available for sale securities(b)

     3,650       3,650        -        -   

Total

   $ 10,153     $ 10,723      $ (570   $ -   

 

(a) 

The non-qualified savings plan assets have an offsetting liability of equal amount, which is included in “Accounts payable and other liabilities” in the Company’s consolidated balance sheets.

(b) 

Unrealized total gains/ (losses) on these securities of ($0.6) million, $2.3 million and ($2.0) million as of June 30, 2011 and 2010 and December 31, 2010, respectively, are recorded in “Accumulated other comprehensive income” in the Company’s consolidated statements of equity.

The Company measures the value of its interest rate contracts and forward currency exchange contracts under Level 2 inputs as defined by ASC 820-10. For its interest rate contracts the Company relies on a market place valuation based on yield curves using observable market interest rates for the interest rate contracts. For its forward currency exchange contracts, standard valuation models are used to determine fair value. The significant inputs used in these models are derived from observable market transactions. The fair value of the nonqualified savings plan assets and certain available for sale securities are measured under a Level 1 input. These assets are publicly traded equity securities for which market prices are readily observable. During the six months ended June 30, 2011 and 2010, there were no transfers of assets in or out of Level 1 or Level 2 fair value measurements.

Other Fair Value Disclosures

The carrying amounts and estimated fair values of financial instruments at June 30, 2011 and 2010 and December 31, 2010 were as follows (in thousands):

 

          As of June 30,      As of December 31,  
          2011    2010      2010  
          Carrying
Value
         Estimated
Fair Value
         Carrying
Value
         Estimated
Fair Value
           Carrying
Value
           Estimated
Fair Value
 

Financial assets:

                              

Cash and cash equivalents

   $      48,375     $      48,375     $      46,708     $      46,708     $           38,324     $           38,324  

Pawn loans

        229,343          229,343          184,104          184,104          218,408          218,408  

Consumer loans, net

        160,371          160,371          115,295          115,295          139,377          139,377  

Financial liabilities:

                              

Bank lines of credit

   $      184,256     $      190,404     $      139,799     $      135,674     $           215,025     $           211,576  

Senior unsecured notes

        161,667          161,758          156,920          155,249          137,507          134,125  

2009 Convertible Notes

        105,584          271,400          102,818          175,175          104,172          185,725  

Cash and cash equivalents bear interest at market rates and have maturities of less than 90 days. Pawn loans and consumer loans have relatively short maturity periods that are generally 90 days or less. Since cash and cash equivalents, pawn loans and consumer loans generally have maturities of less than 90 days, their fair value approximates their carrying value. Pawn loan fee and service charge rates are determined by regulations and bear no valuation relationship to the capital markets’ interest rate movements. Generally, pawn loans may only be resold to a licensed pawnbroker.

 

 

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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

The fair values of the Company’s long-term debt instruments are estimated based on market values for debt issues with similar characteristics or rates currently available for debt with similar terms. The Company’s senior unsecured notes have a higher fair market value than the carrying value due to the difference in the yield in excess of like maturity U.S. Treasury yields when compared to recent issuances of similar senior unsecured notes. The 2009 Convertible Notes have a higher fair value than carrying value due to the Company’s stock price as of each period presented above exceeding the applicable conversion price for the 2009 Convertible Notes, thereby increasing the value of the instrument for bondholders.

 

10. Derivative Instruments

The Company periodically uses derivative instruments to manage risk from changes in market conditions that may affect the Company’s financial performance. The Company primarily uses derivative instruments to manage its primary market risks, which are interest rate risk and foreign currency exchange rate risk.

The Company uses interest rate cap agreements for the purpose of managing interest rate exposure on its floating rate debt. For derivatives designated as cash flow hedges, the effective portions of changes in the estimated fair value of the derivative are reported in “Accumulated other comprehensive income (loss)” (or “OCI”) on the Company’s consolidated balance sheets and are subsequently reclassified into earnings when the hedged item affects earnings. The change in the estimated fair value of the ineffective portion of the hedge, if any, will be recorded as income or expense.

On December 3, 2008, the Company entered into an interest rate cap agreement with a notional amount of $15.0 million to hedge the Company’s outstanding floating rate line of credit for a term of 36 months at a fixed rate of 3.25%. On March 27, 2009, the Company entered into an interest rate cap agreement with a notional amount of $15.0 million to hedge the Company’s outstanding floating rate line of credit for a term of 36 months at a fixed rate of 3.25%. These interest rate contracts have been determined to be perfectly effective cash flow hedges, pursuant to ASC 815-20-25, Derivatives and Hedging – Recognition at inception and on an ongoing basis.

The Company periodically uses forward currency exchange contracts to minimize risk of foreign currency exchange rate fluctuations in the United Kingdom, Mexico and Australia. The Company’s forward currency exchange contracts are non-designated derivatives. Any gain or loss resulting from these contracts is recorded as income or loss and is included in “Foreign currency transaction gain (loss)” in the Company’s consolidated statements of income. The Company does not currently manage its exposure to risk from foreign currency exchange rate fluctuations through the use of forward currency exchange contracts in Canada. As the Company’s foreign operations continue to grow, management will continue to evaluate and implement foreign exchange rate risk management strategies.

 

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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

The fair values of the Company’s derivative instruments at June 30, 2011 and 2010 and December 31, 2010 were as follows (in thousands):

 

          Balance at  
Assets    Balance Sheet Location    June 30, 2011     June 30, 2010      December 31, 2010  

Derivatives designated as hedges:

         
 
Notional
Amount
  
  
    
 
Fair
Value
  
  
   
 
Notional
Amount
  
  
    
 
Fair
Value
  
  
    
 
Notional
Amount
  
  
    
 
Fair
Value
  
  

Interest rate contracts

  

Prepaid expenses and

other assets

   $ 30,000      $      $ 30,000      $ 15      $ 30,000      $ 7  

Non-designated derivatives:

                                                         

Forward currency exchange contracts

  

Prepaid expenses and

other assets

   $ 70,207      $ (295   $ 8,328        66      $ 46,392      $ (577

The following table presents information on the effect of derivative instruments on the consolidated results of operations and OCI for the three and six months ended June 30, 2011 and 2010 (in thousands):

 

    Gains (Losses) Recognized  in
Income
    Gains (Losses) Recognized in
OCI
    Gains (Losses) Reclassified
From OCI into Income
 
    Three months ended     Three months ended     Three months ended  
    June 30,     June 30,     June 30,  
    2011     2010     2011     2010     2011     2010  
                       

Derivatives designated as hedges:

           

Interest rate contracts

  $      $      $ 24     $ (11   $      $   

Total

  $      $      $ 24     $ (11   $      $   
                                                 

Non-designated derivatives:

           

Forward currency exchange contracts(a)

  $ (251   $ 289     $      $      $      $   

Total

  $ (251   $ 289     $      $      $      $   

 

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CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 

 

    Losses Recognized in Income     Gains (Losses) Recognized in
OCI
    Gains (Losses) Reclassified
From OCI into Income
 
    Six months ended     Six months ended     Six months ended  
    June 30,     June 30,     June 30,  
    2011     2010     2011     2010     2011     2010  
                       
           

Derivatives designated as hedges:

           

Interest rate contracts

  $      $      $ 39     $ (118   $      $   

Total

  $      $      $ 39     $ (118   $      $   

Non-designated derivatives:

           

Forward currency exchange
contracts
(a)

  $ (1,708   $ (274   $      $      $      $   

Total

  $ (1,708   $ (274   $      $      $      $   

 

(a)

The loss on these derivatives substantially offsets the gain on foreign intercompany balances.

 

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

The following discussion of results of operations, liquidity and capital resources and certain factors that may affect future results, including economic and industry-wide factors, of Cash America International, Inc. (the “Company”) should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included under Part I, Item I of this Quarterly Report on Form 10-Q, as well as with Management’s Discussion and Analysis of Financial Condition and Results of Operations included in the Company’s Annual Report on Form 10-K for the calendar year ended December 31, 2010.

General

The Company provides specialty financial services to individuals through retail services locations and through electronic distribution platforms known as e-commerce activities. These services include secured non-recourse loans, commonly referred to as pawn loans, and secured and unsecured consumer 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 are 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 third parties or from customers.

The Company’s consumer loan portfolio includes short-term single payment loans, longer-term multi-payment installment loans, credit services and, in prior periods, participation interests purchased from third parties in the micro line of credit (or “MLOC”) services channel. Consumer loans provide customers with cash, typically in exchange for a promissory note or other repayment agreement. Through the Credit Services Organization program (the “CSO program”), the Company markets and services third-party lenders’ consumer loan products in certain states by acting as a credit services organization on behalf of consumers in accordance with applicable state laws. The CSO program includes credit services, loans arranged with independent third-party lenders, assistance in the preparation of loan applications and loan documents and acceptance of loan payments. The Company also guarantees the customer’s payment obligations in the event of default if the customer is approved for and accepts the loan through the CSO program. A customer who obtains a loan through the CSO program pays the Company a fee for these credit services (“CSO fees”). Although consumer loan transactions may take the form of loans, deferred check deposit transactions, credit services transactions, or, in prior periods, the processing of, and the participation in receivables originated by, a third-party lender’s MLOC product, the transactions are referred to throughout this discussion as “consumer loans.”

 

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Retail Services Segment

The following table sets forth the number of domestic and foreign locations in the Company’s retail services segment offering pawn lending, consumer lending, and other services as of June 30, 2011 and 2010. The Company’s domestic retail services locations operate under the names “Cash America Pawn,” “SuperPawn,” “Cash America Payday Advance,” “Cashland,” “Maxit,” “Pawn X-Change” and “Mr. Payroll.” (Maxit and Pawn X-Change were acquired in October 2010.) The Company’s foreign retail services locations (of which the Company is a majority owner) operate under the name “Prenda Fácil.”

 

     As of June 30,  
     2011      2010  
     Domestic(a)(b)      Foreign(a)      Total      Domestic      Foreign      Total  
                 

Retail services locations offering:

                 

Both pawn and consumer lending

     572          -         572        573          -         573  

Pawn lending only

     125          184          309        76          200          276  

Consumer lending only

     85          -         85        88          -         88  

Other (c)

     118          -         118        125          -         125  

Total retail services

     900          184          1,084        862          200          1,062  

 

(a) 

Except as described in (c) below, includes locations that operate in 23 and 21 states in the United States and Mexico, respectively.

(b) 

Includes nine unconsolidated franchised locations operating under the name “Cash America Pawn” as of both June 30, 2011 and 2010.

(c) 

As of June 30, 2011 and 2010, includes six and five consolidated Company-owned check cashing locations, respectively, and 112 and 120 unconsolidated franchised check cashing locations, respectively. As of June 30, 2011, includes locations that operate in 18 states in the United States.

E-Commerce Segment

As of June 30, 2011, the Company’s e-commerce operating segment offers consumer loans to customers over the Internet:

 

   

in 30 states in the United States at http://www.cashnetusa.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.

The e-commerce segment also includes the Company’s MLOC services channel, which processed MLOC advances on behalf of a third-party lender and had a participation interest in MLOC receivables during most of 2010. In the past, the MLOC services channel generated its earnings through loan processing services the Company provided for a third-party lender, as well as from fees generated from participation interests in receivables the Company acquired. This program ended in October 2010 because the third-party lender discontinued offering MLOC advances. The Company intends to continue pursuing the development of new MLOC opportunities during the remainder of 2011.

 

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CRITICAL ACCOUNTING POLICIES

 

Except as described below, since December 31, 2010, there have been no changes in critical accounting policies as described in the Company’s Annual Report on Form 10-K for the year ended December 31, 2010.

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’s impairment evaluation of goodwill is based on comparing the fair value of the Company’s reporting units to their carrying value. The fair value of the reporting units was determined based on the income approach and then compared to the results of the market approach for reasonableness. The income approach establishes fair value based on estimated future cash flows of each reporting unit, discounted by an estimated weighted-average cost of capital developed using the capital asset pricing model, which reflects the overall level of inherent risk of a reporting unit. The income approach uses the Company’s projections of financial performance for a five-year period and includes assumptions about future revenue growth rates, operating margins and terminal growth rates, which vary among reporting units. The market approach establishes fair value by applying cash flow multiples to the reporting unit’s operating performance. The multiples are derived from other publicly traded companies that are similar but not identical from an operational and economic standpoint.

As of June 30, 2011, the annual assessment date, the Company’s reporting units had combined fair values that exceeded carrying value by 115.9%. The retail services segment and the e-commerce segment had fair values that exceeded carrying value by 69.8% and 810.4%, respectively. Based on the results of this test, no impairment of goodwill was observed. The Company also performed a sensitivity analysis on the Company’s estimated fair value using the income approach. A key assumption in the Company’s fair value estimate is the weighted average cost of capital utilized for discounting the Company’s cash flow estimates in the Company’s income approach. Holding all other assumptions constant at the annual assessment date, a 100 basis point increase in the discount rates would reduce the combined fair value for the Company’s reporting units by $238.9 million, which would exceed the carrying value by 88.0%.

The Company also evaluated its indefinite-lived intangible assets for impairment as of June 30, 2011 and noted no impairment.

The process of evaluating goodwill and other indefinite-lived intangible assets for impairment involves the determination of the fair value of the Company’s reporting units. Inherent in such fair value determination are certain judgments and estimates relating to future cash flows, including the Company’s interpretation of current economic indicators and market valuations, and assumptions about the Company’s strategic plans with regard to the Company’s operations. To the extent additional information arises, market conditions change or the Company’s strategies change, it is possible that the Company’s conclusions regarding whether existing goodwill is impaired could change and result in a material effect on the Company’s consolidated financial position or results of operations.

 

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RESULTS OF OPERATIONS

 

Highlights

The Company’s financial results for the three months ended June 30, 2011 (the “current quarter”) are summarized below.

 

 

Consolidated total revenue increased 14.4%, to $334.3 million, for the current quarter compared to the three months ended June 30, 2010 (the “prior year quarter”), due to strong demand across all product categories.

 

 

Consolidated net revenue increased $33.1 million, or 18.7%, to $209.8 million, for the current quarter compared to the prior year quarter. 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 16.0%, or $16.5 million, in the current quarter compared to the prior year quarter, primarily due to organic growth in domestic retail pawn operations and the acquisition of substantially all of the assets of Maxit on October 4, 2010, which owned and operated a 39-store chain of pawn lending locations that operate in Washington and Arizona (“the Maxit acquisition”). Consumer loan fees, net of consumer loan loss provision, increased 23.1%, or $16.4 million, in the current quarter compared to the prior year quarter, primarily due to higher average consumer loan balances in the e-commerce segment from growth in foreign markets, partially offset by lower average consumer loan balances in the domestic e-commerce segment.

 

 

Net income increased 29.2%, to $27.0 million, in the current quarter compared to the prior year quarter. Diluted net income per share increased $0.18 per share, or 27.3%, to $0.84 in the current quarter compared to $0.66 in the prior year quarter.

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 three and six months ended June 30, 2011 and 2010 by segment and on a consolidated basis (dollars in thousands):

 

     Three Months Ended June 30, 2011  
     Retail Services     E-Commerce     Consolidated  
            % of            % of            % of  
     Amount      Total     Amount      Total     Amount      Total  

Pawn loan fees and service charges

   $ 68,348        47.2    $ -         -   $ 68,348        32.6 

Proceeds from disposition of merchandise, net of cost of revenue

     51,012        35.2      6        -     51,018        24.3 

Pawn related

   $ 119,360        82.4    $ 6        -   $ 119,366        56.9 
   

Consumer loan fees, net of loan loss provision

   $ 22,564        15.6    $ 64,721        99.5    $ 87,285        41.6 

Other revenue

     2,858        2.0      339        0.5      3,197        1.5 

Net revenue

   $     144,782        100.0    $     65,066        100.0    $     209,848        100