2014 Q2 10Q
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, 2014
  
 
 
 
 
 
  
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
  
 
(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
 
 
76102
(Address of principal executive offices)
 
(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:
28,887,385 of the Registrants’ common shares, $.10 par value, were issued and outstanding as of July 21, 2014.


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 with respect to the business, financial condition, operations and prospects of Cash America International, Inc. and its subsidiaries (collectively, the “Company”). When used in this report, terms such as “believes,” “estimates,” “should,” “could,” “would,” “plans,” “expects,” “intends,” “anticipates,” “may,” “forecast,” “project” and similar expressions or variations as they relate to the Company or its management are intended to identify forward-looking statements. Forward-looking statements address matters that involve risks and uncertainties that are beyond the ability of the Company to control and, in some cases, predict. Accordingly, there are or will be important factors that could cause the Company’s actual results to differ materially from those indicated in these statements. Key factors that could cause the Company’s actual financial results, performance or condition to differ from the expectations expressed or implied in such forward-looking statements include, but are not limited to, the following:

•
the effect of and compliance with domestic and foreign pawn, consumer credit, tax and other laws and government rules and regulations applicable to the Company’s business, including changes in such laws, rules and regulations, or changes in the interpretation or enforcement thereof, and the regulatory and examination authority of the Consumer Financial Protection Bureau with respect to providers of consumer financial products and services in the United States and the Financial Conduct Authority in the United Kingdom;
•
the effect of and compliance with enforcement actions, orders and agreements issued by applicable regulators, such as a consent order the Company entered into with the Consumer Financial Protection Bureau in November 2013;
•
changes in the Company's U.K. business practices as a result of adapting the Company's business in response to the requirements of the Financial Conduct Authority;
•
the deterioration of the political, regulatory or economic environment in foreign countries where the Company operates or in the future may operate;
•
the Company’s ability to process or collect consumer loans through the Automated Clearing House system;
•
risks related to the potential separation of the Company’s online lending business that comprises its E-Commerce Division, Enova International, Inc.;
•
the actions of third parties who provide, acquire or offer products and services to, from or for the Company;
•
public perception of the Company’s business, including the Company’s consumer loan business and the Company’s business practices;
•
the effect of any current or future litigation proceedings and any judicial decisions or rule-making that affects the Company, its products or the legality or enforceability of its arbitration agreements;
•
fluctuations, including a sustained decrease, in the price of gold or a deterioration in economic conditions;
•
a prolonged interruption in the Company’s operations of its facilities, systems or business functions, including the Company’s information technology and other business systems;
•
changes in demand for the Company’s services and changes in competition;
•
the Company’s ability to maintain an allowance or liability for estimated losses on consumer loans that are adequate to absorb credit losses;
•
the Company’s ability to attract and retain qualified executive officers;
•
the Company’s ability to open new locations in accordance with plans or to successfully integrate newly acquired businesses into its operations;
•
interest rate and foreign currency exchange rate fluctuations;
•
changes in the capital markets, including the debt and equity markets;
•
changes in the Company’s ability to satisfy the Company’s debt obligations or to refinance existing debt obligations or obtain new capital to finance growth;
•
cyber-attacks or security breaches;
•
acts of God, war or terrorism, pandemics and other events;
•
the effect of any of the above changes on the Company’s business or the markets in which the Company operates; and
•
other risks and uncertainties described in this report or from time to time in the Company’s filings with the Securities and Exchange Commission (“SEC”).

Table of Contents





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




CASH AMERICA INTERNATIONAL, INC.
INDEX TO FORM 10-Q
 
 
 
 
Page
Item 1.
 
 
 
 
 
 
 
Item 2.
Item 3.
Item 4.
 
 
 
 
 
 
Item 1.
Item 1A.
Item 2.
Item 3.
Item 4.
Item 5.
Item 6.
 
 


Table of Contents




PART I. FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(dollars in thousands, except per share data)
(Unaudited)

 
June 30,
 
December 31,
 
2014
 
2013
 
2013
Assets
 
 
 
 
 
Current assets:
 
 
 
 
 
Cash and cash equivalents
$
192,915

 
$
124,459

 
$
67,228

Restricted cash
60

 
—

 
8,000

Pawn loans
263,668

 
229,574

 
261,148

Consumer loans, net
337,961

 
287,127

 
358,841

Merchandise held for disposition, net
198,919

 
155,112

 
208,899

Pawn loan fees and service charges receivable
51,986

 
45,566

 
53,438

Income taxes receivable
17

 
25,495

 
9,535

Prepaid expenses and other assets
42,545

 
30,985

 
33,655

Deferred tax assets
34,779

 
43,628

 
38,800

Total current assets
1,122,850

 
941,946

 
1,039,544

Property and equipment, net
255,407

 
250,842

 
261,223

Goodwill
706,037

 
608,242

 
705,579

Intangible assets, net
49,135

 
34,067

 
52,256

Other assets
35,457

 
21,571

 
21,129

Total assets
$
2,168,886

 
$
1,856,668

 
$
2,079,731

Liabilities and Equity
 
 
 
 
 
Current liabilities:
 
 
 
 
 
Accounts payable and accrued expenses
$
120,417

 
$
115,591

 
$
140,068

Customer deposits
18,295

 
12,962

 
14,803

Income taxes currently payable
—

 
—

 
—

Current portion of long-term debt
—

 
22,606

 
22,606

Total current liabilities
138,712

 
151,159

 
177,477

Deferred tax liabilities
113,157

 
103,759

 
101,417

Noncurrent income tax payable
—

 
36,834

 
—

Other liabilities
1,268

 
1,609

 
1,031

Long-term debt
793,863

 
547,218

 
717,383

Total liabilities
$
1,047,000

 
$
840,579

 
$
997,308

Equity:
 
 
 
 
 
Cash America International, Inc. equity:
 
 
 
 
 
Common stock, $0.10 par value per share, 80,000,000 shares authorized, 30,235,164 shares issued and outstanding
3,024

 
3,024

 
3,024

Additional paid-in capital
86,184

 
156,349

 
150,833

Retained earnings
1,082,725

 
946,483

 
1,017,981

Accumulated other comprehensive income (loss)
7,998

 
(362
)
 
4,649

Treasury shares, at cost (1,382,602 shares, 2,107,082 shares and 2,224,902 shares as of June 30, 2014 and 2013, and as of December 31, 2013, respectively)
(58,045
)
 
(89,405
)
 
(94,064
)
Total equity
1,121,886

 
1,016,089

 
1,082,423

Total liabilities and equity
$
2,168,886

 
$
1,856,668

 
$
2,079,731



See notes to consolidated financial statements.
1
Table of Contents




CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(dollars in thousands, except per share data)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Revenue
 
 
 
 
 
 
 
Pawn loan fees and service charges
$
80,990

 
$
72,728

 
$
161,177

 
$
148,642

Proceeds from disposition of merchandise
146,772

 
131,532

 
323,227

 
310,249

Consumer loan fees
225,339

 
202,431

 
459,521

 
412,636

Other
1,989

 
3,689

 
4,265

 
6,981

Total Revenue
455,090

 
410,380

 
948,190

 
878,508

Cost of Revenue
 
 
 
 
 
 
 
Disposed merchandise
104,510

 
88,961

 
229,074

 
210,296

Consumer loan loss provision
74,689

 
77,229

 
148,189

 
152,081

Total Cost of Revenue
179,199

 
166,190

 
377,263

 
362,377

Net Revenue
275,891

 
244,190

 
570,927

 
516,131

Expenses
 
 
 
 
 
 
 
Operations and administration
194,975

 
176,942

 
386,561

 
353,766

Depreciation and amortization
19,497

 
18,000

 
38,758

 
35,531

Total Expenses
214,472

 
194,942

 
425,319

 
389,297

Income from Operations
61,419

 
49,248

 
145,608

 
126,834

Interest expense
(12,828
)
 
(8,903
)
 
(22,896
)
 
(16,348
)
Interest income
8

 
5

 
18

 
68

Foreign currency transaction (loss) gain
(179
)
 
65

 
(280
)
 
(312
)
Loss on extinguishment of debt
(15,016
)
 
—

 
(16,562
)
 
—

Equity in loss of unconsolidated subsidiary
—

 
(25
)
 
—

 
(136
)
Income before Income Taxes
33,404

 
40,390

 
105,888

 
110,106

Provision for income taxes
12,433

 
14,946

 
39,180

 
40,740

Net Income
20,971

 
25,444

 
66,708

 
69,366

Net income attributable to the noncontrolling interest
—

 
(312
)
 
—

 
(308
)
Net Income Attributable to Cash America International, Inc.
$
20,971

 
$
25,132

 
$
66,708

 
$
69,058

Earnings Per Share:
 
 
 
 
 
 
 
Net Income attributable to Cash America International, Inc. common shareholders:
 
 
 
 
 
 
 
Basic
$
0.73

 
$
0.88

 
$
2.33

 
$
2.39

Diluted
$
0.72

 
$
0.81

 
$
2.27

 
$
2.23

Weighted average common shares outstanding:
 
 
 
 
 
 
 
Basic
28,823

 
28,721

 
28,616

 
28,910

Diluted
29,256

 
30,845

 
29,365

 
31,023

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 COMPREHENSIVE INCOME
(dollars in thousands)
(Unaudited)
 
Three Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
Net income
$
20,971

 
$
25,444

 
$
66,708

 
$
69,366

Other comprehensive gain (loss), net of tax:
 
 
 
 
 
 
 
Foreign currency translation gain (loss)(a)
2,816

 
(3,781
)
 
3,349

 
(3,347
)
Marketable securities(b)
—

 
(895
)
 
—

 
(254
)
Total other comprehensive gain (loss), net of tax
$
2,816

 
$
(4,676
)
 
$
3,349

 
$
(3,601
)
Comprehensive income
$
23,787

 
$
20,768

 
$
70,057

 
$
65,765

Net income attributable to the noncontrolling interest
—

 
(312
)
 
—

 
(308
)
Foreign currency translation loss, net of tax, attributable to the noncontrolling interest
—

 
112

 
—

 
111

Comprehensive income attributable to the noncontrolling interest
—

 
(200
)
 
—

 
(197
)
Comprehensive income attributable to Cash America International, Inc.
$
23,787

 
$
20,568

 
$
70,057

 
$
65,568

 
(a)
Net of tax (provision) benefit of $(1,365) and $319 for the three months ended June 30, 2014 and 2013, respectively, and $(1,710) and $1,739 for the six months ended June 30, 2014 and 2013, respectively.
(b)
Net of tax benefit of $481 and $136 for the three and six months ended June 30, 2013, respectively.


See notes to consolidated financial statements.
3
Table of Contents




CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EQUITY
(dollars in thousands, except per share data)
(Unaudited)
 
Common Stock
 
Additional
paid-in
capital
 
Retained
earnings
 
Accumulated
other
comprehensive
income (loss)
 
Treasury shares, at cost
 
Total share-
holders’
equity
 
Non-
controlling
interest
 
Total
Equity
 
Shares
 
Amount
 
 
 
 
 
 
 
Shares
 
Amount
 
 
 
 
 
 
Balance as of January 1, 2013
30,235,164

 
$
3,024

 
$
157,613

 
$
879,434

 
$
3,128

 
(1,351,712
)
 
$
(51,304
)
 
$
991,895

 
$
(1,275
)
 
$
990,620

Shares issued under stock-based plans
 
 
 
 
(4,833
)
 
 
 
 
 
124,108

 
4,833

 
—

 
 
 
—

Stock-based compensation expense
 
 
 
 
2,791

 
 
 
 
 
 
 
 
 
2,791

 
 
 
2,791

Income tax benefit from stock-based compensation
 
 
 
 
569

 
 
 
 
 
 
 
 
 
569

 
 
 
569

Net income attributable to Cash America International, Inc.
 
 
 
 
 
 
69,058

 
 
 
 
 
 
 
69,058

 
 
 
69,058

Dividends paid
 
 
 
 
 
 
(2,009
)
 
 
 
 
 
 
 
(2,009
)
 
 
 
(2,009
)
Foreign currency translation loss, net of tax
 
 
 
 
 
 
 
 
(3,236
)
 
 
 
 
 
(3,236
)
 
(111
)
 
(3,347
)
Marketable securities, net of tax
 
 
 
 
 
 
 
 
(254
)
 
 
 
 
 
(254
)
 
 
 
(254
)
Purchases of treasury shares
 
 
 
 
 
 
 
 
 
 
(879,478
)
 
(42,934
)
 
(42,934
)
 
 
 
(42,934
)
Income from noncontrolling interest
 
 
 
 
 
 
 
 
 
 
 
 
 
 
—

 
308

 
308

Purchase of noncontrolling interest
 
 
 
 
209

 
 
 
 
 
 
 
 
 
209

 
1,078

 
1,287

Balance as of June 30, 2013
30,235,164

 
$
3,024

 
$
156,349

 
$
946,483

 
$
(362
)
 
(2,107,082
)
 
$
(89,405
)
 
$
1,016,089

 
$
—

 
$
1,016,089

Balance as of January 1, 2014
30,235,164

 
$
3,024

 
$
150,833

 
$
1,017,981

 
$
4,649

 
(2,224,902
)
 
$
(94,064
)
 
$
1,082,423

 
$
—

 
$
1,082,423

Shares issued under stock-based plans
 
 
 
 
(5,652
)
 
 
 
 
 
130,694

 
5,652

 
—

 
 
 
—

Stock-based compensation expense
 
 
 
 
3,146

 
 
 
 
 
 
 
 
 
3,146

 
 
 
3,146

Reduction in income tax benefit from stock-based compensation
 
 
 
 
(149
)
 
 
 
 
 
 
 
 
 
(149
)
 
 
 
(149
)
Repurchase and conversion of convertible debt
 
 
 
 
(61,994
)
 
 
 
 
 
747,085

 
31,727

 
(30,267
)
 
 
 
(30,267
)
Net income attributable to Cash America International, Inc.
 
 
 
 
 
 
66,708

 
 
 
 
 
 
 
66,708

 
 
 
66,708

Dividends paid
 
 
 
 
 
 
(1,964
)
 
 
 
 
 
 
 
(1,964
)
 
 
 
(1,964
)
Foreign currency translation gain, net of tax
 
 
 
 
 
 
 
 
3,349

 
 
 
 
 
3,349

 


 
3,349

Purchases of treasury shares
 
 
 
 
 
 
 
 
 
 
(35,479
)
 
(1,360
)
 
(1,360
)
 
 
 
(1,360
)
Balance as of June 30, 2014
30,235,164

 
$
3,024

 
$
86,184

 
$
1,082,725

 
$
7,998

 
(1,382,602
)
 
$
(58,045
)
 
$
1,121,886

 
$
—

 
$
1,121,886



See notes to consolidated financial statements.
4
Table of Contents




CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(dollars in thousands)
(Unaudited)
 
Six Months Ended 
 June 30,
 
2014
 
2013
Cash Flows from Operating Activities
 
 
 
Net Income
$
66,708

 
$
69,366

Adjustments to reconcile net income to net cash provided by operating activities:
 
 
 
Depreciation and amortization expenses
38,758

 
35,531

Amortization of debt discount and issuance costs
2,467

 
3,055

Consumer loan loss provision
148,189

 
152,081

Stock-based compensation
3,146

 
2,791

Deferred income taxes, net
14,207

 
9,287

Excess income tax benefit from stock-based compensation
—

 
(569
)
Other
4,603

 
1,954

Changes in operating assets and liabilities, net of assets acquired:
 
 
 
Merchandise other than forfeited
4,026

 
9,252

Pawn loan fees and service charges receivable
1,494

 
3,454

Finance and service charges on consumer loans
4,279

 
(344
)
Restricted cash
7,940

 
—

Prepaid expenses and other assets
(8,331
)
 
318

Accounts payable and accrued expenses
(18,789
)
 
(6,241
)
Current and noncurrent income taxes
9,057

 
3,380

Other operating assets and liabilities
3,480

 
1,536

Net cash provided by operating activities
$
281,234

 
$
284,851

Cash Flows from Investing Activities
 
 
 
Pawn loans made
(404,091
)
 
(350,648
)
Pawn loans repaid
239,934

 
219,807

Principal recovered through dispositions of forfeited pawn loans
164,299

 
146,618

Consumer loans made or purchased
(988,917
)
 
(958,816
)
Consumer loans repaid
856,226

 
806,397

Acquisitions, net of cash acquired
(1,204
)
 
(923
)
Purchases of property and equipment
(29,459
)
 
(22,392
)
Proceeds from sale of marketable securities
—

 
6,616

Other investing activities
86

 
297

Net cash used in investing activities
$
(163,126
)
 
$
(153,044
)
Cash Flows from Financing Activities
 
 
 
Net payments under bank lines of credit
(193,717
)
 
(301,011
)
Issuance of long-term debt
493,810

 
300,000

Debt issuance costs paid
(16,626
)
 
(9,862
)
Payments on/repurchases of notes payable
(276,920
)
 
(9,167
)
Excess income tax benefit from stock-based compensation
—

 
569

Treasury shares purchased
(1,360
)
 
(42,934
)
Dividends paid
(1,964
)
 
(2,009
)
Purchase of noncontrolling interest
—

 
(4
)
Net cash provided by (used in) financing activities
$
3,223

 
$
(64,418
)
Effect of exchange rates on cash
$
4,356

 
$
(4,304
)
Net increase in cash and cash equivalents
125,687

 
63,085

Cash and cash equivalents at beginning of year
67,228

 
61,374

Cash and cash equivalents at end of period
$
192,915

 
$
124,459

Supplemental Disclosures
 
 
 
Non-cash investing and financing activities
 
 
 
Pawn loans forfeited and transferred to merchandise held for disposition
$
161,201

 
$
145,986

Pawn loans renewed
$
128,590

 
$
127,314

Consumer loans renewed
$
193,996

 
$
333,526

Fair value of common shares issued for conversion of convertible debt
$
31,727

 
$
—


See notes to consolidated financial statements.
5
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 subsidiaries (collectively, the “Company”). All significant intercompany accounts and transactions have been eliminated in consolidation.

The financial statements presented as of June 30, 2014 and 2013 and December 31, 2013 and for the six-month periods ended June 30, 2014 and 2013 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 consolidated 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. Certain amounts in the consolidated financial statements for the three and six months ended June 30, 2013 have been reclassified to conform to the current year presentation. These reclassifications have no effect on the net income previously reported. See “Revision of Prior Period Financial Statements” for further discussion.

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, 2013.

Cash and Cash Equivalents

The Company considers cash on hand in operating locations, deposits in banks and short-term investments with original maturities of 90 days or less as cash and cash equivalents. Cash equivalents are principally invested in short-term money market funds.

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 Accounting Standards Codification (“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 expected 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 estimated 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, 2014 and determined that the fair value of its goodwill is in excess of carrying value, and, as a result, no impairment existed at that date.

The Company performed its annual indefinite-lived intangible asset impairment test as of June 30, 2014. The Company elected to perform a qualitative assessment in accordance with Accounting Standards Update

6
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

(“ASU”) No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment (“ASU 2012-02”), and determined that it was not more likely than not that the indefinite-lived intangible assets are impaired. Therefore, no further quantitative assessment was required.
Adopted Accounting Standards
    
In April 2014, the Financial Accounting Standards Board (the “FASB”) issued ASU 2014-08, Presentation of Financial Statements (Topic 205) and Property, Plant, and Equipment (Topic 360): Reporting Discontinued Operations and Disclosures of Disposals of Components of an Entity (“ASU 2014-08”). The amendments in ASU 2014-08 change the criteria for reporting discontinued operations and enhance disclosures in this area. The new guidance requires expanded disclosures about discontinued operations that will provide financial statement users with more information about the assets, liabilities, income, and expenses of discontinued operations. The new guidance also requires disclosure of the pre-tax income or loss attributable to a disposal of an individually significant component of an organization that does not qualify for discontinued operations presentation in the financial statements. The Company is required to adopt ASU 2014-08 prospectively for all disposals (or classifications as held for sale) of components of an entity that occur within annual periods beginning on or after December 15, 2014 and interim periods within those years. Early adoption is permitted. The Company adopted ASU 2014-08 on June 30, 2014, and the adoption did not have a material effect on its financial position or results of operations.

In July 2013, the FASB issued ASU No. 2013-11, Presentation of an Unrecognized Tax Benefit When a Net Operating Loss Carryforward, a Similar Tax Loss, or a Tax Credit Carryforward Exists (“ASU 2013-11”), which provides guidance on the presentation of unrecognized tax benefits when net operating loss carryforwards, similar tax losses, or tax credit carryforwards exist. The amendments in this update are effective for fiscal years (and interim periods within those years) beginning after December 15, 2013. The amendments should be applied prospectively to all unrecognized tax benefits that exist at the effective date. Retrospective application is permitted. The Company prospectively adopted ASU 2013-11 on January 1, 2014, and the adoption did not have a material effect on its financial position or results of operations.

In March 2013, the FASB issued ASU No. 2013-05, Foreign Currency Matters (Topic 830): Parent’s Accounting for the Cumulative Translation Adjustment upon Derecognition of Certain Subsidiaries or Groups of Assets within a Foreign Entity or of an Investment in a Foreign Entity (a consensus of the FASB Emerging Issues Task Force) (“ASU 2013-05”), which applies to the release of the cumulative translation adjustment into net income when a parent either sells all or a part of its investment in a foreign entity or no longer holds a controlling financial interest in a subsidiary or group of assets that is a business (other than a sale of in substance real estate or conveyance of oil and gas mineral rights) within a foreign entity. ASU 2013-05 is effective prospectively for fiscal years (and interim reporting periods within those years) beginning after December 15, 2013. The Company adopted ASU 2013-05 on January 1, 2014, and the adoption did not have a material effect on its financial position or results of operations.

In February 2013, the FASB issued ASU No. 2013-04, Obligations Resulting from Joint and Several Liability Arrangements for Which the Total Amount of the Obligation Is Fixed at the Reporting Date (“ASU 2013-04”). ASU 2013-04 requires an entity to measure obligations resulting from joint and several liability arrangements for which the total amount of the obligation is fixed at the reporting date as the amount the reporting entity agreed to pay plus additional amounts the reporting entity expects to pay on behalf of its co-obligors. The guidance further provides for disclosure of the nature and amount of the obligation. ASU 2013-04 is effective for interim and annual reporting periods beginning after December 15, 2013. The Company adopted ASU 2013-04 on January 1, 2014, and the adoption did not have a material effect on its financial position or results of operations.

Accounting Standards to be Adopted in Future Periods

In May 2014, the FASB issued ASU No. 2014-09, Revenue from Contracts with Customers (Topic 606), which supersedes the revenue recognition requirements in ASC 605, Revenue Recognition. ASU 2014-09 requires

7
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

entities to recognize revenue in a way that depicts the transfer of goods or services to customers in an amount that reflects the consideration to which the entity expects to be entitled to in exchange for those goods or services. ASU 2014-09 requires additional disclosure about the nature, amount, timing and uncertainty of revenue and cash flows arising from customer contracts, including significant judgments and changes in judgments and assets recognized from costs incurred to obtain or fulfill a contract. ASU 2014-09 is effective retrospectively for fiscal years, and interim periods within those years, beginning after December 15, 2016. Early adoption is not permitted. The Company is still assessing the impact of ASU 2014-09 on its financial position and results of operations.

Revision of Prior Period Financial Statements

“Cash and cash equivalents” and “Accounts payable and accrued expenses” on the consolidated balance sheets as of June 30, 2013 and December 31, 2013 were revised to reclassify certain liabilities as in-transit cash disbursements due to the timing of payments for certain contracts. Management determined that the impact on all previously issued financial statements was immaterial. The correction resulted in the following increases (decreases) to amounts previously reported in the Company’s financial statements (dollars in thousands):

 
 
December 31, 2013
 
September 30, 2013
 
June 30, 2013
 
March 31, 2013
 
December 31, 2012
 
December 31, 2011
Consolidated Balance Sheet
 
 
 
 
 
 
 
 
 
 
 
 
Cash and cash equivalents
$
(2,010
)
 
$
(3,737
)
 
$
(7,446
)
 
$
(8,008
)
 
$
(1,760
)
 
$
(3,749
)
 
Accounts payable and accrued expenses
(2,010
)
 
(3,737
)
 
(7,446
)
 
(8,008
)
 
(1,760
)
 
(3,749
)
Consolidated Statements of Cash Flows
 
 
 
 
 
 
 
 
 
 
 
 
Net cash provided by operating activities
$
(250
)
 
$
(1,977
)
 
$
(5,686
)
 
$
(6,248
)
 
$
1,989

 
$
(2,215
)
 
Cash and cash equivalents at beginning of year
(1,760
)
 
(1,760
)
 
(1,760
)
 
(1,760
)
 
(3,749
)
 
(1,534
)
 
Cash and cash equivalents at end of period
(2,010
)
 
(3,737
)
 
(7,446
)
 
(8,008
)
 
(1,760
)
 
(3,749
)

As other prior period financial information is presented, the Company will similarly revise the consolidated balance sheets and statements of cash flows in its future filings.


2. Credit Quality Information on Pawn Loans    

The Company manages its pawn loan portfolio by monitoring the type and adequacy of collateral compared to historical gross profit margins. If a pawn loan defaults, the Company relies on the disposition of pawned property to recover the principal amount of an unpaid pawn loan, plus a yield on the investment, because the Company’s pawn loans are non-recourse against the customer. In addition, the customer’s creditworthiness does not affect the Company’s financial position or results of operations. Generally, forfeited merchandise has historically sold for an amount in excess of the cost of goods sold (which is generally the principal amount loaned on an item or the amount paid for purchased merchandise). 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 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. As of June 30, 2014 and 2013 and December 31, 2013, the Company had current pawn loans outstanding of $254.2 million, $222.9 million and $251.9 million, respectively, and delinquent pawn loans outstanding of $9.5 million, $6.7 million and $9.2 million, respectively.

8
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)


3. Consumer Loans, Credit Quality Information on Consumer Loans, Allowance and Liability for Estimated Losses on Consumer Loans and Guarantees of Consumer Loans

Consumer loan fee revenue generated from consumer loans for the three and six months ended June 30, 2014 and 2013 was as follows (dollars in thousands):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
Interest and fees on short-term loans
$
86,148

 
$
126,560

 
$
181,122

 
$
266,775

Interest and fees on line of credit accounts
74,894

 
28,283

 
147,930

 
51,517

Interest and fees on installment loans
64,297

 
47,588

 
130,469

 
94,344

Total consumer loan revenue
$
225,339

 
$
202,431

 
$
459,521

 
$
412,636


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.

The Company generally does not accrue interest on delinquent consumer loans and does not resume accrual of interest on a delinquent loan unless it is returned to current status. In addition, delinquent consumer loans generally may not be renewed, and if, during its attempt to collect on a delinquent consumer loan, the Company allows additional time for payment through a payment plan or a promise to pay, it is still considered delinquent. Generally, 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 its credit services organization programs (“CSO programs”) is initially recorded at fair value and 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. For delinquent short-term loans, the allowance or liability is based on a six-month rolling average of loss rates by stage of collection. For line of credit accounts and installment loan portfolios, the Company generally uses a migration analysis to estimate losses inherent in the portfolio. The allowance or liability calculation under the migration analysis is based on historical charge-off experience and the loss emergence period, which represents the average amount of time between the first occurrence of a loss event to the charge-off of a loan. The factors the Company considers to assess the adequacy of the allowance or liability

9
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

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.
The components of Company-owned consumer loan portfolio receivables as of June 30, 2014 and 2013 and December 31, 2013 were as follows (dollars in thousands):
 
 
As of June 30, 2014
 
Short-term
Loans
 
Line of
Credit
Accounts
 
Installment
Loans
 
Total
Current loans
$
78,691

 
$
112,391

 
$
162,052

 
$
353,134

Delinquent loans
24,194

 
10,018

 
22,802

 
57,014

Total consumer loans, gross
102,885

 
122,409

 
184,854

 
410,148

Less: allowance for losses
(21,679
)
 
(21,578
)
 
(28,930
)
 
(72,187
)
Consumer loans, net
$
81,206

 
$
100,831

 
$
155,924

 
$
337,961

 
As of June 30, 2013
 
Short-term
Loans
 
Line of
Credit
Accounts
 
Installment
Loans
 
Total
Current loans
$
119,084

 
$
51,508

 
$
124,126

 
$
294,718

Delinquent loans
49,074

 
6,563

 
16,635

 
72,272

Total consumer loans, gross
168,158

 
58,071

 
140,761

 
366,990

Less: allowance for losses
(42,068
)
 
(10,649
)
 
(27,146
)
 
(79,863
)
Consumer loans, net
$
126,090

 
$
47,422

 
$
113,615

 
$
287,127

 
As of December 31, 2013
 
Short-term
Loans
 
Line of
Credit
Accounts
 
Installment
Loans
 
Total
Current loans
$
101,379

 
$
111,822

 
$
168,221

 
$
381,422

Delinquent loans
29,857

 
13,980

 
21,448

 
65,285

Total consumer loans, gross
131,236

 
125,802

 
189,669

 
446,707

Less: allowance for losses
(24,425
)
 
(29,784
)
 
(33,657
)
 
(87,866
)
Consumer loans, net
$
106,811

 
$
96,018

 
$
156,012

 
$
358,841



10
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

Changes in the allowance for losses for the Company-owned loans and the liability for estimated losses on the Company’s guarantees of third-party lender-owned loans through the CSO programs during the three and six months ended June 30, 2014 and 2013 were as follows (dollars in thousands):
 
 
Three Months Ended June 30, 2014
 
Short-term
Loans
 
Line of
Credit
Accounts
 
Installment
Loans
 
Total
Allowance for losses for Company-owned consumer loans:
 
 
 
 
 
 
 
Balance at beginning of period
$
21,119

 
$
26,669

 
$
29,921

 
$
77,709

Consumer loan loss provision
25,067

 
21,786

 
27,116

 
73,969

Charge-offs
(32,051
)
 
(31,154
)
 
(34,801
)
 
(98,006
)
Recoveries
7,544

 
4,277

 
6,694

 
18,515

Balance at end of period
$
21,679

 
$
21,578

 
$
28,930

 
$
72,187

Liability for third-party lender-owned consumer loans:
 
 
 
 
 
 
 
Balance at beginning of period
$
1,467

 
$
—

 
$
989

 
$
2,456

Increase in liability
554

 
—

 
166

 
720

Balance at end of period
$
2,021

 
$
—

 
$
1,155

 
$
3,176

 
Three Months Ended June 30, 2013
 
Short-term
Loans
 
Line of
Credit
Accounts
 
Installment
Loans
 
Total
Allowance for losses for Company-owned consumer loans:
 
 
 
 
 
 
 
Balance at beginning of period
$
42,570

 
$
8,064

 
$
27,033

 
$
77,667

Consumer loan loss provision
42,039

 
9,919

 
24,319

 
76,277

Charge-offs
(52,852
)
 
(8,874
)
 
(27,731
)
 
(89,457
)
Recoveries
10,311

 
1,540

 
3,525

 
15,376

Balance at end of period
$
42,068

 
$
10,649

 
$
27,146

 
$
79,863

Liability for third-party lender-owned consumer loans:
 
 
 
 
 
 
 
Balance at beginning of period
$
1,547

 
$
—

 
$
548

 
$
2,095

Increase in liability
892

 
—

 
60

 
952

Balance at end of period
$
2,439

 
$
—

 
$
608

 
$
3,047


11
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 
Six Months Ended June 30, 2014
 
Short-term
Loans
 
Line of
Credit
Accounts
 
Installment
Loans
 
Total
Allowance for losses for Company-owned consumer loans:
 
 
 
 
 
 
 
Balance at beginning of period
$
24,425

 
$
29,784

 
$
33,657

 
$
87,866

Consumer loan loss provision
47,683

 
45,161

 
55,249

 
148,093

Charge-offs
(69,459
)
 
(61,142
)
 
(71,890
)
 
(202,491
)
Recoveries
19,030

 
7,775

 
11,914

 
38,719

Balance at end of period
$
21,679

 
$
21,578

 
$
28,930

 
$
72,187

Liability for third-party lender-owned consumer loans:
 
 
 
 
 
 
 
Balance at beginning of period
$
2,322

 
$
—

 
$
758

 
$
3,080

(Decrease) increase in liability
(301
)
 
—

 
397

 
96

Balance at end of period
$
2,021

 
$
—

 
$
1,155

 
$
3,176

 
Six Months Ended June 30, 2013
 
Short-term
Loans
 
Line of
Credit
Accounts
 
Installment
Loans
 
Total
Allowance for losses for Company-owned consumer loans:
 
 
 
 
 
 
 
Balance at beginning of period
$
45,982

 
$
11,107

 
$
28,614

 
$
85,703

Consumer loan loss provision
88,592

 
16,472

 
47,468

 
152,532

Charge-offs
(113,642
)
 
(20,076
)
 
(55,475
)
 
(189,193
)
Recoveries
21,136

 
3,146

 
6,539

 
30,821

Balance at end of period
$
42,068

 
$
10,649

 
$
27,146

 
$
79,863

Liability for third-party lender-owned consumer loans:
 
 
 
 
 
 
 
Balance at beginning of period
$
2,934

 
$
—

 
$
564

 
$
3,498

(Decrease) increase in liability
(495
)
 
—

 
44

 
(451
)
Balance at end of period
$
2,439

 
$
—

 
$
608

 
$
3,047


Guarantees of Consumer Loans
    
In connection with its CSO programs, the Company guarantees consumer loan payment obligations to unrelated third-party lenders for short-term loans and installment loans that are secured by a customer’s vehicle and is required to purchase any defaulted loans it has guaranteed. 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. Loans secured by a customer's vehicle, which are included in the Company’s installment loan portfolio, that are guaranteed typically have an average term of less than 24 months, with available terms of up to 42 months. As of June 30, 2014 and 2013 and December 31, 2013, the amount of consumer loans guaranteed by the Company was $47.5 million, $50.9 million and $59.0 million, respectively, representing amounts due under consumer loans originated by third-party lenders under the CSO programs. The liability for estimated losses on consumer loans guaranteed by the Company of $3.2 million, $3.0 million and $3.1 million, as of June 30, 2014 and 2013 and December 31, 2013, respectively, is included in “Accounts payable and accrued expenses” in the accompanying consolidated balance sheets.


12
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

4. Merchandise Held for Disposition

Merchandise held for disposition and the related allowance as of June 30, 2014 and 2013 and December 31, 2013 associated with the Company’s domestic and foreign retail services operations were as follows (dollars in thousands):
 
 
As of June 30,
 
As of December 31,
 
2014
 
2013
 
2013
 
Total
 
Allowance
 
Net
 
Total
 
Allowance
 
Net
 
Total
 
Allowance
 
Net
Domestic
$
194,745

 
$
(2,000
)
 
$
192,745

 
$
150,084

 
$
(840
)
 
$
149,244

 
$
204,663

 
$
(840
)
 
$
203,823

Foreign
6,283

 
(109
)
 
6,174

 
5,977

 
(109
)
 
5,868

 
5,185

 
(109
)
 
5,076

Total
$
201,028

 
$
(2,109
)
 
$
198,919

 
$
156,061

 
$
(949
)
 
$
155,112

 
$
209,848

 
$
(949
)
 
$
208,899



5. Investments in Unconsolidated Subsidiaries

The Company records investments in unconsolidated subsidiaries at cost. The aggregate carrying values of the Company’s investments in unconsolidated subsidiaries were $8.4 million and $7.3 million as of June 30, 2014 and 2013, respectively, and $8.3 million as of December 31, 2013 and were held in “Other assets” in the consolidated balance sheets. Carrying values for these investments are adjusted for cash contributions and distributions. The Company evaluates these investments for impairment if an event occurs or circumstances change that would more likely than not reduce the fair value of the investment below carrying value. If an impairment of the investment 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.


13
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

6. Long-term Debt

The long-term debt instruments and balances outstanding as of June 30, 2014 and 2013 and December 31, 2013 for each of the Company and its wholly-owned subsidiary, Enova International, Inc. (“Enova”), were as follows (dollars in thousands):
 
 
Balance as of
 
June 30,
 
December 31,
 
2014
 
2013
 
2013
Domestic and multi-currency line of credit due 2018
$
—

 
$
—

 
$
193,717

6.09% Series A senior unsecured notes due 2016
—

 
28,000

 
21,000

7.26% senior unsecured notes due 2017
—

 
20,000

 
20,000

Variable rate senior unsecured notes due 2018
—

 
37,500

 
33,333

5.75% senior unsecured notes due 2018
300,000

 
300,000

 
300,000

6.00% Series A senior unsecured notes due 2019
—

 
47,000

 
47,000

6.21% Series B senior unsecured notes due 2021
—

 
20,455

 
18,182

6.58% Series B senior unsecured notes due 2022
—

 
5,000

 
5,000

5.25% convertible senior notes due 2029
—

 
111,869

 
101,757

Subtotal - Company debt
$
300,000

 
$
569,824

 
$
739,989

Enova line of credit due 2017
—

 
—

 
—

Enova 9.75% senior unsecured notes due 2021
493,863

 
—

 
—

Subtotal - Enova debt
$
493,863

 
$
—

 
$
—

Total debt
$
793,863

 
$
569,824

 
$
739,989

Less current portion
—

 
(22,606
)
 
(22,606
)
Total long-term debt
$
793,863

 
$
547,218

 
$
717,383


Domestic and Multi-Currency Line

On March 30, 2011, the Company and its domestic subsidiaries as guarantors entered into a Credit Agreement with a syndicate of financial institutions as lenders (the “Credit Agreement”). The Credit Agreement was amended on each of November 29, 2011, May 10, 2013, May 12, 2014 and June 13, 2014. The Credit Agreement, as amended, provides for a domestic and multi-currency line of credit in an aggregate principal amount of up to $280.0 million permitting revolving credit loans, including a multi-currency subfacility that gives the Company the ability to borrow up to $50.0 million that may be in specified foreign currencies, subject to the terms and conditions of the Credit Agreement (the “Domestic and Multi-currency Line of Credit”). The Credit Agreement contains an accordion feature whereby the revolving line of credit may be increased up to an additional $100.0 million with the consent of any increasing lenders. The Domestic and Multi-currency Line of Credit matures on March 31, 2018.

The May 2014 amendment to the Credit Agreement modified certain of the Credit Agreement’s covenants to permit (i) the Enova Debt Issuance (as defined below), and (ii) the incurrence of additional indebtedness by Enova and its subsidiaries under a new credit facility in an aggregate principal amount not to exceed $75.0 million. The permissibility of the Enova Debt Issuance and additional permitted debt incurrence is subject to satisfaction of certain conditions, including repayment of all intercompany indebtedness owed by Enova to the Company, the payment of a cash dividend by Enova to the Company and that such debt issued by Enova be non-recourse to the Company. Additionally, the amendment to the Credit Agreement (i) amended provisions of the Credit Agreement to permit a distribution of Enova’s stock to the Company’s shareholders and allows the administrative agent to release Enova and its subsidiaries as guarantors of the Credit Agreement, subject to certain conditions, and (ii) amended restrictive covenants to permit the prepayment of certain indebtedness outstanding. The amendment also contains restrictions on the Company and its subsidiaries with regard to making any additional investments, loans or cash

14
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

distributions to Enova and amends certain financial covenants and restrictions. The June 2014 amendment to the Credit Agreement made certain clarifications with respect to the types of prepayments permissible in connection with the prepayment of certain indebtedness.

Interest on the Domestic and Multi-currency Line of Credit is charged, at the Company’s option, at either the London Interbank Offered Rate (“LIBOR”) for one week or one-, two-, three- or six-month periods, as selected by the Company, 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%. The margin for the Domestic and Multi-currency Line of Credit is dependent on the Company’s cash flow leverage ratios as defined in the Credit Agreement entered into in connection with the Domestic and Multi-currency Line of Credit. The Company also pays a fee on the unused portion of the Domestic and Multi-currency Line of Credit ranging from 0.25% to 0.50% (0.38% as of June 30, 2014) based on the Company’s cash flow leverage ratios. The weighted average interest rate (including margin) on the Domestic and Multi-currency Line of Credit was 3.30% as of December 31, 2013.

On May 30, 2014, Enova completed the issuance and sale of $500.0 million of senior unsecured notes (the “Enova Debt Issuance”) discussed below under “$500.0 million 9.75% Senior Unsecured Notes.” In connection with the proceeds received from Enova’s repayment of intercompany indebtedness to the Company following the Enova Debt Issuance, the Company repaid the entire amount outstanding on the Domestic and Multi-currency Line of Credit. As of June 30, 2014, the Company had no outstanding borrowings under its Domestic and Multi-currency Line of Credit.

The Company routinely refinances borrowings pursuant to the terms of its Domestic and Multi-currency Line of Credit. Therefore, these borrowings are reported as part of the applicable line of credit and as long-term debt.     

Variable Rate Senior Unsecured Notes    

When the Company entered into the Credit Agreement, it also entered into a $50.0 million term loan facility under which it issued variable rate senior unsecured notes that are guaranteed by all of the Company’s domestic subsidiaries (the “2018 Variable Rate Notes”). The maturity date of the 2018 Variable Rate Notes was March 31, 2018, but in connection with the proceeds received from Enova’s repayment of intercompany indebtedness to the Company following the Enova Debt Issuance, the Company prepaid the entire amount outstanding on the 2018 Variable Rate Notes.

In conjunction with the prepayment of the 2018 Variable Rate Notes during the three months ended June 30, 2014, the Company incurred a $0.1 million expense to write-off unamortized deferred financing costs associated with the 2018 Variable Rate Notes. This expense is included in “Loss on extinguishment of debt” in the consolidated statements of income.

Letter of Credit Facility
    
When the Company entered into the Credit Agreement, it also entered into a Standby Letter of Credit Agreement (the “LC Agreement”) for the issuance of up to $20.0 million in letters of credit (the “Letter of Credit Facility”) that is guaranteed by the Company’s domestic subsidiaries and matures on March 31, 2018. In the event that an amount is paid by the issuing bank under a stand-by letter of credit, it will be due and payable by the Company on demand, and amounts due by the Company under the LC Agreement will bear interest annually at a rate that is the lesser of (a) 2% above the prime rate for Wells Fargo Bank, National Association or (b) the maximum rate of interest permissible under applicable laws. The LC Agreement also requires the Company to pay quarterly fees equal to the applicable margin set forth in the LC Agreement on the undrawn amount of the credit outstanding. The Company had standby letters of credit of $12.6 million under its Letter of Credit Facility as of June 30, 2014.


15
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

$300.0 million 5.75% Senior Unsecured Notes

On May 15, 2013, the Company issued and sold $300.0 million in aggregate principal amount of 5.75% Senior Notes due 2018 (the “2018 Senior Notes”). The 2018 Senior Notes bear interest at a rate of 5.75% annually on the principal amount, payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2013. The 2018 Senior Notes will mature on May 15, 2018. The 2018 Senior Notes were sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act of 1933, as amended (the “Securities Act”), and outside the United States pursuant to Regulation S under the Securities Act.

In connection with the issuance and registration of the 2018 Senior Notes, the Company incurred debt issuance and registration costs of approximately $8.7 million, which primarily consisted of underwriting fees, legal and other professional expenses. These costs are being amortized over a period of five years and are included in “Other assets” in the consolidated balance sheets.    

The 2018 Senior Notes are senior unsecured debt obligations of the Company and are guaranteed by all of the Company’s domestic subsidiaries and one of its foreign subsidiaries (the “Guarantors”). The Guarantors have guaranteed fully and unconditionally, on a joint and several basis, the obligations to pay principal and interest for the 2018 Senior Notes. Cash America International, Inc. (“Parent Company”), on a stand-alone unconsolidated basis, has no independent assets or operations. The Guarantors are 100% owned by the Company. The assets and operations of the Parent Company’s non-guarantor subsidiaries, individually and in the aggregate, are minor. The domestic Guarantors under the 2018 Senior Notes are also guarantors under the Credit Agreement. The 2018 Senior Notes Indenture provides that if any of the Guarantors is released from its guarantees of the Company’s borrowings and obligations under the Credit Agreement, that Guarantor’s guaranty of the 2018 Senior Notes will also be released. There are certain restrictions on the ability of Enova and its subsidiaries to pay funds to the Parent Company through dividends, loans, advances or otherwise. See “Enova Line of Credit” and “$500.0 Million 9.75% Senior Unsecured Notes” below for a description of these restrictions.

The 2018 Senior Notes are redeemable at the Company’s option, in whole or in part, at any time at 100% of the aggregate principal amount of 2018 Senior Notes redeemed plus the applicable “make whole” redemption price specified in the Indenture that governs the 2018 Senior Notes (the “2018 Senior Notes Indenture”), plus accrued and unpaid interest, if any, to the redemption date. In addition, if a change of control occurs, as that term is defined in the 2018 Senior Notes Indenture, the holders of 2018 Senior Notes will have the right, subject to certain conditions, to require the Company to repurchase their 2018 Senior Notes at a purchase price equal to 101% of the aggregate principal amount of 2018 Senior Notes repurchased plus accrued and unpaid interest, if any, as of the date of repurchase. As required by a registration rights agreement that the Company entered into with the initial purchasers when the 2018 Senior Notes were issued, the Company completed an exchange offer with respect to the 2018 Senior Notes in January 2014. All of the unregistered 2018 Senior Notes have been exchanged for identical new notes registered under the Securities Act.

16
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

2029 Convertible Notes

On May 19, 2009, the Company completed the offering of $115.0 million aggregate principal amount of 5.25% Convertible Senior Notes due May 15, 2029 (the “2029 Convertible Notes”). The Company notified the holders of its outstanding 2029 Convertible Notes that on May 15, 2014, it would redeem all outstanding 2029 Convertible Notes, and as a result of this notification, all holders of outstanding 2029 Convertible Notes elected conversion on May 15, 2014. Pursuant to the terms of the 2029 Convertible Notes, the Company elected to pay cash for the $44.4 million of principal amount of all converted notes outstanding at that date, plus accrued interest, and to re-issue 747,085 shares of common stock held in treasury for the amount in excess of principal owed to noteholders as a result of the net-share settlement provisions in the Indenture that governs the 2029 Convertible Notes. In accordance with ASC 470, Debt, no gain or loss was recorded in the consolidated statements of income for the conversion. Additionally, the Company’s consolidated shareholders' equity was not changed as a result of this activity.

During the three months ended March 31, 2014 and prior to the conversion of the 2029 Convertible Notes, the Company repurchased $58.6 million principal amount of the 2029 Convertible Notes in privately-negotiated transactions for aggregate cash consideration of $89.5 million plus accrued interest. In connection with these purchases, the Company recorded a loss on extinguishment of debt of approximately $1.5 million, which is included in “Loss on extinguishment of debt” in the consolidated statements of income, and a $30.3 million decrease to additional paid-in capital, which is included in “Repurchases and conversion of convertible debt” in the consolidated statements of equity.

Contractual interest expense recognized for the 2029 Convertible Notes was $0.5 million and $1.3 million for the three and six months ended June 30, 2014 and was $1.5 million and $3.0 million for the three and six months ended June 30, 2013. Additionally, interest expense related to non-cash amortization of the discount represented $0.2 million and $0.7 million for the three and six months ended June 30, 2014 and $0.8 million and $1.7 million for the three and six months ended June 30, 2013.

Enova Line of Credit

On May 14, 2014, Enova and certain of its domestic subsidiaries, as guarantors, entered into a credit agreement among Enova, the guarantors, Jefferies Finance LLC as administrative agent and Jefferies Group LLC as lender (the “Enova Credit Agreement”). The Enova Credit Agreement provides for an unsecured revolving credit facility of an aggregate principal amount of up to $75.0 million, including a multi-currency sub-facility that gives Enova the ability to borrow up to $25.0 million that may be in specified foreign currencies, subject to the terms and conditions of the Enova Credit Agreement (the “Enova Credit Facility”). The Enova Credit Facility will mature on June 30, 2017. However, if Enova’s guarantees of the Company’s indebtedness are not released on or before March 31, 2015, the Enova Credit Agreement provides that the Enova Credit Facility will instead mature on March 31, 2015. The Enova Credit Agreement is an unsecured debt obligation of Enova and is unconditionally guaranteed by all of Enova's domestic subsidiaries. Neither the Company nor any of its other subsidiaries that are not subsidiaries of Enova guarantee the Enova Credit Facility.

Interest on the Enova Credit Facility will be charged, at Enova’s option, at either the LIBOR for one week or one-, two-, three- or six-month periods, as selected by Enova, plus a margin varying from 2.50% to 3.75% or at the agent’s base rate plus a margin varying from 1.50% to 2.75%. The margin for the Enova Credit Facility borrowings is dependent on Enova’s cash flow leverage ratios. Enova will also be required to pay a fee on the unused portion of the line of credit ranging from 0.25% to 0.50% based on Enova’s cash flow leverage ratios. Enova had no outstanding borrowings on the Enova Credit Facility as of June 30, 2014. Enova’s ability to pay dividends or make distributions to the Company is subject to certain limitations in the Enova Credit Agreement.

The Enova Credit Agreement also includes a sub-limit of up to $20.0 million for standby or commercial letters of credit. In the event that an amount is paid by the issuing bank under a letter of credit, it will be due and payable by Enova on demand. Pursuant to the terms of the Enova Credit Agreement, Enova agrees to pay fees equal

17
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

to the LIBOR margin per annum on the undrawn amount of each outstanding standby Letter of Credit plus a one-time commercial letter of credit fee of 0.20% of the face amount of each commercial Letter of Credit plus 0.25% per annum on the average daily amount of the total Letter of Credit exposure. Enova had no outstanding letters of credit under the Enova Credit Agreement as of June 30, 2014.

In connection with the Enova Credit Facility, Enova incurred debt issuance costs of approximately $1.6 million for the six months ended June 30, 2014, which primarily consisted of underwriting fees and legal expenses. The unamortized balance of these costs as of June 30, 2014 is included in “Other assets” in the consolidated balance sheets. These costs are being amortized to interest expense over a period of 37 months, the term of the Enova Credit Facility.

$500.0 million 9.75% Senior Unsecured Notes

On May 30, 2014, Enova issued and sold $500.0 million in aggregate principal amount of 9.75% Senior Notes due 2021 (the “Enova 2021 Senior Notes”). The Enova 2021 Senior Notes bear interest at a rate of 9.75% annually on the principal amount payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2014. The Enova 2021 Senior Notes were sold at a discount of the principal amount to yield 10.0% to maturity. The Enova 2021 Senior Notes will mature on June 1, 2021. The Enova 2021 Senior Notes are unsecured debt obligations of Enova, and are unconditionally guaranteed by all of Enova’s domestic subsidiaries. Neither the Company nor any of its other subsidiaries that are not subsidiaries of Enova guarantee the Enova 2021 Senior Notes. The Enova 2021 Senior Notes were sold to qualified institutional buyers in accordance with Rule 144A under the Securities Act and outside the United States pursuant to Regulation S under the Securities Act.

As of June 30, 2014, the carrying amount of the Enova 2021 Senior Notes was $493.9 million, which includes an unamortized discount of $6.1 million. The discount is being amortized to interest expense over a period of seven years, through the maturity date of June 1, 2021. The total interest expense recognized was $4.3 million for the six months ended June 30, 2014, of which $0.1 million represented the non-cash amortization of the discount. In connection with the issuance of the Enova 2021 Senior Notes, the Company incurred approximately $14.7 million for issuance costs, which primarily consisted of underwriting fees, legal and other professional expenses. These costs are being amortized to interest expense over seven years and are included in “Other assets” in the consolidated balance sheets.

During the three months ended June 30, 2014, Enova used the $479.0 million it received as net proceeds from the issuance of the Enova 2021 Senior Notes to repay all intercompany indebtedness it owed to the Company and to pay a significant portion of a cash dividend to the Company.    

The Enova 2021 Senior Notes are redeemable at Enova’s option, in whole or in part, (i) at any time prior to June 1, 2017 at 100% of the aggregate principal amount of 2021 Senior Notes redeemed plus the applicable “make whole” redemption price specified in the indenture that governs the Enova 2021 Notes (the “Enova 2021 Senior Notes Indenture”), plus accrued and unpaid interest, if any, to the redemption date and (ii) at any time on or after June 1, 2017 at a premium specified in the Enova 2021 Senior Notes Indenture that will decrease over time, plus accrued and unpaid interest, if any, to the redemption date. In addition, prior to June 1, 2017, at its option, Enova may redeem up to 35% of the aggregate principal amount of the Enova 2021 Senior Notes at a redemption price equal to 109.75% of the principal amount thereof, plus accrued and unpaid interest, if any, to the redemption date, with the proceeds of certain equity offerings as described in the Enova 2021 Senior Notes Indenture. Additionally, if Enova and its subsidiaries’ guarantee of certain indebtedness of the Company as described in the Enova 2021 Senior Notes Indenture is not released on or before March 31, 2015, then Enova may redeem all of the Enova 2021 Senior Notes outstanding at a redemption price equal to 103% of the aggregate principal amount, plus accrued and unpaid interest, if any, to the redemption date (the “Special Redemption”), and if the Special Redemption does not occur, then the interest rate on the Enova 2021 Senior Notes will increase 2.0% per annum until Enova and its subsidiaries no longer guarantee certain indebtedness of the Company as described in the Enova 2021 Senior Notes Indenture. If a change of control occurs, as that term is defined in the Enova 2021 Senior Notes Indenture, the holders of the

18
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

Enova 2021 Senior Notes will have the right, subject to certain conditions, to require Enova to repurchase the Enova 2021 Senior Notes at a purchase price equal to 101% of the aggregate principal amount, plus accrued and unpaid interest, if any, as of the date of repurchase. Enova’s ability to pay dividends or make distributions to the Company is subject to certain limitations in the Enova 2021 Senior Notes Indenture.

Additionally, on May 30, 2014, Enova entered into a registration rights agreement with Jefferies LLC as the initial purchaser (the “Enova Registration Rights Agreement”) of the Enova 2021 Senior Notes, pursuant to which Enova agreed to use commercially reasonable efforts to cause a registration statement to be declared effective on or prior to the 360th day following the closing date relating to an exchange offer of the Enova 2021 Senior Notes for identical new notes registered under the Securities Act. In certain circumstances, Enova may be required to file a shelf registration to cover resales of the Enova 2021 Senior Notes. If Enova does not comply with certain covenants set forth in the Enova Registration Rights Agreement, it must pay liquidated damages to holders of the Enova 2021 Senior Notes. If Enova fails to satisfy any of its registration obligations, it will be required to pay the holders of the Enova 2021 Senior Notes additional interest of 0.25% to 0.50% per annum until it satisfies its registration obligations.

Private Placement Notes    

On May 9, 2014, the Company and its domestic subsidiaries, as guarantors, entered into an Omnibus Waiver, Consent, and Amendment Agreement (the “Waiver and Amendment”) with respect to its 6.09% Series A senior unsecured notes due 2016, 7.26% senior unsecured notes due 2017, 6.00% Series A senior unsecured notes due 2019, 6.21% Series B senior unsecured notes due 2021 and its 6.58% Series B senior unsecured notes due 2022 (collectively, the “Private Placement Notes”), which provided for Enova’s release as a guarantor for the Private Placement Notes upon completion of the Enova Debt Issuance. The Waiver and Amendment also required the Company to prepay the entire outstanding balance of Private Placement Notes, including any applicable make-whole premium, with proceeds received from Enova for repayment of intercompany indebtedness and payment of a dividend following the Enova Debt Issuance. The Company completed the prepayment of the Private Placement Notes during the three months ended June 30, 2014, which included an aggregate principal repayment of $106.2 million and a make-whole premium of $14.3 million. Additionally, in conjunction with this prepayment, the Company incurred a $0.6 million expense to write-off the remaining deferred financing costs associated with the Private Placement Notes. The expenses for the make-whole premium and the write-off of deferred financing costs are included in “Loss on extinguishment of debt” in the consolidated statements of income.

Debt Agreement Compliance
    
The debt agreements for the Domestic and Multi-currency Line of Credit, the Enova Credit Facility, the 2018 Senior Notes and the Enova 2021 Senior Notes require the Company and Enova to maintain certain financial ratios. As of June 30, 2014, the Company and Enova, as applicable, were in compliance with all covenants or other requirements set forth in the debt agreements.


19
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

7. Reclassification out of Accumulated Other Comprehensive Income

The reclassification adjustments from accumulated other comprehensive income (“AOCI”) to net income for the three and six months ended June 30, 2014 and 2013 were as follows (dollars in thousands):
 
 
Three Months Ended June 30, 2014
 
Six Months Ended June 30, 2014
 
Foreign
currency
translation
gain, net
of tax
 
Marketable
securities,  net
of tax
 
Total
 
Foreign
currency
translation
gain, net
of tax
 
Marketable
securities,  net
of tax
 
Total
Balance at the beginning of period
$
5,182

 
$
—

 
$
5,182

 
$
4,649

 
$
—

 
$
4,649

Other comprehensive income before reclassifications
2,816

 
—

 
2,816

 
3,349

 
—

 
3,349

Net change in AOCI
2,816

 
—

 
2,816

 
3,349

 
—

 
3,349

Balance at the end of period
$
7,998

 
$
—

 
$
7,998

 
$
7,998

 
$
—

 
$
7,998


 
Three Months Ended June 30, 2013
 
Six Months Ended June 30, 2013
 
Foreign
currency
translation
gain (loss), net
of tax
 
Marketable
securities,  net
of tax
 
Total
 
Foreign
currency
translation
gain (loss), net
of tax
 
Marketable
securities,  net
of tax
 
Total
Balance at the beginning of period
$
3,307

 
$
895

 
$
4,202

 
$
2,874

 
$
254

 
$
3,128

Other comprehensive income before reclassifications
(3,669
)
 
(268
)
 
(3,937
)
 
(3,236
)
 
373

 
(2,863
)
Amounts reclassified from AOCI(a)
—

 
(627
)
 
(627
)
 
—

 
(627
)
 
(627
)
Net change in AOCI
(3,669
)
 
(895
)
 
(4,564
)
 
(3,236
)
 
(254
)
 
(3,490
)
Balance at the end of period
$
(362
)
 
$
—

 
$
(362
)
 
$
(362
)
 
$
—

 
$
(362
)
 
 
 
 
 
(a)
The gain on marketable securities reclassified out of AOCI for the three and six months ended June 30, 2013 is composed of a $964 gain and income tax expense of $337. The gain and income tax expense are included in “Other revenue” and “Provision for income taxes,” respectively, in the consolidated statements of income.

8. Net Income Per Share

Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the period. Diluted net income 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. Restricted stock units issued under the Company’s stock-based employee compensation plans are included in diluted shares upon the granting of the awards even though the vesting of shares will occur over time. Performance-based awards are included in diluted shares based on the level of performance that management estimates is the most probable outcome at the grant date. Throughout the requisite service period, management monitors the probability of achievement of the performance condition and, if material, adjusts the number of shares included in diluted shares accordingly.

20
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

The following table sets forth the reconciliation of numerators and denominators of basic and diluted net income per share computations for the three and six months ended June 30, 2014 and 2013 (dollars and shares in thousands, except per share amounts):
 
 
Three Months Ended  
 June 30,
 
Six Months Ended 
June 30,
 
2014
 
2013
 
2014
 
2013
Numerator:
 
 
 
 
 
 
 
Net income attributable to Cash America International, Inc.
$
20,971

 
$
25,132

 
$
66,708

 
$
69,058

Denominator:
 
 
 
 
 
 
 
Total weighted average basic shares(a)
28,823

 
28,721

 
28,616

 
28,910

Shares applicable to stock-based compensation(b)
87

 
75

 
61

 
89

Convertible debt(c)
346

 
2,049

 
688

 
2,024

Total weighted average diluted shares(d)
29,256

 
30,845

 
29,365

 
31,023

Net income – basic
$
0.73

 
$
0.88

 
$
2.33

 
$
2.39

Net income – diluted
$
0.72

 
$
0.81

 
$
2.27

 
$
2.23

 
 
 
 
 
(a)
Includes (i) vested and deferred restricted stock units of 309 and 313, as well as 32 and 31 shares held in the Company’s nonqualified savings plan for the three months ended June 30, 2014 and 2013, respectively, and (ii) vested and deferred restricted stock units of 309 and 312, as well as 32 and 31 shares held in the Company's nonqualified savings plan for the six months ended June 30, 2014 and 2013, respectively.
(b)
Includes shares related to unvested restricted stock unit awards.
(c)
On May 15, 2014, the Company called the notes and the noteholders elected to convert such notes. The Company settled the principal portion of the outstanding 2029 Convertible Notes in cash and issued 747,085 of the Company's common shares related to the conversion spread. Prior to the repayment of the 2029 Convertible Notes, only the shares related to the conversion spread were included in weighted average diluted shares, because the Company intended to pay the principal portion of the notes in cash. See Note 6 for further discussion of the 2029 Convertible Notes.
(d)
There were 7 and 13 anti-dilutive shares for the three and six months ended June 30, 2014, respectively, and 5 and 46 anti-dilutive shares for the three and six months ended June 30, 2013, respectively.

9. Operating Segment Information

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

Corporate operations primarily include corporate expenses such as legal, occupancy, executive oversight, insurance and risk management, public and government relations, internal audit, treasury, payroll, compliance and licensing, finance, accounting, tax and information systems (except for online lending 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.

During the first quarter of 2014, the Company changed the presentation of financial information within its e-commerce segment to report certain administrative and depreciation and amortization expenses within that segment separately from its domestic and foreign operating components. Administrative expenses in the e-commerce segment, which were previously allocated between the domestic and foreign components based on the amount of loans written

21
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

and renewed, are included under the “Admin” heading within the e-commerce segment information in the following tables. Depreciation and amortization related to the e-commerce administrative function is also included in this category. For comparison purposes, amounts for prior years have been conformed to the current presentation.

The following tables contain operating segment data for the three and six months ended June 30, 2014 and 2013 by segment, for the Company’s corporate operations and on a consolidated basis (dollars in thousands):
 
 
Retail Services
 
E-Commerce
 
 
 
 
 
Domestic
 
Foreign
 
Total
 
Domestic
 
Foreign
 
Admin
 
Total
 
Corporate
 
Consolidated
Three Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pawn loan fees and service charges
$
78,911

 
$
2,079

 
$
80,990

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
80,990

Proceeds from disposition of merchandise
142,447

 
4,325

 
146,772

 
—

 
—

 
—

 
—

 
—

 
146,772

Consumer loan fees
23,900

 
—

 
23,900

 
108,751

 
92,688

 
—

 
201,439

 
—

 
225,339

Other
1,718

 
45

 
1,763

 
35

 
8

 
—

 
43

 
183

 
1,989

Total revenue
246,976

 
6,449

 
253,425

 
108,786

 
92,696

 
—

 
201,482

 
183

 
455,090

Cost of revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Disposed merchandise
101,177

 
3,333

 
104,510

 
—

 
—

 
—

 
—

 
—

 
104,510

Consumer loan loss provision
7,849

 
—

 
7,849

 
38,729

 
28,111

 
—

 
66,840

 
—

 
74,689

Total cost of revenue
109,026

 
3,333

 
112,359

 
38,729

 
28,111

 
—

 
66,840

 
—

 
179,199

Net revenue
137,950

 
3,116

 
141,066

 
70,057

 
64,585

 
—

 
134,642

 
183

 
275,891

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operations and administration
100,189

 
3,386

 
103,575

 
25,816

 
24,061

 
22,387

 
72,264

 
19,136

 
194,975

Depreciation and amortization
10,122

 
421

 
10,543

 
2,054

 
559

 
1,703

 
4,316

 
4,638

 
19,497

Total expenses
110,311

 
3,807

 
114,118

 
27,870

 
24,620

 
24,090

 
76,580

 
23,774

 
214,472

Income (loss) from operations
$
27,639

 
$
(691
)
 
$
26,948

 
$
42,187

 
$
39,965

 
$
(24,090
)
 
$
58,062

 
$
(23,591
)
 
$
61,419

As of June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
952,990

 
$
121,193

 
$
1,074,183

 
$
462,039

 
$
205,249

 
$
14,779

 
$
682,067

 
$
412,636

 
$
2,168,886

Goodwill
 
 
 
 
$
495,672

 
 
 
 
 
 
 
$
210,365

 
 
 
$
706,037

 
 
Retail Services
 
E-Commerce
 
 
 
 
 
Domestic
 
Foreign
 
Total
 
Domestic
 
Foreign
 
Admin
 
Total
 
Corporate
 
Consolidated
Three Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pawn loan fees and service charges
$
70,802

 
$
1,926

 
$
72,728

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
72,728

Proceeds from disposition of merchandise
127,214

 
4,318

 
131,532

 
—

 
—

 
—

 
—

 
—

 
131,532

Consumer loan fees
26,647

 
—

 
26,647

 
87,502

 
88,282

 
—

 
175,784

 
—

 
202,431

Other
1,918

 
258

 
2,176

 
361

 
16

 
—

 
377

 
1,136

 
3,689

Total revenue
226,581

 
6,502

 
233,083

 
87,863

 
88,298

 
—

 
176,161

 
1,136

 
410,380

Cost of revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Disposed merchandise
85,352

 
3,609

 
88,961

 
—

 
—

 
—

 
—

 
—

 
88,961

Consumer loan loss provision
7,112

 
—

 
7,112

 
33,343

 
36,774

 
—

 
70,117

 
—

 
77,229

Total cost of revenue
92,464

 
3,609

 
96,073

 
33,343

 
36,774

 
—

 
70,117

 
—

 
166,190

Net revenue
134,117

 
2,893

 
137,010

 
54,520

 
51,524

 
—

 
106,044

 
1,136

 
244,190

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operations and administration
89,487

 
2,998

 
92,485

 
21,838

 
26,284

 
16,985

 
65,107

 
19,350

 
176,942

Depreciation and amortization
8,900

 
430

 
9,330

 
2,532

 
835

 
1,218

 
4,585

 
4,085

 
18,000

Total expenses
98,387

 
3,428

 
101,815

 
24,370

 
27,119

 
18,203

 
69,692

 
23,435

 
194,942

Income (loss) from operations
$
35,730

 
$
(535
)
 
$
35,195

 
$
30,150

 
$
24,405

 
$
(18,203
)
 
$
36,352

 
$
(22,299
)
 
$
49,248

As of June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Total assets
$
1,023,015

 
$
123,601

 
$
1,146,616

 
$
374,720

 
$
190,612

 
$
11,909

 
$
577,241

 
$
132,811

 
$
1,856,668

Goodwill
 
 
 
 
$
397,876

 
 
 
 
 
 
 
$
210,366

 
 
 
$
608,242



22
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 
Retail Services
 
E-Commerce
 
 
 
 
 
Domestic
 
Foreign
 
Total
 
Domestic
 
Foreign
 
Admin
 
Total
 
Corporate
 
Consolidated
Six Months Ended June 30, 2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pawn loan fees and service charges
$
157,378

 
$
3,799

 
$
161,177

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
161,177

Proceeds from disposition of merchandise
314,617

 
8,610

 
323,227

 
—

 
—

 
—

 
—

 
—

 
323,227

Consumer loan fees
49,659

 
—

 
49,659

 
217,799

 
192,063

 
—

 
409,862

 
—

 
459,521

Other
3,720

 
130

 
3,850

 
74

 
11

 
—

 
85

 
330

 
4,265

Total revenue
525,374

 
12,539

 
537,913

 
217,873

 
192,074

 
—

 
409,947

 
330

 
948,190

Cost of revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Disposed merchandise
222,435

 
6,639

 
229,074

 
—

 
—

 
—

 
—

 
—

 
229,074

Consumer loan loss provision
15,447

 
—

 
15,447

 
67,364

 
65,378

 
—

 
132,742

 
—

 
148,189

Total cost of revenue
237,882

 
6,639

 
244,521

 
67,364

 
65,378

 
—

 
132,742

 
—

 
377,263

Net revenue
287,492

 
5,900

 
293,392

 
150,509

 
126,696

 
—

 
277,205

 
330

 
570,927

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operations and administration
201,342

 
6,635

 
207,977

 
49,224

 
49,181

 
42,026

 
140,431

 
38,153

 
386,561

Depreciation and amortization
20,426

 
824

 
21,250

 
3,959

 
1,082

 
3,393

 
8,434

 
9,074

 
38,758

Total expenses
221,768

 
7,459

 
229,227

 
53,183

 
50,263

 
45,419

 
148,865

 
47,227

 
425,319

Income (loss) from operations
$
65,724

 
$
(1,559
)
 
$
64,165

 
$
97,326

 
$
76,433

 
$
(45,419
)
 
$
128,340

 
$
(46,897
)
 
$
145,608

 
Retail Services
 
E-Commerce
 
 
 
 
 
Domestic
 
Foreign
 
Total
 
Domestic
 
Foreign
 
Admin
 
Total
 
Corporate
 
Consolidated
Six Months Ended June 30, 2013
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Pawn loan fees and service charges
$
144,976

 
$
3,666

 
$
148,642

 
$
—

 
$
—

 
$
—

 
$
—

 
$
—

 
$
148,642

Proceeds from disposition of merchandise
301,364

 
8,885

 
310,249

 
—

 
—

 
—

 
—

 
—

 
310,249

Consumer loan fees
54,969

 
—

 
54,969

 
178,143

 
179,524

 
—

 
357,667

 
—

 
412,636

Other
4,418

 
351

 
4,769

 
802

 
23

 
—

 
825

 
1,387

 
6,981

Total revenue
505,727

 
12,902

 
518,629

 
178,945

 
179,547

 
—

 
358,492

 
1,387

 
878,508

Cost of revenue
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Disposed merchandise
203,039

 
7,257

 
210,296

 
—

 
—

 
—

 
—

 
—

 
210,296

Consumer loan loss provision
13,890

 
—

 
13,890

 
63,166

 
75,025

 
—

 
138,191

 
—

 
152,081

Total cost of revenue
216,929

 
7,257

 
224,186

 
63,166

 
75,025

 
—

 
138,191

 
—

 
362,377

Net revenue
288,798

 
5,645

 
294,443

 
115,779

 
104,522

 
—

 
220,301

 
1,387

 
516,131

Expenses
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operations and administration
180,189

 
6,601

 
186,790

 
43,243

 
50,931

 
36,515

 
130,689

 
36,287

 
353,766

Depreciation and amortization
17,701

 
829

 
18,530

 
4,960

 
1,395

 
2,673

 
9,028

 
7,973

 
35,531

Total expenses
197,890

 
7,430

 
205,320

 
48,203

 
52,326

 
39,188

 
139,717

 
44,260

 
389,297

Income (loss) from operations
$
90,908

 
$
(1,785
)
 
$
89,123

 
$
67,576

 
$
52,196

 
$
(39,188
)
 
$
80,584

 
$
(42,873
)
 
$
126,834


23
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

10. Commitments and Contingencies

Litigation

2013 Litigation Settlement

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

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

In accordance with ASC 450, Contingencies, the Company recognized a liability in 2013 in the amount of $18.0 million. The liability was recorded in “Accounts payable and accrued liabilities” in the consolidated balance sheets and “Operations and administration expense” in the consolidated statements of income for the year ended December 31, 2013. The Class Claims and Costs have been finalized, and the Company paid $18.6 million in connection with the Class Claims and Costs and recognized an additional $0.6 million of expenses, during the six months ended June 30, 2014.

Ohio Litigation

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

24
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

amount that is less than permitted under the OMLA, the Company does not offer loans under the Ohio Short-Term Lender Law. On December 3, 2012, the Ohio Ninth District Court of Appeals affirmed the Municipal Court’s ruling in a 2-1 decision. The Supreme Court of Ohio heard the Company’s appeal of the Ninth District Court’s decision in December 2013. On June 11, 2014, the Ohio Supreme Court unanimously held that Cashland is properly offering short-term, single-payment loans in the State of Ohio under the OMLA reversing the decision entered by the Ohio Ninth District Court of Appeals.

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

Consumer Financial Protection Bureau

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

The $8.0 million of cash set aside was classified as restricted cash on the Company’s consolidated balance sheets. In June 2014, following the expiration of the 180-day period extended claims period, the Company released $7.9 million of restricted cash. As of June 30, 2014, the remaining balance in restricted cash is approximately $60 thousand, reflecting the amount of refunds that were still outstanding as of that date.

11. Fair Value Measurements

Recurring Fair Value Measurements

In accordance with ASC 820, Fair Value Measurements and Disclosures (“ASC 820”), 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.

25
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

The Company’s financial assets and liabilities that are measured at fair value on a recurring basis as of June 30, 2014 and 2013 and December 31, 2013 are as follows (dollars in thousands):
 
 
June 30,
 
Fair Value Measurements Using
 
2014
 
Level 1
 
Level 2
 
Level 3
Financial assets (liabilities):
 
 
 
 
 
 
 
Cash equivalents
$
64,948

 
$
64,948

 
$
—

 
$
—

Forward currency exchange contracts
(93
)
 
$
—

 
(93
)
 
—

Nonqualified savings plans’ assets(a)
15,560

 
15,560

 
—

 
—

Total
$
80,415

 
$
80,508

 
$
(93
)
 
$
—

 
June 30,
 
Fair Value Measurements Using
 
2013
 
Level 1
 
Level 2
 
Level 3
Financial assets :
 
 
 
 
 
 
 
Cash equivalents
$
34,007

 
$
34,007

 
$
—

 
$
—

Forward currency exchange contracts
454

 
—

 
454

 
—

Nonqualified savings plans’ assets(a)
13,336

 
13,336

 
—

 
—

Total
$
47,797

 
$
47,343

 
$
454

 
$
—

 
December 31,
 
Fair Value Measurements Using
 
2013
 
Level 1
 
Level 2
 
Level 3
Financial assets:
 
 
 
 
 
 
 
Forward currency exchange contracts
$
6

 
$
—

 
$
6

 
$
—

Nonqualified savings plans’ assets(a)
14,576

 
14,576

 
—

 
—

Total
$
14,582

 
$
14,576

 
$
6

 
$
—

 
 
 
 
 
 
(a) The nonqualified savings plan assets have an offsetting liability of equal amount, which is included in “Accounts payable and accrued
expenses” in the Company’s consolidated balance sheets.

The Company’s cash equivalents are investments in money market funds, which are highly liquid investments with maturities of three months or less. These assets are classified within Level 1 of the fair value hierarchy, as the money market funds are valued using quoted market prices in active markets.

The Company measures the fair value of its forward currency exchange contracts under Level 2 inputs as defined by ASC 820. For these forward currency exchange contracts, current market rates are used to determine fair value. The significant inputs used in these models are derived from observable market rates. During the six months ended June 30, 2014 and 2013, there were no transfers of assets in or out of Level 1 or Level 2 fair value measurements.

26
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

Financial Assets and Liabilities Not Measured at Fair Value
The Company’s financial assets and liabilities as of June 30, 2014 and 2013 and December 31, 2013 that are not measured at fair value in the consolidated balance sheets are as follows (dollars in thousands):
 
 
Carrying Value
 
Estimated Fair Value
 
June 30,
 
June 30,
 
Fair Value Measurement Using
 
2014
 
2014
 
Level 1
Level 2
Level 3
Financial assets:
 
 
 
 
 
 
 
 
Cash
$
127,967

 
$
127,967

 
$
127,967

 
$
—

$
—

Restricted cash
60

 
60

 
60

 
—

—

Pawn loans
263,668

 
263,668

 
—

 
—

263,668

Short-term loans and line of credit accounts, net
182,037

 
182,037

 
—

 
—

182,037

Installment loans, net
155,924

 
155,924

 
—

 
—

155,924

Pawn loan fees and service charges receivable
51,986

 
51,986

 
—

 
—

51,986

Total
$
781,642

 
$
781,642

 
$
128,027

 
$
—

$
653,615

Financial liabilities:
 
 
 
 
 
 
 
 
Liability for estimated losses on consumer loans guaranteed by the Company
$
3,176

 
$
3,176

 
$
—

 
$
—

$
3,176

Senior unsecured notes
793,863

 
805,625

 
307,500

(a) 
498,125

—

Total
$
797,039

 
$
808,801

 
$
307,500

 
$
498,125

$
3,176

 
 
 
 
 
 
 
 
 
(a) The 2018 Senior Notes were transferred from Level 2 to Level 1 in the first quarter of 2014 in conjunction with the Company’s registration of these notes with the SEC in January 2014. See Note 6 for further discussion of the 2018 Senior Notes.
 
Carrying Value
 
Estimated Fair Value
 
June 30,
 
June 30,
 
Fair Value Measurement Using
 
2013
 
2013
 
Level 1
 
Level 2
Level 3
Financial assets:
 
 
 
 
 
 
 
 
Cash
$
90,452

 
$
90,452

 
$
90,452

 
$
—

$
—

Pawn loans
229,574

 
229,574

 
—

 
—

229,574

Short-term loans and line of credit accounts, net
173,512

 
173,512

 
—

 
—

173,512

Installment loans, net
113,615

 
113,615

 
—

 
—

113,615

Pawn loan fees and service charges receivable
45,566

 
45,566

 
—

 
—

45,566

Total
$
652,719

 
$
652,719

 
$
90,452

 
$
—

$
562,267

Financial liabilities:
 
 
 
 
 
 
 
 
Liability for estimated losses on consumer loans guaranteed by the Company
$
3,047

 
$
3,047

 
$
—

 
$
—

$
3,047

Senior unsecured notes
457,955

 
443,480

 
—

 
443,480

—

2029 Convertible Notes
111,869

 
207,863

 
—

 
207,863

—

Total
$
572,871

 
$
654,390

 
$
—

 
$
651,343

$
3,047



27
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

 
Carrying Value
 
Estimated Fair Value
 
December 31,
 
December 31,
 
Fair Value Measurement Using
 
2013
 
2013
 
Level 1
 
Level 2
Level 3
Financial assets:
 
 
 
 
 
 
 
 
Cash
$
67,228

 
$
67,228

 
$
67,228

 
$
—

$
—

Restricted cash
8,000

 
8,000

 
8,000

 
—

—

Pawn loans
261,148

 
261,148

 
—

 
—

261,148

Short-term loans and line of credit accounts, net
202,829

 
202,829

 
—

 
—

202,829

Installment loans, net
156,012

 
156,012

 
—

 
—

156,012

Pawn loan fees and service charges receivable
53,438

 
53,438

 
—

 
—

53,438

Total
$
748,655

 
$
748,655

 
$
75,228

 
$
—

$
673,427

Financial liabilities:
 
 
 
 
 
 
 
 
Liability for estimated losses on consumer loans guaranteed by the Company
$
3,080

 
$
3,080

 
$
—

 
$
—

$
3,080

Domestic and Multi-currency Line of credit
193,717

 
207,426

 
—

 
207,426

$
—

Senior unsecured notes
444,515

 
430,554

 
—

 
430,554

—

2029 Convertible Notes
101,757

 
155,788

 
—

 
155,788

—

Total
$
743,069

 
$
796,848

 
$
—

 
$
793,768

$
3,080

Pawn loans generally have maturity periods of less than 90 days. If a pawn loan defaults, the Company disposes of the collateral. Historically, collateral has sold for an amount in excess of the principal amount of the loan.
Short-term loans, line of credit accounts and installment loans are carried in the consolidated balance sheet net of the allowance for estimated loan losses, which is calculated by applying historical loss rates combined with recent default trends to the gross consumer loan balance. The unobservable inputs used to calculate the fair value of these loans include historical loss rates, recent default trends and estimated remaining loan terms; therefore, the carrying value approximates the fair value. Short-term loans and line of credit accounts have relatively short maturity periods that are generally 12 months or less. The fair value of unsecured and secured installment loans are estimated using a discounted cash flow analysis, which considers interest rates offered for loans with similar terms to borrowers of similar credit quality. The carrying values of the Company’s installment loans approximate the fair value of these loans.
Pawn loan fees and service charges receivable are accrued ratably over the term of the loan based on the portion of these pawn loans deemed collectible. The Company uses historical performance data to determine collectability of pawn loan fees and service charges receivable. Additionally, pawn loan fees and service charge rates are determined by regulations and bear no valuation relationship to the capital markets’ interest rate movements.
In connection with its CSO programs, the Company guarantees consumer loan payment obligations to unrelated third-party lenders for short-term loans and installment loans that are secured by a customer’s vehicle and is required to purchase any defaulted loans it has guaranteed. The Company measures the fair value of its liability for third-party lender-owned consumer loans under Level 3 inputs. The fair value of these liabilities is calculated by applying historical loss rates combined with recent default trends to the gross consumer loan balance. The unobservable inputs used to calculate the fair value of these loans include historical loss rates, recent default trends and estimated remaining loan terms; therefore, the carrying value of these liabilities approximates the fair value.
The Company measures the fair value of long-term debt instruments that are registered with the SEC using Level 1 inputs. The Company measures the fair value of its senior unsecured notes using Level 2 inputs. The fair values of the Company’s senior unsecured notes are estimated based on market values for debt issues with similar characteristics or rates currently available for debt with similar terms. As of June 30, 2014, the Company’s senior

28
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

unsecured notes had a higher fair market value than the carrying value due to the difference in yield when compared to recent issuances of similar senior unsecured notes.

12. 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 forward currency exchange contracts to hedge foreign currency risk in the United Kingdom 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’s derivative instruments are presented in its financial statements on a net basis. The following table presents information related to the Company’s derivative instruments as of June 30, 2014 and 2013 and December 31, 2013 (dollars in thousands):
 
Assets
 
As of June 30, 2014
Non-designated derivatives:
 
Notional
Amount
 
Gross Amounts
of Recognized
Assets
 
Gross Amounts
Offset  in the
Consolidated
Balance  Sheets(a)
 
Net Amounts of  Assets
Presented in the
Consolidated Balance
Sheets(b)
Forward currency exchange contracts
 
$
35,843

 
$
—

 
$
(93
)
 
$
(93
)
Assets
 
As of June 30, 2013
Non-designated derivatives:
 
Notional
Amount
 
Gross Amounts
of Recognized
Assets
 
Gross Amounts
Offset in the
Consolidated
Balance Sheets(a)
 
Net Amounts of Assets
Presented in the
Consolidated Balance
Sheets(b)
Forward currency exchange contracts
 
$
87,553

 
$
454

 
$
—

 
$
454

Assets
 
As of December 31, 2013
Non-designated derivatives:
 
Notional
Amount
 
Gross Amounts
of Recognized
Assets
 
Gross Amounts
Offset in the
Consolidated
Balance Sheets(a)
 
Net Amounts of Assets
Presented in the
Consolidated Balance
Sheets(b)
Forward currency exchange contracts
 
$
81,547

 
$
27

 
$
(21
)
 
$
6

 
 
 
 
 
(a) As of June 30, 2014, the Company had no gross amounts of recognized derivative instruments that the Company makes an accounting
policy election not to offset. In addition, there is no financial collateral related to the Company’s derivatives. The Company has no
liabilities that are subject to an enforceable master netting agreement or similar arrangement.
(b) Represents the fair value of forward currency exchange contracts, which is recorded in “Prepaid expenses and other assets” in the
consolidated balance sheets.

29
Table of Contents
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Unaudited) (Continued)

The following table presents information on the effect of derivative instruments on the consolidated results of operations and AOCI for the three and six months ended June 30, 2014 and 2013 (dollars in thousands):
 
 
Gains (Losses) Recognized 
in Income
 
Gains Recognized in AOCI
 
Gains (Losses) Reclassified
From AOCI into Income
 
Three Months Ended
 
Three Months Ended
 
Three Months Ended
 
June 30,
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Non-designated derivatives:
 
 
 
 
 
 
 
 
 
 
 
Forward currency exchange contracts(a)
$
(995
)
 
$
(66
)
 
$
—

 
$
—

 
$
—

 
$
—

Total
$
(995
)
 
$
(66
)
 
$
—

 
$
—

 
$
—

 
$
—


 
Gains (Losses) Recognized 
in Income
 
Gains Recognized in AOCI
 
Gains (Losses) Reclassified
From AOCI into Income
 
Six Months Ended
 
Six Months Ended
 
Six Months Ended
 
June 30,
 
June 30,
 
June 30,
 
2014
 
2013
 
2014
 
2013
 
2014
 
2013
Non-designated derivatives:
 
 
 
 
 
 
 
 
 
 
 
Forward currency exchange contracts(a)
$
(1,755
)
 
$
5,251

 
$
—

 
$
—

 
$
—

 
$
—

Total
$
(1,755
)
 
$
5,251

 
$
—

 
$
—

 
$
—

 
$
—

 
 
 
 
 
 
 
 
 
 
 
 
(a) The gains/(losses) on these derivatives substantially offset the (losses)/gains on the hedged portion of foreign intercompany balances.


30
Table of Contents




ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS.
The following discussion of financial condition, results of operations, liquidity, capital resources and certain factors that may affect future results of Cash America International, Inc. and its subsidiaries (the “Company”) should be read in conjunction with the Company’s consolidated financial statements and accompanying notes included under Part I, Item 1 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 year ended December 31, 2013.

GENERAL

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

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

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

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

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


31


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

Corporate operations primarily include corporate expenses such as legal, occupancy, executive oversight, insurance and risk management, public and government relations, internal audit, treasury, payroll, compliance and licensing, finance, accounting, tax and information systems (except for online lending 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.

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 June 30, 2014 and 2013. The Company’s domestic retail services locations operate under the names “Cash America Pawn,” “SuperPawn,” “Cash America Payday Advance,” “Cashland” and “Mr. Payroll.” In addition, some recently acquired domestic retail services locations operate under various names that are expected to be changed to “Cash America Pawn.” The Company’s foreign retail services locations operate under the name “Cash America casa de empeño.”
 
As of June 30,
 
2014
 
2013
 
Domestic(a)
 
Foreign
 
Total
 
Domestic(a)
 
Foreign
 
Total
Retail services locations offering:
 
 
 
 
 
 
 
 
 
 
 
Both pawn and consumer lending
576

 
—

 
576

 
581

 
—

 
581

Pawn lending only
256

 
47

 
303

 
169

 
47

 
216

Consumer lending only
37

 
—

 
37

 
77

 
—

 
77

Other (b)
88

 
—

 
88

 
90

 
—

 
90

Total retail services
957

 
47

 
1,004

 
917

 
47

 
964

 
 
 
 
 
(a)
Except as described in (b) below, includes locations that operated in 22 states in the United States as of June 30, 2014 and 2013, respectively.
(b)
As of June 30, 2014 and 2013, includes 88 and 90 unconsolidated franchised check cashing locations, respectively, that operated in 12 and 14 states in the United States, respectively.

E-Commerce Segment

As of June 30, 2014 and 2013, the Company’s e-commerce segment provided services in 33 and 32 states, respectively, in the United States and in four foreign countries:

•
in the United States at http://www.cashnetusa.com and http://www.netcredit.com,
•
in the United Kingdom at http://www.quickquid.co.uk, http://www.quickquidflexcredit.co.uk, http://www.poundstopocket.co.uk, and www.onstride.co.uk,
•
in Australia at http://www.dollarsdirect.com.au,
•
in Canada at http://www.dollarsdirect.ca, and

32

•
in Brazil at http://www.simplic.com.br.

On June 30, 2014, the Company launched a pilot program in Brazil where it arranges loans that are made by a third-party lender in accordance with applicable laws and guarantees the payment of these loans by agreeing to purchase the loans from the third-party under certain circumstances.

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

Recent Developments

Developments in the Company’s Business in the United Kingdom

During the six-month periods ended June 30, 2014 and June 30, 2013 and the twelve month period ended December 31, 2013, the Company’s U.K. operations generated 21.7%, 19.5% and 19.9%, respectively, of the Company’s consolidated net revenue. Recent regulatory changes in the United Kingdom will significantly affect future results from the Company’s U.K. operations as described below.

In the United Kingdom, supervision of consumer credit was transferred on April 1, 2014 to the Financial Conduct Authority (the “FCA”), and pursuant to new legislation, the FCA is authorized to adopt prescriptive rules and regulations and to impose stringent requirements on what a lender may and may not do with a specific product. On February 28, 2014, the Consumer Credit Sourcebook was issued under the FCA Handbook and incorporates prescriptive regulations for lenders such as the Company, including mandatory affordability assessments on borrowers, limiting the number of rollovers to two, restricting how lenders can advertise, banning advertisements it deems misleading, and introducing a limit of two unsuccessful attempts on the use of continuous payment authority (which provides a creditor the ability to directly debit a customer’s account for payment when authorized by the customer to do so) to pay off a loan. The Company is in frequent communication with the FCA in an effort to demonstrate that it satisfies the expectations of the FCA, and the Company has made and is continuing to make significant modifications to many of its business practices to address the FCA’s requirements. These modifications include adjustments to the Company’s affordability assessment practices and underwriting standards that govern who will qualify for a loan from the Company, reductions in certain maximum loan amounts, alterations to advertising practices and adjustments to collections processes (including its practices related to continuous payment authority) and debt forbearance processes (or its practices regarding customers who have indicated they are experiencing financial difficulty). In addition, the Company previously has not had a physical presence in the United Kingdom as business functions have been performed remotely from its facilities in the United States. In order to alleviate concerns in relation to the Company’s ability to presently demonstrate to the FCA that it is capable of being effectively supervised, the Company is establishing an office in the United Kingdom.

In connection with implementing these changes to its U.K. business, the Company expects a significant year-over-year decrease in its U.K. loan volume, U.K. loan balances and U.K. revenue for the remainder of 2014 and potentially into 2015 as a result of adapting its U.K. business practices in response to the requirements of the FCA. The implementation of stricter affordability assessments and underwriting standards will result in a decrease in the number of consumer loans written, the average consumer loan amount and the total amount of consumer loans written to new and existing customers. Additionally, the Company will experience an increase in compliance- and administrative-related costs for the United Kingdom, but the overall expenses of its U.K. operations (including the consumer loan loss provision) are expected to decrease as the Company’s U.K. business contracts. The ultimate impact of the changes the Company is making to its U.K. operations will be dependent on a number of factors (some of which may be unforeseen), including the effectiveness of the Company’s execution of the operational changes, the impact the FCA’s requirements may have on the Company’s competitors that could result in a potential increase in the Company’s market share, and consumer reaction to the changes occurring to the Company’s services, among other things. The impact potentially could also be offset by an improved performance of the Company’s U.K. consumer loan portfolio as a result of stricter affordability assessments and underwriting standards being implemented, which is expected to result in lower consumer loan loss rates, and by continued strong demand

33

for the online loan products the Company offers in the U.S. and other markets. The Company is still assessing the potential impact of the changes it is making to its U.K. operations and what effect such changes may have on its business, but the impact of these changes is likely to be significant for the balance of 2014 and potentially into 2015.
On July 15, 2014, the FCA issued a consultation paper that proposed a cap on the total cost of credit and requested comments on the proposal. The consultation paper proposed a maximum rate of 0.8% of principal per day, and the proposal limits the total fees, interest (including post-default interest) and charges (including late fees which are capped at £15) to an aggregate amount not to exceed 100% of the principal amount loaned. The FCA has requested comments on the proposal and is expected to issue a final rule in November 2014. The final rule on a cost of credit cap will likely become effective by January 2, 2015, as required by the 2013 amendment to the Financial Services and Markets Act 2000. If the final rules adopted by the FCA match the proposed rules, the Company will need to make additional changes to the products it offers in the United Kingdom, including increasing the minimum monthly payment under its line of credit products offered in the United Kingdom. The Company is still assessing the full impact of the potential cost of credit cap changes as they are currently proposed; however, after the Company has made all of the other changes to its U.K. business described above, the Company does not currently expect the impact of the modifications made to address a final cost of credit rule that tracks the proposed parameters to be significant.
    
The results for the three- and six-month periods ended June 30, 2014 and the year ended December 31, 2013 do not include the full impact of the changes described above, and the results for the three- and six-month periods ended June 30, 2013 do not include any impact of the changes described above. The results for each of these periods are not indicative of the Company’s future results of operations and cash flows from its operations in the United Kingdom. For recent developments related to the FCA, see the risk factors included in “Part II. Other Information-Risk Factors.”

Review of Strategic Separation Alternatives for the E-commerce Business
    
On April 10, 2014, the Company announced that its Board of Directors authorized management to review potential strategic alternatives, including a tax-free spin-off, for the separation of its online lending business that comprises its E-commerce Division, Enova International, Inc. (“Enova”). After evaluating separation alternatives for Enova, management has recommended that the Company’s Board of Directors pursue a tax-free spin-off, and the Company’s Board of Directors has authorized the filing of a Registration Statement on Form 10 with the Securities and Exchange Commission by Enova in connection with the proposed spin-off. If a spin-off occurs, the Company will be separated into two publicly traded companies: Enova International, Inc., which would own and operate the Company’s online lending business that comprises its E-Commerce Division (or the e-commerce segment), and Cash America International, Inc., which would own and operate the Company’s storefront lending businesses that comprise its Retail Services Division (or the retail services segment).

The Company’s Board of Directors has not yet approved the separation, but if it is approved, a transaction could be completed in late 2014 or early 2015, subject to market, regulatory and other conditions, including, if the separation takes the form of a tax-free spin-off, the receipt of a private letter ruling from the Internal Revenue Service, an opinion from the Company’s tax counsel and a solvency opinion from an independent financial advisor. The Company currently expects that any spin-off would be in the form of a tax-free distribution of 80 percent of the Enova common stock to the Company’s shareholders.

The separation is subject to a number of conditions, including final approval by the Board of Directors of transaction specifics. In addition, external events beyond the control of the Company and Enova could impact the timing or occurrence of a separation. There can be no assurance that any separation or other transaction will occur or, if one does occur, there can be no assurance as to its form, terms or timing.


34
Table of Contents




Ohio Litigation

On May 28, 2009, one of the Company’s subsidiaries, Ohio Neighborhood Finance, Inc., doing business as Cashland (“Cashland”), filed a standard collections suit in an Elyria Municipal Court in Ohio against Rodney Scott seeking judgment against Mr. Scott in the amount of $570.16, which was the amount due under his loan agreement. Cashland’s loan was offered under the Ohio Mortgage Loan Act (“OMLA”), which allows for interest at a rate of 25% per annum plus certain loan fees allowed by the statute. The Municipal Court, in Ohio Neighborhood Finance, Inc. v. Rodney Scott, held that short-term, single-payment consumer loans made by Cashland are not authorized under the OMLA, and instead should have been offered under the Ohio Short-Term Lender Law, which was passed by the Ohio legislature in 2008 for consumer loans with similar terms. Due to a cap on interest and loan fees at an amount that is less than permitted under the OMLA, the Company does not offer loans under the Ohio Short-Term Lender Law. On December 3, 2012, the Ohio Ninth District Court of Appeals affirmed the Municipal Court’s ruling in a 2-1 decision. The Supreme Court of Ohio heard the Company’s appeal of the Ninth District Court’s decision in December 2013, and on June 11, 2014, the Ohio Supreme Court unanimously held that Cashland is properly offering short-term, single-payment loans in the State of Ohio under the OMLA reversing the decision entered by the Ohio Ninth District Court of Appeals.

CRITICAL ACCOUNTING POLICIES

Except as described below, since December 31, 2013, 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, 2013.

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 Accounting Standards Codification (“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 expected 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 estimated 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, 2014 and determined that the fair value of its goodwill is in excess of carrying value, and, as a result, no impairment existed at that date. Although no goodwill impairment was noted, there can be no assurances that future goodwill impairments will not occur. However, a 10% decrease in the estimated fair values of any of the Company’s reporting units for the June 2014 assessment would not have resulted in a goodwill impairment.

The Company performed its annual indefinite-lived intangible asset impairment test as of June 30, 2014. The Company elected to perform a qualitative assessment in accordance with Financial Accounting Standards Board Accounting Standards Update (“ASU”) No. 2012-02, Intangibles-Goodwill and Other (Topic 350): Testing Indefinite-Lived Intangible Assets for Impairment, and determined that it was not more likely than not that the indefinite-lived intangible assets are impaired. Therefore, no further quantitative assessment was required.


35
Table of Contents




RECENT ACCOUNTING PRONOUCEMENTS

See “Item 1. Financial Statements—Note 1” for a discussion of recent accounting pronouncements that the Company has adopted or will adopt in future periods.

36
Table of Contents





RESULTS OF CONTINUING OPERATIONS

Overview and Highlights

The Company’s financial results for the three months ended June 30, 2014 (the “current quarter”) are summarized below.

•
Consolidated total revenue was $455.1 million, representing an increase of $44.7 million, or 10.9%, for the current quarter compared to the three months ended June 30, 2013 (the “prior year quarter”).

•
Consolidated net revenue increased $31.7 million, or 13.0%, to $275.9 million for the current quarter from $244.2 million for the prior year quarter. The increase was primarily due to a $25.4 million, or 20.3%, increase in consumer loan net revenue, which consists of consumer loan fees, net of consumer loan loss provision.

•
Consolidated income from operations increased $12.2 million, or 24.7%, to $61.4 million in the current quarter compared to $49.2 million in the prior year quarter.

•
Consolidated net income decreased $4.1 million, or 16.6%, to $21.0 million in the current quarter compared to $25.1 million in the prior year quarter. Consolidated net income includes expenses totaling $9.7 million, net of tax, primarily related to a loss on early extinguishment of debt of $15.0 million, or $9.5 million, net of tax. Excluding these expenses, non-GAAP adjusted net income for the current quarter would have been $30.7 million. See “Overview—Non-GAAP Disclosure—Adjusted Earnings Measures” for additional information.

•
Consolidated diluted net income per share decreased 11.1%, or $0.09 per share, to $0.72 in the current quarter compared to $0.81 in the prior year quarter. Diluted earnings per share includes expenses totaling $0.33 per share, net of tax, primarily related to expenses for a loss on the early extinguishment of debt. Excluding these expenses, non-GAAP adjusted diluted net income per share attributable to the Company for the current quarter would have been $1.05. See “Overview—Non-GAAP Disclosure—Adjusted Earnings Measures” for additional information.


37
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 current quarter and prior year quarter for the Company’s retail services and e-commerce segments, for the Company’s corporate operations and on a consolidated basis (dollars in thousands):
 
Three Months Ended June 30, 2014
 
Retail Services
 
E-Commerce
 
Corporate
 
Consolidated
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Pawn loan fees and service charges
$
80,990

 
57.4
%
 
$
—

 
—

 
$
—

 
—

 
$
80,990

 
29.4
%
Proceeds from disposition of merchandise, net of cost of disposed merchandise
42,262

 
30.0
%
 
—

 
—

 
—

 
—

 
42,262

 
15.3
%
Pawn related
$
123,252

 
87.4
%
 
$
—

 
—

 
$
—

 
—

 
$
123,252

 
44.7
%
Consumer loan fees, net of loss provision
$
16,051

 
11.4
%
 
$
134,599

 
100.0
%
 
$
—

 
—

 
$
150,650

 
54.6
%
Other revenue
1,763

 
1.2
%
 
43

 
—
%
 
183

 
100.0
%
 
1,989

 
0.7
%
Net revenue
$
141,066

 
100.0
%
 
$
134,642

 
100.0
%
 
$
183

 
100.0
%
 
$
275,891

 
100.0
%
 
 
Three Months Ended June 30, 2013
 
Retail Services
 
E-Commerce
 
Corporate
 
Consolidated
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Pawn loan fees and service charges
$
72,728

 
53.1
%
 
$
—

 
—

 
$
—

 
—

 
$
72,728

 
29.8
%
Proceeds from disposition of merchandise, net of cost of disposed merchandise
42,571

 
31.1
%
 
—

 
—

 
—

 
—

 
42,571

 
17.4
%
Pawn related
$
115,299

 
84.2
%
 
$
—

 
—

 
$
—

 
—

 
$
115,299

 
47.2
%
Consumer loan fees, net of loss provision
$
19,535

 
14.3
%
 
$
105,667

 
99.6
%
 
$
—

 
—

 
$
125,202

 
51.3
%
Other revenue
2,176

 
1.5
%
 
377

 
0.4
%
 
1,136

 
100.0
%
 
3,689

 
1.5
%
Net revenue
$
137,010

 
100.0
%
 
$
106,044

 
100.0
%
 
$
1,136

 
100.0
%
 
$
244,190

 
100.0
%


38
Table of Contents




 
Six Months Ended June 30, 2014
 
Retail Services
 
E-Commerce
 
Corporate
 
Consolidated
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Pawn loan fees and service charges
$
161,177

 
54.9
%
 
$
—

 
—

 
$
—

 
—

 
$
161,177

 
28.2
%
Proceeds from disposition of merchandise, net of cost of disposed merchandise
94,153

 
32.1
%
 
—

 
—

 
—

 
—

 
94,153

 
16.5
%
Pawn related
$
255,330

 
87.0
%
 
$
—

 
—

 
$
—

 
—

 
$
255,330

 
44.7
%
Consumer loan fees, net of loss provision
$
34,212

 
11.7
%
 
$
277,120

 
100.0
%
 
$
—

 
—

 
$
311,332

 
54.5
%
Other revenue
3,850

 
1.3
%
 
85

 
—
%
 
330

 
100.0
%
 
4,265

 
0.8
%
Net revenue
$
293,392

 
100.0
%
 
$
277,205

 
100.0
%
 
$
330

 
100.0
%
 
$
570,927

 
100.0
%
 
Six Months Ended June 30, 2013
 
Retail Services
 
E-Commerce
 
Corporate
 
Consolidated
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
 
Amount
 
% of
Total
Pawn loan fees and service charges
$
148,642

 
50.5
%
 
$
—

 
—

 
$
—

 
—

 
$
148,642

 
28.8
%
Proceeds from disposition of merchandise, net of cost of disposed merchandise
99,953

 
33.9
%
 
—

 
—

 
—

 
—

 
99,953

 
19.4
%
Pawn related
$
248,595

 
84.4
%
 
$
—

 
—

 
$
—

 
—

 
$
248,595

 
48.2
%
Consumer loan fees, net of loss provision
$
41,079

 
14.0
%
 
$
219,476

 
99.6
%
 
$
—

 
—

 
$
260,555

 
50.5
%
Other revenue
4,769

 
1.6
%
 
825

 
0.4
%
 
1,387

 
100.0
%
 
6,981

 
1.3
%
Net revenue
$
294,443

 
100.0
%
 
$
220,301

 
100.0
%
 
$
1,387

 
100.0
%
 
$
516,131

 
100.0
%
   
For the current quarter, consolidated net revenue increased $31.7 million, or 13.0%, to $275.9 million from $244.2 million for the prior year quarter. Consumer loan net revenue accounted for 54.6% and 51.3% of total consolidated net revenue for the current quarter and prior year quarter, respectively. Consumer loan net revenue increased $25.4 million, to $150.7 million during the current quarter, mainly due to an increase in consumer loan fees that resulted from an increase in consumer loan balances in the e-commerce segment and a decrease in the loss provision as a percentage of consumer loan fees. Pawn-related net revenue accounted for 44.7% and 47.2% of total consolidated net revenue for the current quarter and prior year quarter, respectively. Pawn-related net revenue increased $8.0 million, to $123.3 million during the current quarter from $115.3 million in the prior year quarter. The increase in pawn-related net revenue was primarily attributable to higher pawn loan fees and service charges and higher gross profit on retail sales, partially offset by lower commercial sales and a decrease in gross profit margin on the disposition of merchandise.

For the six months ended June 30, 2014 (the “current six-month period”), consolidated net revenue increased $54.8 million, or 10.6%, to $570.9 million from $516.1 million for the same period in 2013 (the “prior year six-month period”). Consumer loan net revenue accounted for 54.5% and 50.5% of total consolidated net revenue for the current six-month period and prior year six-month period, respectively. Consumer loan net revenue increased $50.8 million to $311.3 million during the current six-month period, mainly due to an increase in consumer loan fees that resulted from an increase in consumer loan balances in the e-commerce segment and a decrease in the loss provision as a percentage of consumer loan fees in the e-commerce segment. Pawn-related net revenue accounted for 44.7% and 48.2% of consolidated net revenue for the current six-month period and prior year six-month period, respectively. Pawn-related net revenue increased $6.7 million, to $255.3 million during the current six-month period from $248.6 million in the prior year six-month period. The increase in pawn-related net revenue was primarily attributable to higher pawn loan fees and services charges and higher gross profit on retail sales, offset by lower commercial sales and a decrease in gross profit margin on the disposition of merchandise.

39
Table of Contents





Non-GAAP Disclosure
In addition to the financial information prepared in conformity with generally accepted accounting principles in the United States of America (“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 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.


40
Table of Contents




Adjusted Earnings Measures

In addition to reporting financial results in accordance with GAAP, the Company has provided adjusted net income, adjusted diluted net income per share attributable to the Company, adjusted earnings and adjusted earnings per share (collectively, the “Adjusted Earnings Measures”), which are non-GAAP measures. Management believes that the presentation of these measures provides investors with greater transparency and facilitates comparison of operating results across a broad spectrum of companies with varying capital structures, compensation strategies, derivative instruments and amortization methods, which provides a more complete understanding of the Company’s financial performance, competitive position and prospects for the future. Management also believes that investors regularly rely on non-GAAP financial measures, such as the Adjusted Earnings Measures, to assess operating performance and that such measures may highlight trends in the Company’s business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. In addition, management believes that the adjustments shown below, especially the loss on the early extinguishment of a portion of the Company’s debt (the “Debt Extinguishment”) and the charges related to the Company's settlement of a litigation matter in 2013 (the “2013 Litigation Settlement”) are useful to investors in order to allow them to compare the Company’s financial results for the current quarter and current six-month period with the prior year quarter and prior year six-month period, respectively. The computation of Adjusted Earnings Measures as presented below may differ from the computation of similarly-titled measures provided by other companies.
The following table provides a reconciliation for the three and six months ended June 30, 2014 and 2013, respectively, between net income attributable to the Company and diluted earnings per share calculated in accordance with GAAP to the Adjusted Earnings Measures, which are shown net of tax (dollars in thousands, except per share data):
 
 
Three Months Ended June 30,
 
Six Months Ended June 30,
 
2014
 
2013
 
2014
 
2013
 
$
 
Per
Diluted
Share(a)
 
$
 
Per
Diluted
Share(a)
 
$
 
Per
Diluted
Share(a)
 
$
 
Per
Diluted
Share(a)
Net income and diluted net income per share attributable to Cash America International, Inc.
$
20,971

 
$
0.72

 
$
25,132

 
$
0.81

 
$
66,708

 
$
2.27

 
$
69,058

 
$
2.23

Adjustments (net of tax):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Loss on Debt Extinguishment (b)
9,460

 
0.32

 
—

 
—

 
10,434

 
0.36

 
—

 
—

2013 Litigation Settlement(c)
236

 
0.01

 
—

 
—

 
400

 
0.01

 
—

 
—

Adjusted net income and adjusted diluted net income per share attributable to the Company
30,667

 
1.05

 
25,132

 
0.81

 
77,542

 
2.64

 
69,058

 
2.23

Other adjustments (net of tax):
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Intangible asset amortization
1,045

 
0.04

 
828

 
0.03

 
2,092

 
0.07

 
1,661

 
0.05

Non-cash equity-based compensation
1,040

 
0.04

 
770

 
0.02

 
1,982

 
0.07

 
1,758

 
0.05

Non-cash interest and debt issuance cost amortization
789

 
0.02

 
1,094

 
0.04

 
1,554

 
0.05

 
1,925

 
0.06

Foreign currency transaction loss (gain)
113

 
—

 
(41
)
 
—

 
176

 
0.01

 
197

 
0.01

Adjusted earnings and adjusted earnings per share
$
33,654

 
$
1.15

 
$
27,783

 
$
0.90

 
$
83,346

 
$
2.84

 
$
74,599

 
$
2.40

 
 
(a)
Diluted shares are calculated by giving effect to the potential dilution that could occur if securities or other contracts to issue common shares were exercised and converted into common shares during the period.
(b)
For the three months ended June 30, 2014, represents charges related to the Debt Extinguishment of $15.0 million, net of tax benefit of $5.5 million. For the six months ended June 30, 2014, represents $16.6 million of charges, net of tax benefit of $6.1 million.
(c)
For the three months ended June 30, 2014, represents charges related to the 2013 Litigation Settlement of $0.4 million, net of tax benefit of $0.2 million. For the six months ended June 30, 2014, represents $0.6 million of charges, net of tax benefit of $0.2 million.


41
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, loss on extinguishment of debt, equity in earnings or loss of unconsolidated subsidiary, taxes and including the net income or loss attributable to noncontrolling interests. Management believes adjusted EBITDA is used by investors to analyze operating performance and evaluate the Company’s ability to incur and service debt and its capacity for making capital expenditures. Adjusted EBITDA is also useful to investors to help assess the Company’s estimated enterprise value. In addition, management believes that the adjustments shown below, especially the adjustments for the closure of 36 consumer lending-only retail services locations in Texas during the second half of 2013 (the “Texas Consumer Loan Store Closures”), the penalty paid to the Consumer Financial Protection Bureau (“CFPB”) in connection with the issuance of a consent order by the CFPB (the “Regulatory Penalty”), charges related to the 2013 Litigation Settlement, the withdrawal in July 2012 of the proposed initial public offering by the Company’s wholly-owned subsidiary, Enova (“Enova IPO”), an income tax benefit related to the change of tax basis in the stock of one of the Company's subsidiaries in connection with the Mexico Reorganization (as defined below) (the “Creazione Deduction”), the reorganization of the Company's Mexico-based pawn operations during 2012 (the “Mexico Reorganization”) and a voluntary program to reimburse Ohio customers in connection with legal collections proceedings initiated by the Company in Ohio (the “Ohio Reimbursement Program”), including a decrease in the Company's remaining liability related to the Ohio Reimbursement Program during 2013 after the assessment of the claims made to date and related matters (the “Ohio Adjustment”), are useful to investors in order to allow them to compare the Company’s financial results during the periods shown without the effect of each of these income and expense items. The computation of adjusted EBITDA as presented below may differ from the computation of similarly-titled measures provided by other companies. The following table provides a reconciliation between Net Income attributable to Cash America International, Inc., which is the nearest GAAP measure presented in the Company’s financial statements, to Adjusted EBITDA (dollars in thousands): 
 
Trailing 12 Months Ended
 
June 30,
 
2014
 
2013
Net income attributable to Cash America International, Inc.
$
140,178

 
$
105,241

Adjustments:
 
 
 
Texas Consumer Loan Store Closures (a)
1,373

 
—

Regulatory Penalty (b)
5,000

 
—

2013 Litigation settlement(c)
18,635

 
—

Charges related to withdrawn proposed Enova IPO(d)
—

 
3,112

Charges related to Mexico Reorganization(e)
—

 
28,873

Charges related to Ohio Adjustment and Ohio Reimbursement Program(f)
(5,000
)
 
13,400

Depreciation and amortization expenses(g)
76,319

 
68,587

Interest expense, net
42,843

 
31,455

Foreign currency transaction loss
1,173

 
460

Loss on Debt Extinguishment(h)
17,169

 
—

Equity in loss of unconsolidated subsidiary
—

 
283

Provision for income taxes(i)
29,194

 
75,864

Net loss attributable to the noncontrolling interest (j)
—

 
(3,954
)
Adjusted EBITDA
$
326,884

 
$
323,321

Adjusted EBITDA margin calculated as follows:
 
 
 
Total revenue
$
1,866,337

 
$
1,809,806

Adjusted EBITDA
$
326,884

 
$
323,321

Adjusted EBITDA as a percentage of total revenue
17.5
%
 
17.9
%
 
 
 
 
 

42
Table of Contents




(a)
Represents charges related to the Texas Consumer Loan Store Closures of $1.4 million, before tax benefit of $0.5 million.
(b)
Represents charges for the Regulatory Penalty, which is nondeductible for tax purposes.
(c)
Represents charges related to the 2013 Litigation Settlement of $18.6 million, before tax benefit of $6.9 million.
(d)
Represents charges directly related to the withdrawn Enova IPO, before tax benefit of $1.1 million.
(e)
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 (g) and (i) below.
(f)
For the trailing 12 months ended June 30, 2014, represents the Ohio Adjustment of $5.0 million, before tax provision of $1.8 million. For the trailing 12 months ended June 30, 2013, represents charges related to the Ohio Reimbursement Program, before tax benefit of $5.0 million.
(g)
For the trailing 12 months ended June 30, 2014, excludes $0.2 million of depreciation and amortization expenses, which are included in the Texas Consumer Loan Store Closures. For the trailing 12 months ended June 30, 2013, excludes $12.6 million of depreciation and amortization expenses which are included in “Charges related to the Mexico Reorganization”.
(h)
For the trailing 12 months ended June 30, 2014, represents charges of $17.2 million, before tax benefit of $6.4 million, related to the Debt Extinguishment.
(i)
For the trailing 12 months ended June 30, 2014, includes income benefit of $33.2 million related to the Creazione Deduction. For the trailing 12 months ended June 30, 2013, excludes a $7.2 million charge for the recognition of a deferred tax asset valuation allowance, which is included in “Charges related to the Mexico Reorganization” in the table above and includes an income tax benefit related to the Mexico Reorganization of $1.2 million.
(j)
For the trailing twelve months ended June 30, 2013, includes $2.3 million of noncontrolling interests related to the Mexico Reorganization.



43
Table of Contents





In addition, management believes that the adjusted EBITDA shown by segment and for the Company’s corporate operations are useful to investors in order to allow them to compare the Company’s financial results during the periods shown without the effect of each of the applicable income and expense items discussed above. The following table provides a reconciliation between Income (loss) from operations, which is the nearest GAAP measure presented for the Company’s segments in the notes to the Company’s financial statements, to Adjusted EBITDA (dollars in thousands): 
 
Trailing 12 Months Ended June 30,
 
2014
 
2013
 
Retail Services
 
E-Commerce
 
Corporate
 
Consolidated
 
Retail Services
 
E-Commerce
 
Corporate
 
Consolidated
Income (loss) from operations
$
119,296

 
$
198,371

 
$
(87,110
)
 
$
230,557

 
$
152,227

 
$
144,506

 
$
(80,223
)
 
$
216,510

Depreciation and amortization expenses(a)
42,181

 
16,549

 
17,589

 
76,319

 
36,683

 
16,398

 
15,506

 
68,587

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Texas Consumer Loan Store Closures
1,373

 
—

 
—

 
1,373

 
—

 
—

 
—

 
—

Regulatory Penalty
2,500

 
2,500

 
 
 
5,000

 
—

 
—

 
—

 
—

2013 Litigation Settlement
18,635

 
—

 
—

 
18,635

 
—

 
—

 
—

 
—

Charges related to withdrawn Enova IPO
—

 
—

 
—

 
—

 
—

 
3,112

 
—

 
3,112

Charges related to the Mexico Reorganization(b)
—

 
—

 
—

 
—

 
21,712

 
—

 
—

 
21,712

Charges related to Ohio Adjustment and Ohio Reimbursement(c)
(5,000
)
 
—

 
—

 
(5,000
)
 
13,400

 
—

 
—

 
13,400

Adjusted EBITDA
$
178,985

 
$
217,420

 
$
(69,521
)
 
$
326,884

 
$
224,022

 
$
164,016

 
$
(64,717
)
 
$
323,321


(a)
For the trailing 12 months ended June 30, 2014, excludes $0.2 million of depreciation and amortization expenses, which are included in the Texas Consumer Loan Store Closures. For the trailing 12 months ended June 30, 2013, excludes $12.6 million of depreciation and amortization expenses which are included in “Charges related to the Mexico Reorganization.”
(b)
Includes $12.6 million of depreciation and amortization expenses as noted in (a) above.
(c)
For the trailing 12 months ended June 30, 2014, represents the Ohio Adjustment. For the trailing 12 months ended June 30, 2013, represents charges related to the Ohio Reimbursement Program.


 
Six Months Ended June 30,
 
2014
 
2013
 
Retail Services
 
E-Commerce
 
Corporate
 
Consolidated
 
Retail Services
 
E-Commerce
 
Corporate
 
Consolidated
Income (loss) from operations
$
64,165

 
$
128,340

 
$
(46,897
)
 
$
145,608

 
$
89,123

 
$
80,584

 
$
(42,873
)
 
$
126,834

Depreciation and amortization expenses
21,250

 
8,434

 
9,074

 
38,758

 
18,530

 
9,028

 
7,973

 
35,531

Adjustments:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
2013 Litigation Settlement(a)
635

 
—

 
—

 
635

 
—

 
—

 
—

 
—

Adjusted EBITDA
$
86,050

 
$
136,774

 
$
(37,823
)
 
$
185,001

 
$
107,653

 
$
89,612

 
$
(34,900
)
 
$
162,365


(a) Represents charges related to the 2013 Litigation Settlement during the six months ended June 30, 2014.

44
Table of Contents




QUARTER ENDED JUNE 30, 2014 COMPARED TO QUARTER ENDED JUNE 30, 2013

Pawn Lending Activities

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

The following table sets forth selected data related to the Company’s pawn lending activities as of and for the three months ended June 30, 2014 and 2013 (dollars in thousands except where otherwise noted):
 
 
As of June 30,
 
2014
 
2013
 
Change
 
% Change
Ending pawn loan balances
 
 
 
 
 
 
 
Domestic retail services
$
257,647

 
$
224,622

 
$
33,025

 
14.7
 %
Foreign retail services
6,021

 
4,952

 
1,069

 
21.6
 %
Consolidated pawn loan balances
$
263,668

 
$
229,574

 
$
34,094

 
14.9
 %
Ending merchandise balance, net
 
 
 
 
 
 
 
Domestic retail services
$
192,745

 
$
149,244

 
$
43,501

 
29.1
 %
Foreign retail services
6,174

 
5,868

 
306

 
5.2
 %
Consolidated merchandise balance, net
$
198,919

 
$
155,112

 
$
43,807

 
28.2
 %
 
Three Months Ended June 30,
 
2014
 
2013
 
Change
 
% Change
Pawn loan fees and service charges
 
 
 
 
 
 
 
Domestic retail services
$
78,911

 
$
70,802

 
$
8,109

 
11.5
 %
Foreign retail services
2,079

 
1,926

 
153

 
7.9
 %
Consolidated pawn loan fees and service charges
$
80,990

 
$
72,728

 
$
8,262

 
11.4
 %
Average pawn loan balance outstanding
 
 
 
 
 
 
 
Domestic retail services
$
235,187

 
$
211,195

 
$
23,992

 
11.4
 %
Foreign retail services
5,683

 
5,237

 
446

 
8.5
 %
Consolidated average pawn loans outstanding
$
240,870

 
$
216,432

 
$
24,438

 
11.3
 %
Amount of pawn loans written and renewed
 
 
 
 
 
 
 
Domestic retail services
$
271,226

 
$
234,327

 
$
36,899

 
15.7
 %
Foreign retail services
15,909

 
15,166

 
743

 
4.9
 %
Consolidated amount of pawn loans written and renewed
$
287,135

 
$
249,493

 
$
37,642

 
15.1
 %
Average amount per pawn loan (in ones)
 
 
 
 
 
 
 
Domestic retail services
$
123

 
$
126

 
$
(3
)
 
(2.4
)%
Foreign retail services
$
88

 
$
89

 
$
(1
)
 
(1.1
)%
Consolidated average amount per pawn loan (in ones)
$
120

 
$
123

 
$
(3
)
 
(2.4
)%
Annualized yield on pawn loans
 
 
 
 
 
 
 
Domestic retail services
134.6
%
 
134.5
%
 
 
 
 
Foreign retail services
146.7
%
 
147.5
%
 
 
 
 
Consolidated annualized yield on pawn loans
134.9
%
 
134.8
%
 
 
 
 
Gross profit margin on disposition of merchandise
 
 
 
 
 
 
 
Domestic retail services
29.0
%
 
32.9
%
 
 
 
 
Foreign retail services
23.0
%
 
16.4
%
 
 
 
 
Gross profit margin on disposition of merchandise
28.8
%
 
32.4
%
 
 
 
 
Merchandise turnover
 
 
 
 
 
 
 
Domestic retail services
2.2

 
2.4

 
 
 
 
Foreign retail services
2.4

 
2.6

 
 
 
 
Consolidated merchandise turnover
2.2

 
2.4

 
 
 
 


45
Table of Contents




Pawn Loan Fees and Service Charges and Pawn Loan Balances

Consolidated pawn loan balances as of June 30, 2014 were $263.7 million, which was $34.1 million, or 14.9%, higher than June 30, 2013. The increase in pawn loan balances led to an 11.4% increase in pawn loan fees and service charges.

Domestic Pawn Loan Balances

The average balance of domestic pawn loans outstanding during the current quarter increased by $24.0 million, or 11.4%, compared to the prior year quarter, primarily due to an increase in the loan balances as a result of the addition of 85 domestic pawn lending locations through acquisitions and de novo store growth since the prior year quarter. Additionally, pawn loan balances in same-store domestic retail services locations (stores that have been open for at least 12 months) increased 4.5% as of June 30, 2014 compared to June 30, 2013. The average amount per loan in domestic pawn operations decreased to $123 in the current quarter from $126 in the prior year quarter and was influenced by a greater mix of pawn loans being collateralized by non-jewelry merchandise, which generally have a lower average loan amount than loans collateralized by jewelry.

Domestic pawn loan fees and service charges increased $8.1 million, or 11.5%, to $78.9 million in the current quarter from $70.8 million in the prior year quarter. The increase was primarily driven by the higher average domestic pawn loan balances during the current quarter as compared to the prior year quarter. Pawn loan yield was relatively unchanged at 134.6% in the current quarter compared to 134.5% in the prior year quarter.

Foreign Pawn Loan Balances

The average balance of foreign pawn loans outstanding increased 8.5% in the current quarter to $5.7 million, from $5.2 million in the prior year quarter. Foreign pawn loan fees and service charges increased 7.9%, to $2.1 million in the current quarter compared to $1.9 million in the prior year quarter.

Proceeds from Disposition of Merchandise and Gross Profit

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 generally the principal amount loaned on an item or the amount paid for purchased merchandise. Retail sales include the sale of jewelry and general merchandise direct to consumers through the Company’s domestic and foreign retail services locations or over the internet through auction and other similar sites. Commercial sales include the sale of refined gold, platinum, silver and diamonds to brokers or manufacturers. The following table summarizes the proceeds from the disposition of merchandise and the related profit for the current quarter and the prior year quarter (dollars in thousands):
 
 
Three Months Ended June 30,
 
2014
 
2013
 
Retail
 
Commercial
 
Total
 
Retail
 
Commercial
 
Total
Proceeds from disposition
$
117,951

 
$
28,821

 
$
146,772

 
$
89,836

 
$
41,696

 
$
131,532

Gross profit on disposition
$
38,681

 
$
3,581

 
$
42,262

 
$
33,385

 
$
9,186

 
$
42,571

Gross profit margin
32.8
%
 
12.4
%
 
28.8
%
 
37.2
%
 
22.0
%
 
32.4
%
Percentage of total gross profit
91.5
%
 
8.5
%
 
100.0
%
 
78.4
%
 
21.6
%
 
100.0
%

As the table above indicates, the Company is placing a greater emphasis on retail disposition of merchandise in its retail services locations and placed much less reliance on the disposition of commercial merchandise due to the prevailing lower market price for pure gold. Management expects this trend to continue and will focus on the retail profit on the disposition of merchandise as the percentage of gross profit from commercial

46
Table of Contents




sales has become a less significant percentage of the total gross profit from dispositions. This shift is expected to result in higher levels of merchandise available for disposition and a decrease in inventory turnover ratio as more goods will be available for sale in retail services locations.
    
The total proceeds from disposition of merchandise increased $15.2 million, or 11.6%, in the current quarter compared to the prior year quarter. The total gross profit from the disposition of merchandise continued to be influenced by the decrease in gross profit on commercial dispositions and decreased $0.3 million, or 0.7%, during the current quarter compared to the prior year quarter. The overall gross profit margin percentage decreased to 28.8% in the current quarter compared to 32.4% in the prior year quarter, mainly due to a decrease in gross profit margin on both commercial and retail dispositions. The consolidated merchandise turnover rate decreased to 2.2 times during the current quarter compared to 2.4 times in the prior year quarter, primarily due to management’s decision to emphasize retail disposition activity rather than routinely disposing of a higher volume of merchandise on regular intervals through commercial sales.

Proceeds from retail disposition of merchandise increased $28.1 million, or 31.3%, during the current quarter compared to the prior year quarter. Proceeds from retail dispositions in domestic retail operations increased $27.6 million, or 32.1%, primarily due to management’s emphasis on retail disposition activity and the addition of retail services locations through de novo store growth and acquisitions since the prior year quarter. Proceeds from retail dispositions in foreign retail operations increased $0.5 million in the current quarter from the prior year quarter.

Consolidated gross profit from retail dispositions increased $5.3 million, or 15.9%. The consolidated gross profit margin on the retail disposition of merchandise decreased to 32.8% in the current quarter compared to 37.2% in the prior year quarter, mostly due to the discounting of merchandise prices to encourage retail sales activity. Gross profit from retail dispositions increased to 91.5% of total gross profit compared to 78.4% in the prior year quarter, primarily due to the shift to emphasize retail disposition of jewelry over commercial sales activity.
Consolidated proceeds from commercial dispositions decreased 30.9%, or $12.9 million, during the current quarter compared to the prior year quarter. Proceeds from commercial dispositions from domestic operations decreased by $12.4 million, primarily due to a decrease in the sales volume of commercial gold as part of an effort to place a greater emphasis on retail disposition of jewelry due to a decrease in the average market price of gold.
Gross profit from commercial dispositions decreased $5.6 million. Gross profit from commercial dispositions in domestic operations decreased $5.7 million, and gross profit from commercial dispositions in foreign operations increased $0.1 million. The decrease in consolidated gross profit margin from commercial sales, to 12.4% in the current quarter from 22.0% in the prior year quarter, was mainly due to a lower market price of gold sold.

In future periods, management expects the ratio of commercial sales to total sales to remain relatively consistent with current levels as the Company will continue to emphasize sales of jewelry in its retail services locations. Management expects to continue to experience gross profit margin levels consistent with the current quarter on retail dispositions. Management also expects gross profit margin on commercial dispositions to remain at these lower levels in future periods, mainly due to lower prevailing market prices for gold.


47
Table of Contents





The table below summarizes the age of merchandise held for disposition related to the Company’s pawn lending operations before valuation allowance of $2.1 million and $0.9 million as of June 30, 2014 and 2013, respectively (dollars in thousands):
 
As of June 30,
 
2014
 
2013
 
Amount
 
%
 
Amount
 
%
Jewelry - held for one year or less
$
107,905

 
53.7
%
 
$
90,105

 
57.8
%
Other merchandise - held for one year or less
80,050

 
39.8
%
 
56,398

 
36.1
%
Total merchandise held for one year or less
187,955

 
93.5
%
 
146,503

 
93.9
%
Jewelry - held for more than one year
5,480

 
2.7
%
 
3,856

 
2.4
%
Other merchandise - held for more than one year
7,593

 
3.8
%
 
5,702

 
3.7
%
Total merchandise held for more than one year
13,073

 
6.5
%
 
9,558

 
6.1
%
Merchandise held for disposition, gross
$
201,028

 
100.0
%
 
$
156,061

 
100.0
%
Merchandise held for disposition, net of allowance
$
198,919

 
 
 
$
155,112

 
 

Consumer Loan Activities
    
Consumer Loan Fees

Consumer loan fees increased $22.9 million, or 11.3%, to $225.3 million in the current quarter compared to $202.4 million in the prior year quarter. The increase in consumer loan fees is due to growth in consumer loan balances in the e-commerce segment, with domestic e-commerce channels contributing $21.2 million and foreign e-commerce channels contributing $4.4 million of the consolidated increase. Offsetting the increase from the e-commerce segment was a $2.7 million decrease in consumer loan fees in the retail services segment, primarily due to a decrease in the number of retail services locations offering the product, mainly as a result of the Texas Consumer Loan Store Closures during 2013, and reduced loan demand in the Company’s retail services locations.

Consumer loan fees from the foreign component of the e-commerce segment were 46.0% of consumer loan fees for the e-commerce segment and 41.1% of consolidated consumer loan fees in the current quarter, compared to 50.2% of consumer loan fees for the e-commerce segment and 43.6% of consolidated consumer loan fees in the prior year quarter. See “Recent Developments—Developments in the Company's Business in the United Kingdom” for a discussion about the changes being made to the Company’s U.K. consumer loan business.

Consumer Loan Loss Provision

The consumer loan loss provision decreased by $2.5 million, or 3.3%, to $74.7 million in the current quarter from $77.2 million in the prior year quarter. The loss provision as a percentage of consumer loan fees decreased to 33.1% in the current quarter compared to 38.2% in the prior year quarter. The decrease was primarily due to the lower loss experience across all products in the Company’s consumer loan portfolio, primarily in the e-commerce segment. During the current quarter as compared to the prior year quarter, the Company experienced fewer delinquencies, increased collections and a higher percentage mix of the number of loans written and renewed to customers with established payment histories. In addition, the Company recently made refinements to its consumer loan underwriting models partially as a result of the changes being made to the Company's U.K. consumer loan business in response to the requirements of the FCA, which management believes also contributed to the recent improvements in loss rates. Additional discussion of the specific factors influencing each product is included in “Consumer Loan Loss Experience by Product” below. Management expects the loss provision as a percentage of fees will be influenced by the mix of new and returning customers, the mix of outstanding loan products and the changes being made to the Company’s U.K. consumer loan business. See “Recent Developments—Developments in the Company’s Business in the United Kingdom” for further discussion.
    

48
Table of Contents




The combination of the decrease in the consumer loan loss provision with higher consumer loan fees led to a 20.3% increase in consumer loan fees, net of the consumer loan loss provision, which increased by $25.4 million to $150.7 million. The increase in consumer loan fees, net of consumer loan loss provision contributed significantly to the consolidated increase in net revenue during the period. Contributions from the line of credit and installment loan products offset a decrease in consumer loan fees, net of loss provision from the short-term consumer loan product during the period.

The following table sets forth interest and fees on consumer loans by product type and segment, and the related loan loss provision for the current quarter and the prior year quarter (dollars in thousands):
 
 
Three Months Ended June 30,
 
2014
 
2013
 
Short-term loans
 
Line of credit accounts
 
Installment loans
 
Total
 
Short-term loans
 
Line of credit accounts
 
Installment loans
 
Total
Retail services
$
20,440

 
$
—

 
$
3,460

 
$
23,900

 
$
23,529

 
$
—

 
$
3,118

 
$
26,647

E-commerce
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Domestic
41,392

 
36,066

 
31,293

 
108,751

 
42,398

 
26,465

 
18,639

 
87,502

   Foreign
24,316

 
38,828

 
29,544

 
92,688

 
60,633

 
1,818

 
25,831

 
88,282

Total E-commerce
65,708

 
74,894

 
60,837

 
201,439

 
103,031

 
28,283

 
44,470

 
175,784

Consumer loan fees
$
86,148

 
$
74,894

 
$
64,297

 
$
225,339

 
$
126,560

 
$
28,283

 
$
47,588

 
$
202,431

Less: consumer loan loss provision
25,621

 
21,786

 
27,282

 
74,689

 
42,931

 
9,919

 
24,379

 
77,229

Consumer loan fees, net loss provision
$
60,527

 
$
53,108

 
$
37,015

 
$
150,650

 
$
83,629

 
$
18,364

 
$
23,209

 
$
125,202

Year-over-year change - $
$
(23,102
)
 
$
34,744

 
$
13,806

 
$
25,448

 
$
(3,750
)
 
$
9,279

 
$
11,348

 
$
16,877

Year-over-year change - %
(27.6
)%
 
189.2
%
 
59.5
%
 
20.3
%
 
(4.3
)%
 
102.1
%
 
95.7
%
 
15.6
%
Consumer loan loss provision
as a % of consumer loan fees
29.7
 %
 
29.1
%
 
42.4
%
 
33.1
%
 
33.9
 %
 
35.1
%
 
51.2
%
 
38.2
%

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, including ratios calculated using 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. Management believes 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 consumer loan loss provision 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 $47.3 million, or 14.1%, to $382.2 million as of June 30, 2014 from $335.0 million as of June 30, 2013, primarily due to increased demand for the line of credit product in the e-commerce segment, with strong growth in both domestic and foreign markets. Additionally, the Company experienced strong growth in the

49
Table of Contents




installment loan products in the domestic e-commerce segment. Offsetting these increases was a reduction in demand for the Company’s short-term consumer loan products in both segments.

The combined consumer loan balance includes $410.1 million and $367.0 million as of June 30, 2014 and 2013, respectively, of Company-owned consumer loan balances before the allowance for losses of $72.2 million and $79.9 million provided in the consolidated financial statements for June 30, 2014 and 2013, respectively. The combined consumer loan balance also includes $47.5 million and $50.9 million as of June 30, 2014 and 2013, 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 $3.2 million and $3.0 million provided in the consolidated financial statements for June 30, 2014 and 2013, respectively. See “Recent Developments—Developments in the Company's Business in the United Kingdom” for a discussion about the changes being made to the Company’s U.K. consumer loan business.

The following table summarizes consumer loan balances outstanding as of June 30, 2014 and 2013 (dollars in thousands):
 
As of June 30,
 
2014
 
2013
 
Company
Owned(a)
 
Guaranteed
by the
Company(a)
 
Combined(b)
 
Company
Owned(a)
 
Guaranteed
by the
Company(a)
 
Combined(b)
Ending consumer loan balances:
 
 
 
 
 
 
 
 
 
 
 
Retail Services
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
$
42,744

 
$
3,976

 
$
46,720

 
$
45,324

 
$
5,338

 
$
50,662

Installment loans
7,643

 
8,565

 
16,208

 
9,819

 
10,131

 
19,950

Total Retail Services, gross
50,387

 
12,541

 
62,928

 
55,143

 
15,469

 
70,612

E-Commerce
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
30,545

 
34,914

 
65,459

 
31,594

 
35,115

 
66,709

Line of credit accounts
64,490

 
—

 
64,490

 
47,368

 
—

 
47,368

Installment loans
100,009

 
—

 
100,009

 
44,509

 
—

 
44,509

Total Domestic, gross
195,044

 
34,914

 
229,958

 
123,471

 
35,115

 
158,586

Foreign
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
29,596

 
—

 
29,596

 
91,240

 
301

 
91,541

Line of credit accounts
57,919

 
—

 
57,919

 
10,703

 
—

 
10,703

Installment loans
77,202

 
—

 
77,202

 
86,433

 
—

 
86,433

Total Foreign, gross
164,717

 
—

 
164,717

 
188,376

 
301

 
188,677

Total E-Commerce, gross
359,761

 
34,914

 
394,675

 
311,847

 
35,416

 
347,263

Total ending loan balance, gross
410,148

 
47,455

 
457,603

 
366,990

 
50,885

 
417,875

Less: Allowance and liabilities for losses
(72,187
)
 
(3,176
)
 
(75,363
)
 
(79,863
)
 
(3,047
)
 
(82,910
)
Total ending loan balance, net
$
337,961

 
$
44,279

 
$
382,240

 
$
287,127

 
$
47,838

 
$
334,965

Allowance and liability for losses as a % of consumer loan balances, gross
17.6
%
 
6.7
%
 
16.5
%
 
21.8
%
 
6.0
%
 
19.8
%
 
 
 
 
 
 
(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.


50
Table of Contents




Consumer Loans Written and Renewed

The amount of combined consumer loans written and renewed was $750.1 million in the current quarter, a decrease of $84.2 million, or 10.1%, from $834.3 million in the prior year quarter. The Company is experiencing a shift away from short-term consumer loans, as installment loans and line of credit balances comprise a greater percentage of its consumer loan portfolio due to customers’ preference for these products. Management believes that the consumer loans written and renewed statistics are becoming less meaningful than the change in the balances and product composition of consumer loans outstanding. For a discussion about the changes being made to the Company's U.K. business and how they are expected to impact the Company's consumer loan business in the United Kingdom, see “Recent Developments—Developments in the Company's Business in the United Kingdom.”

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

51
Table of Contents




The following table summarizes the consumer loans written and renewed for the current quarter and the prior year quarter:
 
Three Months Ended June 30,
 
2014
 
2013
 
Company
Owned(a)
 
Guaranteed
by the
Company(a)(b)
 
Combined(a)
 
Company
Owned(a)
 
Guaranteed
by the
Company(a)(b)
 
Combined(a)
Amount of consumer loans written and renewed (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
 
Retail Services
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
$
157,268

 
$
16,878

 
$
174,146

 
$
167,896

 
$
26,446

 
$
194,342

Installment loans
2,526

 
6,763

 
9,289

 
2,051

 
5,274

 
7,325

Total Retail Services
159,794

 
23,641

 
183,435

 
169,947

 
31,720

 
201,667

E-Commerce
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
73,493

 
157,905

 
231,398

 
71,507

 
163,236

 
234,743

Line of credit accounts
49,708

 
—

 
49,708

 
37,649

 
—

 
37,649

Installment loans
58,058

 
—

 
58,058

 
31,385

 
—

 
31,385

Total Domestic
181,259

 
157,905

 
339,164

 
140,541

 
163,236

 
303,777

Foreign
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
95,250

 
—

 
95,250

 
249,953

 
739

 
250,692

Line of credit accounts
76,241

 
—

 
76,241

 
13,484

 
—

 
13,484

Installment loans
56,047

 
—

 
56,047

 
64,665

 
—

 
64,665

Total Foreign
227,538

 
—

 
227,538

 
328,102

 
739

 
328,841

Total E-Commerce
408,797

 
157,905

 
566,702

 
468,643

 
163,975

 
632,618

Total amount of consumer loans written and renewed
$
568,591

 
$
181,546

 
$
750,137

 
$
638,590

 
$
195,695

 
$
834,285

Number of consumer loans written and renewed (in ones):
 
 
 
 
 
 
 
 
 
 
 
Retail Services
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
331,032

 
31,482

 
362,514

 
354,546

 
51,763

 
406,309

Installment loans
1,833

 
5,180

 
7,013

 
1,798

 
928

 
2,726

Total Retail Services
332,865

 
36,662

 
369,527

 
356,344

 
52,691

 
409,035

E-Commerce
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
219,274

 
229,007

 
448,281

 
242,617

 
227,956

 
470,573

Line of credit accounts
198,956

 
—

 
198,956

 
139,550

 
—

 
139,550

Installment loans
37,751

 
—

 
37,751

 
30,229

 
—

 
30,229

Total Domestic
455,981

 
229,007

 
684,988

 
412,396

 
227,956

 
640,352

Foreign
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
187,561

 
—

 
187,561

 
454,293

 
919

 
455,212

Line of credit accounts
255,171

 
—

 
255,171

 
30,748

 
—

 
30,748

Installment loans
44,200

 
—

 
44,200

 
56,679

 
—

 
56,679

Total Foreign
486,932

 
—

 
486,932

 
541,720

 
919

 
542,639

Total E-Commerce
942,913

 
229,007

 
1,171,920

 
954,116

 
228,875

 
1,182,991

Total number of consumer loans written and renewed
1,275,778

 
265,669

 
1,541,447

 
1,310,460

 
281,566

 
1,592,026


(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.


52
Table of Contents




The average amount per consumer loan is calculated as the total amount of combined consumer loans written and renewed for the period divided by the total number of combined consumer loans written and renewed for the period. The following table shows the average amount per consumer loan by product for the current quarter compared to the prior year quarter:
 
Three Months Ended June 30,
 
2014
 
2013
Average amount per consumer loan (in ones)(a)
 
 
 
 
 
Retail Services
 
 
 
 
 
Short-term loans
 
$
480

 
 
$
478

Installment loans
 
1,325

 
 
2,687

E-Commerce
 
 
 
 
 
Domestic
 
 
 
 
 
Short-term loans
 
$
516

 
 
$
499

Line of credit accounts(b)
 
250

 
 
270

Installment loans
 
1,538

 
 
1,038

Foreign
 
 
 
 
 
Short-term loans
 
$
508

 
 
$
551

Line of credit accounts(b)
 
299

 
 
439

Installment loans
 
1,268

 
 
1,141

Consolidated
 
 
 
 
 
Short-term loans
 
$
502

 
 
$
510

Line of credit accounts(b)
 
277

 
 
300

Installment loans
 
1,387

 
 
1,153

(a) The disclosure regarding the average amount per consumer loan is statistical data that is not included in the Company’s financial statements.
(b) Represents the average amount of each incremental draw on line of credit accounts.

Consumer Loans Written to New and Returning 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 returning 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 returning 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 returning customers include both 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.

53
Table of Contents




The following table shows, for the e-commerce segment, loans written and renewed to new customers and to returning customers for the current quarter and prior year quarter (dollars in thousands):
 
 
Three Months Ended June 30,
 
2014
 
2013
 
Company
Owned(a)
 
Guaranteed
by the
Company(a)(b)
 
Combined(a)
 
Company
Owned(a)
 
Guaranteed
by the
Company(a)(b)
 
Combined(a)
Amount of consumer loans written and renewed to:
 
 
 
 
 
 
 
 
 
 
 
New customers
$
66,359

 
$
8,967

 
$
75,326

 
$
61,953

 
$
11,755

 
$
73,708

% of total
11.7
%
 
1.6
%
 
13.3
%
 
9.8
%
 
1.9
%
 
11.7
%
Returning customers
342,438

 
148,938

 
491,376

 
406,690

 
152,220

 
558,910

% of total
60.4
%
 
26.3
%
 
86.7
%
 
64.3
%
 
24.0
%
 
88.3
%
Total amount of consumer loans written and renewed
$
408,797

 
$
157,905

 
$
566,702

 
$
468,643

 
$
163,975

 
$
632,618

Number of consumer loans written and renewed to (in ones):
 
 
 
 
 
 
 
 
 
 
 
New customers
94,348

 
16,812

 
111,160

 
124,912

 
20,878

 
145,790

% of total
8.1
%
 
1.4
%
 
9.5
%
 
10.6
%
 
1.7
%
 
12.3
%
Returning customers
848,565

 
212,195

 
1,060,760

 
829,204

 
207,997

 
1,037,201

% of total
72.4
%
 
18.1
%
 
90.5
%
 
70.1
%
 
17.6
%
 
87.7
%
Total number of consumer loans written and renewed
942,913

 
229,007

 
1,171,920

 
954,116

 
228,875

 
1,182,991

 
(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 is included in “Accounts payable and accrued expenses” in the consolidated balance sheets.

The allowance and liability for estimated losses as a percentage of combined consumer loans and fees receivable decreased to 16.5% in the current quarter from 19.8% in the prior year quarter, primarily due to improved performance across all of the Company’s consumer loan products in both of its segments as further discussed in “Consumer Loan Loss Experience by Product” below.

The consumer loan loss provision in the current quarter was $74.7 million, which was composed of $74.0 million related to Company-owned consumer loans and $0.7 million related to loans guaranteed by the Company through the CSO programs. The consumer loan loss provision in the prior year quarter was $77.2 million, which was composed of $76.3 million related to Company-owned consumer loans and $0.9 million related to loans guaranteed by the Company through the CSO programs. Consolidated charge-offs, net of recoveries, were $79.5 million and $74.1 million in the current quarter and prior year quarter, respectively.

54
Table of Contents




The following table shows consumer loan balances and fees and the relationship of the allowance for losses to the combined balances of consumer loans for each of the last five quarters (dollars in thousands):
 
2013
 
2014
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
First Quarter
 
Second Quarter
Consumer loan balances and fees receivable:
 
 
 
 
 
 
 
 
 
Gross - Company owned
$
366,990

 
$
418,237

 
$
446,707

 
$
399,820

 
$
410,148

Gross - Guaranteed by the Company(a)
50,885

 
50,085

 
58,950

 
42,191

 
47,455

Combined consumer loans and fees receivable, gross(b)
$
417,875

 
$
468,322

 
$
505,657

 
$
442,011

 
$
457,603

Allowance and liability for losses on consumer loans
82,910

 
92,786

 
90,946

 
80,165

 
75,363

Combined consumer loans and fees receivable, net(b)
$
334,965

 
$
375,536

 
$
414,711

 
$
361,846

 
$
382,240

Allowance and liability for losses as a % of combined consumer loans and fees receivable, gross(b)
19.8
%
 
19.8
%
 
18.0
%
 
18.1
%
 
16.5
%
 
 
 
 
 
 
(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.

Consumer Loan Loss Experience by Product

Management evaluates loss rates for all of its consumer loan products to determine credit quality and evaluate trends. For short-term loans, the Company evaluates consumer loan losses as a percentage of combined consumer loans written and renewed. For line of credit accounts and installment loans, the Company evaluates consumer loan losses as a percentage of the average consumer loan balance outstanding and the average combined consumer loan balance outstanding, respectively, for each portfolio.

Short-term Loans

Due to the nature of the short-term loan product and the high velocity of loans written and renewed, seasonal trends are evidenced in quarter-to-quarter performance. In the typical business cycle, the consumer loan loss provision as a percent of combined consumer loans written and renewed for short-term consumer loans is usually lowest in the first quarter and typically increases throughout the year. This seasonal trend was evidenced in the current quarter, but the loss provision as a percentage of combined consumer loans written and renewed was lower than the seasonally comparable prior year quarter, primarily due to a decrease in demand from new customers for short-term consumer loans as the Company continued to experience a shift in customers’ preference for the Company’s line of credit and installment loan products over its short-term consumer loan product, the recent refinements made to the Company’s consumer loan underwriting models and increased collections. For a discussion about the changes being made to the Company's U.K. consumer loan business and how they are expected to impact the Company's business in the United Kingdom, see “Recent Developments—Developments in the Company's Business in the United Kingdom.”

55
Table of Contents




The following table includes information related only to the Company’s short-term consumer loan product and shows the Company’s loss experience trends for short-term consumer loans for each of the last five quarters (dollars in thousands): 
 
2013
 
2014
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
First Quarter
 
Second Quarter
Short-term consumer loans:
 
 
 
 
 
 
 
 
 
Consumer loan loss provision
$
42,931

 
$
41,806

 
$
33,567

 
$
21,761

 
$
25,621

Charge-offs (net of recoveries)
42,541

 
49,271

 
43,862

 
25,922

 
24,507

Short-term consumer loans written and renewed:(a)
 
 
 
 
 
 
 
 
 
Company owned
$
489,356

 
$
435,837

 
$
398,781

 
$
346,098

 
$
326,011

Guaranteed by the Company(b)
190,421

 
211,426

 
209,965

 
181,092

 
174,783

Combined consumer loans written and renewed
$
679,777

 
$
647,263

 
$
608,746

 
$
527,190

 
$
500,794

Short-term consumer loans and fees receivable:
 
 
 
 
 
 
 
 
 
Gross - Company owned
$
168,158

 
$
145,026

 
$
131,236

 
$
102,955

 
$
102,885

Gross - Guaranteed by the Company(b)
40,754

 
39,810

 
46,311

 
33,077

 
38,890

Combined consumer loans and fees receivable, gross(c)
$
208,912

 
$
184,836

 
$
177,547

 
$
136,032

 
$
141,775

Short-term consumer loan ratios:
 
 
 
 
 
 
 
 
 
Consumer loan loss provision as a % of combined consumer loans written and renewed(a)
6.3
%
 
6.5
%
 
5.5
%
 
4.1
%
 
5.1
%
Charge-offs (net of recoveries) as a % of combined consumer loans written and renewed(a)
6.3
%
 
7.6
%
 
7.2
%
 
4.9
%
 
4.9
%
Consumer loan loss provision as a % of consumer loan fees
33.9
%
 
35.2
%
 
32.2
%
 
22.9
%
 
29.7
%
Allowance and liability for losses as a % of combined consumer loans and fees receivable, gross(c)
21.3
%
 
20.0
%
 
15.1
%
 
16.6
%
 
16.7
%
 
 
 
 
 
(a)
The disclosure regarding the amount of short-term 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.
(c)
Non-GAAP measure.

Line of Credit Accounts

The consumer loan loss provision as a percentage of average consumer loan balance for line of credit accounts exhibits a similar quarterly seasonal trend to short-term consumer loan loss rates as the ratio is typically lower in the first quarter and increases throughout the remainder of the year, peaking in the third and fourth quarters with higher loan demand.

The consumer loan loss provision as a percentage of consumer loan fees was 29.1% in the current quarter compared to 35.1% in the prior year quarter. The decrease was primarily due to the maturing of the domestic line of credit portfolio and a sequential decline from the first quarter in the average line of credit account balance, which was driven by a lower sequential quarter balance in the United Kingdom partially as a result of changes made to the Company’s U.K. consumer loan business. As a result, the typical seasonal trend was not evidenced during the current quarter. See “Recent Developments—Developments in the Company’s Business in the United Kingdom” for further discussion.

56
Table of Contents




The following table includes information related only to the Company’s line of credit account product and shows the Company’s loss experience trends for line of credit accounts for each of the last five quarters (dollars in thousands):
 
 
2013
 
2014
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
First Quarter
 
Second Quarter
Line of credit accounts:
 
 
 
 
 
 
 
 
 
Consumer loan loss provision
$
9,919

 
$
25,140

 
$
32,694

 
$
23,375

 
$
21,786

Charge-offs (net of recoveries)
7,334

 
13,855

 
24,844

 
26,490

 
26,877

Average consumer loan balance(a)
$
47,513

 
$
78,839

 
$
112,704

 
$
122,403

 
$
120,707

Line of credit account ratios:
 
 
 
 
 
 
 
 
 
Consumer loan loss provision as a % of average consumer loan balance(a)
20.9
%
 
31.9
%
 
29.0
%
 
19.1
%
 
18.0
%
Charge-offs (net of recoveries) as a % of average consumer loan balance(a) 
15.4
%
 
17.6
%
 
22.0
%
 
21.6
%
 
22.3
%
Consumer loan loss provision as a % of consumer loan fees
35.1
%
 
49.8
%
 
47.7
%
 
32.0
%
 
29.1
%
Allowance for losses as a % of average consumer loan balance(a)
22.4
%
 
27.8
%
 
26.4
%
 
21.8
%
 
17.9
%
 
 
 
 
 
 
(a)
The average consumer loan balance for line of credit accounts is the simple average of the beginning and ending consumer loan balance for the quarter for line of credit accounts.

Installment Loans

For installment loans, the consumer loan loss provision as a percentage of combined average consumer loan balance is more consistent throughout the year than short-term loans or line of credit accounts. Due to the scheduled monthly or bi-weekly payments that are inherent with installment loans, the Company does not experience the higher levels of repayments in the first quarter for these loans as it experiences with short-term loans and to a lesser extent, line of credit accounts.

Consumer loan loss provision as a percentage of consumer loan fees are generally higher for the installment loan product than for other loan products partially because installment loans typically have a higher average amount per loan and the highest level of default is exhibited in the early stages of the loan, while revenue is recognized over the term of the loan. Another factor contributing to the higher rate of losses as a percentage of fees is that the loan yield for installment loans is typically significantly lower than the short-term loan products offered by the Company. During the current quarter, the Company experienced lower loss rates than it has been experiencing, primarily due to the maturing of the installment loan product in its domestic portfolio and a decrease in new customer activity in its U.K. portfolio due to changes initiated in that market during the current quarter. See “Recent Developments—Developments in the Company’s Business in the United Kingdom” for further discussion. The installment loan portfolio includes a higher percentage of customers with established payment histories in the current quarter compared to the prior year quarter, particularly in the e-commerce segment. New customers tend to have a higher risk of default than customers with a history of successfully repaying loans.


57
Table of Contents




The following table includes information related only to the Company’s installment loan product and shows the Company’s loss experience trends for installment loans for each of the last five quarters (dollars in thousands):
 
2013
 
2014
 
Second Quarter
 
Third Quarter
 
Fourth Quarter
 
First Quarter
 
Second Quarter
Installment loans:
 
 
 
 
 
 
 
 
 
Consumer loan loss provision
$
24,379

 
$
32,747

 
$
33,220

 
$
28,364

 
$
27,282

Charge-offs (net of recoveries)
24,206

 
26,691

 
32,615

 
31,869

 
28,107

Installment loan average loan balance:(a)
 
 
 
 
 
 
 
 
 
Company owned
$
133,773

 
$
157,183

 
$
181,637

 
$
183,765

 
$
181,358

Guaranteed by the Company(b)
9,631

 
10,203

 
11,457

 
10,877

 
8,840

Combined average consumer loan balance(c)
$
143,404

 
$
167,386

 
$
193,094

 
$
194,642

 
$
190,198

Installment loan ratios:
 
 
 
 
 
 
 
 
 
Consumer loan loss provision as a % of combined average consumer loan balance(a)(c)
17.0
%
 
19.6
%
 
17.2
%
 
14.6
%
 
14.3
%
Charge-offs (net of recoveries) as a % of combined average consumer loan balance(a)(c)
16.9
%
 
15.9
%
 
16.9
%
 
16.4
%
 
14.8
%
Consumer loan loss provision as a % of consumer loan fees
51.2
%
 
56.2
%
 
50.9
%
 
42.9
%
 
42.4
%
Allowance and liability for losses as a % of combined average consumer loan balance(a)(c)
19.4
%
 
20.2
%
 
17.8
%
 
15.9
%
 
15.8
%
 
 
 
 
 
 
(a)
The combined average consumer loan balance for installment loans is the simple average of the beginning and ending combined consumer loan balance for the quarter for installment loans.
(b)
Represents loans originated by third-party lenders through the CSO programs, which are not included in the Company's financial statements.
(c)
Non-GAAP measure.

Total Expenses

The table below shows total expenses by segment, for corporate operations and by significant category for the current quarter and the prior year quarter (dollars in thousands):
 
 
Three Months Ended June 30,
 
2014
 
2013
 
Retail
Services
 
E-Commerce
 
Corporate
 
Total
 
Retail
Services
 
E-Commerce
 
Corporate
 
Total
Operations and administration:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel
$
59,831

 
$
25,941

 
$
13,473

 
$
99,245

 
$
52,195

 
$
22,869

 
$
12,984

 
$
88,048

Occupancy
31,279

 
3,225

 
793

 
35,297

 
27,630

 
2,925

 
569

 
31,124

Marketing
2,421

 
30,826

 
60

 
33,307

 
3,498

 
30,050

 
47

 
33,595

Other
10,044

 
12,272

 
4,810

 
27,126

 
9,162

 
9,263

 
5,750

 
24,175

Total operations and administration
103,575

 
72,264

 
19,136

 
194,975

 
92,485

 
65,107

 
19,350

 
176,942

Depreciation and amortization
10,543

 
4,316

 
4,638

 
19,497

 
9,330

 
4,585

 
4,085

 
18,000

Total expenses
$
114,118

 
$
76,580

 
$
23,774

 
$
214,472

 
$
101,815

 
$
69,692

 
$
23,435

 
$
194,942

Year-over-year change - $
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operations and administration
$
11,090

 
$
7,157

 
$
(214
)
 
$
18,033

 
$
(3,541
)
 
$
11,556

 
$
4,737

 
$
12,752

Depreciation and amortization
1,213

 
(269
)
 
553

 
1,497

 
695

 
1,558

 
560

 
2,813

Total expenses
$
12,303

 
$
6,888

 
$
339

 
$
19,530

 
$
(2,846
)
 
$
13,114

 
$
5,297

 
$
15,565

Year-over-year change - %
12.1
%
 
9.9
%
 
1.4
%
 
10.0
%
 
(2.7
)%
 
23.2
%
 
29.2
%
 
8.7
%


58
Table of Contents




Consolidated total expenses increased $19.5 million, or 10.0%, to $214.5 million in the current quarter compared to $194.9 million in the prior year quarter. Total expenses for the retail services segment increased $12.3 million, or 12.1%, to $114.1 million during the current quarter compared to $101.8 million in the prior year quarter. Total expenses for the e-commerce segment increased $6.9 million, or 9.9%, to $76.6 million in the current quarter.

Operations and Administration Expenses

Retail Services

Operations and administration expenses for the retail services segment increased $11.1 million, or 12.0%, to $103.6 million during the current quarter compared to the prior year quarter. Personnel expenses for the retail services segment increased $7.6 million, or 14.6%, primarily due to the addition of 85 retail services locations through acquisitions and de novo store growth that occurred since the prior year quarter and normal merit increases. Occupancy expenses, which include rent, property taxes, insurance, utilities and maintenance, increased $3.6 million, or 13.2%, primarily due to normal rent increases, acquisitions and de novo store growth. Offsetting these increases was a $1.1 million decrease in marketing costs, which was related to a reduction in certain advertising activities in the current quarter as compared to the prior year quarter.

E-commerce

Operations and administration expenses for the e-commerce segment increased $7.2 million, or 11.0%, to $72.3 million during the current quarter compared to the prior year quarter, primarily due to higher marketing, personnel and other operations and administration expenses.
Marketing expenses increased $0.8 million, or 2.6%, resulting from offsetting fluctuations in domestic and foreign marketing expenses. Domestic marketing expenses increased by approximately $3.2 million in the current quarter as compared to the prior year quarter. The increase was primarily due to higher direct mail and pay-per-click internet advertising costs in domestic markets. This increase was partially offset by a decrease of $2.4 million in foreign marketing expenses, primarily associated with lower pay-per-click internet expenses and lower lead generation expenses.
Personnel expenses increased $3.1 million, or 13.4%, to $25.9 million, in the current quarter compared to the prior year quarter, primarily due to performance-based incentives, increased headcount and normal merit increases.

Other operations and administration expenses increased by $3.0 million, or 32.5%, primarily related to higher accounting and legal professional services incurred in the current quarter in conjunction with the Company’s recent decision to review strategic alternatives for the e-commerce segment and an increase in regulatory-related expenses related to its U.K. business. See “Recent Developments—Review of Strategic Separation Alternatives for the E-commerce Business” and “Recent Developments—Developments in the Company’s Business in the United Kingdom.”

Corporate

Corporate administration expenses decreased $0.2 million, or 1.1%, to $19.1 million in the current quarter, primarily due to lower legal and accounting professional services in the current quarter compared to the prior year quarter.

Depreciation and Amortization Expenses
Consolidated depreciation and amortization expenses increased $1.5 million, or 8.3%, primarily due to an increase in these expenses in the retail services segment due to the addition of 85 retail services locations and the amortization of certain intangible assets related to acquisitions completed in 2013.

59
Table of Contents




Interest Expense

Interest expense increased $3.9 million, or 44.1%, to $12.8 million in the current quarter as compared to $8.9 million in the prior year quarter, primarily due to higher average levels of debt outstanding and higher blended cost of debt outstanding than the prior year quarter. During the current quarter, the average amount of debt outstanding increased $180.5 million, to $700.0 million from $519.5 million during the prior year quarter, primarily due to acquisitions completed during 2013. The higher blended cost of debt was primarily due to the issuance by Enova, a wholly-owned subsidiary of the Company, of $500.0 million of 9.75% senior unsecured notes in May 2014 (the “Enova 2021 Senior Notes”). The issuance of this higher-rate debt by Enova and the corresponding payoff by the Company of lower-rate debt was the primary factor in the Company’s higher effective blended borrowing cost. The Enova 2021 Senior Notes were outstanding for one month during the current quarter and the average blended borrowing cost for the current quarter increased to 6.3% in the current quarter compared to 5.8% in the prior year quarter. See “Liquidity and Capital Resources—Cash Flows from Financing Activities—$500.0 million 9.75% Senior Unsecured Notes” for further discussion.
Loss on Extinguishment of Debt

The Company incurred a loss on extinguishment of debt of $15.0 million in the current quarter. The increase was primarily due to a $14.3 million make-whole expense and $0.6 million of expense for the write-off of deferred loan costs associated with the prepayment of $106.2 million of principal amount of the Company’s outstanding private placement notes. The Company made these prepayments of debt after receiving proceeds from Enova in connection with the issuance of the Enova 2021 Senior Notes.

Income Taxes

The Company’s effective tax rate changed only slightly in the current quarter, to 37.2% for the current quarter compared to 37.0% for the prior year quarter.

60
Table of Contents





SIX MONTHS ENDED JUNE 30, 2014 COMPARED TO SIX MONTHS ENDED JUNE 30, 2013
Pawn Lending Activities

The following table sets forth selected data related to the Company’s pawn lending activities as of and for the six months ended June 30, 2014 and 2013 (dollars in thousands except where otherwise noted):

 
Six Months Ended June 30,
 
2014
 
2013
 
Change
 
% Change
Pawn loan fees and service charges
 
 
 
 
 
 
 
Domestic retail services
$
157,378

 
$
144,976

 
$
12,402

 
8.6
 %
Foreign retail services
3,799

 
3,666

 
133

 
3.6
 %
Consolidated pawn loan fees and service charges
$
161,177

 
$
148,642

 
$
12,535

 
8.4
 %
Average pawn loan balance outstanding
 
 
 
 
 
 
 
Domestic retail services
$
239,089

 
$
219,709

 
$
19,380

 
8.8
 %
Foreign retail services
5,175

 
4,858

 
317

 
6.5
 %
Consolidated average pawn loans outstanding
$
244,264

 
$
224,567

 
$
19,697

 
8.8
 %
Amount of pawn loans written and renewed
 
 
 
 
 
 
 
Domestic retail services
$
503,786

 
$
449,703

 
$
54,083

 
12.0
 %
Foreign retail services
28,895

 
28,259

 
636

 
2.3
 %
Consolidated amount of pawn loans written and renewed
$
532,681

 
$
477,962

 
$
54,719

 
11.4
 %
Average amount per pawn loan (in ones)
 
 
 
 
 
 
 
Domestic retail services
$
124

 
$
128

 
$
(4
)
 
(3.1
)%
Foreign retail services
$
88

 
$
87

 
$
1

 
1.1
 %
Consolidated average amount per pawn loan (in ones)
$
121

 
$
124

 
$
(3
)
 
(2.4
)%
Annualized yield on pawn loans
 
 
 
 
 
 
 
Domestic retail services
132.7
%
 
133.1
%
 
 
 
 
Foreign retail services
148.0
%
 
152.2
%
 
 
 
 
Consolidated annualized yield on pawn loans
133.1
%
 
133.5
%
 
 
 
 
Gross profit margin on disposition of merchandise
 
 
 
 
 
 
 
Domestic retail services
29.3
%
 
32.6
%
 
 
 
 
Foreign retail services
22.9
%
 
18.3
%
 
 
 
 
Gross profit margin on disposition of merchandise
29.1
%
 
32.2
%
 
 
 
 
Merchandise turnover
 
 
 
 
 
 
 
Domestic retail services
2.3

 
2.7

 
 
 
 
Foreign retail services
2.5

 
2.6

 
 
 
 
Consolidated merchandise turnover
2.3

 
2.7

 
 
 
 

Pawn Loan Fees and Service Charges and Pawn Loan Balances

The average consolidated balance of pawn loans outstanding during the current six-month period increased $19.7 million, or 8.8%, compared to the prior year six-month period, primarily due to higher average balances in the second quarter, which offset the lower growth experienced in the first quarter of 2014. Consolidated pawn loan fees and service charges increased by $12.5 million, or 8.4%, in the current six-month period compared to the prior year six-month period.

61
Table of Contents




Domestic Pawn Loan Balances

The average balance of domestic pawn loans outstanding during the current six-month period increased by $19.4 million, or 8.8%, compared to the prior year six-month period, due to higher average balances in the second quarter of 2014 that offset the lower growth experienced in the first quarter of 2014. The average amount per loan in domestic pawn operations decreased to $124 in the current six-month period from $128 in the prior year six-month period and was influenced by a greater mix of pawn loans being collateralized by non-jewelry merchandise, which generally have a lower average loan amount than loans collateralized by jewelry.

Domestic pawn loan fees and service charges increased $12.4 million, or 8.6%, to $157.4 million in the current six-month period from $145.0 million in the prior year six-month period. The increase was primarily driven by the higher average domestic pawn loan balances during the current six-month period as compared to the prior year six-month period. Pawn loan yield in the current six-month period was relatively flat as compared to the prior year six-month period at 132.7% in 2014 compared to 133.1% in 2013.

Foreign Pawn Loan Balances

The average balance of foreign pawn loans outstanding increased slightly in the current six-month period to $5.2 million, from $4.9 million in the prior year six-month period. Foreign pawn loan fees and service charges were relatively flat at $3.8 million in the current six-month period compared to $3.7 million in the prior year six-month period.

Proceeds from Disposition of Merchandise and Gross Profit

The following table summarizes the proceeds from the disposition of merchandise and the related profit for the current quarter and the prior year quarter (dollars in thousands):

 
Six Months Ended June 30,
 
2014
 
2013
 
Retail
 
Commercial
 
Total
 
Retail
 
Commercial
 
Total
Proceeds from disposition
$
260,244

 
$
62,983

 
$
323,227

 
$
202,246

 
$
108,003

 
$
310,249

Gross profit on disposition
$
88,033

 
$
6,120

 
$
94,153

 
$
75,375

 
$
24,578

 
$
99,953

Gross profit margin
33.8
%
 
9.7
%
 
29.1
%
 
37.3
%
 
22.8
%
 
32.2
%
Percentage of total gross profit
93.5
%
 
6.5
%
 
100.0
%
 
75.4
%
 
24.6
%
 
100.0
%

The total proceeds from disposition of merchandise increased $13.0 million, or 4.2%, in the current six-month period compared to the prior year six-month period primarily as a result of the emphasis on retail sales. Total gross profit from the disposition of merchandise decreased $5.8 million, or 5.8%, during the current six-month period compared to the prior year six-month period, primarily due to the decrease in commercial sales activity and lower gross profit margin on commercial sales during the current six-month period, partially offset by an increase in gross profit from retail sales activity. The overall gross profit margin decreased to 29.1% in the current six-month period compared to 32.2% in the prior year six-month period, primarily due to lower retail margins and a decrease in gross profit margin on commercial sales. The consolidated merchandise turnover rate decreased to 2.3 times during the current six-month period compared to 2.7 times in the prior year six-month period, primarily due to management’s decision to emphasize retail disposition activity rather than routinely disposing of a higher volume of merchandise on regular intervals through commercial sales.

Proceeds from retail dispositions of merchandise increased $58.0 million, or 28.7%, during the current six-month period compared to the prior year six-month period. Proceeds from retail dispositions in domestic retail operations increased $57.0 million, primarily due to management’s emphasis on retail disposition activity and the addition of retail services locations through de novo store growth and acquisitions since the prior year six-month

62
Table of Contents




period. Proceeds from retail dispositions in foreign retail operations increased $1.0 million in the current six-month period from the prior year six-month period.

Gross profit from retail dispositions increased to 93.5% of total gross profit compared to 75.4% in the prior year six-month period, primarily due to the shift to emphasize retail disposition of jewelry over commercial sales. Consolidated gross profit from retail dispositions increased $12.7 million, or 16.8%. The consolidated gross profit margin on the retail disposition of merchandise decreased to 33.8% in the current six-month period compared to 37.3% in the prior year six-month period, primarily due to the discounting of merchandise prices to encourage retail sales activity.

Consolidated proceeds from commercial dispositions decreased $45.0 million, or 41.7%, during the current six-month period compared to the prior year six-month period. Proceeds from commercial dispositions from domestic operations decreased by $43.8 million, primarily due to a decrease in the sales volume of commercial gold sold as part of an effort to place a greater emphasis on retail disposition of jewelry and due to a decrease in the average market price of gold sold.

Gross profit from commercial dispositions decreased $18.5 million during the current six-month period compared to the prior year six-month period. The decrease in consolidated gross profit margin from commercial sales, to 9.7% in the current six-month period from 22.8% in the prior year six-month period, was mainly due to lower market price of gold sold, partially offset by a slightly higher gross margin generated on the sale of loose diamonds in the current six-month period.

Consumer Loan Activities

Consumer Loan Fees

Consumer loan fees increased $46.9 million, or 11.4%, to $459.5 million in the current six-month period compared to $412.6 million in the prior year six-month period. The increase in consumer loan fees is primarily due to growth in consumer loan balances in the e-commerce segment, with domestic e-commerce channels contributing $39.7 million and foreign e-commerce channels contributing $12.5 million of the consolidated increase. Offsetting the increase from the e-commerce segment was a $5.3 million decrease in consumer loan fees in the retail services segment, primarily due to a decrease in the number of retail services locations offering the product, mainly as a result of the Texas Consumer Loan Store Closures in 2013, and reduced loan demand in the Company’s retail services locations.

Consumer loan fees from the foreign component of the e-commerce segment were 46.9% of consumer loan fees for the e-commerce segment and 41.8% of consolidated consumer loan fees in the current six-month period, compared to 50.2% of consumer loan fees for the e-commerce segment and 43.5% of consolidated consumer loan fees in the prior year six-month period. See “Recent Developments—Developments in the Company’s Business in the United Kingdom” for a discussion about the changes being made to the Company’s U.K. consumer loan business.

Consumer Loan Loss Provision

The consumer loan loss provision decreased by $3.9 million, or 2.6%, to $148.2 million in the current six-month period from $152.1 million in the prior year six-month period. The loss provision as a percentage of consumer loan fees decreased to 32.2% in the current six-month period compared to 36.9% in the prior year six-month period. The decrease was due to the lower loss experience across all products in the Company’s consumer loan portfolio, primarily in the e-commerce segment. During the current six-month period as compared to the prior year six-month period, the Company experienced fewer delinquencies, increased collections and a higher percentage mix of the number of loans written and renewed to customers with established payment histories. In addition, the Company recently made refinements to its consumer loan underwriting models partially as a result of changes made to the Company’s U.K. consumer loan business, which it believes also contributed to the recent

63
Table of Contents




improvements in loss rates. See “Recent Developments—Developments in the Company’s Business in the United Kingdom” for further discussion.
 
The combination of the decrease in the consumer loan loss provision with higher consumer loan fees led to a 19.5% increase in consumer loan fees, net of the consumer loan loss provision which increased by $50.8 million to $311.3 million. The increase in consumer loan fees, net of the consumer loan loss provision, contributed significantly to the consolidated increase in net revenue during the current six-month period. Contributions from the line of credit and installment loan products offset a decrease in net revenue from the short-term consumer loan product during the period.

The following table sets forth interest and fees on consumer loans by product type and segment, and the related loan loss provision for the current and prior year six-month periods (dollars in thousands):
 
 
Six Months Ended June 30,
 
2014
 
2013
 
Short-term loans
 
Line of credit accounts
 
Installment loans
 
Total
 
Short-term loans
 
Line of credit accounts
 
Installment loans
 
Total
Retail services
$
42,437

 
$
—

 
$
7,222

 
$
49,659

 
$
48,736

 
$
—

 
$
6,233

 
$
54,969

E-commerce
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
   Domestic
85,786

 
71,082

 
60,931

 
217,799

 
89,994

 
49,699

 
38,450

 
178,143

   Foreign
52,899

 
76,848

 
62,316

 
192,063

 
128,045

 
1,818

 
49,661

 
179,524

Total E-commerce
138,685

 
147,930

 
123,247

 
409,862

 
218,039

 
51,517

 
88,111

 
357,667

Consumer loan fees
$
181,122

 
$
147,930

 
$
130,469

 
$
459,521

 
$
266,775

 
$
51,517

 
$
94,344

 
$
412,636

Less: consumer loan loss provision
47,382

 
45,161

 
55,646

 
148,189

 
88,097

 
16,472

 
47,512

 
152,081

Consumer loan fees, net loss provision
$
133,740

 
$
102,769

 
$
74,823

 
$
311,332

 
$
178,678

 
$
35,045

 
$
46,832

 
$
260,555

Year-over-year change - $
$
(44,938
)
 
$
67,724

 
$
27,991

 
$
50,777

 
$
(797
)
 
$
17,730

 
$
24,840

 
$
41,773

Year-over-year change - %
(25.2
)%
 
193.2
%
 
59.8
%
 
19.5
%
 
(0.4
)%
 
102.4
%
 
113.0
%
 
19.1
%
Consumer loan loss provision as a % of consumer loan fees
26.2
 %
 
30.5
%
 
42.7
%
 
32.2
%
 
33.0
 %
 
32.0
%
 
50.4
%
 
36.9
%


64
Table of Contents




Consumer Loans Written and Renewed

The amount of combined consumer loans written and renewed was $1.51 billion in the current six-month period, a decrease of $148.3 million, or 8.9%, from $1.66 billion in the prior year six-month period. The following table summarizes the consumer loans written and renewed for the current six-month period and the prior year six-month period:
 
Six Months Ended June 30,
 
2014
 
2013
 
Company
Owned(a)
 
Guaranteed
by the
Company(a)(b)
 
Combined(a)
 
Company
Owned(a)
 
Guaranteed
by the
Company(a)(b)
 
Combined(a)
Amount of consumer loans written and renewed (dollars in thousands):
 
 
 
 
 
 
 
 
 
 
 
Retail Services
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
$
316,728

 
$
35,242

 
$
351,970

 
$
339,816

 
$
54,772

 
$
394,588

Installment loans
4,351

 
11,201

 
15,552

 
3,497

 
8,986

 
12,483

Total Retail Services
321,079

 
46,443

 
367,522

 
343,313

 
63,758

 
407,071

E-Commerce
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
144,949

 
320,633

 
465,582

 
144,135

 
337,502

 
481,637

Line of credit accounts
90,321

 
—

 
90,321

 
66,455

 
—

 
66,455

Installment loans
98,369

 
—

 
98,369

 
56,056

 
—

 
56,056

Total Domestic
333,639

 
320,633

 
654,272

 
266,646

 
337,502

 
604,148

Foreign
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
210,432

 
—

 
210,432

 
516,280

 
13,971

 
530,251

Line of credit accounts
151,237

 
—

 
151,237

 
13,484

 
—

 
13,484

Installment loans
128,459

 
—

 
128,459

 
105,250

 
—

 
105,250

Total Foreign
490,128

 
—

 
490,128

 
635,014

 
13,971

 
648,985

Total E-Commerce
823,767

 
320,633

 
1,144,400

 
901,660

 
351,473

 
1,253,133

Total amount of consumer loans written and renewed
$
1,144,846

 
$
367,076

 
$
1,511,922

 
$
1,244,973

 
$
415,231

 
$
1,660,204

Number of consumer loans written and renewed (in ones):
 
 
 
 
 
 
 
 
 
 
 
Retail Services
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
659,497

 
64,970

 
724,467

 
709,859

 
105,752

 
815,611

Installment loans
3,327

 
8,221

 
11,548

 
3,194

 
1,562

 
4,756

Total Retail Services
662,824

 
73,191

 
736,015

 
713,053

 
107,314

 
820,367

E-Commerce
 
 
 
 
 
 
 
 
 
 
 
Domestic
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
433,505

 
461,249

 
894,754

 
485,865

 
463,178

 
949,043

Line of credit accounts
370,061

 
—

 
370,061

 
251,201

 
—

 
251,201

Installment loans
67,779

 
—

 
67,779

 
53,414

 
—

 
53,414

Total Domestic
871,345

 
461,249

 
1,332,594

 
790,480

 
463,178

 
1,253,658

Foreign
 
 
 
 
 
 
 
 
 
 
 
Short-term loans
402,432

 
—

 
402,432

 
921,197

 
18,235

 
939,432

Line of credit accounts
499,408

 
—

 
499,408

 
30,748

 
—

 
30,748

Installment loans
104,301

 
—

 
104,301

 
89,754

 
—

 
89,754

Total Foreign
1,006,141

 
—

 
1,006,141

 
1,041,699

 
18,235

 
1,059,934

Total E-Commerce
1,877,486

 
461,249

 
2,338,735

 
1,832,179

 
481,413

 
2,313,592

Total number of consumer loans written and renewed
2,540,310

 
534,440

 
3,074,750

 
2,545,232

 
588,727

 
3,133,959

(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.

65
Table of Contents





The average amount per consumer loan is calculated as the total amount of combined consumer loans written and renewed for the period divided by the total number of combined consumer loans written and renewed for the period. The following table shows the average amount per consumer loan by product for the current six-month period compared to the prior year six-month period:
 
Six Months Ended June 30,
 
2014
 
2013
Average amount per consumer loan (in ones)(a)
 
 
 
 
 
Retail Services
 
 
 
 
 
Short-term loans
 
$
486

 
 
$
484

Installment loans
 
1,347

 
 
2,625

E-Commerce
 
 
 
 
 
Domestic
 
 
 
 
 
Short-term loans
 
$
520

 
 
$
507

Line of credit accounts(b)
 
244

 
 
265

Installment loans
 
1,451

 
 
1,049

Foreign
 
 
 
 
 
Short-term loans
 
$
523

 
 
$
564

Line of credit accounts(b)
 
303

 
 
439

Installment loans
 
1,232

 
 
1,173

Consolidated
 
 
 
 
 
Short-term loans
 
$
508

 
 
$
520

Line of credit accounts(b)
 
278

 
 
284

Installment loans
 
1,320

 
 
1,175

(a) The disclosure regarding the average amount per consumer loan is statistical data that is not included in the Company’s financial statements.
(b) Represents the average amount of each incremental draw on line of credit accounts.


66
Table of Contents




Consumer Loans Written to New and Returning Customers in the E-commerce Segment

The following table shows, for the e-commerce segment, loans written and renewed to new customers and to returning customers for the current and prior year six-month periods (dollars in thousands):
 
 
Six Months Ended June 30,
 
2014
 
2013
 
Company
Owned(a)
 
Guaranteed
by the
Company(a)(b)
 
Combined(a)
 
Company
Owned(a)
 
Guaranteed
by the
Company(a)(b)
 
Combined(a)
Amount of consumer loans written and renewed to:
 
 
 
 
 
 
 
 
 
 
 
New customers
$
120,852

 
$
18,587

 
$
139,439

 
$
117,077

 
$
22,288

 
$
139,365

% of total
10.6
%
 
1.6
%
 
12.2
%
 
9.3
%
 
1.8
%
 
11.1
%
Returning customers
702,915

 
302,046

 
1,004,961

 
784,583

 
329,185

 
1,113,768

% of total
61.4
%
 
26.4
%
 
87.8
%
 
62.6
%
 
26.3
%
 
88.9
%
Total amount of consumer loans written and renewed
$
823,767

 
$
320,633

 
$
1,144,400

 
$
901,660

 
$
351,473

 
$
1,253,133

Number of consumer loans written and renewed to (in ones):
 
 
 
 
 
 
 
 
 
 
 
New customers
188,292

 
33,714

 
222,006

 
237,326

 
39,859

 
277,185

% of total
8.1
%
 
1.4
%
 
9.5
%
 
10.3
%
 
1.7
%
 
12.0
%
Returning customers
1,689,194

 
427,535

 
2,116,729

 
1,594,853

 
441,554

 
2,036,407

% of total
72.2
%
 
18.3
%
 
90.5
%
 
68.9
%
 
19.1
%
 
88.0
%
Total number of consumer loans written and renewed
1,877,486

 
461,249

 
2,338,735

 
1,832,179

 
481,413

 
2,313,592

 
(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 consumer loan loss provision in the current six-month period was $148.2 million, which was composed of $148.1 million related to Company-owned consumer loans and $0.1 million related to loans guaranteed by the Company through the CSO programs. The consumer loan loss provision in the prior year six-month period was $152.1 million, which was composed of $152.5 million related to Company-owned consumer loans, offset by $0.4 million related to loans guaranteed by the Company through the CSO programs. Consolidated charge-offs, net of recoveries, were $163.8 million and $158.4 million in the current six-month period and prior year six-month period, respectively.


67
Table of Contents




Total Expenses

The table below shows total expenses by segment, for corporate operations and by significant category for the current quarter and the prior year quarter (dollars in thousands):
 
 
Six Months Ended June 30,
 
2014
 
2013
 
Retail
Services
 
E-Commerce
 
Corporate
 
Total
 
Retail
Services
 
E-Commerce
 
Corporate
 
Total
Operations and administration:
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Personnel
$
121,636

 
$
51,749

 
$
27,558

 
$
200,943

 
$
106,326

 
$
48,444

 
$
24,492

 
$
179,262

Occupancy
61,920

 
5,957

 
1,537

 
69,414

 
54,501

 
5,397

 
1,671

 
61,569

Marketing
4,148

 
59,306

 
124

 
63,578

 
6,549

 
58,068

 
78

 
64,695

Other
20,273

 
23,419

 
8,934

 
52,626

 
19,414

 
18,780

 
10,046

 
48,240

Total operations and administration
207,977

 
140,431

 
38,153

 
386,561

 
186,790

 
130,689

 
36,287

 
353,766

Depreciation and amortization
21,250

 
8,434

 
9,074

 
38,758

 
18,530

 
9,028

 
7,973

 
35,531

Total expenses
$
229,227

 
$
148,865

 
$
47,227

 
$
425,319

 
$
205,320

 
$
139,717

 
$
44,260

 
$
389,297

Year-over-year change - $
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
Operations and administration
$
21,187

 
$
9,742

 
$
1,866

 
$
32,795

 
$
(8,689
)
 
$
26,599

 
$
1,511

 
$
19,421

Depreciation and amortization
2,720

 
(594
)
 
1,101

 
3,227

 
1,635

 
3,126

 
962

 
5,723

Total expenses
$
23,907

 
$
9,148

 
$
2,967

 
$
36,022

 
$
(7,054
)
 
$
29,725

 
$
2,473

 
$
25,144

Year-over-year change - %
11.6
%
 
6.5
%
 
6.7
%
 
9.3
%
 
(3.3
)%
 
27.0
%
 
5.9
%
 
6.9
%
    
Consolidated total expenses increased $36.0 million, or 9.3%, to $425.3 million in the current six-month period compared to $389.3 million in the prior year six-month period. Total expenses for the retail services segment increased $23.9 million, or 11.6%, to $229.2 million during the current six-month period compared to $205.3 million in the prior year six-month period. Total expenses for the e-commerce segment increased $9.1 million, or 6.5%, to $148.9 million in the current six-month period.

Operations and Administration Expenses

Retail Services

Operations and administration expenses for the retail services segment increased $21.2 million, or 11.3%, to $208.0 million during the current six-month period compared to the prior year six-month period. Personnel expenses for the retail services segment increased $15.3 million, or 14.4%, primarily due to acquisitions and de novo store growth that occurred since the prior year six-month period and normal merit increases. Occupancy expenses, which include rent, property taxes, insurance, utilities and maintenance, increased $7.4 million, or 13.6%, primarily due to normal rent increases, acquisitions and de novo store growth. Offsetting these increases was a $2.4 million decrease in marketing costs, which was primarily due to a reduction in certain advertising activities in the current six-month period as compared to the prior year six-month period.

E-commerce

Operations and administration expenses for the e-commerce segment increased $9.7 million, or 7.5%, to $140.4 million during the current six-month period compared to the prior year six-month period.

Marketing expenses increased $1.2 million, or 2.1%, resulting primarily from offsetting fluctuations in domestic and foreign marketing expenses. Domestic marketing expenses increased by approximately $5.3 million in the current six-month period as compared to the prior year six-month period, which was primarily due to higher direct mail and pay-per-click internet advertising costs in domestic markets. This increase was primarily offset by a decrease of $4.1 million in foreign marketing expenses, primarily associated with lower pay-per-click internet expenses and lower lead generation expenses.

68
Table of Contents




Personnel expenses increased $3.3 million, to $51.7 million, in the current six-month period compared to the prior year six-month period, primarily due to performance-based incentives, increased headcount and normal merit increases.

Other operations and administration expenses increased by $4.6 million, or 24.7%, primarily related to higher accounting and legal professional services incurred in the current six-month period in conjunction with the Company’s recent decision to review strategic alternatives for the e-commerce segment and an increase in regulatory related expenses related to its foreign business. See “Recent Developments—Review of Strategic Separation Alternatives for the E-commerce Business” and “Recent Developments—Developments in the Company’s Business in the United Kingdom.”

Corporate
Corporate administration expenses increased $1.9 million, or 5.1%, to $38.2 million in the current six-month period, primarily due to higher personnel expenses, primarily attributable to incentive and compensation increases in the current six-month period compared to the prior year six-month period.

Depreciation and Amortization Expenses

Consolidated depreciation and amortization expenses increased $3.2 million, or 9.1%, primarily due to an increase in these expenses in the retail services segment due to the addition of 85 retail services locations and the amortization of certain intangible assets related to acquisitions completed in 2013.

Interest Expense

Interest expense increased $6.6 million, or 40.1%, to $22.9 million in the current six-month period as compared to $16.3 million in the prior year six-month period, primarily due to higher average levels of debt outstanding and higher blended cost of debt outstanding than the prior year six-month period. During the current six-month period, the average amount of debt outstanding increased $170.3 million, to $701.8 million from $531.5 million during the prior year six-month period, primarily due to the issuance of the Enova 2021 Senior Notes. The issuance of this higher-rate debt by Enova and the corresponding payoff by the Company of lower-rate debt was the primary factor in the Company’s higher effective blended borrowing cost, which increased to 5.8% in the current six-month period compared to 5.3% in the prior year six-month period. See “Liquidity and Capital Resources—Cash Flows from Financing Activities—$500.0 million 9.75% Senior Unsecured Notes” for further discussion.

Loss on Extinguishment of Debt

The Company incurred a loss on extinguishment of debt of $16.6 million in the current six-month period. The increase was primarily due to a $14.3 million make-whole expense and $0.6 million of expense for the write-off of deferred loan costs associated with the prepayment of $106.2 million of principal amount of the Company’s outstanding private placement notes during the current six-month period. The Company made these prepayments of debt after receiving proceeds from Enova in connection with the issuance of the Enova 2021 Senior Notes. In the first quarter of 2014, the Company incurred a $1.5 million loss on extinguishment of debt related to the repurchases of $58.6 million of principal amount of convertible notes.

Income Taxes

The Company’s effective tax rate was 37.0% for both the current six-month period and the prior year six-month period.


69
Table of Contents




LIQUIDITY AND CAPITAL RESOURCES

Cash Flows Highlights

The Company’s cash flows and other key indicators of liquidity are summarized as follows (dollars in thousands):
 
Six Months Ended June 30,
 
 
 
2014
 
 
 
2013
 
 
Cash flows provided by operating activities
$
281,234

 
  
 
$
284,851

 
  
Cash flows used in investing activities
 
 
 
 
 
 
 
Pawn activities
$
142

 
 
 
$
15,777

 
 
Consumer loan activities
(132,691
)
 
 
 
(152,419
)
 
 
Acquisitions
(1,204
)
 
 
 
(923
)
 
 
Property and equipment additions
(29,459
)
 
 
 
(22,392
)
 
 
Proceeds from sale of marketable securities
—

 
 
 
6,616

 
 
Other investing
86

 
 
 
297

 
 
Total cash flows used in investing activities
$
(163,126
)
 
 
 
$
(153,044
)
 
 
Cash flows used in financing activities
$
3,223

 
  
 
$
(64,418
)
 
  
Working capital
$
984,138

 
  
 
$
790,787

 
  
Current ratio
8.1

 
x 
 
6.2

 
x 
Merchandise turnover
2.3
 
x 
 
2.7

 
x 
Debt to Adjusted EBITDA ratio(a)
2.4

 
x 
 
1.8

 
x 
(a)
Non-GAAP measure. See “Overview—Adjusted EBITDA” section above for a reconciliation of adjusted EBITDA to net income attributable to the Company.

Management expects the Company’s U.K. consumer loan business to be affected by the changes it has made and is making to its U.K. business practices in response to the requirements of the FCA.  See “Recent Developments -Developments in the Company’s Business in the United Kingdom.”

Cash Flows from Operating Activities

Net cash provided by operating activities decreased $3.7 million, or 1.3%, from $284.9 million in the prior year six-month period to $281.2 million in current six-month period. Changes in accounts payable and accrued expenses decreased cash provided by $12.5 million, mainly due to an $18.6 million payment made in the current six-month period related to the accrued 2013 Litigation Settlement and other decreases in accrued expenses of $9.1 million. These decreases were partially offset by an $8.0 million increase in accrued incentive compensation as a result of improved performance during the current six-month period and $7.2 million of payments made related to the Ohio Reimbursements in the prior year six-month period. Cash used for prepaid and other assets increased approximately $8.6 million during the current six-month period, mainly due to deposits with third-party vendors in the Company’s e-commerce segment and increased prepaid hardware and software maintenance. In addition, current and deferred income taxes payable increased $10.6 million, mainly due to a $10.1 million reduction of the Company's 2014 Federal estimated tax payments resulting from the application of a 2013 tax overpayment against the 2014 estimated tax liability. Finally, cash provided by operating activities increased by $7.9 million, mainly due to the reclassification during the current six-month period of cash from “Restricted cash” to “Cash and cash equivalents” on the Company’s consolidated balance sheet in connection with the release of restrictions on certain funds associated with the Company's Consent Order issued by the CFPB.


70
Table of Contents




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.

Cash Flows from Investing Activities

Net cash used in investing activities increased $10.1 million, or 6.6%, from $153.0 million in the prior year six-month period to $163.1 million in the current six-month period. Net cash used for pawn lending activities was $15.6 million higher in the current six-month period as compared to the prior year six-month period, primarily due to the year-over-year growth in pawn loans written. Other factors contributing to the increase were a $7.1 million increase in purchases of software, property and equipment in the current six-month period as compared to the prior year six-month period, and a non-recurring $6.6 million decrease of cash received from the Company's sale of marketable securities in the prior year six-month period. Offsetting these increases was a $19.7 million decrease in cash used for consumer loan activities, mainly due to increased payments from customers and collections on consumer loans.

Management anticipates that expenditures for software, property and equipment related to its operations for the remainder of 2014 will be between $15 million and $25 million, excluding acquisitions, primarily for the remodeling of stores, facility upgrades, technology infrastructure and for the establishment of approximately two to five new retail services locations.

Cash Flows from Financing Activities

Net cash flow from financing activities was a source of cash of $3.2 million in the current six-month period and a use of cash of $64.4 million in the prior year six-month period. The change in cash flows from financing activities was primarily due to financing activities related to the issuance of debt and payments on debt and lines of credit as described below and the $41.6 million decrease in the repurchases of shares of Company common stock through open market transactions during the current six-month period from the prior year six-month period. See “Share Repurchases” below for additional information related to share repurchase activity.

2014 Financing Activities

$500.0 million 9.75% Senior Unsecured Notes

On May 30, 2014, Enova issued and sold $500.0 million in aggregate principal amount of 9.75% Senior Notes due 2021 (the “Enova 2021 Senior Notes”). The Enova 2021 Senior Notes bear interest at a rate of 9.75% annually on the principal amount payable semi-annually in arrears on June 1 and December 1 of each year, beginning on December 1, 2014. The Enova 2021 Senior Notes were sold at a discount of the principal amount to yield 10.0% to maturity generating proceeds of $493.9 million before debt issuance costs of $14.7 million. The Enova 2021 Senior Notes will mature on June 1, 2021. The Enova 2021 Senior Notes are unsecured debt obligations of Enova, and are unconditionally guaranteed by all of the Enova’s domestic subsidiaries. Neither the Company nor any of its other subsidiaries that are not subsidiaries of Enova guarantee the Enova 2021 Senior Notes. Enova’s ability to pay dividends or make distributions to the Company is subject to certain limitations in the Enova 2021 Senior Notes Indenture.

Enova Line of Credit

On May 14, 2014, Enova and certain of its domestic subsidiaries, as guarantors, entered into a credit agreement among Enova, the guarantors, Jefferies Finance LLC as administrative agent and Jefferies Group LLC as lender (the “Enova Credit Agreement”). The Enova Credit Agreement provides for an unsecured revolving credit facility in an aggregate principal amount of up to $75.0 million, including a multi-currency sub-facility that gives Enova the ability to borrow up to $25.0 million that may be in specified foreign currencies, subject to the terms and conditions of the Enova Credit Agreement (the “Enova Credit Facility”). The Enova Credit Facility will mature on June 30, 2017. However, if any of Enova's guarantees of the Company’s indebtedness are not released on or before

71
Table of Contents




March 31, 2015, the Enova Credit Agreement provides that the Enova Credit Facility will instead mature on March 31, 2015. Enova did not draw on the Enova Credit Facility during the six months ended June 30, 2014 and there was balance outstanding. Enova’s ability to pay dividends or make distributions to the Company is subject to certain limitations in the Enova Credit Agreement.

Debt Prepayments and Paydown of Domestic and Multi-Currency Line of Credit

In connection with the proceeds received from Enova’s repayment of intercompany indebtedness to the Company following the issuance of the Enova 2021 Senior Notes, the Company repaid the entire amount outstanding on its domestic and multi-currency line of credit (the “Domestic and Multi-currency Line of Credit”). The Domestic and Multi-currency Line of Credit was amended in May 2014, and that amendment contains restrictions on the Company and its subsidiaries with regard to making any additional investments, loans or cash distributions to Enova

The Company prepaid all of its outstanding private placement notes during the six months ended June 30, 2014, which included an aggregate principal repayment of $106.2 million and a make-whole premium of $14.3 million. In addition, the Company also prepaid all of its variable rate senior unsecured notes during the six months ended June 30, 2014, which included an aggregate principal repayment of $31.3 million.

2029 Convertible Notes

During the six-months ended June 30, 2014, the Company repurchased $58.6 million principal amount of its $115.0 million aggregate principal amount of 5.25% Convertible Senior Notes due May 15, 2029 (the “2029 Convertible Notes”) in privately-negotiated transactions for aggregate cash consideration of $89.5 million. In addition, pursuant to the terms of the 2029 Convertible Notes, all remaining holders of outstanding notes elected to convert their notes on May 15, 2014. The Company elected to pay cash for the $44.4 million of principal amount of all converted notes outstanding at that date, and the Company re-issued 747,085 shares of common stock held in treasury for the amount in excess of principal owed to noteholders as a result of the net-share settlement provision in the Indenture that governs the 2029 Convertible Notes.

2013 Financing Activities

$300.0 million 5.75% Senior Unsecured Notes

On May 15, 2013, the Company issued and sold $300.0 million in aggregate principal amount of 5.75% Senior Notes due 2018 (the “2018 Senior Notes”). The 2018 Senior Notes bear interest at a rate of 5.75% annually on the principal amount, payable semi-annually in arrears on May 15 and November 15 of each year, beginning on November 15, 2013. The 2018 Senior Notes will mature on May 15, 2018.
Letters of Credit and Other Debt Information

As of June 30, 2014, the Company had standby letters of credit of $12.6 million issued under the Company's $20.0 million letter of credit facility associated with the Credit Agreement. As of June 30, 2014, there were no letters of credit issued under the $20.0 million letter of credit facility associated with the Enova Credit Facility.

The debt agreements of the Company and Enova require both companies to maintain certain financial ratios. As of June 30, 2014, the Company and Enova were in compliance with all covenants and other requirements set forth in each of their debt agreements. As of June 30, 2014, the Company’s available borrowings under its Domestic and Multi-currency Line of Credit and Enova Credit Facility were $280.0 million and $75.0 million, respectively. Management believes that the borrowings available under the Company’s Domestic and Multi-currency Line of Credit, the Enova Credit Facility, anticipated cash generated from operations and current working capital of $984.1 million is sufficient to meet the Company’s anticipated capital requirements for its business.


72
Table of Contents




Should the Company experience a significant decline in demand for the Company’s products and services or other unexpected changes in financial condition, management would evaluate several alternatives to ensure that it is in a position to meet liquidity requirements. The Company’s strategies to generate additional liquidity may include the sale of assets, reductions in capital spending, changes to the issuance of debt or equity securities and/or its management of its current assets. The characteristics of the Company’s current assets, specifically the ability to rapidly liquidate gold jewelry inventory and adjust outflows of cash in its lending practices, gives the Company flexibility to quickly modify its business strategy to increase cash flow from its business, if necessary.

Share Repurchases

During the current six-month period, the Company did not purchase any shares in open market transactions. However, the Company repurchased a portion of the outstanding 2029 Convertible Notes, which reduced the number of diluted weighted average shares outstanding for the current six-month period.

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 its common stock and canceled the Company’s previous share repurchase authorization from January 2011. Management anticipates that it will periodically purchase shares under this authorization based on its assessment of market conditions, the liquidity position of the Company and alternative prospects for the investment of capital to expand the business and pursue strategic objectives. At June 30, 2014, there were 1,533,300 shares remaining under the 2013 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.

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 the 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 if they go into default. Short-term loans that are guaranteed generally have terms of less than 90 days. Loans secured by customer’s vehicle, which are included in the Company’s installment loan portfolio, typically have an average term of less than 24 months, with available terms of up to 42 months.

As of June 30, 2014 and 2013, the gross amount of active consumer loans originated by third-party lenders under the CSO programs were $47.5 million and $50.9 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 $3.2 million and $3.0 million as of June 30, 2014 and 2013, respectively, was included in “Accounts payable and accrued expenses” in the consolidated balance sheets.

ITEM 3.
QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Market risks relating to the Company’s operations result primarily from changes in interest rates, foreign exchange rates, and gold prices. The Company does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes. There have been no material changes to the Company’s exposure to market risks since December 31, 2013.


73
Table of Contents




ITEM 4.
CONTROLS AND PROCEDURES

Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, or the “Exchange Act”) as of June 30, 2014 (the “Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective and provide reasonable assurance (i) to ensure that information required to be disclosed in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms; and (ii) to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.

There was no change in the Company’s internal control over financial reporting during the quarter ended June 30, 2014 that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or internal controls will prevent or detect all possible misstatements due to error or fraud. The Company’s disclosure controls and procedures and internal controls are, however, designed to provide reasonable assurance of achieving their objectives, and the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s disclosure controls and procedures are effective at that reasonable assurance level.

PART II. OTHER INFORMATION

ITEM 1.
LEGAL PROCEEDINGS
See Note 10 of Part I, “Item 1. Financial Statements.”
ITEM 1A.
RISK FACTORS

Except as set forth below and on Exhibit 99.1 to the Current Report on Form 8-K dated and filed on May 14, 2014 and incorporated herein by reference, there have been no material changes from the Risk Factors described in Part I “Item 1A. Risk Factors” of the Company’s Annual Report on Form 10-K for the fiscal year ended December 31, 2013.

The United Kingdom has imposed, and continues to impose, increased regulation of the short-term high-cost credit industry with the stated expectation that some firms will exit the market.
In the United Kingdom, the Company is subject to regulation by the Financial Conduct Authority (the “FCA”), the Financial Services and Markets Act 2000 (the “FSMA”), the European Union Consumer Credit Directive, the Consumer Credit Act 1974, as amended (the “CCA”), and secondary legislation passed under it, among other rules and regulations. In December 2012, the U.K. Parliament passed the Financial Services Act 2012 (the “FSA Act 2012”), which created a new regulatory framework for the supervision and regulation of the consumer credit industry in the United Kingdom, including the consumer lending industry in which the Company operates. The FSA Act 2012 mandated that, in April 2014, the FCA take over responsibility for regulating consumer credit from the Office of Fair Trading (the “OFT”) and it also made changes to the relevant legislation including the CCA and the FSMA. During the period of transition of regulatory responsibility over consumer credit from the OFT to the FCA, the OFT continued to regulate consumer credit, including the short-term loan market.

74
Table of Contents




The FCA regulates consumer credit and related activities pursuant to the FSMA and the FCA Handbook, which includes prescriptive rules and regulations and carries across many of the standards set out in the CCA and its secondary legislation as well as the OFT’s previous Irresponsible Lending Guidance (the “Guidance”). The regulations under the FCA consumer credit regime are more prescriptive than the former U.K. consumer credit regime and impose more stringent requirements relating to what a lender may and may not do. The FSMA gives the FCA the power to authorize, supervise, examine and bring enforcement actions against providers of consumer credit, as well as to make rules for the regulation of consumer credit. On February 28, 2014, the FCA issued the Consumer Credit Sourcebook (the “CONC”), contained in the FCA Handbook. The CONC incorporates prescriptive regulations for consumer loans such as those that the Company offers, including mandatory affordability checks on borrowers, limiting the number of rollovers to two, restricting how lenders can advertise, banning advertisements it deems misleading, and introducing a limit of two unsuccessful attempts on the use of continuous payment authority (which provides a creditor the ability to directly debit a customer’s account for payment when authorized by the customer to do so) to pay off a loan. Certain provisions of the CONC took effect on April 1, 2014, and other provisions for high-cost short-term credit providers, such as the limits on rollovers, continuous payment authority and advertising, took effect on July 1, 2014. As a result of the FCA’s requirements, the Company has made, and is in the process of making significant adjustments to many of its business practices in the United Kingdom, as discussed below under “The Company’s primary regulators in the United Kingdom have expressed and continue to express serious concerns about the Company’s compliance with applicable U.K. regulations, which has caused and will continue to cause the Company to make significant changes to its U.K. business that will negatively impact the Company’s U.K. operations and results, and this impact will likely be significant.”
In addition, on December 18, 2013, the United Kingdom passed the Financial Services (Banking Reform) Act, which includes an amendment to the FSMA that requires the FCA to introduce rules “with a view to securing an appropriate degree of protection for borrowers against excessive charges” on “high-cost short-term” consumer loans. On July 15, 2014, the FCA issued a consultation paper proposing a cap on the total cost of credit and requesting comments on the proposal. The consultation paper proposed a maximum rate of 0.8% of principal per day, and the proposal limits the total fees, interest (including post-default interest) and charges (including late fees which are capped at £15) to an aggregate amount not to exceed 100% of the principal amount loaned. The FCA has requested comments on the proposal and is expected to issue a final rule in November 2014. The final rule on a cost of credit cap will likely become effective by January 2, 2015, as required by the 2013 amendment to the FSMA. As a result, the Company will need to change the products that it offers, including increasing the minimum monthly payment under its line of credit products in the United Kingdom. The Company is still assessing the full impact of the potential cost of credit cap changes as they are currently proposed and what affect such changes may have on its business, prospects, results of operations, financial condition and cash flows; however, after the Company has made all of the other changes to its U.K. business discussed below under “The Company’s primary regulators in the United Kingdom have expressed and continue to express serious concerns about the Company’s compliance with applicable U.K. regulations, which has caused and will continue to cause the Company to make significant changes to its U.K. business that will negatively impact the Company’s U.K. operations and results, and this impact will likely be significant” the Company does not currently expect the impact of the modifications made to address a final cost of credit rule that tracks the proposed parameters to be significant. The Company can make no assurance that the final rule that is adopted by the FCA will have similar parameters as the proposed rules, and if the final rules are more restrictive, the Company could have to make additional modifications to the products it offers in the United Kingdom or cease offering such products. Any changes the Company makes to its U.K. operations as a result of the final rule could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and cash flows.

The FCA has stated that actions taken by it with respect to the payday industry will likely force a quarter or more of the firms out of the industry. During the six month periods ended June 30, 2014 and June 30, 2013 and the twelve-month period ended December 31, 2013, the Company’s U.K. operations represented 21.7%, 19.5% and 19.9%, respectively, of the Company’s consolidated net revenue. The results for the six-month period ended June 30, 2014 do not include the full impact of the changes described above, and the results for the six-month period ended June 30, 2013 and the twelve-month period ended December 31, 2013 do not include any impact of these

75
Table of Contents




changes. The results for each of these periods are not indicative of the Company’s future results of operations and cash flows from its operations in the United Kingdom.
These legislative or regulatory activities and changes that the Company has implemented or is required to implement in the future as a result of such legislative and regulatory activities could have a material adverse effect on the Company’s U.K. business, as further described below under “The Company’s primary regulators in the United Kingdom have expressed and continue to express serious concerns about the Company’s compliance with applicable U.K. regulations, which has caused and will continue to cause significant changes to the Company's U.K. business that will negatively impact the Company’s U.K. operations and results, and this impact will likely be significant,” and “Due to restructuring of the consumer credit regulatory framework in the United Kingdom, the Company is required to obtain full authorization from its U.K. regulators to continue providing consumer credit and perform related activities in the United Kingdom., and there is no guarantee that the Company will receive full authorization to continue offering consumer loans in the United Kingdom.”
Due to restructuring of the consumer credit regulatory framework in the United Kingdom, the Company is required to obtain full authorization from its U.K. regulators to continue providing consumer credit and perform related activities in the United Kingdom, and there is no guarantee that the Company will receive full authorization to continue offering consumer loans in the United Kingdom.
The Company has obtained interim permission from the FCA to provide consumer credit and perform related activities. The Company is required to apply for and obtain full authorization from the FCA to continue to provide consumer credit. In order to obtain full authorization, and as a threshold condition to maintaining its interim permission to provide consumer credit in the United Kingdom, the Company is required to demonstrate that it satisfies, and continues to satisfy, certain minimum standards set out in the FSMA, including certain specified “threshold conditions,” and this may result in additional costs to the Company that could be significant. As a “threshold condition” to maintaining its interim permission and to obtaining and retaining full authorization, the FCA must be satisfied that the Company can be “effectively supervised” by the FCA, as this term is defined in the FSMA. The FCA has informed the Company that it has concerns that the Company cannot presently be “effectively supervised” given its structure with all of its operations conducted outside of the United Kingdom. The Company has historically performed substantially all of its U.K. business operations from the United States, as business functions have been performed remotely from the Company's U.S. facilities. In order to alleviate the FCA's concerns in relation to the Company’s ability to presently demonstrate to the FCA that it is capable of being effectively supervised, the Company is in the process of establishing an office in the United Kingdom. Furthermore, the FCA must approve certain individuals conducting “controlled functions” with respect to the operation and management of the Company’s U.K. business. All of these changes will result in additional costs to the Company. The Company is in frequent communication with the FCA regarding its activities to address the FCA’s concerns about the threshold conditions. The FCA has the power to revoke the Company’s interim permission to conduct a consumer credit business if it determines the Company does not meet the threshold conditions. Additionally, the FCA could elect to impose additional conditions that could delay the authorization process, further increase the Company’s compliance costs or require further changes to the conduct of the Company's U.K. business that could have a material adverse effect on the Company’s U.K. operations.
The Company will begin the official application process for full authorization in late 2014 or early 2015. The FCA is expected to complete the process of reviewing applications of previous OFT license holders, such as the Company, for full authorization by April 1, 2016, and there is no guarantee that the Company will receive full authorization. If the Company does not receive full authorization, it will have to cease its U.K. consumer loan business.
The Company’s primary regulators in the United Kingdom have expressed and continue to express serious concerns about the Company’s compliance with applicable U.K. regulations, which has caused and will continue to cause the Company to make significant changes to its U.K. business that will negatively impact the Company’s operations and results, and this impact will likely be significant.
In February 2012, the OFT launched a review of the payday lending sector to assess the sector’s compliance with the CCA, the Guidance, and other relevant guidance and legal obligations. As part of this review,

76
Table of Contents




the OFT conducted examinations of a number of payday lenders in the United Kingdom, including the Company, to assess individual company compliance with these laws and guidance. In May 2013, the OFT sent the Company a letter of findings related to its examination of the Company’s U.K. short term consumer loan (or payday) business, which indicated that the Company may not have been complying fully with all aspects of the Guidance, the CCA and other relevant laws and guidance. This letter indicated the OFT’s general and specific concerns in the following categories: advertising and marketing, pre-contract information and explanations, affordability assessments, rollovers, debt forbearance and debt collection, and regulatory and other compliance issues. As requested by the OFT, in July 2013, the Company provided the OFT with an independent audit report setting out the steps taken to address each concern the OFT had identified in its letter. Through March 2014, the Company continued to receive additional requests for data and documentation from the OFT, and the Company complied with those requests.
The FCA has now assumed the supervision and regulation of the Company, and the Company continues to receive additional requests for data and documentation from the FCA about its consumer loan products and has been complying with those requests. The FCA informed the Company that it has serious concerns regarding its compliance with the FCA’s rules and principles, including those with respect to its affordability assessment process in determining whether the loans the Company makes are affordable for its customers and its debt forbearance practices (or its practices regarding customers who have indicated they are experiencing financial difficulty). The FCA also noted concerns regarding certain of the Company’s advertising practices. The Company has been, and continues to be, in frequent communication with the FCA regarding the concerns raised by the FCA and the Company’s efforts to address such concerns through, among other things, significant modifications to its business practices. The FCA is closely monitoring the Company’s efforts to comply with its requirements, including the Company’s changes to its business practices made in an effort to comply with the FCA’s concerns. For example, the Company is in the process of establishing an office in the United Kingdom to help alleviate the FCA’s concerns about effective supervision, and the Company will be required to obtain FCA approval of certain individuals performing “controlled functions,” as defined by applicable regulation, as discussed above under “Due to restructuring of the consumer credit regulatory framework in the United Kingdom, the Company is required to obtain full authorization from its U.K. regulators to continue providing consumer credit and perform related activities in the United Kingdom, and there is no guarantee that the Company will receive full authorization to continue offering consumer loans in the United Kingdom.”
In addition, the Company has made and is in the process of making significant adjustments to many of its business practices, including modifying its affordability assessments and underwriting standards, reducing certain maximum loan amounts, changing its collections processes (including its practices relating to continuous payment authority) and debt forbearance practices and altering certain advertising practices, all of which the Company believes will result in a significant year-over-year decrease in its U.K. loan volume, U.K. loan balances and U.K. revenue for the remainder of 2014 and potentially into 2015 as a result of adapting its U.K. business practices in response to the requirements of the FCA. The implementation of stricter affordability assessments and underwriting standards will result in a decrease in the number of consumer loans written, the average consumer loan amount and the total amount of consumer loans written to new and existing customers. Additionally, the changes the Company is making to its collections and debt forbearance practices in the United Kingdom could result in lower collection rates, and the Company will experience an increase in compliance- and administrative-related costs for its U.K. operations. In addition, the FCA could require the Company to make additional changes to its business that could further negatively affect future results for the Company’s U.K. operations. The Company is still assessing the potential impact of the changes it is making to its U.K. operations and what affect such changes may have on its business, but the impact of these changes is likely to be significant for the balance of 2014 and potentially into 2015 and could result in a material adverse effect on the Company’s U.K. business and its prospects, results of operation, financial condition and cash flows.
The Company is subject to examination and review by the FCA. If such examination or review identifies activities that are deemed by the FCA to have caused consumer detriment or are not in compliance with the FCA’s requirements, the FCA could require the Company to take remedial action, which could result in additional changes to the Company’s business practices, the payment of consumer redress, fines or penalties, the denial of the Company’s permanent authorization application, the withdrawal of the Company’s interim authorization or permanent authorization if granted, or other remedial actions.

77
Table of Contents





There can be no assurance that the Company will successfully implement the changes it is making to its U.K. business described above or any additional changes the Company may be required to make to its U.K business to address concerns raised by the FCA. Any inability to make changes to the satisfaction of the FCA could also have an adverse effect on the Company’s existing interim authorization from the FCA to continue to provide consumer credit and on the Company's ability to obtain full authorization from the FCA, and the Company may not be able to successfully resolve the concerns expressed by the FCA. Any such changes or the Company’s failure to successfully make any such changes or resolve the concerns of the FCA could have a material adverse effect on the Company’s business, prospects, results of operations, financial condition and cash flows.

Competition regulators in the United Kingdom are currently reviewing the Company’s industry and could order remedial action, which could materially adversely affect the Company’s business or even impair the Company's ability to continue its current operations in the United Kingdom.

In June 2013, the OFT referred the payday lending industry in the United Kingdom to the Competition Commission, which is now the Competition & Markets Authority (the “CMA”), for a market investigation. The CMA has been gathering data from industry participants, including the Company, in connection with its review of the United Kingdom payday lending industry to determine whether certain features of the payday lending industry prevent, restrict or distort competition (which is also referred to as having an adverse effect on competition) and, if so, what remedial action should be taken. On June 11, 2014, the CMA released a provisional findings report, which indicated that it believes that many payday lenders fail to compete on price. The CMA also indicated that it will look at potential ways to increase price competition, which could include the establishment of an independent price comparison website, requiring more clear upfront disclosure of borrowing costs if a loan is not paid back in full and on time, requiring periodic account statements to be provided to borrowers and requiring greater transparency about the role played by lead generators. The CMA also indicated it is expanding its review of the payday lending industry to include lead generators.

The CMA has announced that it expects to hold hearings on its provisional findings this summer and to announce its provisional decision on remedies in the fall of 2014. The CMA is required to complete its report by June 26, 2015, although it has stated publicly that it expects to publish its final report in December 2014 or January 2015. If the investigation’s final conclusions indicate that remedial action is necessary for the payday loan industry, the CMA will decide whether to order such remedial action itself or whether it should recommend certain actions or remedies be taken by the FCA, or other government bodies or organizations. If such action is taken, it may include any of the remedies outlined above or other remedies and any of these remedies could have a material adverse effect on the Company’s business, prospects, results of operations, financial conditions and cash flows and could impair its ability to continue current operations in the United Kingdom.
    
There are risks associated with the potential separation of Enova International, Inc.    
On April 10, 2014, the Company announced that its Board of Directors authorized management to review potential strategic alternatives, including a tax-free spin-off, for the separation of its online lending business that comprises its E-commerce Division, Enova International, Inc. (“Enova”). After evaluating separation alternatives for Enova, management has recommended that the Company’s Board of Directors pursue a tax-free spin-off, and the Company’s Board of Directors has authorized the filing of a Registration Statement on Form 10 with the Securities and Exchange Commission by Enova in connection with the proposed spin-off. If a spin-off occurs, the Company will be separated into two publicly traded companies: Enova International, Inc., which would own and operate the Company’s online lending business that comprises its E-Commerce Division (or the e-commerce segment), and Cash America International, Inc., which would own and operate the Company’s storefront lending businesses that comprise its Retail Services Division (or the retail services segment).

The Company’s Board of Directors has not yet approved the separation, but if it is approved, a transaction could be completed in late 2014 or early 2015, subject to market, regulatory and other conditions, including, if the separation takes the form of a tax-free spin-off, the receipt of a private letter ruling from the Internal Revenue Service, an opinion from the Company’s tax counsel and a solvency opinion from an independent financial advisor.

78
Table of Contents




The Company currently expects that any spin-off would be in the form of a tax-free distribution of 80 percent of the Enova common stock to the Company’s shareholders.

The separation is subject to a number of conditions, including final approval by the Board of Directors of transaction specifics. In addition, external events beyond the control of the Company and Enova could impact the timing or occurrence of a separation. There can be no assurance that any separation or other transaction will occur or, if one does occur, there can be no assurance as to its form, terms or timing.
ITEM 2.
UNREGISTERED SALES OF EQUITY SECURITIES AND USE OF PROCEEDS
The following table provides the information with respect to purchases made by the Company of shares of its common stock, par value $0.10 per share, during each of the months in the first six months of 2014:
 
Period
Total Number
of Shares
Purchased(a)
 
Average
Price Paid
Per Share
 
Total Number of
Shares Purchased as
Part of Publicly
Announced Plan (b)
 
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plan (b)
January 1 to January 31
720

 
$
37.20

 
—

 
1,533,300

February 1 to February 28
34,735

 
$
37.23

 
—

 
1,533,300

March 1 to March 31
—

 
$0.00

 
—

 
1,533,300

April 1 to April 30
—

 
$0.00

 
—

 
1,533,300

May 1 to May 31
24

 
$
45.22

 
—

 
1,533,300

June 1 to June 30
—

 
$0.00

 
—

 
1,533,300

Total
35,479

 
$
37.23

 
—

 
 
(a)
Includes the following: shares withheld from employees as partial tax payments for shares issued under the Company’s stock-based compensation plans of 720 and 34,708 shares for the months of January and February, respectively; and the reinvestment of dividends in the Company’s nonqualified savings plan for its directors, which resulted in the purchase of 27 and 24 shares for the months of February and May.
(b)
On January 24, 2013, the Board of Directors authorized the Company’s repurchase of up to a total of 2,500,000 shares of the Company’s common stock. This repurchase authorization canceled and replaced the Company’s previous authorization for the repurchase of up to a total of 2,500,000 shares of the Company’s common stock that was approved by the Board of Directors on January 26, 2011.

ITEM 3.
DEFAULTS UPON SENIOR SECURITIES
    
None.

ITEM 4.
MINE SAFETY DISCLOSURES
Not applicable.
 
ITEM 5.
OTHER INFORMATION

None.

79
Table of Contents




ITEM 6.
EXHIBITS
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
Incorporated by Reference
  
 
Exhibit No.
  
Exhibit Description
  
Form
  
File No.
  
Exhibit
  
Filing
Date
  
Filed
Herewith
 
 
 
 
 
 
 
4.1
 
Indenture, dated May 30, 2014, between Enova International, Inc., the U.S. subsidiaries of Enova International, Inc. as guarantors, and U.S. Bank National Association, as trustee
 
8-K
 
001-09733
 
4.1
 
5/30/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1
 
Credit Agreement dated as of May 14, 2014 among Enova International, Inc., certain domestic subsidiaries of Enova International, Inc. as guarantors, Jefferies Finance LLC as administrative agent and Jefferies Group LLC as lender
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
10.2
 
Registration Rights Agreement, dated May 30, 2014, between Enova International, Inc., the U.S. subsidiaries of Enova International, Inc. as guarantors, and Jefferies LLC
 
8-K
 
001-09733
 
10.1
 
5/30/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.3
 
Omnibus Waiver, Consent and Amendment Agreement dated as of May 9, 2014 among Cash America International, Inc., the domestic subsidiaries of Cash America International, Inc., as guarantors, and the noteholders named therein
 
8-K
 
001-09733
 
10.1
 
5/15/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4
 
Fifth Amendment to Credit Agreement Dated as of June 13, 2014 among Cash America International, Inc., the domestic subsidiaries of Cash America International, Inc., as guarantors, Wells Fargo Bank, National Association and certain lenders named therein
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
10.5
 
Fourth Amendment to Credit Agreement dated as of May 12, 2014 among Cash America International, Inc., the domestic subsidiaries of Cash America International, Inc., as guarantors, Wells Fargo Bank, National Association and certain lenders named therein
 
8-K
 
001-09733
 
10.2
 
5/15/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.6
 
Cash America International, Inc. 2014 Long-Term Incentive Plan
 
DEF 14A
 
001-09733
 
Appendix A
 
4/11/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

80
Table of Contents




10.7
 
Form of 2014 Restricted Stock Unit Award Agreement for Directors under the Cash America International, Inc. 2014 Long-Term Incentive Plan
 
8-K
 
001-09733
 
10.1
 
5/29/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.8
 
2014 Long-Term Incentive Plan Award Agreement for One-Time Grant of Restricted Stock Units to Chief Information Officer
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
31.1
  
Certification of Chief Executive Officer
  
 
  
 
  
 
  
 
  
X
 
 
 
 
 
 
 
31.2
  
Certification of Chief Financial Officer
  
 
  
 
  
 
  
 
  
X
 
 
 
 
 
 
 
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
 
  
 
  
 
  
 
  
X
 
 
 
 
 
 
 
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
 
  
 
  
 
  
 
  
X
 
 
 
 
 
 
 
99.1
 
Subsection of the “Risk Factors” section of the Preliminary Offering Memorandum of Enova International, Inc.
 
8-K
 
001-09733
 
99.1
 
5/14/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
101.INS 
  
XBRL Instance Document
  
 
  
 
  
 
  
 
  
  X(2)
 
 
 
 
 
 
 
101.SCH (1)
  
XBRL Taxonomy Extension Schema Document
  
 
  
 
  
 
  
 
  
  X(2)
 
 
 
 
 
 
 
101.CAL (1)
  
XBRL Taxonomy Extension Calculation Linkbase Document
  
 
  
 
  
 
  
 
  
  X(2)
 
 
 
 
 
 
 
101.DEF (1)
  
XBRL Taxonomy Extension Definition Linkbase Document
  
 
  
 
  
 
  
 
  
  X(2)
 
 
 
 
 
 
 
101.LAB (1)
  
XBRL Taxonomy Label Linkbase Document
  
 
  
 
  
 
  
 
  
  X(2)
 
 
 
 
 
 
 
101.PRE (1)
  
XBRL Taxonomy Extension Presentation Linkbase Document
  
 
  
 
  
 
  
 
  
  X(2)
 

(1)
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2014, June 30, 2013 and December 31, 2013; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2014 and June 30, 2013; (iii) Consolidated Statements of Equity as of June 30, 2014 and June 30, 2013; (iv) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and June 30, 2013; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and June 30, 2013; and (vi) Notes to Consolidated Financial Statements.
(2)
Submitted electronically herewith.

81
Table of Contents




SIGNATURES
Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.
 
 
 
 
 
 
 
 
 
Date:
July 29, 2014
 
 
 
CASH AMERICA INTERNATIONAL, INC.
 
 
 
 
 
 
 
 
 
 
By:
 
/s/ Thomas A. Bessant, Jr.
 
 
 
 
 
 
 
Thomas A. Bessant, Jr.
 
 
 
 
 
 
 
Executive Vice President and Chief Financial Officer
 
 
 
 
 
 
 
(On behalf of the Registrant and as Principal Financial Officer)

82
Table of Contents




EXHIBIT INDEX
 
 
 
 
 
 
 
 
 
 
 
 
 
 
  
 
  
Incorporated by Reference
  
 
Exhibit No.
  
Exhibit Description
  
Form
  
File No.
  
Exhibit
  
Filing
Date
  
Filed
Herewith
 
 
 
 
 
 
 
4.1
 
Indenture, dated May 30, 2014, between Enova International, Inc., the U.S. subsidiaries of Enova International, Inc. as guarantors, and U.S. Bank National Association, as trustee
 
8-K
 
001-09733
 
4.1
 
5/30/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.1
 
Credit Agreement dated as of May 14, 2014 among Enova International, Inc., certain domestic subsidiaries of Enova International, Inc. as guarantors, Jefferies Finance LLC as administrative agent and Jefferies Group LLC as lender
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
10.2
 
Registration Rights Agreement, dated May 30, 2014, between Enova International, Inc., the U.S. subsidiaries of Enova International, Inc. as guarantors, and Jefferies LLC
 
8-K
 
001-09733
 
10.1
 
5/30/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.3
 
Omnibus Waiver, Consent and Amendment Agreement dated as of May 9, 2014 among Cash America International, Inc., the domestic subsidiaries of Cash America International, Inc., as guarantors, and the noteholders named therein
 
8-K
 
001-09733
 
10.1
 
5/15/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.4
 
Fifth Amendment to Credit Agreement Dated as of June 13, 2014 among Cash America International, Inc., the domestic subsidiaries of Cash America International, Inc., as guarantors, Wells Fargo Bank, National Association and certain lenders named therein
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
10.5
 
Fourth Amendment to Credit Agreement dated as of May 12, 2014 among Cash America International, Inc., the domestic subsidiaries of Cash America International, Inc., as guarantors, Wells Fargo Bank, National Association and certain lenders named therein
 
8-K
 
001-09733
 
10.2
 
5/15/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.6
 
Cash America International, Inc. 2014 Long-Term Incentive Plan
 
DEF 14A
 
001-09733
 
Appendix A
 
4/11/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 
10.7
 
Form of 2014 Restricted Stock Unit Award Agreement for Directors under the Cash America International, Inc. 2014 Long-Term Incentive Plan
 
8-K
 
001-09733
 
10.1
 
5/29/2014
 
 
 
 
 
 
 
 
 
 
 
 
 
 
 

83
Table of Contents




10.8
 
2014 Long-Term Incentive Plan Award Agreement for One-Time Grant of Restricted Stock Units to Chief Information Officer
 
 
 
 
 
 
 
 
 
X
 
 
 
 
 
 
 
 
 
 
 
 
 
31.1
  
Certification of Chief Executive Officer
  
 
  
 
  
 
  
 
  
X
 
 
 
 
 
 
 
31.2
  
Certification of Chief Financial Officer
  
 
  
 
  
 
  
 
  
X
 
 
 
 
 
 
 
32.1
  
Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
 
  
 
  
 
  
 
  
X
 
 
 
 
 
 
 
32.2
  
Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
  
 
  
 
  
 
  
 
  
X
 
 
 
 
 
 
 
101.INS 
  
XBRL Instance Document
  
 
  
 
  
 
  
 
  
  X(2)
 
 
 
 
 
 
 
101.SCH (1)
  
XBRL Taxonomy Extension Schema Document
  
 
  
 
  
 
  
 
  
  X(2)
 
 
 
 
 
 
 
101.CAL (1)
  
XBRL Taxonomy Extension Calculation Linkbase Document
  
 
  
 
  
 
  
 
  
  X(2)
 
 
 
 
 
 
 
101.DEF (1)
  
XBRL Taxonomy Extension Definition Linkbase Document
  
 
  
 
  
 
  
 
  
  X(2)
 
 
 
 
 
 
 
101.LAB (1)
  
XBRL Taxonomy Label Linkbase Document
  
 
  
 
  
 
  
 
  
  X(2)
 
 
 
 
 
 
 
101.PRE (1)
  
XBRL Taxonomy Extension Presentation Linkbase Document
  
 
  
 
  
 
  
 
  
  X(2)


(1)
Attached as Exhibit 101 to this report are the following formatted in XBRL (Extensible Business Reporting Language): (i) Consolidated Balance Sheets as of June 30, 2014, June 30, 2013 and December 31, 2013; (ii) Consolidated Statements of Income for the three and six months ended June 30, 2014 and June 30, 2013; (iii) Consolidated Statements of Equity as of June 30, 2014 and June 30, 2013; (iv) Consolidated Statements of Comprehensive Income for the three and six months ended June 30, 2014 and June 30, 2013; (v) Consolidated Statements of Cash Flows for the six months ended June 30, 2014 and June 30, 2013; and (vi) Notes to Consolidated Financial Statements.
(2)
Submitted electronically herewith.


84