As filed with the Securities and Exchange Commission on November 1, 2017.
Registration No. 333-221081
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
Amendment No. 1
Form S-1
REGISTRATION STATEMENT
UNDER
THE SECURITIES ACT OF 1933
CURO GROUP HOLDINGS CORP.
(Exact name of registrant as specified in its charter)
Delaware (State or other jurisdiction of incorporation or organization) |
6199 (Primary Standard Industrial Classification Code Number) |
90-0934597 (I.R.S. Employer Identification Number) |
3527 North Ridge Road
Wichita, Kansas 67205
(316) 425-1410
(Address, including Zip Code, and Telephone Number, including Area Code, of registrants principal executive offices)
Vin Thomas
Chief Legal Officer
3527 North Ridge Road
Wichita, Kansas 67205
(316) 425-1410
(Name, Address, including Zip Code, and Telephone Number, including Area Code, of Agent for Service)
Copies to:
Cristopher Greer
Willkie Farr & Gallagher LLP
|
F. Holt Goddard Jonathan Michels White & Case LLP 1221 Avenue of the Americas New York, NY 10020
(212)
819-8200
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Approximate date of commencement of proposed sale to the public:
As soon as practicable after the effective date hereof.
If any of the securities being registered on this Form are to be offered on a delayed or continuous basis pursuant to Rule 415 under the Securities Act of 1933, check the following box. ☐
If this Form is filed to register additional securities for an offering pursuant to Rule 462(b) under the Securities Act, check the following box and list the Securities Act registration statement number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ☐
If this Form is a post-effective amendment filed pursuant to Rule 462(d) under the Securities Act, check the following box and list the Securities Act registration number of the earlier effective registration statement for the same offering. ☐
Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of large accelerated filer, accelerated filer, smaller reporting company, and emerging growth company in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer ☐ | Accelerated filer ☐ |
Non-accelerated filer ☒ (Do not check if a smaller reporting company) |
Smaller reporting company ☐ | Emerging growth company ☒ |
If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period with any new or revised accounting standards provided pursuant to Section 7(a)(2)(B) of the Securities Act. ☐
CALCULATION OF REGISTRATION FEE
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Title of Each Class of Securities
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Proposed Maximum
Aggregate Offering Price(1)(2) |
Amount of
Registration Fee(3) |
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Common Stock, $0.001 par value per share |
$100,000,000 | $12,450.00 | ||
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(1) | Includes offering price of shares that the underwriters have the option to purchase. |
(2) | Estimated solely for the purpose of calculating the amount of the registration fee pursuant to Rule 457(o) under the Securities Act of 1933, as amended. |
(3) | Previously paid. |
The registrant hereby amends this registration statement on such date or dates as may be necessary to delay its effective date until the registrant shall file a further amendment which specifically states that this registration statement shall thereafter become effective in accordance with Section 8(a) of the Securities Act of 1933, as amended, or until this registration statement shall become effective on such date as the Commission, acting pursuant to said Section 8(a), may determine.
The information in this prospectus is not complete and may be changed. Neither we nor the selling stockholders may sell these securities until a registration statement filed with the Securities and Exchange Commission is declared effective. This preliminary prospectus is not an offer to sell these securities, and we are not soliciting an offer to buy these securities in any state where the offer or sale is not permitted.
SUBJECT TO COMPLETION, DATED NOVEMBER 1, 2017
Shares
CURO Group Holdings Corp.
Common Stock
We are selling shares of our common stock.
This is the initial public offering of shares of common stock of CURO Group Holdings Corp. Prior to this offering, there has been no public market for our common stock. We anticipate that the initial public offering price will be between $ and $ per share. We have applied to list our common stock on The New York Stock Exchange under the symbol CURO.
The selling stockholders listed in this prospectus have granted the underwriters a 30-day option to purchase up to shares from the selling stockholders at the initial public offering price, less the underwriting discounts and commissions. We will not receive any proceeds from the sale of shares by the selling stockholders.
We are an emerging growth company as the term is used in the Jumpstart Our Business Startups Act of 2012 and, as such, have elected to comply with certain reduced public company reporting requirements. See SummaryImplications of Being an Emerging Growth Company.
Investing in our common stock involves risks. See Risk Factors on page 18.
Price to
Public |
Underwriting
Discounts and Commissions |
Proceeds to
CURO Group Holdings Corp. (before expenses)(1) |
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Per Share |
$ | $ | $ | |||||||||
Total |
$ | $ | $ |
(1) | See Underwriting for information relating to underwriting compensation, including certain expenses of the underwriters to be reimbursed by the Company. |
Neither the Securities and Exchange Commission, any state securities commission nor any other regulatory body has approved or disapproved of these securities or determined if this prospectus is truthful or complete. Any representation to the contrary is a criminal offense.
The underwriters expect to deliver the shares on or about , 2017.
Credit Suisse | Jefferies | Stephens Inc. | ||
William Blair | ||||
Janney Montgomery Scott |
The date of this prospectus is , 2017.
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M ANAGEMENT S D ISCUSSION AND A NALYSIS OF F INANCIAL C ONDITION AND R ESULTS OF O PERATIONS |
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F-1 |
You should rely only on the information contained in this document or to which we have referred you. Neither we, nor the selling stockholders, nor the underwriters have authorized anyone to provide you with information that is different. This document may only be used where it is legal to sell these securities under applicable law. The information in this document may only be accurate on the date of this document regardless of the time of delivery of this prospectus or of any sale of shares of our common stock, and the information in any free writing prospectus that we may provide you in connection with this offering is accurate only as of the date of that free writing prospectus. Our business, financial condition, results of operations and future growth prospects may have changed since those dates. This prospectus is not an offer to sell or the solicitation of an offer to buy shares of our common stock in any circumstances under which such offer or solicitation is unlawful.
Dealer Prospectus Delivery Obligation
Until , (25 days after the date of this prospectus), all dealers that effect transactions in these securities, whether or not participating in this offering, may be required to deliver a prospectus. This is in addition to the dealers obligation to deliver a prospectus when acting as an underwriter and with respect to unsold allotments or subscriptions.
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This prospectus contains forward-looking statements that are subject to a number of risks and uncertainties, many of which are beyond our control. See Risk Factors and Cautionary Note Regarding Forward-Looking Statements.
We do not intend our use or display of other companies tradenames, trademarks or service marks to imply a relationship with, or endorsement or sponsorship of us by, any other company. Each trademark, tradename or service mark of any other company appearing in this prospectus is the property of its respective holder.
We or one of our subsidiaries own or have applied for ownership of the marks CURO, CURO Financial Technologies Corp., Speedy Cash ® , RC Rapid Cash SM , OPT+ SM , Rapid Cash, Avio Credit, LendDirect and Wage Day Advance. All other trademarks, service marks and trade names appearing in this prospectus are the property of their respective owners.
In this prospectus, when we refer to
| CURO, we are referring to CURO Group Holdings Corp. and its subsidiaries, including CURO Financial Technologies Corp.; |
| CFTC, we are referring to CURO Financial Technologies Corp.; |
| CURO Intermediate, we are referring to CURO Intermediate Holdings Corp.; |
| the FFL Holders, we are referring to Friedman Fleischer & Lowe Capital Partners II, L.P., FFL Executive Partners II, L.P. and FFL Parallel Fund II, L.P.; and |
| the Founder Holders, we are referring to Doug Rippel, Chad Faulkner and Mike McKnight and certain of their family trusts and affiliated entities. |
Unless otherwise specified herein or the context otherwise requires, all references to $, U.S.$, USD or dollars in this prospectus refer to U.S. dollars, all references to C$ refer to Canadian dollars, and all references to £, pound sterling or GBP refer to British pounds sterling. The C$ and GBP are the functional currency of our Canadian and U.K. operations, respectively.
For investors outside the United States: neither we nor any of the underwriters have done anything that would permit this offering or possession or distribution of this prospectus in any jurisdiction where action for that purpose is required, other than in the United States. You are required to inform yourselves about and to observe any restrictions relating to this offering and the distribution of this prospectus outside of the United States.
Industry and Market Data
This prospectus includes statistical data, market data and other industry data and forecasts, which we obtained from market research, publicly available information and independent industry publications and reports, including those by the Pew Research Center, CFI Group and FactorTrust. We have supplemented these data and forecasts where necessary with information from publicly available sources and our own internal estimates. We use these sources and estimates and believe them to be reliable, but they involve a number of assumptions and limitations.
The sources of certain industry and market data contained in this prospectus are listed below.
| ACORN Canada, Its Expensive to be Poor: How Canadian Banks are Failing Low Income Communities ; May 2016. |
| Board of Governors of the Federal Reserve System, Report on the Economic Well-Being of U.S. Households in 2015 , May 2016. |
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| Center for Financial Services Innovation, or CFSI, 2016 Financially Underserved Market Size Study ; November 2016. |
| CFI Group, Bank Satisfaction Barometer ; 2016. |
| FactorTrust, The FactorTrust Underbanked Index ; May 2017. |
| FICO, U S Average FICO Score Hits 700: A Milestone for Consumers ; July 2017. |
| Financial Credit Authority, High-cost credit ; July 2017. |
| JPMorgan Chase & Co., Weathering Volatility: Big Data on the Financial Ups and Downs of U.S. Individuals , 2015. |
| L.E.K. Consulting, Consumer Specialist Lending Newly Sustainable or Another Boom-and-Bust ; Volume XVIII, Issue 10. |
| Pew Research Center, Smartphone Ownership and Internet Usage Continues to Climb in Emerging Economies ; February 2016. |
| Pricewaterhouse Coopers LLP, or PWC, Banking the Under-Banked: The Growing Demand for Near Prime Credit , 2016. |
The industry in which we operate is subject to a high degree of uncertainty and risk due to a variety of factors, including those described in Risk Factors and elsewhere in this prospectus. These and other factors could cause our and the industrys results to differ materially from those expressed in the estimates made by the independent parties and by us.
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The following summary highlights information contained elsewhere in this prospectus and does not contain all of the information that you should consider before investing in our common stock. You should read this entire prospectus, including the sections entitled Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and our consolidated financial statements and the related notes to those statements before making an investment decision. The terms we, our, us, CURO and the Company, as used in this prospectus, refer to CURO Group Holdings Corp. and its consolidated subsidiaries, except where otherwise stated or where it is clear that the terms mean only CURO Group Holdings Corp. exclusive of its subsidiaries. Unless the context otherwise indicates or requires, the term Curo Platform and platform, as used in this prospectus, refer to our Companys proprietary IT systems and operating platform.
Company Overview
We are a growth-oriented, technology-enabled, highly-diversified consumer finance company serving a wide range of underbanked consumers in the United States, Canada and the United Kingdom and are a market leader in our industry based on revenues. We believe that we have the only true omni-channel customer acquisition, onboarding and servicing platform that is integrated across store, online, mobile and contact center touchpoints. Our IT platform, which we refer to as the Curo Platform, seamlessly integrates loan underwriting, scoring, servicing, collections, regulatory compliance and reporting activities into a single, centralized system. We use advanced risk analytics powered by proprietary algorithms and over 15 years of loan performance data to efficiently and effectively score our customers loan applications. Since 2010, we have extended $13.9 billion in total credit across approximately 36.5 million total loans, and our revenue of $828.6 million in 2016 represents a 26.3% compound annual growth rate, or CAGR, over the same time period.
We operate in the United States under two principal brands, Speedy Cash and Rapid Cash, and launched our new brand Avio Credit in the United States in the second quarter of 2017. In the United Kingdom, we operate online as Wage Day Advance and, prior to their closure in the third quarter of 2017, our stores were branded Speedy Cash. In Canada our stores are branded Cash Money and, we offer LendDirect installment loans online. As of September 30, 2017 our store network consisted of 405 locations across 14 U.S. states and seven Canadian provinces. As of September 30, 2017, we offered our online services in 26 U.S. states, five Canadian provinces and the United Kingdom.
We offer a broad range of consumer finance products including Unsecured Installment Loans, Secured Installment Loans, Open-End Loans and Single-Pay Loans. We have tailored our products to fit our customers particular needs as they access and build credit. Our product suite allows us to serve a broader group of potential borrowers than most of our competitors. The flexibility of our products, particularly our installment and open-end products, allows us to continue serving customers as their credit needs evolve and mature. Our broad product suite creates a diversified revenue stream and our omni-channel platform seamlessly delivers our products across all contact pointswe refer to it as Call, Click or Come In. We believe these complementary channels drive brand awareness, increase approval rates, lower our customer acquisition costs and improve customer satisfaction levels and customer retention.
We serve the large and growing market of individuals who have limited access to traditional sources of consumer credit and financial services. We define our addressable market as underbanked consumers in the United States, Canada and the United Kingdom. According to a study by CFSI, there are as many as 121 million Americans who are currently underserved by financial services companies. According to studies by ACORN Canada and PWC, the statistics in Canada and the United Kingdom are similar, with an estimated 15% of Canadian residents (approximately 5 million individuals) and an estimated 20% to 25% of United Kingdom
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residents (approximately 10 to 14 million individuals) classified as underbanked. Given our international footprint, this translates into an addressable market of approximately 140 million individuals. We believe that with our scalable omni-channel platform and diverse product offerings, we are well positioned to gain market share as sub-scale players struggle to keep pace with the technological evolution taking place in the industry.
Our customers require essential financial services and value timely, transparent, affordable and convenient alternatives to banks, credit card companies and other traditional financial services companies. According to a recent study by FactorTrust, underbanked customers in the United States tend to have the following characteristics:
| average age of 39 for applicants and 41 for borrowers; |
| applicants are 47% male and 53% female; |
| 41% are homeowners; |
| 45% have a bachelors degree or higher; and |
| the top five employment segments are Retail, Food Service, Government, Banking/Finance and Business Services. |
In the United States, our customers generally earn between $25,000 and $75,000 annually. In Canada, our customers generally earn between C$25,000 and C$60,000 annually. In the United Kingdom, our customers generally earn between £18,000 and £31,000 annually.
Products and Services
We provide Unsecured Installment Loans, Secured Installment Loans, Open-End Loans, Single-Pay Loans and a number of ancillary financial products including check cashing, proprietary reloadable prepaid debit cards (Opt+), credit protection insurance in the Canadian market, gold buying, retail installment sales and money transfer services. We have designed our products and customer journey to be consumer-friendly, accessible and easy to understand. Our platform and product suite enable us to provide several key benefits that appeal to our customers:
| transparent approval process; |
| flexible loan structure, providing greater ability to manage monthly payments; |
| simple, clearly communicated pricing structure; and |
| full account management online and via mobile devices. |
Our centralized underwriting platform and its proprietary algorithms are used for every aspect of underwriting and scoring of our loan products. The customer application, approval, origination and funding processes differ by state, country and by channel. Our customers typically have an active phone number, open checking account, recurring income and a valid government-issued form of identification. For in-store loans, the customer presents required documentation, including a recent pay stub or support for underlying bank account activity for in-person verification. For online loans, application data is verified with third-party data vendors, our proprietary algorithms and/or tech-enabled account verification. Our proprietary, highly scalable, scoring system employs a champion/challenger process whereby models compete to produce the most successful customer outcomes and profitable cohorts. Our algorithms use data relevancy and machine learning techniques to identify approximately 60 variables from a universe of approximately 11,600 that are the most predictive in terms of credit outcomes. The algorithms are continuously reviewed and refreshed and are focused on a number of factors related to disposable income, expense trends and cash flows, among other factors, for a given loan applicant. The
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predictability of our scoring models is driven by the combination of application data, purchased third-party data and our robust internal database of over 71 million records associated with loan information. These variables are then combined in a series of algorithms to create a score that allows us to scale lending decisions.
Geography and Channel Mix
For the nine months ended September 30, 2017, our revenue distribution in the United States, Canada and United Kingdom was 76.4%, 19.5% and 4.1%, respectively.
Stores: As of September 30, 2017, we had 405 stores in 14 U.S. states and seven provinces in Canada, which included the following:
| 215 United States locations: Texas (92), California (36), Nevada (18), Arizona (13), Tennessee (11), Kansas (10), Illinois (8), Alabama (7), Missouri (5), Louisiana (5), Colorado (3), Oregon (3), Washington (2) and Mississippi (2); and |
| 190 Canadian locations: Ontario (121), Alberta (27), British Columbia (26), Saskatchewan (6), Nova Scotia (5), Manitoba (4) and New Brunswick (1). |
Online: We lend online in 26 U.S. states, five provinces in Canada and in England, Wales, Scotland and Northern Ireland in the United Kingdom. During the third quarter of 2017, we began offering loans online in Virginia.
The following charts reflect the revenue contribution, including CSO fees, of the products and services that we currently offer in the regions in which we operate.
Year Ended December 31, 2016 $829 million |
Nine Months Ended September 30, 2017 $697 million |
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For the year ended December 31, 2016 and the period ending September 30, 2017, revenue generated through our online channel was 33% and 37%, respectively.
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Overview of Loan Products
Below is an outline of the primary products we offered as of September 30, 2017.
Installment | ||||||||
Unsecured | Secured | Open-End | Single-Pay | |||||
Channel |
Online and in-store:
15 U.S. states, Canada and the United Kingdom(1) |
Online and in-store:
7 U.S. states |
Online: KS, TN, ID, UT,
VA, DE and RI In-store: KS and TN |
Online and
in-store:
12 U.S. states, Canada and the United Kingdom(1) |
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Approximate Average Loan Size (2) |
$636 | $1,299 | $463 | $335 | ||||
Duration |
Up to 48 months | Up to 42 months | Revolving / Open-ended | Up to 62 days | ||||
Pricing |
13.2% average
monthly interest rate(3) |
10.6% average
monthly interest rate(3) |
Daily interest rates
ranging from 0.74% to 0.99% |
Fees ranging from $13
to $25 per $100 borrowed |
(1) | Online only in the United Kingdom. |
(2) | Includes CSO loans. |
(3) | Weighted average of the contractual interest rates for the portfolio as of September 30, 2017. Excludes CSO fees. |
Unsecured Installment Loans
Unsecured Installment Loans are fixed-term, fully-amortizing loans with a fixed payment amount due each period during the term of the loan. These loans are originated and owned by us or by third-party lenders pursuant to credit services organization and credit access business statutes, which we refer to as our CSO programs. For CSO programs, we arrange, service and guarantee the loans. Payments are due bi-weekly or monthly to match the customers pay cycle. Customers may prepay without penalty or fees. Unsecured Installment Loan terms are governed by enabling state legislation in the United States, provincial and federal legislation in Canada and national regulations in the United Kingdom. Unsecured Installment Loans comprised 49.3%, and 40.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. We believe that the flexible terms and lower payments associated with Installment Loans significantly expands our addressable market by allowing us to serve a broader range of customers with a variety of credit needs.
Secured Installment Loans
Secured Installment Loans are similar to Unsecured Installment Loans but are also secured by a vehicle title. These loans are originated and owned by us or by third-party lenders through our CSO programs. For these loans the customer provides clear title or security interest in the vehicle as collateral. The customer receives the benefit of immediate cash but retains possession of the vehicle while the loan is outstanding. The loan requires periodic payments of principal and interest with a fixed payment amount due each period during the term of the loan. Payments are due bi-weekly or monthly to match the customers pay cycle. Customers may prepay without penalty or fees. Secured Installment Loan terms are governed by enabling state legislation in the United States. Secured Installment Loans comprised 10.5% and 9.8% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
Open-End Loans
Open-End Loans are a line of credit for the customer without a specified maturity date. Customers may draw against their line of credit, repay with minimum, partial or full payments and redraw as needed. We report
% ancillary revenue 7% 5% 5% % ancillary revenue 5% 4% 4% % online revenue 28% 30% 33% % online revenue 30% 35% 39%
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and earn interest on the outstanding loan balances drawn by the customer against their approved credit limit. Typically, customers do not draw the full amount of their credit limit. Customers may prepay without penalty or fees. Loan terms are governed by enabling state legislation in the United States. Unsecured Open-End Loans comprised 6.6% and 7.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. Secured Open-End Loans are offered as part of our product mix in states with enabling legislation and accounted for approximately 0.9% and 1.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
Single-Pay Loans
Single-Pay Loans are generally unsecured short-term, small-denomination loans whereby a customer receives cash in exchange for a post-dated personal check or a pre-authorized debit from the customers bank account. These loans are originated and owned by us or by third-party lenders through our CSO programs. We agree to defer deposit of the check or debiting of the customers bank account until the loan due date which typically falls on the customers next pay date. Single-Pay Loans are governed by enabling state legislation in the United States, federal and provincial regulations in Canada and national regulation in the United Kingdom. Single-Pay Loans comprised 28.4% and 37.8% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
Ancillary products
We also provide a number of ancillary financial products including check cashing, proprietary reloadable prepaid debit cards (Opt+), credit protection insurance in the Canadian market, gold buying, retail installment sales and money transfer services. We had 112,607 active Opt+ cards as of September 30, 2017, which includes any card with a positive balance or transaction in the past 90 days. Opt+ customers have loaded over $1.5 billion to their cards since we started offering this product.
CSO Programs
Through our CSO programs, we act as a credit services organization/credit access business on behalf of customers in accordance with applicable state laws. We currently offer loans through CSO programs in stores and online in the state of Texas and online in the state of Ohio. In Texas we offer Unsecured Installment Loans and Secured Installment Loans with a maximum term of 180 days. In Ohio we offer an Unsecured Installment Loan product with a maximum term of 18 months. As a CSO we earn revenue by charging the customer a fee (the CSO fee) for arranging an unrelated third-party to make a loan to that customer. When a customer executes an agreement with us under our CSO programs, we agree, for a CSO fee payable to us by the customer, to provide certain services to the customer, one of which is to guarantee the customers obligation to repay the loan the customer receives from the third-party lender. CSO fees are calculated based on the amount of the customers loan. For CSO loans, each lender is responsible for providing the criteria by which the customers application is underwritten and, if approved, determining the amount of the customer loan. We in turn are responsible for assessing whether or not we will guarantee the loan. This guarantee represents an obligation to purchase specific loans if they go into default.
As of September 30, 2017, the maximum amount payable under all such guarantees was $59.1 million, compared to $59.6 million at December 31, 2016. Should we be required to pay any portion of the total amount of the loans we have guaranteed, we will attempt to recover the amount we pay from the customers. We hold no collateral in respect of the guarantees. Our guarantee liability was $16.9 million and $17.1 million at September 30, 2017 and December 31, 2016, respectively.
Since CSO loans are made by a third party lender, we do not include them in our Consolidated Balance Sheets as loans receivable. CSO fees receivable are included in Prepaid expense and other in our Consolidated Balance Sheets. We receive payments from customers for these fees on their scheduled loan repayment due dates.
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The majority of revenue generated through our CSO programs was for Unsecured Installment Loans, which comprised 96.2% and 91.6% of total CSO revenue for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
Total revenue generated through our CSO programs comprised 26.5% and 26.1% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
Industry Overview
We operate in a segment of the financial services industry that provides lending products to underbanked consumers in need of convenient and flexible access to credit and other financial products. Up to 140 million individuals fall within the definition of our target market. In the United States alone, according to a study by CFSI, these underserved consumers spent an estimated $126.5 billion on fees and interest related to credit products similar to those we offer.
We believe our target consumers have a need for tailored financing products to cover essential expenses. According to a study by the Federal Reserve, 44% of American adults could not cover an emergency expense costing $400, or would cover it by selling an asset or borrowing money. Additionally, a study conducted by JPMorgan Chase & Co., which analyzed the transaction information of 2.5 million of its account holders, found that 41% of those sampled experienced month-to-month income swings of more than 30%.
We compete against a wide variety of consumer finance providers including online and branch-based consumer lenders, credit card companies, pawnshops, rent-to-own and other financial institutions that offer similar financial services. A study by CFSI has estimated that spending on credit products offered by our industry exhibited a 10.0% CAGR from 2010 to 2015. This growth has been accompanied by shrinking access to credit for our customer base as evidenced by an estimated $142 billion reduction in the availability of non-prime consumer credit from the 2008 to 2009 credit crisis to 2015 (based on analysis of master pool trust data of securitizations for major credit card issuers).
In addition to the beneficial secular trends broadly impacting the consumer finance landscape, we believe we are well positioned to grow our market share as a result of several changes we have observed related to consumer preferences within alternative financial services. Specifically, we believe that a combination of evolving consumer preferences, increasing use of mobile devices and overall adoption rates for technology are driving significant change in our industry.
| Shifting preference towards installment loan s We believe from our experience in offering installment loan products since 2008 that single-pay loans are becoming less popular or less suitable for a growing portion of our customers. Customers generally have shown a preference for our Installment Loan products, which typically have longer terms, lower periodic payments and a lower relative cost. Offering more flexible terms and lower payments also significantly expands our addressable market by broadening our products appeal to a larger proportion of consumers in the market. |
| Increasing adoption of online channels Our experience is that customers prefer service across multiple channels or touch points. Approximately 63% of respondents in a recent study by CFI Group said they conducted more than half of their banking activities electronically. That same group of respondents reported an overall level of satisfaction that met or exceeded the average. In 2017, our online revenue of $257 million represented 37% of our 2017 consolidated revenues through September 30, 2017. |
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Increasing adoption of mobile apps and devices With the proliferation of pay-as-you-go and other smartphone plans, many of our underbanked customers have moved directly to mobile devices for loan origination and servicing. According to a 2016 study by the Pew Research Center involving the United |
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States, the United Kingdom and Canada, smartphone penetration is 72%, 68% and 67%, respectively. Additionally, 43% of respondents to a study by CFI Group said they conduct transactions using a mobile banking app. Five years ago, less than 30% of our U.S. customers reached us via a mobile device. In the third quarter of 2017, that percentage was over 80%. |
Our Strengths
We believe the following competitive strengths differentiate us and serve as barriers for others seeking to enter our market.
| Unique omni-channel platform / site-to-store capability We believe we have the only fully-integrated store, online, mobile and contact center platform to support omni-channel customer engagement. We offer a seamless Call, Click or Come In capability for customers to apply for loans, receive loan proceeds, make loan payments and otherwise manage their accounts in store, online or over the phone. Customers can utilize any of our three channels at any time and in any combination to obtain a loan, make a payment or manage their account. In addition, we have our Site-to-Store capability in which online customers that do not qualify for a loan online are referred to a store to complete a loan transaction with one of our associates. These aspects of our platform enable us to source a larger number of customers, serve a broader range of customers and continue serving these customers for longer periods of time while lowering cost per funded loan. |
| Industry leading product and geographic diversification In addition to channel diversification, we have increased our diversification by product and geography allowing us to serve a broader range of customers with a flexible product offering. As part of this effort, we have also developed and launched new brands and will continue to develop new brands with differentiated marketing messages. These initiatives have helped diversify our revenue streams, enabling us to appeal to a wider array of borrowers. |
| Leading analytics and information technology drives strong credit risk management We have developed a bespoke, proprietary IT platform, referred to as the Curo Platform, which is a unified, centralized platform that seamlessly integrates activities related to customer acquisition, underwriting, scoring, servicing, collections, compliance and reporting. Our IT platform is built upon over 15 years of continually updated customer data comprising over 71 million loan records used to formulate our robust, proprietary underwriting algorithms. This platform then automatically applies multi-algorithmic analysis to a customers loan application to produce a Curo Score, which drives our underwriting decision. Globally, as of September 30, 2017 we had 183 employees who write code and manage our networks and infrastructure for our IT platform. This fully-integrated IT platform enables us to make real-time, data-driven changes, to our acquisition and risk models, which yield significant benefits in terms of customer acquisition costs and credit performance. |
| Multi-faceted marketing strategy drives low customer acquisition costs Our marketing strategy includes a combination of strategic direct mail, television advertisements and online and mobile-based digital campaigns, as well as strategic partnerships. Our global Marketing, Risk and Credit Analytics team, consisting of 72 professionals as of September 30, 2017, uses our integrated IT platform to cross reference marketing spend, new customer account data and granular credit metrics to optimize our marketing budget across these channels in real time to produce higher quality new loans. Besides these diversified marketing programs, our stores play a critical role in creating brand awareness and driving new customer acquisition. From January 2015 through the end of September 2017, we acquired nearly 1.9 million new customers in North America. For the first nine months of 2017 compared to the first nine months of 2015, our average first-pay defaults in the United States improved by 203 bps, while our average cost per funded loan decreased from $72.90 to $63.30. |
|
Focus on customer experience We focus on customer service and experience and have designed our stores, website and mobile application interfaces to appeal to our customers needs. We continue to |
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augment our web and mobile app interfaces to enhance our Call, Click or Come In strategy, with a focus on adding functionality across all our channels. Our stores are branded with distinctive and recognizable signage, conveniently located and typically open seven days a week. Furthermore, we have highly experienced managers in our stores, which we believe is a critical component to driving customer retention, lowering acquisition costs and driving store-level margins. For example, the average tenure for our U.S. store managers is over nine years and over 11 years for regional directors. |
| Strong compliance culture with centralized collections operations We seek to consistently engage in proactive and constructive dialogue with regulators in each of our jurisdictions and have made significant investments in best-practice automated tools for monitoring, training and compliance management. As of September 30, 2017, our compliance group consisted of 28 individuals based in all three countries in which we operate and our compliance management systems are integrated into our proprietary IT platform. Additionally, our in-house centralized collections strategy, supported by our proprietary back-end customer database and analytics team, drives an effective, compliant and highly-scalable model. |
| Demonstrated access to capital markets and diversified funding sources We have raised over $1.1 billion of debt financing in six separate offerings since 2008, most recently in October 2017. See Recent Developments We also closed a $150 million nonrecourse installment loan financing facility in 2016 and have routinely accessed banks and other lenders for revolving credit capacity. We believe this is a significant differentiator from our peers who may have trouble accessing capital markets to fund their business models if credit markets tighten. For more information, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources. |
| Experienced and innovative management team and sponsor Our senior leadership team is among the most experienced in the industry with over a century of collective experience and an average tenure at CURO of over eight years. We also have deep bench strength across key functional areas including accounting, compliance, IT and legal. Our equity sponsor, FFL Partners, LLC, or FFL Partners, has been our partner since 2008 and has contributed significant resources to helping define our growth strategy. |
| History of growth and profitability Throughout our operating history we have maintained strong profitability and growth. Between 2010 and 2016 we grew revenue, Adjusted EBITDA and net income at a CAGR of 26.3%, 25.4% and 21.9%, respectively. At the same time, we have grown our product offerings to better serve our growing and expanding customer base. |
Growth Strategy
| Leverage our capabilities to continue growing installment and open-end products I nstallment and open-end products accounted for 58% of our consolidated revenue for the year ended December 31, 2016, up from 19% in 2010, and we believe that our customers greatly prefer these products. We believe that these products will continue to account for a greater share of our revenue and provide us a competitive advantage versus other consumer lenders with narrower product focus. We believe that our ability to continue to be successful in developing and managing new products is based upon our capabilities in three key areas. |
| Underwriting: Installment and open-end products generally have lower yields than single-pay products, which necessitates more stringent credit criteria supported by more sophisticated credit analytics. Our industry leading analytics platform combines data from over 71 million records associated with loan information from third-party reporting agencies and has helped to reduce average first-pay defaults in the United States by approximately 203 bps for the first nine months of 2017 compared to the first nine months of 2016. |
|
Collections and Customer Service: Installment and open-end products have longer terms than single-pay loans, in some cases up to 48 months. These longer terms drive the need for a more |
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comprehensive collection and default servicing strategy that emphasizes curing a default and putting the customer back on a track to repay the loan. We utilize a centralized collection model that prevents our store management personnel from ever having to contact customers to resolve a delinquency. We have also invested in building new contact centers in all three of the countries in which we operate, each of which utilizes sophisticated dialer technologies to help us contact our customers in a scalable, efficient manner. |
| Funding: The shift to larger balance installment loans with extended terms and open-end loans with revolving terms requires more substantial and more diversified funding sources. Given our deep and successful track record in accessing diverse sources of capital, we believe that we are well-positioned to support future new product transition. |
| Serve additional types of borrowers In addition to growing our existing suite of installment and open-end lending products, we are focused on expanding the total number of customers that we are able to serve through product, geographic and channel expansion. This includes expansion of our online channel, particularly in the United Kingdom, as well as continued targeted additions to our physical store footprint. We also continue to introduce additional products to address our customers preference for longer term products that allow for greater flexibility in managing their monthly payments. |
| In the second quarter of 2017, we launched Avio Credit, a new online product branded in the United States targeting individuals in the 600-675 FICO band. This product is structured as an Unsecured Installment Loan with varying principal amounts and loan terms up to 48 months. As of April 2017, 10% of U.S. consumers had FICO scores between 600 and 649. A further 13.2% of U.S. consumers had FICO scores between 650 and 699, a portion of whom would fall into the credit profile targeted by our Avio Credit product. |
| We expect to expand our LendDirect brand in Canada to include additional provinces and increase acquisition efforts in existing markets. We also plan to open LendDirect stores in Canada during the fourth quarter of 2017. Seven million Canadians have a FICO score below 700. We estimate that the consumer credit opportunity for this customer segment exceeds C$165 billion. We believe these customers represent a highly-fragmented market with low penetration. |
| In the United Kingdom, we expect to launch online longer-term loans, some supported by a guarantor. According to a study by the Financial Conduct Authority, in 2016, the U.K. guarantor market alone comprised approximately £300 million in loans outstanding and had annual originations of approximately £200 million in 2016. A report by L.E.K. Consulting found that this market experienced double digit percentage growth from 2008 to 2017. We believe it is currently dominated by one lender but otherwise largely made up of smaller participants with growth challenges. |
| Continue to bolster our core business through enhancement of our proprietary risk scoring models We continuously refine and update our credit models to drive additional improvements in our performance metrics. By regularly updating our credit underwriting algorithms we can continue to expand the value of each of our customer relationships through improved credit performance. By combining these underwriting improvements with data driven marketing spend, we believe our optimization efforts will produce margin expansion and earnings growth. |
| Expand credit for our borrowers Through extensive testing and our proprietary underwriting, we have successfully increased credit limits for customers, enabling us to offer the right loan to the right customer. The favorable take rates and successful credit performance have improved overall vintage and portfolio performance. For the first nine months of 2017, our average loan amount for Unsecured and Secured Installment Loans rose by $128 (a 26% increase) and $247 (a 24% increase), respectively, versus the same period in 2016. |
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| Continue to improve the customer journey and experience We have projects in our development pipeline to enhance our Call, Click or Come In customer experience and execution, ranging from redesign of web and app interfaces to enhanced service features to payments optimization. |
| Enhance our network of strategic partnerships Our strategic partnership network generates applicants that we then close through our diverse array of marketing channels. By further leveraging these existing networks and expanding the reach of our partnership platform to include new relationships, we can increase the number of overall leads we receive. |
Corporate and Other Information
The CURO business was founded in 1997. CURO Financial Technologies Corp., or CFTC (then known as Speedy Cash Holdings Corp.), was incorporated in Delaware on July 16, 2008. On September 10, 2008, our founders sold or otherwise contributed all of the outstanding equity of the various operating entities that comprised the CURO business to a wholly-owned subsidiary of CFTC in connection with an investment in CFTC by Friedman Fleischer & Lowe Capital Partners II, L.P. and its affiliated funds, or FFL Partners. CURO Group Holdings Corp. (then known as Speedy Group Holdings Corp.) was incorporated in Delaware on February 7, 2013 as the parent company of CFTC. On May 11, 2016, we changed the name of Speedy Group Holdings Corp. to CURO Group Holdings Corp. We similarly changed the names of some of its subsidiaries.
Our directors, including the Founder Holders, executive officers and the FFL Holders, currently collectively own approximately 89.36% of our common stock. Following the completion of this offering, our directors, including the Founder Holders, executive officers and the FFL Holders will beneficially own approximately % of our outstanding common stock. For additional information on the beneficial ownership of our common stock prior to and immediately after the completion of this offering, see Principal and Selling Stockholders.
Our principal business office is located at 3527 North Ridge Road, Wichita, Kansas 67205. Our website address is www.curo.com . We do not incorporate the information contained on, or accessible through, our corporate website into this prospectus, and you should not consider it to be part of this prospectus.
Implications of Being an Emerging Growth Company
As a company with less than $1.07 billion in revenue during our last fiscal year, we qualify as an emerging growth company as defined in the Jumpstart Our Business Startups Act of 2012, or the JOBS Act.
An emerging growth company may take advantage of specified reduced reporting and other requirements that are otherwise generally applicable to public companies. As an emerging growth company:
| we are required to have only two years of audited financial statements, two years of selected financial data and only two years of related Managements Discussion and Analysis of Financial Condition and Results of Operations disclosure; |
| we are not required to engage an auditor to report on the effectiveness of our internal controls over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act of 2002, or Sarbanes-Oxley Act; |
| we are not required to comply with any requirement that may be adopted by the Public Company Accounting Oversight Board, or PCAOB, regarding a supplement to the auditors report providing additional information about the audit and the financial statements ( i.e. , an auditor discussion and analysis); |
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| we are not required to submit certain executive compensation matters to stockholder advisory votes, such as say-on-pay, say-on-frequency and say-on-golden parachutes; |
| we are not required to disclose certain executive compensation-related items, such as the correlation between executive compensation and performance and comparisons of the Chief Executive Officers compensation to median employee compensation, or to include a compensation committee report, provided we comply with the scaled compensation disclosure rules applicable to smaller reporting companies; and |
| we may take advantage of an extended transition period for complying with new or revised accounting standards, allowing us to delay the adoption of some accounting standards until those standards would otherwise apply to private companies. |
We have elected to take advantage of these reduced reporting and other requirements available to us as an emerging growth company. As a result of these elections, the information that we provide in this prospectus may be different from the information you may receive from other public companies. In addition, it is possible that certain investors will find our common stock less attractive as a result of our elections, which may result in a less active trading market for our shares and more volatility in our stock price.
We may take advantage of these provisions until we are no longer an emerging growth company. We could remain an emerging growth company until the last day of the fifth fiscal year after this offering, or until the earliest of the following: (i) the last day of the first fiscal year in which our total annual gross revenues are at least $1.07 billion; (ii) the date that we become a large accelerated filer as defined in Rule 12b-2 under the Securities Exchange Act of 1934, as amended, or the Exchange Act, which would occur as of the end of the fiscal year in which, among other things, the market value of our voting and non-voting common equity securities held by non-affiliates is at least $700 million as of the last business day of our most recently completed second fiscal quarter; or (iii) the date on which we have issued more than $1 billion in nonconvertible debt securities during the preceding three-year period.
Summary Risk Factors
Investing in our common stock involves substantial risk. The risks described under the heading Risk Factors immediately following this summary may cause us to not realize the full benefits of our strengths or may cause us to be unable to successfully execute all or part of our strategy. Some of the more significant challenges include the following:
| the recently adopted CFPB rule on payday, vehicle title, and certain high-cost installment loans could, if enacted, have a material adverse effect on our business and results of operations; |
| the extent to which federal, state, local and foreign governmental regulation of consumer lending and related financial products and services limits or prohibits the operation of our business; |
| our failure to comply with applicable laws and regulations, and resulting fines, penalties or other sanctions that could adversely affect our business and results of operations; |
| the impact of proposed rules and regulations that, if enacted, could have a material adverse effect on our business and results of operations; |
| future changes to regulations to which we are subject could restrict us in ways that adversely affect our business and results of operations; |
| the adverse impact of existing or new local regulation of our industry; |
| the impact of the complex regulatory environment in which we operate, which increase our costs of compliance and the risk that we may fail to comply; |
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| the risk that our interpretation and application of laws and regulations related to consumer lending activities differs from the interpretations applied by federal, state, local and foreign regulatory bodies; |
| the effect of judicial decisions, agency rulemaking, or amendments to law on the legality or enforceability of our agreements; |
| current and future litigation and regulatory proceedings against us may impact our results of operations, cash flow and financial condition; |
| risks associated with negative public perception of our products and services; |
| the adverse impact of material modifications of U.S. laws and regulations and existing trade agreements by the new U.S. presidential administration on our business, financial condition, and results of operations; |
| our substantial indebtedness may expose us to material risks, and could adversely affect our business, results of operations and financial condition, as we currently depend in large part on debt financing to provide the cash needed to fund the loans we originate; |
| our business could be adversely affected by a lack of sufficient debt financing at acceptable prices or disruptions in the credit markets, which could reduce our access to credit and our ability to fund loans; |
| risks associated with our ability to refinance our substantial indebtedness; |
| risks associated with a lack of sufficient debt financing made to our business on acceptable terms; |
| our ability to protect our proprietary technology and analytics or keep up with that of our competitors; |
| risks associated with disruption in the availability of our information systems; |
| risks associated with information provided by customers or third parties being inaccurate, and causing us to misjudge a customers qualification to receive a loan; |
| because of the non-prime nature of our customers, our business has much higher rates of charge-offs than traditional lenders, and if we are unable to price our loan products to take into account the credit risks of our customers, our operating results and financial condition could be adversely affected. |
| risks associated with the failure of our proprietary credit and fraud scoring system to effectively price the credit risk of our prospective or existing customers; |
| risks associated with the handling of customer personal data and cyber-attacks that could result in liability or harm to our reputation; |
| risks associated with failure of third parties who provide us products, services or support, including our ability to maintain relationships with banks and other third-party electronic payment solutions providers; |
| our ability to maintain relationships with third-party service providers to offer credit services organizations, or CSO, loans in Texas and Ohio; |
| the adverse impact of employee and third-party theft and errors as well as liability resulting from crimes at our stores; |
| the adequacy of our allowance for loan losses, accrual for third-party loan losses and estimates of losses; |
| changes in demand for our products and services; |
| risks associated with effectively managing our growth; |
| our ability to integrate acquisitions into our existing business operations; |
| the sufficiency of indemnifications associated with assumed liabilities of acquired entities to cover our exposures to litigation and settlement costs; |
| our ability to attract and retain qualified management and employees; |
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| the possible impairment of goodwill; |
| the seasonality of our lending business; |
| our ability to find suitable real estate to support future new store development; |
| our ability to keep up with rapid changes in e-commerce and the uses of the Internet; |
| the fragmentation of our industry and competition from various other sources providing similar financial products, or other alternative sources of credit, to consumers; |
| risks related to the international scope of our business and operations; |
| the adverse impact of natural disasters and other business disruptions on our future revenue and financial condition; and |
| the FFL Holders and the Founder Holders will together have a controlling interest following this offering, and their interests may conflict with ours or yours in the future. |
You should carefully consider all of the information included in this prospectus, including matters set forth under the headings Risk Factors and Special Note Regarding Forward-Looking Statements, before deciding to invest in our common stock.
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Issuer |
CURO Group Holdings Corp. |
Offering price per share |
$ |
Common stock offered by us |
shares. |
Underwriters option to purchase additional shares from the selling stockholders |
up to shares. |
Common stock to be outstanding immediately after completion of this offering |
shares. |
Use of proceeds |
We estimate that our net proceeds from this offering will be approximately $ million, based on an assumed price to the public in this offering of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, and after deducting underwriting discounts and commissions and estimated offering expenses. We will not receive any proceeds from any sale of shares by the selling stockholders. We plan to use approximately $ of our net proceeds from this offering to purchase, redeem, defease or otherwise repay portions of the 12.00% Senior Secured Notes due 2022, or the Senior Secured Notes, issued by CFTC and pay fees, expenses, premiums and accrued interest in connection therewith. We plan to use the remainder of our net proceeds from this offering for working capital and other general corporate purposes including to fund capital expenditures and potential acquisitions, if any. See Use of Proceeds. |
Dividend policy |
See Dividend Policy for a discussion of our policy on paying dividends. |
Directed share program |
The underwriters have reserved for sale at the initial public offering price up to shares of our common stock for employees, directors and other persons associated with us who have expressed an interest in purchasing our common stock in the offering. If purchased by certain of these persons, these shares will be subject to a 180-day lock-up restriction. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. Any reserved shares they do not purchase will be offered by the underwriters to the general public on the same terms as the other shares in this offering. See Underwriting. |
Proposed listing symbol |
We have applied to have our common stock listed on The New York Stock Exchange under the symbol CURO. |
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Risk factors |
Investing in our common stock involves substantial risks. You should carefully read and consider the information set forth under the heading Risk Factors and all other information set forth in this prospectus before deciding to invest in our common stock. |
The number of shares of our common stock to be outstanding after this offering is based on shares outstanding as of September 30, 2017 and excludes:
| shares of our common stock issuable upon the exercise of options outstanding as of , 2017 at a weighted average price of $ per share; |
| shares of our common stock reserved, in the aggregate, for issuance pursuant to our 2017 Incentive Plan and our 2010 Equity Incentive Plan as of , 2017, as well as any additional automatic increases in the number of shares of our common stock reserved for future issuance under this plan; and |
| shares of our common stock reserved for issuance pursuant to our 2017 Employee Stock Purchase Plan as of , , 2017, as well as additional automatic increases in the number of shares of our common stock reserved for future issuance under this plan. |
Unless we specifically state otherwise, the information in this prospectus assumes:
| that the price to the public of our common stock in this offering will be $ per share, the midpoint of the price range set forth on the cover page of this prospectus; |
| that holders will not exercise options issued under our equity incentive plans; |
| the application of a for split of our common stock to occur immediately prior to the completion of this offering; and |
| the filing of our amended and restated certificate of incorporation to occur immediately prior to the completion of this offering. |
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Summary Consolidated Financial And Other Data
Set forth below is our summary consolidated financial and other data as of and for the periods indicated. We have derived the summary consolidated financial and other data as of and for the years ended December 31, 2016 and 2015 from our audited consolidated financial statements and the accompanying notes thereto included elsewhere in this prospectus. We have derived the summary consolidated financial and other data as of and for the nine month periods ended September 30, 2017 and 2016 from our unaudited consolidated financial statements that are included elsewhere in this prospectus and that, in our opinion, include all adjustments, consisting of normal, recurring adjustments, necessary for the fair presentation of such information. Our historical results for any prior period are not necessarily indicative of results we may expect or achieve in any future period. Our results for any interim period are not necessarily indicative of results we may achieve during a full year.
The following information is only a summary and may not be complete. Accordingly, you should read these summary consolidated financial data in conjunction with the sections entitled Use of Proceeds, Capitalization, Selected Historical Consolidated Financial Data, Managements Discussion and Analysis of Financial Condition and Results of Operations and our audited and unaudited consolidated financial statements and the notes thereto contained elsewhere in this prospectus.
(in thousands, except per share data) |
Nine Months Ended
September 30, (unaudited) |
Year Ended
December 31, |
||||||||||||||
2017 | 2016 | 2016 | 2015 | |||||||||||||
Consolidated Statements of Income Data: |
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Revenue |
$ | 696,643 | $ | 609,692 | $ | 828,596 | $ | 813,131 | ||||||||
Provision for losses |
226,523 | 177,756 | 258,289 | 281,210 | ||||||||||||
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|
|
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Net revenue |
470,120 | 431,936 | 570,307 | 531,921 | ||||||||||||
Cost of providing services |
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Salaries and benefits |
79,554 | 79,359 | 104,541 | 107,059 | ||||||||||||
Occupancy |
41,421 | 40,368 | 54,509 | 53,288 | ||||||||||||
Office |
15,519 | 14,294 | 20,463 | 19,929 | ||||||||||||
Other costs of providing services |
40,954 | 39,385 | 53,617 | 47,380 | ||||||||||||
Advertising |
35,599 | 28,925 | 43,921 | 65,664 | ||||||||||||
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|
|
|
|
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Total cost of providing services |
213,047 | 202,331 | 277,051 | 293,320 | ||||||||||||
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|
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|
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Gross margin |
257,073 | 229,605 | 293,256 | 238,601 | ||||||||||||
Operating (income) expense |
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Corporate and district |
103,605 | 95,109 | 125,119 | 129,046 | ||||||||||||
Interest expense |
60,694 | 48,179 | 64,334 | 65,020 | ||||||||||||
Loss (gain) on extinguishment of debt |
12,458 | (6,991 | ) | (6,991 | ) | | ||||||||||
Restructuring |
7,393 | 2,967 | 3,618 | 4,291 | ||||||||||||
Goodwill and intangible asset impairment charges |
| | | 2,882 | ||||||||||||
Other (income) expense |
192 | (559 | ) | (845 | ) | 1,488 | ||||||||||
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|
|
|
|
|
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Total operating expense |
184,342 | 138,705 | 185,235 | 202,727 | ||||||||||||
Net income before taxes |
72,731 | 90,900 | 108,021 | 35,874 | ||||||||||||
Provision for income tax expense |
29,988 | 35,041 | 42,577 | 18,105 | ||||||||||||
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|
|
|
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Net income |
$ | 42,743 | $ | 55,859 | $ | 65,444 | $ | 17,769 | ||||||||
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|
|
|
|
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Basic earnings per share |
$ | 40.59 | $ | 53.05 | $ | 62.15 | $ | 16.87 | ||||||||
Diluted earnings per share |
$ | 39.50 | $ | 52.01 | $ | 60.71 | $ | 16.45 |
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(in thousands, except per share data) |
Nine Months Ended
September 30, (unaudited) |
Year Ended
December 31, |
||||||||||||||
2017 | 2016 | 2016 | 2015 | |||||||||||||
Non-GAAP Statement of Operations Data and Other Operating Data (unaudited): |
||||||||||||||||
Adjusted Earnings(1) |
$ | 59,372 | $ | 55,688 | $ | 66,411 | $ | 24,656 | ||||||||
EBITDA(2) |
$ | 147,545 | $ | 153,323 | $ | 191,260 | $ | 120,006 | ||||||||
Adjusted EBITDA(3) |
$ | 173,257 | $ | 150,260 | $ | 189,361 | $ | 130,876 | ||||||||
Adjusted EBITDA Margin(4) |
24.9 | % | 24.6 | % | 22.9 | % | 16.1 | % | ||||||||
Gross Margin Percentage(5) |
36.9 | % | 37.7 | % | 35.4 | % | 29.3 | % | ||||||||
Number of stores (at period end) |
405 | 420 | 420 | 420 | ||||||||||||
Selected Balance Sheet Data (at period end): |
||||||||||||||||
Cash |
$ | 95,545 | $ | 175,418 | $ | 193,525 | $ | 100,561 | ||||||||
Gross loans receivable |
$ | 393,423 | $ | 244,602 | $ | 286,196 | $ | 252,180 | ||||||||
Less: allowance for loan losses |
(71,271 | ) | (33,302 | ) | (39,192 | ) | (32,948 | ) | ||||||||
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Loans receivable, net |
$ | 322,152 | $ | 211,300 | $ | 247,004 | $ | 219,232 | ||||||||
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Total assets |
$ | 762,139 | $ | 721,119 | $ | 780,798 | $ | 666,017 | ||||||||
Total liabilities (including debt) |
$ | 696,249 | $ | 682,716 | $ | 739,943 | $ | 685,399 | ||||||||
Total stockholders equity (deficit) |
$ | 65,890 | $ | 38,403 | $ | 40,855 | $ | (19,382 | ) |
(1) | We define Adjusted Earnings as net income plus or minus certain non-cash or other adjusting items. We provide Adjusted Earnings in this prospectus because our management finds its useful in evaluating the performance and underlying operations of our business. We provide a detailed description of Adjusted Earnings and how we use it, including a reconciliation of Adjusted Earnings to net income, under Managements Discussion and Analysis of Financial Condition and Results of OperationsSupplemental Non-GAAP Financial Information. |
(2) | We define EBITDA as earnings before interest, income taxes, depreciation and amortization. We provide EBITDA in this prospectus because our management finds it useful in evaluating the performance and underlying operations of our business. We provide a detailed description of EBITDA and how we use it, along with a reconciliation of EBITDA to net income, under Managements Discussion and Analysis of Financial Condition and Results of OperationsSupplemental Non-GAAP Financial Information. |
(3) | We define Adjusted EBITDA as earnings before interest, income taxes, depreciation and amortization, plus or minus certain non-cash or other adjusting items. We provide Adjusted EBITDA in this prospectus because our management finds it useful in evaluating the performance and underlying operations of our business. We provide a detailed description of Adjusted EBITDA and how we use it, along with a reconciliation of Adjusted EBITDA to net income, under Managements Discussion and Analysis of Financial Condition and Results of OperationsSupplemental Non-GAAP Financial Information. |
(4) | Calculated as Adjusted EBITDA as a percentage of revenue. |
(5) | Calculated as Gross Margin as a percentage of revenue. |
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Investing in our common stock involves a high degree of risk. You should consider and read carefully all of the risks and uncertainties described below, as well as other information included in this prospectus, including our consolidated financial statements and related notes appearing at the end of this prospectus, before making an investment decision. The risks described below are not the only ones we face. The occurrence of any of the following risks or additional risks and uncertainties not presently known to us or that we currently believe to be immaterial could materially and adversely affect our business, financial condition or results of operations. In such case, the trading price of our common stock could decline, and you may lose all or part of your original investment. This prospectus also contains forward-looking statements and estimates that involve risks and uncertainties. Our actual results could differ materially from those anticipated in the forward-looking statements as a result of specific factors, including the risks and uncertainties described below.
Risks Relating to the Regulation of Our Industry
The CFPB promulgated new rules applicable to our loans that could have a material adverse effect on our business and results of operations.
The CFPB adopted a new rule applicable to payday vehicle title, and certain high-cost installment loans in October 2017, which we refer to as the CFPB Rule, with most provisions becoming effective 21 months after this CFPB Rule is published in the Federal Register (no earlier than July 2019, if the publication occurs in October 2017). See Regulatory Environment and ComplianceU.S. RegulationsU.S. Federal RegulationsCFPB Rule. This CFPB Rule establishes ability-to-repay, or ATR, requirements for covered short-term loans, such as our single-payment loans, and for covered longer-term balloon-payment loans, such as our revolving lines of credit, as currently structured. It establishes penalty fee prevention provisions that will apply to all of our loans, including our covered short-term loans, covered longer-term balloon-payment loans and our installment loans, which are covered longer-term loans under the CFPB Rule.
Covered short-term loans are consumer loans with a term of 45 days or less. Covered longer-term balloon payment loans include consumer loans with a term of more than 45 days where (i) the loan is payable in a single payment, (ii) any payment is more than twice any other payment, or (iii) the loan is a multiple advance loan that may not fully amortize by a specified date and the final payment could be more than twice the amount of other minimum payments. Covered longer-term loans are consumer loans with a term of more than 45 days where (i) the total cost of credit exceeds an annual rate of 36%, and (ii) the lender obtains a form of leveraged payment mechanism giving the lender a right to initiate transfers from the consumers account. Post-dated checks, authorizations to initiate ACH payments and authorizations to initiate prepaid or debit card payments are all leveraged payment mechanisms under the CFPB Rule. While there are certain coverage exceptionsfor example, an exception for typical pawn loansthey do not apply to our loans.
The ATR provisions of the CFPB Rule apply to covered short-term loans and covered longer-term balloon-payment loans but not to covered longer term loans. Under these provisions, to make a covered short-term loan or a covered longer-term balloon-payment loan, a lender has two options.
| A full payment test, under which the lender must make a reasonable determination of the consumers ability to repay the loan in full and cover major financial obligations and living expenses over the term of the loan and the succeeding 30 days. Under this test, the lender must take account of the consumers basic living expenses and obtain and generally verify evidence of the consumers income and major financial obligations. |
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A principal-payoff option, under which the lender may make up to three sequential loans, without engaging in an ATR analysis. The first of these so-called Section 1041.6 Loans in any sequence of Section 1041.6 Loans without a 30-day cooling off period between them is limited to $500, the second is limited to two-thirds of the first and the third is limited to one-third of the first. A lender may not use this |
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option if (1) the consumer had in the past 30 days an outstanding covered short-term loan or an outstanding longer-term balloon-payment loan that is not a Section 1041.6 Loan, or (2) the new Section 1041.6 Loan would result in the consumer having more than six covered short-term loans (including Section 1041.6 Loans) during a consecutive 12-month period or being in debt for more than 90 days on such loans during a consecutive 12-month period. For Section 1041.6 Loans, the lender cannot take vehicle security or structure the loan as open-end credit. |
We believe that conducting a comprehensive ATR analysis will be costly and that many of our short-term borrowers will not be able to pass a full payment test. Accordingly, we expect that the full payment test option will have little if any utility for us. The option to make Section 1041.6 Loans using the principal-payoff option may be more viable but the restrictions on these loans under the CFPB Rule will significantly reduce the permitted borrowings by individual consumers. Although we hope that the CFPB Rule will produce offsetting industry consolidation to our benefit, there can be no assurance that any positive effects from such a consolidation will be sufficient to compensate for the adverse impact the ATR provisions will have on individual borrowings.
The CFPB Rules penalty fee prevention provisions, which will apply to all covered loans, may have a greater impact on our operations than the ATR provisions of the CFPB Rule. Under these provisions, if two consecutive attempts to collect money from a particular account of the borrower are unsuccessful due to insufficient funds, the lender cannot make any further attempts to collect from such account unless and until it provides notice of the unsuccessful attempts to the borrower and obtains from the borrower a new and specific authorization for additional payment transfers. Obtaining such authorization will be costly and in many cases not possible.
Additionally, the penalty fee prevention provisions will require the lender generally to give the consumer at least three business days advance notice before attempting to collect payment by accessing a consumers checking, savings, or prepaid account. These requirements will necessitate revisions to our payment, customer notification, and compliance systems and create delays in initiating automated collection attempts where payments we initiate are initially unsuccessful.
In short, if and when the CFPB Rule goes into effect, the penalty fee prevention provisions will require substantial modifications in our current practices. These modifications would increase costs and reduce revenues. Accordingly, this aspect of the CFPB Rule could have a substantial adverse impact on our results of operations. However, as of the date hereof, these provisions will not become effective before July 2019, at the earliest, and the CFPB Rule remains subject to potential override by disapproval under the Congressional Review Act. Moreover, after the current CFPB Director leaves office, his successor could suspend, delay, modify or withdraw the CFPB Rule. Further, we expect that important elements of the CFPB Rule will be subject to legal attack, including application of the penalty fee provisions to card payments (where issuing banks do not charge penalty fees on declined transactions). Thus, it is impossible to predict whether and when the CFPB Rule (and the penalty fee provisions) will go into effect and, if so, whether and how it (and they) might be modified. While we will make every effort to be in compliance with the new CFPB Rule by July 2019, we make no assurances that we will be fully compliant by the time the rule becomes effective. For a further discussion of the CFPB Rule and the impact it may have on our operations, see Regulatory Environment and Compliance U.S. Regulations U.S. Federal Regulations CFPB Rule and Managements Discussion and Analysis of Financial Condition and Results of Operations Potential Future Impact of CFPB Rule.
Our industry is strictly regulated everywhere we operate, and these regulations could have an adverse effect on our business and results of operations.
We are subject to substantial regulation everywhere we operate. In the United States and Canada, our business is subject to a variety of statutes and regulations enacted by government entities at the federal, state or provincial, and municipal levels. In the United Kingdom, we are subject to statutes and regulations enacted by
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the U.K. government, as well as directly applicable European Union legislation. These regulations affect our business in many ways, and include regulations relating to:
| the amount we may charge in interest rates and fees; |
| the terms of our loans (such as maximum and minimum durations), repayment requirements and limitations, number and frequency of loans, maximum loan amounts, renewals and extensions, required repayment plans and reporting and use of state-wide databases; |
| underwriting requirements; |
| collection and servicing activity, including initiation of payments from consumer accounts; |
| the establishment and operation of credit services organizations or credit access businesses, which we refer to as CSOs and CABs in this prospectus; |
| licensing, reporting and document retention; |
| unfair, deceptive and abusive acts and practices; |
| non-discrimination requirements; |
| disclosures, notices, advertising and marketing; |
| loans to members of the military and their dependents; |
| requirements governing electronic payments, transactions, signatures and disclosures; |
| check cashing; |
| money transmission; |
| currency and suspicious activity recording and reporting; |
| privacy and use of personally identifiable information and consumer data, including credit reports; |
| anti-money laundering and counter-terrorist financing requirements, including currency and suspicious transaction recording and reporting; |
| posting of fees and charges; and |
| repossession practices in certain jurisdictions where we operate as a title lender, including requirements regarding notices and prompt remittance of excess proceeds for the sale of repossessed automobiles. |
We provide a more detailed description of the regulations to which we are subject and the regulatory environment in the jurisdictions in which we operate under Regulatory Environment and Compliance elsewhere in this prospectus.
These regulations affect our business in many ways, including affecting the loans and other products we can offer, the prices we can charge, the other terms of our loans and other products, the customers to whom we are allowed to lend, how we obtain our customers, how we communicate with our customers, how we pursue repayment of our loans, and many others. Consequently, these restrictions adversely affect our loan volume, revenues, delinquencies and other aspects of our business, including our results of operations.
If we fail to adhere to applicable laws and regulations, we could be subject to fines, civil penalties and other relief that could adversely affect our business and results of operations.
The governmental entities that regulate our business have the ability to sanction us and obtain redress for violations of these regulations, either directly or through civil actions, in a variety of different ways, including:
| ordering remedial or corrective actions, including changes to compliance systems, product terms, and other business operations; |
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| imposing fines or other monetary penalties, including for substantial amounts; |
| ordering the payment of restitution, damages or other amounts to customers, including multiples of the amounts charged; |
| disgorgement of revenue or profit from certain activities; |
| imposing cease and desist orders, including orders requiring affirmative relief, targeting specific business activities; |
| subjecting our operations to additional regulatory examinations during a remediation period; |
| changes to our U.K. business practices in response to the requirements of the Financial Conduct Authority; |
| revocation of licenses to operate in a particular jurisdiction; |
| ordering the closure of one or more stores; and |
| other consequences. |
We provide a more detailed description of the potential consequences we face for non-compliance with laws and regulations under Regulatory Environment and Compliance elsewhere in this prospectus.
Many of the government entities that regulate us have the authority to examine us on a regular basis to determine whether we are complying with applicable laws and regulations and to identify and sanction non-compliance. In the United States, the Consumer Financial Protection Bureau, or CFPB, conducts examinations of our business, which include inspecting our books and records and inquiring about our business practices and policies, such as our marketing practices, loan application and origination practices, electronic payment practices, collection practices, and our supervision of our third-party service providers. The CFPB commenced its first examination of us in 2014 and issued its final report of examination in September 2015. The 2014 examination had no material impact on our financial condition or results of operations. The CFPB commenced its second examination of us in February 2017, and completed the related field work in June 2017. The scope of the 2017 examination included a review of our Compliance Management System, our customer account agreements and disclosures, our substantive compliance with applicable federal laws and certain select matters requiring attention. The CFPB completed the field work for this examination in June 2017 but has not yet provided us with its final report of examination. We cannot predict any potential impact until the CFPB provides us with its final report of examination, although we do not currently have any reason to expect any material impact of the examination on our results of operations or financial condition.
During 2017, it was determined that a limited universe of borrowers may have incurred bank overdraft or non-sufficient funds fees because of possible borrower confusion about certain electronic payments we initiated on their loans. As a result, we have decided to reimburse those fees through payments or credits against outstanding loan balances, subject to per-customer dollar limitations, upon receipt of (i) claims from potentially affected borrowers stating that they were in fact confused by our practices and (ii) bank statements from such borrowers showing they incurred these fees at a time that they might reasonably have been confused about our practices. Based on the terms of the reimbursement offer we are currently considering, we do not expect our financial cost under the offer to exceed $4 million. However, if we decide or are forced to modify the terms of the offerfor example, to eliminate or modify caps on per-borrower refunds or to make refunds to a larger universe of borrowersthe refund offer could have a greater impact than we currently anticipate.
We are subject to these types of examinations and audits on an ongoing basis from federal, state and provincial regulators. These examinations and audits increase the likelihood that any failure to comply (or perceived failure to comply) with applicable laws and regulations will be identified and sanctioned.
If we fail to comply with federal, state, provincial or local laws and regulations, or if supervisory or enforcement authorities believe we have failed to comply, we could suffer any of the actions listed above,
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including fines, penalties, consumer redress, disgorgement of profits, adverse changes to our business and being forced to cease operations in applicable jurisdictions. Any of these could have a material adverse effect on our business and results of operations. Our compliance with applicable laws and regulations could also be challenged in class action lawsuits that could adversely affect our business and results of operations.
In addition to the anticipated refund offer, at least in part to meet CFPB expectations, we have made in recent years, and are continuing to make, certain enhancements to our compliance procedures and consumer disclosures. For example, we are in the process of evaluating our payment practices. Even in advance of the effective date of the CFPB Rule (and even if the CFPB Rule does not become effective), it is possible that we will make changes to these practices in a manner that will increase costs and/or reduce revenues.
The regulations to which we are subject change from time to time, and future changes, including some that have been proposed, could restrict us in ways that adversely affect our business and results of operations.
The laws and regulations to which we are subject change from time to time, and there has been a general increase in the volume and burden of laws and regulations that apply to us in the jurisdictions in which we operate, at the federal, state, provincial and municipal levels. We describe certain proposed laws and regulations that could apply to our business in greater detail under Regulatory Environment and Compliance elsewhere in this prospectus.
At the U.S. federal level for example, in 2017 the CFPB adopted the CFPB Rule and a final rule prohibiting the use of mandatory arbitration clauses with class action waivers in consumer financial services contracts, or the CFPB Anti-Arbitration Rule. Congress overturned the CFPB Anti-Arbitration Rule on October 24, 2017, subject to the approval of the President, who issued a statement in support of Congresss action. Additionally, the CFPB has announced tentative plans to propose rules affecting debt collection, debt accuracy and verification. Also, during the past few years, legislation, ballot initiatives and regulations have been proposed or adopted in various states that would prohibit or severely restrict our short-term consumer lending. We, along with others in the short-term consumer loan industry, intend to continue to inform and educate federal, state and local legislators and regulators and to oppose legislative or regulatory actions and ballot initiatives that would prohibit or severely restrict short-term consumer loans. Nevertheless, if changes in law with that effect were taken nationwide or in states in which we have a significant number of stores, such changes could have a material adverse effect on our loan-related activities and revenues.
In Canada, most of the provinces have proposed or enacted legislation or regulations that limit the amount that lenders offering single-pay loans may charge or that limit certain business practices of single-pay lenders. Some provinces have also proposed or enacted legislation or regulations that impose a higher regulatory burden on installment loans or open-end loans that are determined to be high cost. In the United Kingdom, Parliament and the applicable regulatory bodies have been expanding laws and regulations applicable to our industry, including proposals that would expand rules of conduct and similar duties of responsibility to certain senior managers and other employees of our businesses and that could change the price cap applicable to certain consumer loans, including the scope of loans subject to the cap. There are also forthcoming regulatory changes due to come into force in 2017 and 2018 relating to the implementation of new EU data protection and anti-money laundering laws in the United Kingdom, to replace or supplement U.K. legislation in these areas. Compliance with the new regulations is expected to be more onerous than the existing regime.
We expect that the interest in increasing the regulation of our industry will continue. It is possible that the laws and regulations currently proposed, or other future laws and regulations, will be enacted and will adversely affect our pricing, product mix, compliance costs, or other business activities in a way that is detrimental to our results of operations.
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Existing or new local regulation of our industry could adversely affect our business and results of operations.
In recent years, a number of local laws have been passed by municipalities that regulate aspects of our business. For example, a number of municipalities have sought to use zoning and occupancy regulations to limit consumer lending storefronts. If additional local laws are passed that affect our business, this could materially restrict our business operations, increase our compliance costs or exacerbate the risks associated with the complexity of our regulatory environment.
Approximately 45 different Texas municipalities have enacted ordinances that regulate aspects of products offered under our credit access business or CAB programs, including loan sizes and repayment terms. The Texas ordinances have forced us to make substantial changes to the loan products we offer and have resulted in litigation initiated by the City of Austin challenging the terms of our modified loan products. We believe that: (i) the Austin ordinance (like its counterparts elsewhere in the state) conflicts with Texas state law and (ii) our product in any event complies with the ordinance, when it is properly construed. An Austin trial court agreed with our position that the ordinance conflicts with Texas law and, accordingly, did not address our second argument. In August 2017, an Austin appellate court reversed this decision and remanded the case to the trial court for further proceedings consistent with its opinion (including, presumably, a decision on our second argument). However, in October 2017 we appealed this appellate decision. Accordingly, we will not have a final determination of the lawfulness of our CAB program under the Austin ordinance (and similar ordinances in other Texas cities) for some time. A final adverse decision could potentially result in material monetary liability in Austin and elsewhere and would force us to restructure the loans we arrange in Texas.
The regulatory environment in which we operate is very complex, which increases our costs of compliance and the risk that we may fail to comply in ways that adversely affect our business.
The regulatory environment in which we operate is very complex, with applicable regulations being enacted by multiple agencies at each level of government. Accordingly, our regulatory requirements, and consequently, the actions we must take to comply with regulations, vary considerably among the many jurisdictions where we operate. Managing this complex regulatory environment is difficult and requires considerable compliance efforts. It is costly to operate in this environment, and it is possible that our costs of compliance will increase materially over time. This complexity also increases the risks that we will fail to comply with regulations in a way that could have a material adverse effect on our business and results of operations.
Judicial decisions could potentially render our arbitration agreements unenforceable.
We include pre-dispute arbitration provisions in our loan agreements. These provisions are designed to allow us to resolve any customer disputes through individual arbitration rather than in court. Our arbitration provisions explicitly provide that all arbitrations will be conducted on an individual and not on a class basis. Thus, our arbitration agreements, if enforced, have the effect of shielding us from class action liability.
In July 2017, the CFPB issued the CFPB Anti-Arbitration Rule, designed to prohibit the use of mandatory arbitration clauses with class action waivers in agreements for consumer financial services products, effective as to agreements entered into on or after March 19, 2018. However, the Anti-Arbitration Rule was overturned by Congress on October 24, 2017, subject to the approval of the president, who issued a statement in support of Congresss action. Assuming the President consents to the override, the rule will not become effective, and, pursuant to the Congressional Review Act, substantially similar rules may only be reissued with specific legislative authorization.
Our use of pre-dispute arbitration provisions will remain dependent on whether courts continue to enforce these provisions. We take the position that the Federal Arbitration Act, or the FAA, requires that arbitration agreements containing class action waivers of the type we use be enforced in accordance with their terms. In the
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past, a number of courts, including the California and Nevada Supreme Courts, have concluded that arbitration agreements with class action waivers are unconscionable and hence unenforceable, particularly where a small dollar amount is in controversy on an individual basis. However, in April 2011, the U.S. Supreme Court in a 5-4 decision in AT&T Mobility v. Concepcion held that the FAA preempts state laws that would otherwise invalidate consumer arbitration agreements with class action waivers. Our arbitration agreements differ in some respects from the agreement at issue in Concepcion , and some courts have continued since Concepcion to find reasons to find arbitration agreements unenforceable. Thus, it is possible that one or more courts could use the differences between our arbitration agreements and the agreement at issue in Concepcion as a basis for a refusal to enforce our arbitration agreements, particularly if such courts are hostile to our kind of lending or to pre-dispute mandatory consumer arbitration agreements. Further, it is possible that a change in composition at the U.S. Supreme Court, including the replacement of Justice Scalia by Justice Gorsuch, could result in a change in the U.S. Supreme Courts treatment of arbitration agreements under the FAA. If our arbitration agreements were to become unenforceable for some reason, we could experience an increase to our costs to litigate and settle customer disputes and exposure to potentially damaging class action lawsuits, with a potential material adverse effect on our business and results of operations.
Current and future legal, class action and administrative proceedings directed towards our industry or us may have a material adverse impact on our results of operations, cash flows and financial condition.
We have been the subject of administrative proceedings and lawsuits in the past, and may be involved in future proceedings, lawsuits or other claims. Other companies in our industry have also been subject to regulatory proceedings, class action lawsuits and other litigation regarding the offering of consumer loans. We could be adversely affected by interpretations of state, federal, foreign and provincial laws in those legal and regulatory proceedings, even if we are not a party to those proceedings. We anticipate that lawsuits and enforcement proceedings involving our industry, and potentially involving us, will continue to be brought in the future.
We may incur significant expenses associated with the defense or settlement of current or future lawsuits, the potential exposure for which is uncertain. The adverse resolution of legal or regulatory proceedings, whether by judgment or settlement, could force us to refund fees and interest collected, refund the principal amount of advances, pay damages or other monetary penalties or modify or terminate our operations in particular local, state, provincial or federal jurisdictions. The defense of such legal proceedings, even if successful, requires significant time and attention from our senior officers and other management personnel that would otherwise be spent on other aspects of our business, and requires the expenditure of substantial amounts for legal fees and other related costs. Settlement of proceedings may also result in significant cash payouts, foregoing future revenues and modifications to our operations. Additionally, an adverse judgment or settlement in a lawsuit or regulatory proceeding could in certain circumstances provide a basis for the termination, non-renewal, suspension or denial of a license required for us to do business in a particular jurisdiction (or multiple jurisdictions). A sufficiently serious violation of law in one jurisdiction or with respect to one product could have adverse licensing consequences in other jurisdictions and/or with respect to other products. Thus, legal and enforcement proceedings could have a material adverse effect on our business, future results of operations, financial condition and our ability to service our debt obligations.
Public perception of our business and products as being predatory or abusive could negatively affect our business, results of operations and financial condition.
Certain consumer advocacy groups, politicians, government officials and media organizations promote the view that short-term single-payment loans and other alternative financial services like those we offer are predatory or abusive toward consumers. Widespread adoption of this opinion could potentially have negative consequences for our business, including lawsuits, adverse legislative or regulatory changes, difficulty attracting and retaining qualified employees, decreased demand for our products and services and reluctance or refusal of other parties, such as banks or other electronic payment processors, to transact business with us. These consequences could have a material adverse impact on our business and results of operations.
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Material modifications of U.S. laws and regulations and existing trade agreements by the new U.S. presidential administration could adversely affect our business, financial condition and results of operations.
The new U.S. presidential administration may initiate significant changes in U.S. laws and regulations and existing international trade agreements, including the North American Free Trade Agreement, and these changes could affect a wide variety of industries and businesses, including those businesses we own and operate. It remains unclear what the new U.S. presidential administration will do, if anything, with respect to existing laws, regulations or trade agreements. If the new presidential administration materially modifies U.S. laws and regulations and international trade agreements this could adversely affect our business and results of operations.
Risks Relating to Our Business
Our substantial indebtedness could adversely affect our business, results of operations and financial condition.
As of September 30, 2017, we had approximately $589.0 million of total gross debt outstanding. This amount does not reflect the expected issuance of 12.00% Senior Secured Notes due 2022 by CFTC by November 2, 2017, subject to the satisfaction and waiver of customary closing conditions. Our high level of indebtedness could have significant effects on our business, including the following:
| it may be more difficult for us to satisfy our financial obligations; |
| our ability to obtain additional financing for working capital, capital expenditures, strategic acquisitions or general corporate purposes may be impaired; |
| we must use a substantial portion of our cash flow from operations to pay interest on our debt, which reduces funds available to use for operations, invest in our business, pay dividends to our shareholders and use for other purposes; |
| we could be at a competitive disadvantage compared to those of our competitors that may have proportionately less debt; |
| the terms of our debt restricts our ability to pay dividends; and |
| our flexibility in planning for, or reacting to, changes in our business and the industry in which we operate may be limited. |
For instance, as described above, if future changes in regulations affecting our products or services are enacted, they could adversely impact current product offerings or alter the economic performance of our existing products and services. The terms of existing or future debt instruments may restrict us from adopting some of these alternatives.
If our cash flows and capital resources are insufficient to fund our debt service obligations, or if we confront regulatory uncertainty in our industry or challenges in debt capital markets, we may not be able to refinance our indebtedness prior to maturity on favorable terms, or at all. In addition, prevailing interest rates or other factors at the time of refinancing could increase our interest or other debt capital expense. A refinancing of our indebtedness could also require us to comply with more onerous covenants and restrictions on our business operations. If we are unable to refinance our indebtedness prior to maturity we will be required to pursue alternative measures that could include restructuring our current indebtedness, selling all or a portion of our business or assets, seeking additional capital, reducing or delaying capital expenditures or taking other steps to address obligations under the terms of our indebtedness.
Our ability to meet our expenses thus depends on our future performance, which will be affected by financial, business, economic, regulatory and other factors, many of which we cannot control. Our business may not generate sufficient cash flow from operations in the future and our currently anticipated growth in revenue and cash flow may not be realized, either or both of which could result in our being unable to repay indebtedness,
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or to fund other liquidity needs. If we do not have enough funds, we may be required to refinance all or part of our then existing debt, sell assets or borrow more funds, which we may not be able to accomplish on terms acceptable to us, or at all. In addition, the terms of existing or future debt agreements may restrict us from pursuing any of these alternatives.
Because we depend in large part on third-party lenders to provide the cash needed to fund our loans, an inability to affordably access third-party financing could adversely affect our business.
Our principal sources of liquidity to fund the loans we make to our customers are cash provided by operations, funds from third-party lenders under our CSO programs and our Non-Recourse U.S. SPV Facility, which finances the origination of eligible U.S. Unsecured and Secured Installment Loans. However, we cannot guarantee we will be able to secure additional operating capital from third-party lenders or refinance our existing revolving credit facilities on reasonable terms or at all. As the volume of loans that we make to customers increases, or if provision for losses or expenses rise due to various factors, we may have to expand our borrowing capacity on our existing Non-Recourse U.S. SPV Facility (as discussed below) or add new sources of capital. The availability of these financing sources depends on many factors, some of which lie outside of our control. In the event of a sudden or unexpected shortage of funds in the banking system or capital markets, we may not be able to maintain necessary levels of funding without incurring high funding costs, suffering a reduction in the term of funding instruments or having to liquidate certain assets. If our cost of borrowing increases or we are unable to arrange new or alternative methods of financing on favorable terms, we may have to curtail our origination of loans, which could adversely affect our business and results of operations.
We may be unable to protect our proprietary technology and analytics or keep up with that of our competitors.
The success of our business depends to a significant degree upon the protection of our proprietary technology, including our proprietary credit and fraud scoring models, which we use for pricing loans. We seek to protect our intellectual property with non-disclosure agreements we sign with third parties and employees and through standard measures to protect trade secrets. We also implement cybersecurity policies and procedures to prevent unauthorized access to our systems and technology. However, we may be unable to deter misappropriation of our proprietary information, detect unauthorized use or take appropriate steps to enforce our intellectual property rights. Our employees, including those working on our Curo Platform, have not been required to execute agreements assigning us proprietary rights to technology developed in the scope of their employment, although we intend to have employees sign such agreements in the future. Additionally, while we currently have a number of registered trademarks and pending applications for trademark registration, we do not own any patents or copyrights with respect to our intellectual property.
If competitors learn our trade secrets (especially with regard to our marketing and risk management capabilities), others attempt to acquire patent protection of algorithms similar to ours, or our employees attempt to make commercial use of the technology they develop for us, it could be difficult to successfully prosecute to recover damages. Additionally, a third-party may attempt to reverse engineer or otherwise obtain and use our proprietary technology without our consent. The pursuit of a claim against a third-party or employee for infringement of our intellectual property could be costly, and there can be no guarantee that any such efforts would be successful. If we are unable to protect our software and other proprietary intellectual property rights, or to develop technologies that are as adaptive to changing consumer trends or appealing to consumers as the technologies of our competitors, we could face a disadvantage relative to our competitors.
Any disruption in the availability of our information technology systems could adversely affect our business operations.
We rely heavily upon our Curo Platform in almost every aspect of our business, including to process customer transactions, provide customer service, determine loan amounts, manage collections, account for our
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business activities, support regulatory compliance and to generate the reporting used by management for analytical, loss management and decision-making purposes. Our store and online platform is part of an integrated data network designed to manage cash levels, facilitate underwriting decisions, reconcile cash balances and report revenue and expense transaction data. Our Curo Platform could be disrupted and become unavailable due to a number of factors, including power outages, a failure of one or more of our information technology, telecommunications or other systems, and cyber-attacks on or sustained disruptions of these systems. Our back-up systems and security measures could fail to prevent a disruption in the availability of our information technology systems. A disruption in our Curo platform could prevent us from performing fundamental aspects of our business, including loan underwriting, customer service, payments and collections, internal reporting, and regulatory compliance.
If we do not effectively price the credit risk of our prospective or existing customers, our operating results and financial condition could be materially and adversely impacted.
Our business has much higher rates of charge-offs than traditional lenders. Accordingly, we must price our loan products to take into account the credit risks of our customers. In deciding whether to extend credit to prospective customers and the terms on which to provide that credit, including the price, we rely heavily on the credit models in our proprietary Curo Platform. These models take into account, among other things, information from customers, third parties and an internal database of loan records gathered through monitoring the performance of our customers over time. Any failure of our Curo Platform to effectively price credit risk could lead to higher-than-anticipated customer defaults, which could lead to higher charge-offs and losses for us, or overpricing, which could lead us to lose customers. Our models could become less effective over time, receive inaccurate information or otherwise fail to accurately estimate customer losses in certain circumstances. If we are unable to maintain and improve the credit models in our proprietary Curo Platform, or if they do not perform up to target standards, they may fail to adequately predict the creditworthiness of customers or to assess prospective customers financial ability to repay their loans. This could further hinder our growth and have an adverse effect on our business and results of operations.
If the information provided by customers or third parties to us is inaccurate, we may misjudge a customers qualification to receive a loan, and our operating results may be harmed.
Our lending decisions are based partly on information provided to us by loan applicants. To the extent that these applicants provide information to us in a manner that we are unable to verify, our scoring may not accurately reflect the associated risk. In addition, data provided by third-party sources is a significant component of our scoring of loan applications and this data may contain inaccuracies. Inaccurate analysis of credit data that could result from false loan application information could harm our reputation, business and operating results.
In addition, we use identity and fraud check analyzing data provided by external databases to authenticate each customers identity. There is a risk, however, that these checks could fail, and fraud may occur. We may not be able to recoup funds underlying loans made in connection with inaccurate statements, omissions of fact or fraud, in which case our revenue, operating results and profitability will be harmed. Fraudulent activity or significant increases in fraudulent activity could also lead to regulatory intervention, negatively impact our operating results, brand and reputation and require us to take steps to reduce fraud risk, which could increase our costs.
Improper disclosure of customer personal data, including by means of a cyber-attack, could result in liability and harm our reputation. Cybersecurity risks and security breaches, in general, could result in increasing costs in an effort to minimize those risks and to respond to cyber incidents.
We store and process large amounts of personally identifiable information, consisting primarily of sensitive customer information. We believe that we maintain adequate policies and procedures, including anti-virus and malware software and access controls, and use appropriate safeguards to protect against attacks. It is possible that
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our security controls over personal data, our training of employees and other practices we follow may not prevent the improper disclosure of personally identifiable information. Such disclosure could harm our reputation and subject us to liability under laws that protect personal data, resulting in increased costs or loss of revenue.
In addition, we are subject to cybersecurity risks and security breaches, which could result in the unauthorized disclosure or appropriation of customer data. To date none of these actual or attempted cyber-attacks has had a material effect on our operations or financial condition. However, we may not be able to anticipate or implement effective preventive measures against these types of security breaches, especially because the techniques change frequently or are not recognized until launched. We may need to expend significant resources to protect against security breaches or to address problems caused by breaches. Actual or anticipated attacks and risks may cause us to incur increasing expenses, including costs to deploy additional personnel and protection technologies, train employees, and engage third-party experts and consultants. It is also possible that our protective measures would fail prevent a cyber-attack and the resulting disclosure or appropriation of customer data. A significant data breach could harm our reputation, diminish our customer confidence and subject us to significant legal claims, any of which may contribute to a loss of customers and have a material adverse effect on us.
In addition, federal and some state regulators are considering promulgating rules and standards to address cybersecurity risks and many U.S. states have already enacted laws requiring companies to notify individuals of data security breaches involving their personal data. In the United Kingdom, U.K. businesses are presently subject to the Data Protection Act 1998, which requires that appropriate technical and organizational measures shall be taken against unauthorized or unlawful processing of personal data and against accidental loss or destruction of, or damage to, personal data. As a result of its membership of the EU, U.K. businesses are subject to directly applicable European Regulation in respect of personal data, U.K. businesses will be required to comply with new obligations from May 25, 2018, which will impose greater responsibility, and the U.K. government have indicated that they are to enact direct U.K. laws applicable after Brexit to similar effect, which will require companies to notify individuals of most data security breaches involving their personal data. These mandatory disclosures regarding a security breach are costly to implement and may lead to widespread negative publicity, which may cause customers to lose confidence in the effectiveness of our data security measures.
The failure of third parties who provide products, services or support to us could disrupt our operations or result in a loss of revenue.
Some of our lending activity depends in part on support we receive from unaffiliated third parties. This includes third-party lenders who make loans to our customers under our CSO programs as well as other third-parties that provide services to facilitate lending, loan underwriting and payment processing in our online lending consumer loan channels. The loss of our relationship with any of these third-parties and an inability to replace them or the failure of these third parties to maintain quality and consistency in their programs or services or to have the ability to provide their products and services, could cause us to lose customers and substantially decrease the revenue and earnings of our business. Our revenue and earnings could also be adversely affected if any of those third-party providers make material changes to the products or services that we rely on. We also use third parties to support and maintain certain of our communication systems and information systems. If a third-party provider fails to provide its products or services, makes material changes to such products and services, does not maintain its quality and consistency or fails to have the ability to provide its products and services, our operations could be disrupted.
In Texas and Ohio, we rely on third-party lenders to conduct business.
In Texas and Ohio we operate as a CSO, also known as a credit services organization, or a credit access business, also known as a CAB, arranging for unrelated third-parties to make loans to our customers. During 2016, our CSO programs in Texas and Ohio generated revenues of $205.7 million and $9.2 million, respectively. During the nine months ended September 30, 2017, our CSO programs in Texas and Ohio generated revenues of
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$172.4 million and $12.6 million, respectively. There are a limited number of third-party lenders that make these types of loans and there is significant demand and competition for the business of these companies. These third parties rely on borrowed funds in order to make consumer loans. If these third-parties lose their ability to make loans or become unwilling to make loans to us and we are unable to find another third-party lender, we would be unable to continue offering loans in Texas and Ohio as a CSO, which would prevent us from receiving revenue from these activities. This would adversely affect our revenue and results of operations.
Our core operations are dependent upon maintaining relationships with banks and other third-party electronic payment solutions providers. Any inability to manage cash movements through the banking system or the Automated Clearing House, or ACH, system would materially impact our business.
We maintain relationships with commercial banks and third-party payment processors. These entities provide a variety of treasury management services including providing depository accounts, transaction processing, merchant card processing, cash management, and ACH processing. We rely on commercial banks to receive and clear deposits, provide cash for our store locations, perform wire transfers and ACH transactions and process debit card transactions. We rely on the ACH system to deposit loan proceeds into customer bank accounts and to electronically withdraw authorized payments from those accounts. It has been reported that the U.S. Department of Justice and the Federal Deposit Insurance Corporation, as well as other federal regulators, have taken or threatened actions, commonly referred to as Operation Choke Point, intended to discourage banks and other financial services providers from providing access to banking and third-party payment processing services to lenders in our industry. We can give no assurances that actions akin to Operation Choke Point will not intensify or resume, or that the effect of such actions against banks and/or third-party payment processors will not pose a future threat to our ability to maintain relationships with commercial banks and third-party payment processors. The failure or inability of retail banks and/or third-party payment providers to continue to provide services to us could adversely affect our operations if we are unable or unsuccessful in replacing those providers with comparable service providers.
Because we maintain a significant supply of cash in our stores, we may be subject to cash shortages due to employee and third-party theft and errors. We also may be subject to liability as a result of crimes at our stores.
Our business requires us to maintain a significant supply of cash in each of our stores. As a result, we are subject to the risk of cash shortages resulting from theft and errors by employees and third-parties. Although we have implemented various programs in an effort to reduce these risks, maintain insurance coverage for theft and utilize various security measures at our facilities, it is possible that employee and third-party theft and errors will occur in material amounts. Cash shortages from employee and third-party theft and errors were $0.2 million (0.03% of consolidated revenue) and $0.3 million (0.05% of consolidated revenue) in the nine months ended September 30, 2017 and 2016, respectively. The extent of our cash shortages could increase as we expand the nature and scope of our products and services. Although we have experienced break-ins by third parties at our stores in the past, none of these has had, either individually or in the aggregate, a material adverse impact on our operations. Going forward, theft and errors could lead to cash shortages and could adversely affect our business, prospects, results of operations and financial condition. It is also possible that violent crimes such as armed robberies may be committed at our stores. We could experience liability or adverse publicity arising from such crimes. For example, we may be liable if an employee, customer or bystander suffers bodily injury or other harm. Any such event may have a material adverse effect on our business, prospects, results of operations and financial condition.
If our allowance for loan losses is not adequate to absorb our actual losses, our results of operations and financial condition may be adversely affected.
We face the risk that our customers will fail to repay their loans in full. We maintain an allowance for loan losses for estimated probable losses on company-funded loans and loans in default. See Note 1 Summary of
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Significant Accounting Policies and Nature of Operations of our Notes to Consolidated Financial Statements included elsewhere in this prospectus for factors considered by management in estimating the allowance for loan losses. We also maintain a credit services guarantee liability for estimated probable losses on loans funded by unrelated third-party lenders under our CSO programs, but for which we are responsible. As of September 30, 2017, the sum of our aggregate reserve and allowance for losses on loans and guarantee liability not in default (including loans funded by unrelated third-party lenders under our CSO programs) was $88.2 million. This reserve, however, is an estimate. Actual losses are difficult to forecast, especially if such losses stem from factors beyond our historical experience, and unlike traditional banks, we are not subject to periodic review by bank regulatory agencies of our allowance for loan losses. As a result, our allowance for loan losses may not be comparable to that of traditional banks subject to regulatory oversight or sufficient to cover actual losses. If actual losses are greater than our reserve and allowance, our results of operations and financial condition could be adversely affected.
Adverse economic conditions could cause demand for our loan products to decline or make it more difficult for our customers to make payments on our loans and increase our default rates.
We derive the majority of our revenue from consumer lending. Factors that may influence demand for our products and services include macroeconomic conditions, such as employment, personal income and consumer sentiment. Our underwriting standards require, among other things, our customers to have a steady source of income as a prerequisite for making a loan. Therefore, if unemployment increases among our customer base, the number of loans we originate will likely decline and the number of loan defaults could increase. Additionally, if consumers become more pessimistic regarding the outlook for the economy and therefore spend less and save more, demand for consumer loans in general may decline. Accordingly, poor economic conditions could adversely affect our business and results of operations.
If negative assertions regarding businesses like ours become widespread, they could reduce demand for our loan products.
Negative press coverage and efforts of special interest groups to persuade customers that the consumer loans and other alternative financial services provided by us are predatory and abusive could also negatively affect demand for our products and services. If consumers accept this negative characterization of our business or our products on a widespread basis, demand for our loans could significantly decline, which would negatively affect our revenues and results of operations. Should we fail to adapt to significant changes in our customers demand for our products or services, our revenues could decrease significantly and our results of operations could be harmed. Even if we do make changes to existing products or services or introduce new products or services to fulfill changing customer demands, our customers may resist or reject such products or services.
Our business and results of operations may be adversely affected if we are unable to manage our growth effectively.
There can be no assurance that we will be able to successfully grow our business or that our current business, results of operations and financial condition will not suffer if we fail to prudently manage our growth. Failure to grow the business and generate estimated future levels of cash flow could inhibit our ability to service our debt obligations. Our expansion strategy, which contemplates disciplined growth in Canada and the United States, increasing the market share of our online operations, selectively expanding our offering of installment loans and potential expansion in other international markets, is subject to significant risks. The profitability of our current operations and any future growth is dependent upon a number of factors, including the ability to obtain and maintain financing to support these opportunities, the ability to hire, train and retain an adequate number of qualified employees, the ability to obtain and maintain any required regulatory permits and licenses and other factors, some of which are beyond our control, such as the continuation of favorable regulatory and legislative environments. Imprudent or poor investments could drain our capital resources and negatively impact our liquidity. As a result, the profitability of our current operations could suffer if our growth strategy is not successfully implemented.
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The failure to successfully integrate newly acquired businesses into our operations could negatively impact our profitability.
From time to time, we may consider opportunities to acquire other products or technologies that may enhance our product platform or technology, expand the breadth of our markets or customer base, or advance our business strategies. The success of the acquisitions we have completed, as well as future acquisitions is, and will continue to be, dependent upon our ability to effectively integrate the management, operations and technology of acquired businesses into our existing management, operations and technology platforms. Integration can be complex, expensive and time-consuming. The failure to successfully integrate acquired businesses into our organization in a timely and cost-effective manner could materially adversely affect our business, prospects, results of operations and financial condition. It is also possible that the integration process could result in the loss of key employees, the disruption of ongoing businesses, tax costs or inefficiencies, or inconsistencies in standards, controls, information technology systems, procedures and policies, any of which could adversely affect our ability to maintain relationships with customers, employees or other third-parties or our ability to achieve the anticipated benefits of such acquisitions and could harm our financial performance. We do not know if we will be able to identify acquisitions we deem suitable, whether we will be able to successfully complete any such acquisitions on favorable terms or at all, or whether we will be able to successfully integrate any acquired products or technologies. Additionally, an additional risk inherent in any acquisition is that we fail to realize a positive return on our investment.
Indemnifications associated with assumed liabilities of acquired entities may be insufficient to cover our exposures to litigation and settlement costs.
In 2011, we completed the acquisition of Cash Money Group, Inc., or Cash Money. While the agreement governing our Cash Money acquisition provides us with limited indemnification for litigation and settlement costs for activities related to Cash Moneys operations prior to the acquisition of Cash Money, our recourse with respect to those matters is limited to set-off against a C$7.5 million escrow note. Through September 30, 2017, we have set off approximately C$4.2 million of class action settlement costs and related expenses, and C$0.3 million of tax indemnification amounts against the escrow note. The balance of this escrow note is included in the Consolidated Balance Sheets as Subordinated Shareholder Debt.
In August 2012, we completed the acquisition of The Money Store, L.P., which operated under the name The Money Box ® Check Cashing, or The Money Box. The Money Box acquisition agreement provides us with limited indemnification for certain matters related to The Money Boxs operations prior to the date of the acquisition of The Money Box; however, our recovery is limited in most cases to an aggregate amount of $2.4 million and our ability to make claims is subject to certain time limitations. To date, no indemnification payments have been made or claimed under The Money Box acquisition agreement.
In 2013, we completed the acquisition of Wage Day Advance Limited, or Wage Day. The Wage Day acquisition agreement provides us with limited indemnification for certain matters related to Wage Days operations prior to the date of the Wage Day acquisition. To date, no indemnification payments or claims have been made under this provision.
These indemnifications provide us with only limited recourse against the sellers of these businesses in the event we incur substantial costs in connection with actions occurring prior to our acquisition of the businesses. The agreements limit the amount we can recover, limit the causes of action for which we can pursue recovery, and place other restrictions on our ability to recover for such losses. Accordingly, if we incur substantial costs for issues arising prior to our acquisitions of these businesses, our financial position and results of operations may be adversely affected.
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If we lose key management or are unable to attract and retain the talent required to operate and grow our business or if we are required to substantially increase our labor costs to attract and retain qualified employees, our business and results of operations could be adversely affected.
Our continued growth and future success will depend on our ability to retain the members of our senior management team, who possess valuable knowledge of, and experience with, the legal and regulatory environment of our industry, who have experience operating in our international markets and who have been instrumental in developing our strategic plans and procuring capital to enable the pursuit of those plans. The loss of the services of one or more members of senior management and our inability to attract new skilled management could harm our business and future development. We do not maintain any key man insurance policies with respect to any senior management or employees.
Labor costs represent a significant portion of our total expenses. If we are required to substantially increase our labor costs in order to attract or retain a sufficient number of qualified employees for our current operations, we may not be able to operate our business in a cost-effective manner. We also believe having experienced employees and staff continuity in our stores is an important contributor to the success of our business. If we were unable to retain our experienced managers and staff, it could adversely affect our customer service and our loan volume could suffer.
Goodwill comprises a significant portion of our total assets. We assess goodwill for impairment at least annually, which could result in a material, non-cash write-down, which would have a material adverse effect on our results of operations and financial condition.
The carrying value of our goodwill was $145.7 million, or approximately 19.1% of our total assets, as of September 30, 2017. We assess goodwill for impairment on an annual basis at a reporting unit level. Goodwill is assessed 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 value. During the third quarter of 2015, due to the decline in our overall financial performance in the United Kingdom, we determined that a triggering event had occurred requiring an impairment evaluation of our goodwill and other intangible assets in the United Kingdom. As a result, during the third quarter of 2015, we recorded non-cash impairment charges of $2.9 million, which comprised a $1.8 million charge related to the Wage Day trade name, a $0.2 million charge related to the customer relationships acquired as part of the Wage Day acquisition, and a $0.9 million non-cash goodwill impairment charge in our United Kingdom reporting segment.
Our impairment reviews require extensive use of accounting judgment and financial estimates. Application of alternative assumptions and definitions, such as reviewing goodwill for impairment at a different organizational level, could produce significantly different results. We may be required to recognize impairment of goodwill based on future events or circumstances which could include a significant change in the business climate, a change in strategic direction, legal factors, operating performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit, or future economic factors such as unfavorable changes in the estimated future discounted cash flows of our reporting units. Impairment of goodwill could result in material charges that could, in the future, result in a material, non-cash write-down of goodwill, which could have an adverse effect on our results of operations and financial condition.
Due to the current economic environment and the uncertainties regarding the impact that future economic consequences will have on our reporting units, there can be no assurance that our estimates and assumptions made for purposes of our annual goodwill impairment test will prove to be accurate predictions of the future. If our assumptions regarding forecasted revenues or margins for certain of our reporting units are not achieved, we may be required to record goodwill impairment losses in future periods. It is not possible at this time to determine if any such future impairment will occur, and if it does occur, whether such charge would be material.
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Our lending business is somewhat seasonal, which causes our revenues to fluctuate and may adversely affect our ability to service our debt obligations.
Our U.S. lending business typically experiences reduced demand in the first quarter as a result of our customers receipt of tax refund checks. Demand for our U.S. lending services is generally greatest during the fourth quarter. This seasonality requires us to manage our cash flows over the course of the year. If a governmental authority were to pursue economic stimulus actions or issue additional tax refunds or tax credits at other times during the year, such actions could have a material adverse effect on our business, prospects, results of operations and financial condition during those periods.
Our lending businesses in Canada and the United Kingdom are somewhat seasonal, although to a lesser extent than our U.S. lending business. We typically experience our highest demand in Canada in the third and fourth calendar quarters with lower demand in the first quarter; however, the reduction in volume relating to tax refunds is not as prevalent as in the United States. If our consolidated revenues were to fall substantially below what we would normally expect during certain periods, our annual financial results and our ability to service our debt obligations could be adversely affected.
Adverse real estate market conditions or zoning restrictions may result in increased operating costs or a reduction in new store development, which could impact our profitability and growth plans.
We lease all of our store locations. An increase in lease costs, property taxes or maintenance costs for lease renewals or new store locations could result in increased operating costs for these locations, thereby negatively impacting the stores operating margins.
A recent trend among some municipalities in the United States and in Canada has been to enact zoning restrictions in certain markets. These zoning restrictions may limit the number of payday lending stores that can operate in an area or require certain distance requirements between competitors, residential areas or highways. These restrictions may make it more difficult to find suitable location for future expansion, thereby negatively impacting our growth plans.
Failure to keep up with the rapid changes in e-commerce and the uses and regulation of the Internet could harm our business.
The business of providing products and services such as ours over the Internet is dynamic and relatively new. We must keep pace with rapid technological change, consumer use habits, Internet security risks, risks of system failure or inadequacy and governmental regulation and taxation, and each of these factors could adversely impact our business. In addition, concerns about fraud, computer security and privacy and/or other problems may discourage additional consumers from adopting or continuing to use the Internet as a medium of commerce. In countries such as the United States and the United Kingdom, where e-commerce generally has been available for some time and the level of market penetration of our online financial services is relatively high, acquiring new customers for our services may be more difficult and costly than it has been in the past. In order to expand our customer base, we must appeal to and acquire consumers who historically have used traditional means of commerce to conduct their financial services transactions. If these consumers prove to be less profitable than our previous customers, and we are unable to gain efficiencies in our operating costs, including our cost of acquiring new customers, our business could be adversely impacted.
Competition in the financial services industry could cause us to lose market share and revenues.
The industry in which we operate is highly fragmented. While we believe the market for U.S. storefronts is mature, it is likely that competition for market share will intensify. We believe the Canadian market is less saturated, but still experiences significant competition by both large, well-financed operators as well as significant numbers of smaller competitors. We believe that online lending in the United Kingdom is more
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widely accepted among consumers than in either the United States or in Canada, and that customers are more likely to transact business via the internet and using mobile phones. Across all geographies, we see a growing number of sophisticated online-based lenders. Increased competition in any of the geographies in which we operate could lead to consolidation in our industry. If our competitors get stronger through consolidation, and we are unable to identify attractive consolidation opportunities, we could be at a competitive disadvantage and could experience declining market share and revenue. If these events materialize, they could negatively affect our ability to generate sufficient cash flow to fund our operations and service our debt obligations.
In addition to increasing competition among companies that offer traditional consumer loan products, there is a risk of losing market share to new market entrants. Increased competition from secured title loan lenders, pawn lenders and unsecured installment loan lenders could also adversely affect our revenues.
Our growth strategy calls for opening additional stores in the United States and Canada, and to expand our online presence in each of those geographies. If our competitors aggressively pursue store expansion, competition for store sites could result in our failing to open our planned number of stores, or increase our costs to secure additional sites, both of which could result in slower growth and diminished operating performance. Increased competition in our online business could result in higher advertising and marketing costs to attract and retain customers, leading to lower margins.
The international scope of our operations leads to increased cost and complexity, which could negatively impact our operations.
The international nature of our operations has increased the complexity of managing our business. This has led to enhanced administrative burdens related to regulatory compliance, tax compliance, labor controls and other federal, state, provincial and local requirements. Additional resources, both internal and external, have been added to comply with these increasing requirements, resulting in an increase in our corporate costs. In addition, it remains to be seen what impact the recent vote by the United Kingdom to leave the European Union will have on the U.K. economy and our U.K. operations. Future changes to laws or regulations may result in further cost increases, thereby negatively impacting our profitability.
Our operations could be subject to natural disasters and other business disruptions, which could adversely impact our future revenue and financial condition and increase our costs and expenses.
Our services and operations are vulnerable to damage or interruption from tornadoes, hurricanes, earthquakes, fires, floods, power losses, telecommunications failures, terrorist attacks, acts of war, human errors and similar events. A significant natural disaster, such as a tornado, hurricane, earthquake, fire or flood, could have a material adverse impact on our ability to conduct business, and our insurance coverage may be insufficient to compensate for losses that may occur. Acts of terrorism, war, civil unrest, violence or human error could cause disruptions to our business or the economy as a whole. Any of these events could cause consumer confidence to decrease, which could result in a decreased number of loans being made to customers.
We rely on trademark protection to distinguish our products from the products of our competitors.
We rely on trademark protection to distinguish our products from the products of our competitors. We have registered various trademarks, including The Money Box, Speedy Cash ® , OPT+ SM and Rapid Cash, in the United States and/or Canada, and are in the process of registering other trademarks in those jurisdictions. We have not registered any trademarks in the United Kingdom. For trademarks we use that are not registered, and as permitted by applicable local law, we rely on common law trademark protection. Third parties may oppose our trademark applications, or otherwise challenge our use of the trademarks, and may be able to use our trademarks in jurisdictions where they are not registered or otherwise protected by law. If our trademarks are successfully challenged or if a third party is using confusingly similar or identical trademarks in particular jurisdictions before we do, we could be forced to rebrand our products, which could result in loss of brand recognition, and could
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require us to devote additional resources to marketing new brands. If others are able to use our trademarks, our ability to distinguish our products may be impaired, which could adversely affect our business.
We may be subject to damages resulting from claims that our employees or we have wrongfully used or disclosed alleged trade secrets of their former employers.
Many of our employees were previously employed at other financial technology companies, including our competitors or potential competitors, and we may hire employees in the future that are so employed. We could in the future be subject to claims that these employees, or we, have inadvertently or otherwise used or disclosed trade secrets or other proprietary information of their former employers. If we fail in defending against such claims, a court could order us to pay substantial damages and prohibit us from using technologies or features that are found to incorporate or be derived from the trade secrets or other proprietary information of the former employers. If any of these technologies or features are important to our products, this could prevent us from selling those products and could have a material adverse effect on our business. Even if we are successful in defending against these claims, such litigation could result in substantial costs and divert the attention of management.
Risks Relating to this Offering and Owning Our Common Stock
An active trading market for our common stock may not develop and the market price for our common stock may decline below the initial public offering price.
Prior to this offering, there has not been a public market for our common stock. We cannot predict the extent to which investor interest in our company will lead to the development of an active trading market, or how liquid that market may become. An active trading market for our common stock may never develop or be sustained, which could adversely impact your ability to sell your shares and could depress the market price of your shares. In addition, the public offering price for our common stock has been determined through negotiations among us and the representatives of the underwriters and may not be indicative of prices that will prevail in the open market upon the completion of this offering. Consequently, you may be unable to sell your shares of our common stock at prices equal to or greater than the price you paid for them. We cannot predict the prices at which our common stock will trade. The initial public offering price may not bear any relationship to the market price at which our common stock will trade after this offering or to any other established criteria of the value of our business.
The market price of our common stock is likely to be volatile and could decline following this offering, resulting in a substantial loss of your investment.
The stock market in general has been highly volatile. As a result, the market price and trading volume for our common stock may also be highly volatile, and investors in our common stock may experience a decrease in the value of their shares, including decreases unrelated to our operating performance or prospects. Factors that could cause the market price of our common stock to fluctuate significantly include:
| our operating and financial performance and prospects and the performance of other similar companies; |
| our quarterly or annual earnings or those of other companies in our industry; |
| conditions that impact demand for our products and services; |
| the publics reaction to our press releases, financial guidance and other public announcements, and filings with the SEC; |
| changes in earnings estimates or recommendations by securities or research analysts who track our common stock; |
| market and industry perception of our level of success in pursuing our growth strategy; |
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| strategic actions by us or our competitors, such as acquisitions or restructurings; |
| changes in government and other regulations; |
| changes in accounting standards, policies, guidance, interpretations or principles; |
| arrival or departure of members of senior management or other key personnel; |
| the number of shares to be publicly traded after this offering; |
| sales of common stock by us, our investors or members of our management team; |
| factors affecting the industry in which we operate, including competition, innovation, regulation, the economy and other factors; and |
| changes in general market, economic and political conditions in the U.S. and global economies or financial markets, including those resulting from natural disasters, telecommunications failures, cyber-attacks, civil unrest in various parts of the world, acts of war, terrorist attacks or other catastrophic events. |
Any of these factors may result in large and sudden changes in the trading volume and market price of our common stock and may prevent you from being able to sell your shares at or above the price you paid for them.
Following periods of volatility in the market price of a companys securities, stockholders often file securities class action lawsuits against such company. Our involvement in a class action lawsuit could be costly to defend and divert our senior managements attention and, if adversely determined, could involve substantial damages.
If securities or industry analysts do not publish research or publish misleading or unfavorable research about our business, our stock price and trading volume could decline.
The trading market for our common stock will depend in part on the research and reports that securities or industry analysts publish about us or our business. Our common stock does not currently have and may never obtain research coverage by securities and industry analysts. If there is no coverage of us by securities or industry analysts, the trading price for our shares could be negatively impacted. In the event we obtain securities or industry analyst coverage and one or more of these analysts downgrades our shares or publishes misleading or unfavorable research about our business, our stock price would likely decline. If one or more of these analysts ceases coverage of us or fails to publish reports on us regularly, demand for our shares could decrease, which could cause our stock price or trading volume to decline.
We are an emerging growth company, and any decision on our part to comply with certain reduced disclosure requirements applicable to emerging growth companies could make our common stock less attractive to investors.
We are an emerging growth company, as defined in the JOBS Act, enacted in April 2012, and, for as long as we continue to be an emerging growth company, we may choose to take advantage of exemptions from various reporting requirements applicable to other public companies, including, but not limited to, reduced disclosure obligations regarding executive compensation (including Chief Executive Officer pay ratio disclosure) in our periodic reports and proxy statements, and exemptions from the requirements of holding a nonbinding advisory vote on executive compensation and stockholder approval of any golden parachute payments not previously approved. Additionally, until we cease to be an emerging growth company, we are not required to comply with the auditor attestation requirements of Section 404(b) of the Sarbanes-Oxley Act. As an emerging growth company, we have elected to use the extended transition period for complying with new or revised accounting standards until those standards would otherwise apply to private companies. As a result, our consolidated financial statements may not be comparable to the financial statements of issuers who are required to comply with the effective dates for new or revised accounting standards that are applicable to public companies.
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We may take advantage of these exemptions until such time that we are no longer an emerging growth company. Accordingly, the information contained herein may be different than the information you receive from other public companies in which you hold stock. We could remain an emerging growth company for up to five years, or until the earliest of (i) the last day of the first fiscal year in which our annual gross revenues are at least $1.07 billion, (ii) the date that we become a large accelerated filer as defined in Rule 12b-2 under the Exchange Act, which would occur if, among other things, the market value of our common equity securities held by non-affiliates exceeds $700 million as of the last business day of our most recently completed second fiscal quarter, or (iii) the date on which we have issued more than $1 billion in nonconvertible debt securities during the preceding three-year period.
We cannot predict whether investors will find our common stock less attractive if we choose to rely on one or more of the exemptions described above. If investors find our common stock less attractive as a result of any decisions to reduce future disclosure, there may be a less active trading market for our common stock and our stock price may be more volatile.
The requirements of being a public company may strain our resources and distract our management, which could make it difficult to manage our business, particularly after we are no longer an emerging growth company.
We have historically operated as a private company and have not been subject to the same financial and other reporting and corporate governance requirements as a public company. After this offering, we will be required to file annual, quarterly and other reports with the SEC. We will need to prepare and timely file financial statements that comply with SEC reporting requirements. We will also be subject to other reporting and corporate governance requirements under the listing standards of The New York Stock Exchange, or NYSE, and the Sarbanes-Oxley Act, which will impose significant compliance costs and obligations upon us. The changes necessitated by becoming a public company will require a significant commitment of additional resources and management oversight, which will increase our operating costs. These changes will also place significant additional demands on our finance and accounting staff, which may not have prior public company experience or experience working for a newly public company, and on our financial accounting and information systems, and we may need to, in the future, hire additional accounting and financial staff with appropriate public company reporting experience and technical accounting knowledge. Other expenses associated with being a public company include increases in auditing, accounting and legal fees and expenses, investor relations expenses, increased directors fees and director and officer liability insurance costs, registrar and transfer agent fees and listing fees, as well as other expenses. As a public company, we will be required, among other things, to:
| prepare and file periodic reports, and distribute other stockholder communications, in compliance with the federal securities laws and the NYSE rules; |
| define and expand the roles and the duties of our board of directors and its committees and adopt a set of corporate governance guidelines; |
| maintain a majority independent board of directors and fully independent audit, compensation and nominating and corporate governance committees, in compliance with the federal securities laws and the NYSE rules; |
| institute more comprehensive compliance, investor relations and internal audit functions; and |
| evaluate and maintain our system of internal control over financial reporting, and report on managements assessment thereof, in compliance with rules and regulations of the SEC and PCAOB. |
In particular, upon the completion of this offering, the Sarbanes-Oxley Act will require us to maintain disclosure controls and procedures and report on their effectiveness, and to maintain and document our internal control over financial reporting document and test their effectiveness in accordance with an established internal control framework, and, after our first annual report, to report on our conclusions as to the effectiveness of our
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internal controls. Likewise, once we are no longer an emerging growth company, our independent registered public accounting firm will be required to provide an attestation report on the effectiveness of our internal control over financial reporting pursuant to Section 404(b) of the Sarbanes-Oxley Act. As described in the previous risk factor, we expect to qualify as an emerging growth company upon the completion of this offering and could potentially qualify as an emerging growth company until December 31, 2022. Any failure to implement required new or improved controls, or difficulties encountered in their implementation or in remediating any weaknesses discovered in the internal controls, could harm our operating results, cause us to fail to meet our reporting obligations, or require us to restate our financial statements from prior periods. Any of these could lead investors to lose confidence in the reliability of our financial statements. This could result in a decrease in the value of our common stock. Failure to comply with the Sarbanes-Oxley Act could potentially subject us to sanctions or investigations by the SEC or other regulatory authorities.
We have broad discretion to use the proceeds from the offering and our investment of those proceeds may not yield favorable returns.
We currently intend to use the net proceeds from this offering for general corporate purposes, including to repurchase, redeem, defease or otherwise repay portions of our outstanding indebtedness. Our management has broad discretion to spend the proceeds from this offering, and you may not agree with the way the proceeds are spent. The failure of our management to apply these proceeds effectively could result in unfavorable returns. This could adversely affect our business, causing the price of our common stock to decline.
We may not pay regular cash dividends on our common stock and, consequently, your ability to achieve a return on your investment may depend on appreciation in the price of our common stock.
Any decision to declare and pay dividends will be dependent on a variety of factors, including earnings, cash flow generation, financial position, results of operations, the terms of our indebtedness and other contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant. The terms of our indebtedness limit the ability of CFTC to pay dividends to CURO Group Holdings Corp., which would be necessary for us to pay dividends on our common stock. For more information, see Dividend Policy. As a result, you should not rely on an investment in our common stock to provide dividend income and the success of an investment in our common stock may depend upon an appreciation in its value.
Future offerings of debt or equity securities may rank senior to our common stock and may result in dilution of your investment.
If we decide to issue debt securities in the future, which would rank senior to shares of our common stock, it is likely that they will be governed by an indenture or other instrument containing covenants restricting our operating flexibility. We and, indirectly, our stockholders will bear the cost of issuing and servicing such securities. We may also issue preferred equity, which will have superior rights relative to our common stock, including with respect to voting and liquidation.
Furthermore, if we raise additional capital by issuing new convertible or equity securities at a lower price than the initial public offering price, your interest will be diluted. This may result in the loss of all or a portion of your investment. If our future access to public markets is limited or our performance decreases, we may need to carry out a private placement or public offering of our common stock at a lower price than the initial public offering price.
Because our decision to issue debt, preferred or other equity or equity-linked securities in any future offering will depend on market conditions and other factors beyond our control, we cannot predict or estimate the amount, timing or nature of our future offerings. Thus, holders of our common stock will bear the risk of our future offerings reducing the market price of our common stock and diluting the value of their shareholdings in us.
38
The market price of our common stock could be negatively affected by future sales of our common stock.
If we or our existing stockholders, our directors, their affiliates, or our executive officers, sell, or are perceived as intending to sell, a substantial number of our common stock in the public market, the market price of our common stock could decrease significantly.
We, our executive officers and directors and certain of our significant stockholders have agreed with the underwriters not to dispose of or hedge any of the shares of our common stock or securities convertible into or exchangeable for shares of our common stock during the period from the date of this prospectus continuing through the date that is 180 days after the date of this prospectus, except with the prior written consent of Credit Suisse Securities (USA) LLC and Jefferies LLC.
These shares of common stock will be freely tradable (subject to certain current public information requirements) after the expiration date of the lock-up agreements, excluding any acquired or held by persons who may be deemed to be our affiliates as defined in Rule 144 under the Securities Act, which will continue to be subject to the volume and other restrictions of Rule 144 under the Securities Act. At any time following the closing of this offering, subject, however, to the 180-day lock-up agreement entered into with the underwriters, the holders of shares of our common stock are entitled to require that we register their shares under the Securities Act for resale into the public markets. All shares sold pursuant to an offering covered by such registration statement would be freely transferable.
In addition, on or as soon as practicable after, the effective date of this prospectus, we intend to file a registration statement on Form S-8 under the Securities Act registering shares of our common stock reserved for future issuance under our equity incentive plans. See the information under the heading Shares Eligible for Future Sale for a more detailed description of the shares that will be available for future sales upon completion of this offering.
Purchasing our common stock through this offering will result in an immediate and substantial dilution of your investment.
The initial public offering price of our common stock is substantially higher than the net tangible book value per share of our common stock. Therefore, if you purchase our common stock in this offering, your interest will be diluted immediately to the extent of the difference between the initial public offering price per share of our common stock and the net tangible book value per share of our common stock after this offering. See Dilution.
Provisions in our charter documents could discourage a takeover that stockholders may consider favorable.
Certain provisions in our governing documents could make a merger, tender offer or proxy contest involving us difficult, even if such events would be beneficial to the interests of our stockholders. Among other things, these provisions:
| permit our board of directors to establish the number of directors and fill any vacancies and newly created directorships; |
| authorize the issuance of blank check preferred stock that our board of directors could use to implement a stockholder rights plan; |
| provide that our board of directors is expressly authorized to amend or repeal any provision of our bylaws; |
| restrict the forum for certain litigation against us to Delaware; |
| establish advance notice requirements for nominations for election to our board of directors or for proposing matters that can be acted upon by stockholders at annual stockholder meetings; |
39
| establish a classified board of directors with three staggered classes of directors, where directors may only be removed for cause (unless we de-classify our board of directors); |
| require that actions to be taken by our stockholders be taken only at an annual or special meeting of our stockholders, and not by written consent; and |
| establish certain limitations on convening special stockholder meetings. |
These provisions may delay or prevent attempts by our stockholders to replace members of our management by making it more difficult for stockholders to replace members of our board of directors, which is responsible for appointing the members of our management. These provisions also may delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. We believe these provisions will protect our stockholders from coercive or otherwise unfair takeover tactics by requiring potential acquirers or investors aiming to effect changes in management to negotiate with our board of directors and by providing our board of directors with more time to assess any proposal. However, such anti-takeover provisions could also depress the price of our common stock by acting to delay or prevent a change in control of us.
For information regarding these and other provisions, see Description of Capital Stock.
Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for substantially all disputes between us and our stockholders, which could limit our stockholders ability to obtain a favorable judicial forum for disputes with us or our directors, officers or employees.
Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware is the exclusive forum for any derivative action or proceeding brought on our behalf, any action asserting a breach of fiduciary duty, any action asserting a claim against us arising pursuant to the General Corporation Law of the State of Delaware, our amended and restated certificate of incorporation or our amended and restated bylaws or any action asserting a claim against us that is governed by the internal affairs doctrine. This choice of forum provision may limit a stockholders ability to bring a claim in a judicial forum that it finds favorable for disputes with us or our directors, officers or other employees and may discourage these types of lawsuits.
The FFL Holders and Founder Holders will together own more than 50% of our common stock, and their interests may conflict with ours or yours in the future.
Immediately following this offering, investment funds associated with the FFL Holders and the Founder Holders will beneficially own approximately % and % of our common stock, respectively, or approximately % and %, respectively, if the underwriters exercise in full their option to purchase additional shares. As a result, the FFL Holders and the Founder Holders will collectively have the ability to elect all of the members of our board of directors and thereby control our policies and operations, including the appointment of management, future issuances of our common stock or other securities, the payment of dividends, if any, on our common stock, the incurrence or modification of debt by us, certain amendments to our amended and restated certificate of incorporation and amended and restated bylaws, and the entering into of extraordinary transactions, and their interests may not in all cases be aligned with your interests. In addition, the FFL Holders together with Founder Holders may have an interest in pursuing acquisitions, divestitures and other transactions that, in their respective judgment, could enhance their investment, even though such transactions might involve risks to you. For example, the FFL Holders together with the Founder Holders could cause us to make acquisitions that increase our indebtedness or cause us to sell revenue-generating assets.
40
Prior to the completion of this offering, we, the FFL Holders and the Founder Holders expect to enter into the Amended and Restated Investor Rights Agreement. See Certain Relationships and Related-Party TransactionsAmended and Restated Investor Rights Agreement.
The FFL Holders and their affiliated funds are in the business of making investments in companies and may from time to time acquire and hold interests in businesses that compete directly or indirectly with us.
41
SPECIAL NOTE REGARDING FORWARD-LOOKING STATEMENTS
This prospectus includes forward-looking statements in addition to historical information. These forward-looking statements are included throughout this prospectus, including in the sections entitled Summary, Risk Factors, Managements Discussion and Analysis of Financial Condition and Results of Operations and Business and relate to matters such as our industry, business strategy, goals and expectations concerning our market position, future operations, margins, profitability, capital expenditures, liquidity and capital resources and other financial and operating information. Words such as anticipate, assume, believe, budget, continue, could, estimate, expect, future, intend, may, objective, outlook, plan, potential, predict, project, should, will and variations of these words and the negative of these or similar words or expressions generally indicate a forward-looking statement in this prospectus.
Forward-looking statements reflect our current expectations regarding future events, results or outcomes. These expectations may or may not be realized. Some of these expectations may be based upon assumptions or judgments that prove to be incorrect. In addition, our business and operations involve numerous risks and uncertainties, many of which are beyond our control, which could result in our expectations not being realized or otherwise materially affect our financial condition, results of operations and cash flows.
Our forward-looking statements are not guarantees of future performance, and actual events, results and outcomes may differ materially from our expectations suggested in any forward-looking statements due to a variety of factors, including, among others, those set forth in the section entitled Risk Factors. Although it is not possible to identify all of these factors, they include, among others, the following:
| the recently adopted CFPB rule on payday, vehicle title, and certain high-cost installment loans could, if enacted, have a material adverse effect on our business and results of operations; |
| the extent to which federal, state, local and foreign governmental regulation of consumer lending and related financial products and services limits or prohibits the operation of our business; |
| our failure to comply with applicable laws and regulations, and resulting fines, penalties or other sanctions that could adversely affect our business and results of operations; |
| the impact of proposed rules and regulations that, if enacted, could have a material adverse effect on our business and results of operations; |
| future changes to regulations to which we are subject could restrict us in ways that adversely affect our business and results of operations; |
| the adverse impact of existing or new local regulation of our industry; |
| the impact of the complex regulatory environment in which we operate, which increase our costs of compliance and the risk that we may fail to comply; |
| the risk that our interpretation and application of laws and regulations related to consumer lending activities differs from the interpretations applied by federal, state, local and foreign regulatory bodies; |
| the effect of judicial decisions, agency rulemaking, or amendments to law on the legality or enforceability of our agreements; |
| current and future litigation and regulatory proceedings against us may impact our results of operations, cash flow and financial condition; |
| risks associated with negative public perception of our products and services; |
| the adverse impact of material modifications of U.S. laws and regulations and existing trade agreements by the new U.S. presidential administration on our business, financial condition, and results of operations; |
| our substantial indebtedness may expose us to material risks, and could adversely affect our business, results of operations and financial condition, as we currently depend in large part on debt financing to provide the cash needed to fund the loans we originate; |
42
| our business could be adversely affected by a lack of sufficient debt financing at acceptable prices or disruptions in the credit markets, which could reduce our access to credit and our ability to fund loans; |
| risks associated with our ability to refinance our substantial indebtedness; |
| risks associated with a lack of sufficient debt financing made to our business on acceptable terms; |
| our ability to protect our proprietary technology and analytics or keep up with that of our competitors; |
| risks associated with disruption in the availability of our information systems; |
| risks associated with information provided by customers or third parties being inaccurate, and causing us to misjudge a customers qualification to receive a loan; |
| because of the non-prime nature of our customers, our business has much higher rates of charge-offs than traditional lenders, and if we are unable to price our loan products to take into account the credit risks of our customers, our operating results and financial condition could be adversely affected. |
| risks associated with the failure of our proprietary credit and fraud scoring system to effectively price the credit risk of our prospective or existing customers; |
| risks associated with the handling of customer personal data and cyber-attacks that could result in liability or harm to our reputation; |
| risks associated with failure of third parties who provide us products, services or support, including our ability to maintain relationships with banks and other third-party electronic payment solutions providers; |
| our ability to maintain relationships with third-party service providers to offer credit services organizations, or CSO, loans in Texas and Ohio; |
| the adverse impact of employee and third-party theft and errors as well as liability resulting from crimes at our stores; |
| the adequacy of our allowance for loan losses, accrual for third-party loan losses and estimates of losses; |
| changes in demand for our products and services; |
| risks associated with effectively managing our growth; |
| our ability to integrate acquisitions into our existing business operations; |
| the sufficiency of indemnifications associated with assumed liabilities of acquired entities to cover our exposures to litigation and settlement costs; |
| our ability to attract and retain qualified management and employees; |
| the possible impairment of goodwill; |
| the seasonality of our lending business; |
| our ability to find suitable real estate to support future new store development; |
| our ability to keep up with rapid changes in e-commerce and the uses of the Internet; |
| the fragmentation of our industry and competition from various other sources providing similar financial products, or other alternative sources of credit, to consumers; |
| risks related to the international scope of our business and operations; |
| the adverse impact of natural disasters and other business disruptions on our future revenue and financial condition; and |
| the FFL Holders and the Founder Holders will together have a controlling interest following this offering, and their interests may conflict with ours or yours in the future. |
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Any one of these factors or a combination of these factors could materially affect our future results of operations and could influence whether any forward-looking statements ultimately prove to be accurate. Our forward-looking statements speak only as of the date hereof and are not guarantees of future performance. Actual results and future performance may differ materially from those suggested in any forward-looking statements. We undertake no obligation to update these statements unless we are required to do so under applicable laws.
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We estimate that the net proceeds from the sale of shares of common stock that we are offering will be approximately $ million, at an assumed initial public offering price of $ per share (the midpoint of the price range set forth on the cover page of this prospectus) and after deducting estimated underwriting discounts and offering expenses.
A $1.00 increase (decrease) in the assumed initial public offering price of $ per share would increase (decrease) the net proceeds to us from this offering by $ million, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.
We intend to use approximately $ of the net proceeds from this offering to purchase, redeem, defease or otherwise repay portions of the 12.00% Senior Secured Notes due March 1, 2022, or the Senior Secured Notes, issued by CFTC and pay fees, expenses, premiums and accrued interest in connection therewith. We plan to use the remainder of our net proceeds from this offering for working capital and other general corporate purposes including to fund capital expenditures and potential acquisitions, if any. CFTC issued $470 million aggregate principal amount of the Senior Secured Notes on February 15, 2017 in a private offering exempt from the registration requirements of the Securities Act and used the proceeds of that offering, together with available cash, to redeem Curo Intermediates outstanding 10.75% Senior Secured Notes due 2018, redeem our 12.00% Senior Cash Pay Notes due 2017 and pay fees, expenses, premiums and accrued interest in connection therewith. On October 27, 2017, CFTC agreed to sell $135 million aggregate principal amount of additional Senior Secured Notes in a private offering exempt from the registration requirements of the Securities Act and will use proceeds from that offering, together with available cash, to pay a cash dividend to our stockholders and pay fees and expenses, in connection therewith. See Managements Discussion and Analysis Recent Developments.
Pending the use of proceeds from this offering as described above, we plan to invest the net proceeds we receive in this offering in short-term and intermediate term interest-bearing obligations, investment grade investments, certificates of deposit or direct or guaranteed U.S. government obligations.
We will not receive any proceeds resulting from any sale of our common stock by the selling stockholders.
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On May 12, 2017, we declared a dividend of $28.0 million, which was paid to our stockholders on May 15, 2017, on August 2, 2017, we declared a dividend of $8.5 million, which was paid to our stockholders on August 11, 2017 and on October 16, 2017, we declared a dividend of $5.5 million, which was paid to our stockholders on October 16, 2017. In connection with issuance of the additional Senior Secured Notes expected to be completed on November 2, 2017, subject to the satisfaction or waiver of customary closing conditions, we expect to declare a dividend of $140 million on November 2, 2017, which we will pay to our stockholders on November 2, 2017. We have otherwise not paid regular or special dividends since our inception in 2013. The terms of our indebtedness limit the ability of CFTC to pay dividends to CURO Group Holdings Corp., which would be necessary for us to pay dividends on our common stock.
Any future determinations relating to our dividends and earning retention policies will be made at the discretion of our board of directors, who will review such policies from time to time in light of the Companys earnings, cash flow generation, financial position, results of operations, the terms of our indebtedness and other contractual restrictions, capital requirements, business prospects and other factors our board of directors may deem relevant.
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The following table sets forth our cash and cash equivalents and capitalization as of September 30, 2017:
| on an actual basis; and |
| on an as adjusted basis to give effect to (1) the expected issuance of $135 million aggregate principal amount of additional 12.00% Senior Secured Notes due 2022 by CFTC and (2) our declaration and payment of a $140 million dividend, all of which we expect to occur on November 2, 2017, collectively referred to as the Offering Adjustments. |
| on a pro forma basis to give effect to the Offering Adjustments, the issuance and sale by us of shares of common stock in this offering and at an assumed initial public offering price of $ per share (the midpoint of the range set forth on the cover page of this prospectus) and our receipt and application of the net proceeds therefrom as described in Use of Proceeds. |
The information below is illustrative only, and our cash and cash equivalents, additional paid-in capital, total stockholders equity and total capitalization following the completion of this offering will be adjusted based on the actual initial public offering price and other terms of the offering determined at the pricing of this offering. You should read this table together with Summary, Selected Consolidated Financial Data, Managements Discussion and Analysis of Financial Condition and Results of Operations, Underwriting and our unaudited interim and audited annual consolidated financial statements and the related notes included elsewhere in this prospectus.
As of September 30, 2017 | ||||||||||||
(in thousands, except share data) |
Actual |
As
Adjusted |
Pro
Forma(2) |
|||||||||
Cash and cash equivalents (1) |
$ | 95,545 | $ | 90,545 | $ | |||||||
|
|
|
|
|
|
|||||||
Debt |
||||||||||||
Non-Recourse U.S. SPV Facility |
$ | 116,590 | $ | 116,590 | $ | |||||||
12.00% Senior Secured Notes due 2022(3) |
470,000 | 605,000 | ||||||||||
Subordinated shareholder debt |
2,401 | 2,401 | ||||||||||
|
|
|
|
|
|
|||||||
Total debt |
588,991 | 723,991 | ||||||||||
Equity |
||||||||||||
Common Stock, $0.001 par value; 2,000,000 shares authorized and 1,052,632 shares issued and outstanding, actual; and shares authorized and shares issued and outstanding, pro forma(4) |
$ | 1 | $ | 1 | $ | |||||||
Dividends in excess of paid-in capital |
(35,686 | ) | (35,686 | ) | ||||||||
Retained earnings |
143,079 | 3,079 | ||||||||||
Accumulated other comprehensive loss |
(41,504 | ) | (41,504 | ) | ||||||||
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|
|
|
|
|
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Total stockholders equity |
65,890 | (74,110 | ) | |||||||||
|
|
|
|
|
|
|||||||
Total capitalization |
$ | 654,881 | $ | 649,881 | $ | |||||||
|
|
|
|
|
|
(1) | As Adjusted amount does not reflect the payment of fees and expenses related to the Additional Notes Offering or any issue premium associated with the 12.00% Senior Secured Notes due 2022. |
(2) | Each $1.00 of increase (decrease) in the public offering price per share would increase (decrease) our total stockholders equity and total capitalization by $ million. |
(3) | As Adjusted amount does not reflect any issue premium associated with the 12.00% Senior Secured Notes due 2022. |
(4) | The pro forma information regarding our common stock takes into account a for split of our common stock and the filing of our amended and restated certificate of incorporation, each to occur immediately prior to the closing of this offering. |
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If you invest in our common stock in this offering, your interest will be diluted to the extent of the difference between the initial public offering price per share and the net tangible book value per share of our common stock immediately after this offering. Net tangible book value per share is determined by dividing our total tangible assets less total liabilities by the total number of shares of common stock outstanding as of September 30, 2017.
Our net tangible book value as of September 30, 2017 was a deficit of $112.8 million, or $ per share of common stock. After giving effect to the sale by us of shares of common stock in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page of this prospectus, and after deducting estimated underwriting discounts and estimated offering expenses, our net tangible book value as of September 30, 2017 would have been approximately $ million, or approximately $ per share. This amount represents an immediate increase in net tangible book value of $ per share to our existing stockholders and an immediate dilution in net tangible book value of approximately $ per share to new investors purchasing shares of common stock in this offering at the assumed initial public offering price.
The following table illustrates this per share dilution:
Assumed initial public offering price per share |
$ | |||||||
Net tangible book value per share as of September 30, 2017 |
$ | |||||||
Increase in net tangible book value per share attributable to new investors in this offering |
$ | |||||||
Net tangible book value per share after this offering |
$ | |||||||
|
|
|||||||
Dilution per share to new investors |
$ | |||||||
|
|
Each $1.00 increase or decrease in the assumed initial public offering price of $ per share would increase or decrease our net tangible book value after the offering by approximately $ million, or approximately $ per share, and the dilution per share to investors participating in this offering by approximately $ per share, assuming that the number of shares offered by us, as set forth on the cover page of this prospectus, remains the same.
The following table sets forth as of September 30, 2017 the number of shares of common stock purchased from us, the total consideration paid by or received from existing stockholders and the weighted-average price per share paid by existing stockholders and by investors purchasing shares of our common stock in this offering at an assumed initial public offering price of $ per share, which is the midpoint of the price range set forth on the cover page on this prospectus, before deducting estimated underwriting discounts and commissions and estimated offering expenses.
Shares Purchased |
Total
Consideration |
Average
Price |
||||||||||||||||||
Number | Percent | Amount | Percent | Per Share | ||||||||||||||||
Existing stockholders |
% | $ | % | $ | ||||||||||||||||
New investors |
||||||||||||||||||||
|
|
|
|
|
|
|
|
|||||||||||||
Total |
100 | % | $ | 100 | % | $ | ||||||||||||||
|
|
|
|
|
|
|
|
A $1.00 increase or decrease in the assumed initial public offering price of $ per share, the midpoint of the price range set forth on the cover page of this prospectus, would increase or decrease total consideration paid to us by new investors and total consideration paid to us by all stockholders by $ million, assuming the number of shares in this offering, as shown on the cover page of this prospectus, remains the same.
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If the underwriters fully exercise their option to purchase additional shares, the percentage of shares of common stock held by existing shareholders would decrease to % of our total shares outstanding after this offering, and the number of shares held by new investors would increase to % of the total number of our shares outstanding after this offering.
The above discussion and tables are based on shares of common stock outstanding as of September 30, 2017 after giving effect to a for split of our common stock to occur immediately prior to the completion of this offering, and exclude:
| shares of our common stock issuable upon the exercise of options outstanding as of , 2017 at a weighted average price of $ per share; |
| shares of our common stock reserved, in the aggregate, for issuance pursuant to our 2017 Incentive Plan and our 2010 Equity Incentive Plan as of , 2017, as well as any additional automatic increases in the number of shares of our common stock reserved for future issuance under these plans; and |
| shares of our common stock reserved for issuance pursuant to our 2017 Employee Stock Purchase Plan as of , 2017, as well as any additional automatic increases in the number of shares of our common stock reserved for future issuance under this plan. |
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SELECTED CONSOLIDATED FINANCIAL DATA
Set forth below is our selected consolidated financial data as of and for the periods indicated. We have derived the selected consolidated financial data as of and for the years ended December 31, 2016 and 2015 from our audited consolidated financial statements and the accompanying notes thereto included elsewhere in this prospectus. We have derived the selected consolidated financial data as of and for the nine month periods ended September 30, 2017 and 2016 from our unaudited consolidated financial statements that are included elsewhere in this prospectus and that, in our opinion, include all adjustments, consisting of normal, recurring adjustments, necessary for the fair presentation of such information. Our historical operating results are not necessarily indicative of results we may expect or achieve in any future period. Our results for the nine months ended September 30, 2017 are not necessarily indicative of results we may achieve during a full year.
The following information is only a summary and may not be complete. Accordingly, you should read these selected consolidated financial data in conjunction with the sections entitled Use of Proceeds, Capitalization, Managements Discussion and Analysis of Financial Condition and Results of Operations and our audited and unaudited consolidated financial statements and the notes thereto contained elsewhere in this prospectus.
(in thousands, except per share data) |
Nine Months Ended
September 30, (unaudited) |
Year Ended
December 31, |
||||||||||||||
2017 | 2016 | 2016 | 2015 | |||||||||||||
Consolidated Statements of Income Data: |
||||||||||||||||
Revenue |
$ | 696,643 | $ | 609,692 | $ | 828,596 | $ | 813,131 | ||||||||
Provision for losses |
226,523 | 177,756 | 258,289 | 281,210 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net revenue |
470,120 | 431,936 | 570,307 | 531,921 | ||||||||||||
Cost of providing services |
||||||||||||||||
Salaries and benefits |
79,554 | 79,359 | 104,541 | 107,059 | ||||||||||||
Occupancy |
41,421 | 40,368 | 54,509 | 53,288 | ||||||||||||
Office |
15,519 | 14,294 | 20,463 | 19,929 | ||||||||||||
Other costs of providing services |
40,954 | 39,385 | 53,617 | 47,380 | ||||||||||||
Advertising |
35,599 | 28,925 | 43,921 | 65,664 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total cost of providing services |
213,047 | 202,331 | 277,051 | 293,320 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross margin |
257,073 | 229,605 | 293,256 | 238,601 | ||||||||||||
Operating (income) expense |
||||||||||||||||
Corporate and district |
103,605 | 95,109 | 125,119 | 129,046 | ||||||||||||
Interest expense |
60,694 | 48,179 | 64,334 | 65,020 | ||||||||||||
Loss (gain) on extinguishment of debt |
12,458 | (6,991 | ) | (6,991 | ) | | ||||||||||
Restructuring costs |
7,393 | 2,967 | 3,618 | 4,291 | ||||||||||||
Goodwill and intangible asset impairment charges |
| | | 2,882 | ||||||||||||
Other (income)/expense |
192 | (559 | ) | (845 | ) | 1,488 | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expense |
184,342 | 138,705 | 185,235 | 202,727 | ||||||||||||
Net income before taxes |
72,731 | 90,900 | 108,021 | 35,874 | ||||||||||||
Provision for income tax expense |
29,988 | 35,041 | 42,577 | 18,105 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 42,743 | $ | 55,859 | $ | 65,444 | $ | 17,769 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Basic earnings per share |
$ | 40.59 | $ | 53.05 | $ | 62.15 | $ | 16.87 | ||||||||
Diluted earnings per share |
$ | 39.50 | $ | 52.01 | $ | 60.71 | $ | 16.45 | ||||||||
Non-GAAP Statement of Operations Data and Other Operating Data (unaudited): |
||||||||||||||||
Adjusted Earnings(1) |
$ | 59,372 | $ | 55,688 | $ | 66,411 | $ | 24,656 | ||||||||
EBITDA(2) |
$ | 147,545 | $ | 153,323 | $ | 191,260 | $ | 120,006 |
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(in thousands, except per share data) |
Nine Months Ended
September 30, (unaudited) |
Year Ended
December 31, |
||||||||||||||
2017 | 2016 | 2016 | 2015 | |||||||||||||
Adjusted EBITDA(3) |
$ | 173,257 | $ | 150,260 | $ | 189,361 | $ | 130,876 | ||||||||
Adjusted EBITDA Margin(4) |
24.9 | % | 24.6 | % | 22.9 | % | 16.1 | % | ||||||||
Gross Margin Percentage(5) |
36.9 | % | 37.7 | % | 35.4 | % | 29.3 | % | ||||||||
Number of stores (at period end) |
405 | 420 | 420 | 420 | ||||||||||||
Selected Balance Sheet Data (at period end) |
||||||||||||||||
Cash |
$ | 95,545 | $ | 175,418 | $ | 193,525 | $ | 100,561 | ||||||||
Gross loans receivable |
$ | 393,423 | $ | 244,602 | $ | 286,196 | $ | 252,180 | ||||||||
Less: allowance for loan losses |
(71,271 | ) | (33,302 | ) | (39,192 | ) | (32,948 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Loans receivable, net |
$ | 322,152 | $ | 211,300 | $ | 247,004 | $ | 219,232 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Total assets |
$ | 762,139 | $ | 721,119 | $ | 780,798 | $ | 666,017 | ||||||||
Total liabilities (including debt) |
$ | 696,249 | $ | 682,716 | $ | 739,943 | $ | 685,399 | ||||||||
Total stockholders equity |
$ | 65,890 | $ | 38,403 | $ | 40,855 | $ | (19,382 | ) |
(1) | We define Adjusted Earnings as net income plus or minus certain non-cash or other adjusting items. We provide Adjusted Earnings in this prospectus because our management finds its useful in evaluating the performance and underlying operations of our business. We provide a detailed description of Adjusted Earnings and how we use it, including a reconciliation of Adjusted Earnings to net income, under Managements Discussion and Analysis of Financial Condition and Results of OperationsSupplemental Non-GAAP Financial Information. |
(2) | We define EBITDA as earnings before interest, income taxes, depreciation and amortization. We provide EBITDA in this prospectus because our management finds it useful in evaluating the performance and underlying operations of our business. We provide a detailed description of EBITDA and how we use it, along with a reconciliation of EBITDA to net income, under Managements Discussion and Analysis of Financial Condition and Results of OperationsSupplemental Non-GAAP Financial Information. |
(3) | We define Adjusted EBITDA as earnings before interest, income taxes, depreciation and amortization, plus or minus certain non-cash or other adjusting items. We provide Adjusted EBITDA in this prospectus because our management finds it useful in evaluating the performance and underlying operations of our business. We provide a detailed description of Adjusted EBITDA and how we use it, along with a reconciliation of Adjusted EBITDA to net income, under Managements Discussion and Analysis of Financial Condition and Results of OperationsSupplemental Non-GAAP Financial Information. |
(4) | Calculated as Adjusted EBITDA as a percentage of revenue. |
(5) | Calculated as Gross Margin as a percentage of revenue. |
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MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
You should read the following discussion and analysis in conjunction with the Selected Consolidated Financial Data and our consolidated financial statements and the related notes thereto included elsewhere in this prospectus. In addition to historical information, this discussion contains forward-looking statements that involve risks, uncertainties and assumptions that could cause actual results to differ materially from managements expectations. Factors that could cause such differences are discussed in the sections entitled Special Note Regarding Forward-Looking Statements and Risk Factors. We undertake no obligation to update any forward-looking statements or other statements we may make in the following discussion or elsewhere in this document even though these statements may be affected by events or circumstances occurring after the forward-looking statements or other statements were made. Therefore, no reader of this document should rely on these statements being current as of any time other than the date of this prospectus. See Special Note Regarding Forward-Looking Statements.
Overview
We are a growth-oriented, technology-enabled, highly-diversified consumer finance company serving a wide range of underbanked consumers in the United States, Canada and the United Kingdom and are a market leader in our industry based on revenues. We believe that we have the only true omni-channel customer acquisition, onboarding and servicing platform in our industry that is integrated across store, online, mobile and contact center touchpoints. Our IT platform, which we refer to as the Curo Platform, seamlessly integrates loan underwriting, scoring, servicing, collections, regulatory compliance and reporting activities into a single, centralized system. We use advanced risk analytics powered by proprietary algorithms and over 15 years of loan performance data to efficiently and effectively score our customers loan applications. Since 2010, we have extended $13.9 billion in total credit across approximately 36.5 million total loans, and our revenue of $828.6 million in 2016 represents a 26.3% compound annual growth rate, or CAGR, over the same time period.
We operate in the United States under two principal brands, Speedy Cash and Rapid Cash, and launched our new brand Avio Credit in the United States in the second quarter of 2017. In the United Kingdom we operate online as Wage Day Advance and, prior to their closure in the third quarter of 2017, our stores were branded Speedy Cash. In Canada our stores are branded Cash Money and we offer LendDirect installment loans online. As of September 30, 2017, our store network consisted of 405 locations across 14 U.S. states and seven Canadian provinces. As of September 30, 2017, we offered our online services in 26 U.S. states, five Canadian provinces, and the United Kingdom.
Company History
The CURO business was founded in 1997 to meet the growing needs of consumers looking for access to credit. The Company set out to offer a variety of convenient, easily-accessible financial and loan services and over its 20 years of operations, expanded across the United States, Canada and the United Kingdom.
CURO Financial Technologies Corp., or CFTC (then known as Speedy Cash Holdings Corp.), was incorporated in Delaware on July 16, 2008. On September 10, 2008, our founders sold or otherwise contributed all of the outstanding equity of the various operating entities that comprised the CURO business to a wholly-owned subsidiary of CFTC in connection with an investment in CFTC by Friedman Fleischer & Lowe Capital Partners II, L.P. and its affiliated funds, or FFL Partners. CURO Group Holdings Corp. (then known as Speedy Group Holdings Corp.) was incorporated in Delaware on February 7, 2013 as the parent company of CFTC. On May 11, 2016, we changed the name of Speedy Group Holdings Corp. to CURO Group Holdings Corp. We similarly changed the names of some of its subsidiaries.
In May 2011, we completed the acquisition of Cash Money Group, Inc., a Canadian entity, for approximately $104.5 million.
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In August 2012, we completed the acquisition of The Money Store, L.P., a Texas limited partnership which operated as The Money Box ® Check Cashing for approximately $26.1 million.
In February 2013, we completed the acquisition of Wage Day Advance Limited, a United Kingdom entity, for approximately $80.9 million. We subsequently effected a corporate name change of Wage Day Advance Limited to CURO Transatlantic Limited, although we still operate online in the United Kingdom as Wage Day Advance.
In October 2015, we opened a state-of-the-art fintech office in Chicago to continue to attract and retain talented IT development and data science professionals. As of September 30, 2017, this office was staffed with 24 professionals.
In March 2016, we launched LendDirect, an online Installment Loan brand in Alberta, Canada. These loans are now offered in four provinces.
In June 2017, we launched Avio Credit, an online Installment Loan brand in the U.S. market. These loans are currently available in California, Missouri, South Carolina and Wisconsin.
Recent Developments
Additional Notes Offering and Dividend
On October 27, 2017, CFTC agreed to sell $135 million principal amount of additional 12.00% Senior Secured Notes due 2022 in a private offering exempt from the registration requirements of the Securities Act, or the Additional Notes Offering. The proceeds from the Additional Notes Offering will be used, together with available cash, to (i) pay a cash dividend, or the Proposed Dividend, in an amount not to exceed $140 million, to CFTCs sole stockholder, the Company, and ultimately our stockholders and (ii) pay fees, expenses, premiums and accrued interest in connection with the Additional Notes Offering. CFTC sought the consent of the holders holding a majority in the outstanding principal amount outstanding of the current 12.00% Senior Secured Notes due 2022 to a one-time waiver with respect to the restrictions contained in Section 5.07(a) of the indenture governing the Senior Secured Notes to permit the Proposed Dividend. The offering is expected to be completed on November 2, 2017, subject to the satisfaction or waiver of customary closing conditions.
Senior Secured Revolving Loan Facility
On September 1, 2017, we closed a $25 million Senior Secured Revolving Loan Facility, or the Senior Revolver. The negative covenants of the Senior Revolver generally conform to the related provisions of the Indenture governing the previously issued notes and the notes offered by this prospectus. We believe this facility complements our other financing sources, while providing seasonal short-term liquidity. Under the Senior Revolver, there is $25 million maximum availability, including up to $5 million of standby letters of credit, for a one-year term, renewable for successive terms following annual review. The Senior Revolver accrues interest at the one-month LIBOR (which may not be negative) plus 5.00% per annum and is repayable on demand. The terms of the Senior Revolver require that the outstanding balance be reduced to $0 for at least 30 consecutive days in each calendar year. The Senior Revolver is guaranteed by all of our subsidiaries that guarantee the previously issued notes and the notes offered by this prospectus and is secured by a lien on substantially all of our assets and the guarantor subsidiaries that is senior to the lien securing the previously issued notes and the notes offered by this prospectus. The Senior Revolver was undrawn at September 30, 2017.
U.K. Store Closures
In the third quarter of 2017, the Boards of Directors of the Company and its U.K. subsidiaries approved a plan to close the remaining 13 Speedy Cash branch locations in the United Kingdom. The affected branches
53
closed during the third quarter and our financial results include $7.4 million of related charges primarily for the remaining net cash obligations for store leases, employee redundancy and severance payments ($5.9 million), and the noncash write-off of fixed assets and leasehold improvements ($1.5 million).
Hurricane Harvey Impact
In a good-faith effort to help our store and online customers in the affected areas of Houston, Corpus Christi and the surrounding areas we waived loan payments that were due during the period from August 25, 2017 to September 8, 2017. This affected approximately 22,500 customers and amounted to approximately $3.0 million in total loan payments. The waived payments and losses on secured installment loans in the market increased our provision for losses by approximately $3.3 million. Property damage to our 18 stores in the affected areas was not material. Our stores in the Texas markets resumed normal operations in September.
Products and Services
We designed our products and customer journey to be consumer-friendly, accessible and easy to understand. Below is an outline of our loan products as of September 30, 2017.
Installment | ||||||||
Unsecured | Secured | Open-End | Single-Pay | |||||
Channel |
Online and in-store: 15
U.S. states, Canada and the United Kingdom(1) |
Online and
in-store:
7
U.S. states |
Online: KS, TN, ID,
VA, UT, DE and
RI.
|
Online and in-store: 12
U.S. states, Canada and the United Kingdom(1) |
||||
Approximate Average Loan Size(2) |
$636 | $1,299 | $463 | $335 | ||||
Duration |
Up to 48 months | Up to 42 months | Revolving/Open-ended | Up to 62 days | ||||
Pricing |
13.2% average
monthly interest rate(3) |
10.6% average
monthly interest rate(3) |
Daily interest rates
ranging from 0.74% to 0.99% |
Fees ranging from $13
to $25 per $100 borrowed. |
(1) | Online only in the United Kingdom. |
(2) | Includes CSO loans. |
(3) | Weighted average of the contractual interest rates for the portfolio as of September 30, 2017. Excludes CSO fees. |
Unsecured Installment Loans
Unsecured Installment Loans are fixed-term, fully-amortizing loans with a fixed payment amount due each period during the term of the loan. Loans are originated and owned by us or third-party lenders pursuant to credit services organization and credit access business statutes, which we refer to as our CSO programs. For CSO programs, we arrange and guarantee the loans. Payments are due bi-weekly or monthly to match the customers pay cycle. Customers may prepay without penalty or fees. Unsecured Installment Loan terms are governed by enabling state legislation in the United States, provincial and federal legislation in Canada and national regulation in the United Kingdom. Unsecured Installment Loans comprised 49.3% and 40.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. We believe that the flexible terms and lower payments associated with Installment Loans significantly expand our addressable market by allowing us to serve a broader range of customers with a variety of credit needs.
Secured Installment Loans
Secured Installment Loans are similar to Unsecured Installment Loans but are also secured by a vehicle title. These loans are originated and owned by us or by third-party lenders through our CSO programs. For these loans
54
the customer provides clear title or security interest in the vehicle as collateral. The customer receives the benefit of immediate cash but retains possession of the vehicle while the loan is outstanding. The loan requires periodic payments of principal and interest with a fixed payment amount due each period during the term of the loan. Payments are due bi-weekly or monthly to match the customers pay cycle. Customers may prepay without penalty or fees. Secured Installment Loan terms are governed by enabling state legislation in the United States. Secured Installment Loans comprised 10.5% and 9.8% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
Open-End Loans
Open-End Loans are a line of credit for the customer without a specified maturity date. Customers may draw against their line of credit, repay with minimum, partial or full payment and redraw as needed. We report and earn interest on the outstanding loan balances drawn by the customer against their approved credit limit. Customers may prepay without penalty or fees. Typically, customers do not draw the full amount of their credit limit. Loan terms are governed by enabling state legislation in the United States. Unsecured Open-End Loans comprised 6.6% and 7.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. Secured Open-End Loans are offered as part of our product mix in states with enabling legislation and accounted for approximately 0.9% and 1.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
Single-Pay Loans
Single-Pay Loans are generally unsecured short-term, small-denomination loans whereby a customer receives cash in exchange for a post-dated personal check or a pre-authorized debit from the customers bank account. These loans are originated and owned by us or by third-party lenders through our CSO programs. We agree to defer deposit of the check or debiting of the customers bank account until the loan due date which typically falls on the customers next pay date. Single-Pay Loans are governed by enabling state legislation in the United States, federal and provincial regulations in Canada and national regulation in the United Kingdom Single-Pay Loans comprised 28.4% and 37.8% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
Ancillary Products
We also provide a number of ancillary financial products including check cashing, proprietary reloadable prepaid debit cards (Opt+), money transfer services, gold buying, credit protection insurance in the Canadian market and retail installment sales. Ancillary products comprised 4.3% and 4.4% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
CSO Programs
Through our CSO programs, we act as a credit services organization/credit access business on behalf of customers in accordance with applicable state laws. We currently offer loans through CSO programs in stores and online in the state of Texas and online in the state of Ohio. In Texas we offer Unsecured Installment Loans and Secured Installment Loans with a maximum term of 180 days. In Ohio we offer an Unsecured Installment Loan product with a maximum term of 18 months. As a CSO we earn revenue by charging the customer a fee (the CSO fee) for arranging an unrelated third-party to make a loan to that customer. When a customer executes an agreement with us under our CSO programs, we agree, for a CSO fee payable to us by the customer, to provide certain services to the customer, one of which is to guarantee the customers obligation to repay the loan the customer receives from the third-party lender. CSO fees are calculated based on the amount of the customers loan. For CSO loans, each lender is responsible for providing the criteria by which the customers
55
application is underwritten and, if approved, determining the amount of the customer loan. We in turn are responsible for assessing whether or not we will guarantee the loan. This guarantee represents an obligation to purchase specific loans if they go into default.
As of September 30, 2017, the maximum amount payable under all such guarantees was $59.1 million, compared to $59.6 million at December 31, 2016. Should we be required to pay any portion of the total amount of the loans we have guaranteed, we will attempt to recover the amount we pay from the customers. We hold no collateral in respect of the guarantees.
These guarantees are performance guarantees as defined in ASC Topic 460. Performance guarantees are initially accounted for pursuant to ASC Topic 460 and recognized at fair value, and subsequently pursuant to ASC Topic 450 as contingent liabilities when we incur losses as the guarantor. The initial measurement of the guarantee liability is recorded at fair value and reported in the Credit services organization guarantee liability line in our Consolidated Balance Sheets. The initial fair value of the guarantee is the price we would pay to a third party market participant to assume the guarantee liability. There is no active market for transferring the guarantee liability. Accordingly, we determine the initial fair value of the guarantee by estimating the expected losses on the guaranteed loans. The expected losses on the guaranteed loans are estimated by assessing the nature of the loan products, the credit worthiness of the borrowers in the customer base, our historical loan default history for similar loans, industry loan default history, and historical collection rates on similar products, current default trends, past-due account roll rates, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. We review the factors that support estimates of expected losses and the guarantee liability monthly. In addition, because the majority of the underlying loan customers make bi-weekly payments, loan-pool payment performance is evaluated more frequently than monthly.
Our guarantee liability was $16.9 million and $17.1 million at September 30, 2017 and December 31, 2016, respectively. This liability represents the unamortized portion of the guarantee obligation required to be recognized at inception of the performance guarantee in accordance with ASC Topic 460 and a contingent liability for those performance guarantees where it is probable that we will be required to purchase the guaranteed loan from the lender in accordance with ASC Topic 450.
CSO fees are calculated based on the amount of the customers loan. We comply with the applicable jurisdictions Credit Services Organization Act or a similar statute. These laws generally define the services that we can provide to consumers and require us to provide a contract to the customer outlining our services and the cost of those services to the customer. For services we provide under our CSO programs, we receive payments from customers on their scheduled loan repayment due dates. The CSO fee is earned ratably over the term of the loan as the customers make payments. If a loan is paid off early, no additional CSO fees are due or collected. The maximum CSO loan term is 180 days and 18 months in Texas and Ohio, respectively. During the year ended December 31, 2016 and the nine months ended September 30, 2017, approximately 53.2% and 52.9%, respectively, of Unsecured Installment Loans, and 62.5% and 52.7%, respectively, of Secured Installment Loans originated under CSO programs were paid off prior to the original maturity date.
Since CSO loans are made by a third party lender, we do not include them in our Consolidated Balance Sheets as loans receivable. CSO fees receivable are included in Prepaid expense and other in our Consolidated Balance Sheets. We receive payments from customers for these fees on their scheduled loan repayment due dates.
The majority of revenue generated through our CSO programs was for Unsecured Installment Loans, which comprised 96.2% and 91.6% of total CSO revenue for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
56
Total revenue generated through our CSO programs comprised 26.5% and 26.1% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
Our revenue diversification, including CSO fees, by product for the periods indicated, with percentages rounded up to the nearest whole digit:
Year Ended December 31, 2016 $829 million |
Nine Months Ended September 30, 2017 $697 million |
|
|
|
For the year ended December 31, 2016 and the period ending September 30, 2017, revenue generated through our online channel was 33% and 37%, respectively, of consolidated revenue.
Components of Our Results of Operations
Revenue
We offer a variety of loan products including Installment, Open-End and Single-Pay Loans. Revenue in our consolidated statements of income includes: interest income, finance charges, CSO fees, late fees and non-sufficient funds fees as permitted by applicable laws and pursuant to the agreement with the customer. Product offerings differ by jurisdiction and are governed by the laws in each separate jurisdiction.
Installment Loans are fully amortizing loans with a fixed payment amount due each period during the term of the loan. We record revenue from Installment Loans on a simple-interest basis. Accrued interest and fees are included in gross loans receivable in the Consolidated Balance Sheets.
Open-End Loans are a revolving line-of-credit with no defined loan term. We record revenue from Open-End Loans on a simple-interest basis. Accrued interest and fees are included in gross loans receivable in the Consolidated Balance Sheets.
Single-Pay Loans are primarily payday loans. Revenues from Single-Pay loan products are recognized each period on a constant-yield basis ratably over the term of each loan. We defer recognition of unearned fees based on the remaining term of the loan at the end of each reporting period.
We also provide a number of ancillary financial products including check cashing, proprietary reloadable prepaid debit cards (Opt+), credit protection insurance in the Canadian market, gold buying, retail installment sales and money transfer services.
Provision for Losses
We calculate provision for losses based on evaluation of the historical and expected cumulative net losses inherent in the underlying loan portfolios, by vintage, and several other quantitative and qualitative factors. We
57
apply the resulting loss provision rate to our loan originations to determine the provision for losses. Accordingly, at the time we originate a loan, we recognize a loss on a portion of the loan balance based upon the applicable loss provision rate. We would then recognize any revenue in connection with that loan over the life of the loan, as described above. We may also record additional provision for losses for owned loans in connection with the periodic assessment of the adequacy of the Allowance for loan losses.
Q1 Loss Recognition Change
Effective January 1, 2017, we modified the timeframe in which Installment Loans are charged-off and made related refinements to our loss provisioning methodology. Prior to January 1, 2017, we deemed all loans uncollectible and charged-off when a customer missed a scheduled payment and the loan was considered past-due. Because of the Companys continuing shift from Single-Pay to Installment Loan products and our analysis of payment patterns on early-stage versus late-stage delinquencies, we revised our estimates and now consider Installment Loans uncollectible when the loan has been contractually past-due for 90 consecutive days. Consequently, past-due Installment Loans and related accrued interest remain in loans receivable, with disclosure of past-due balances, for 90 days before being charged off against the allowance for loan losses. All recoveries on charged-off loans are credited to the allowance for loan losses. We evaluate the adequacy of the allowance for loan losses compared to the related gross loans receivable balances that include accrued interest.
In the income statement, the provision for losses for Installment Loans is based on assessment of the cumulative net losses inherent in the underlying loan portfolios, by vintage, and several other quantitative and qualitative factors. The resulting loss provision rate is applied to loan originations to determine the provision for losses. In addition to improving estimated collectability and loss recognition for Installment Loans, we also believe these refinements result in a loss provisioning methodology that is better aligned with industry comparisons and practices.
The aforementioned change was treated as a change in accounting estimate for accounting purposes and applied prospectively beginning January 1, 2017, which we refer to throughout this prospectus as the Q1 Loss Recognition Change.
The change affects comparability to prior periods as follows:
| Gross Combined Loans Receivablebalances in 2017 include Installment Loans that are up to 90 days past-due with related accrued interest, while balances in prior periods do not include these loans. |
| Revenuesfor the nine months ended September 30, 2017, revenues include accrued interest on past-due loan balances, while revenues in prior periods do not include these amounts. |
| Provision for Lossesprospectively, loans charged off on day 91 include accrued interest. Thus, provision rates in 2017 have been adjusted to account for both principal and accrued interest. Additionally, because loss provision rates are applied to originations while charge-offs and recoveries are applied to the allowance for loan losses, provisioning is less affected by seasonality for the first quarter income tax refunds in the United States, which increases recoveries of delinquent balances. |
For a full discussion of the change, refer to Note 1, Summary of Significant Accounting Policies and Nature of Operations in our Notes to Consolidated Interim Financial Statements included elsewhere in this prospectus.
Cost of Providing Services
Salaries and Benefits
Salaries and benefits include personnel-related costs for our store operations, including salaries, benefits and bonuses and are driven by the number of employees.
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Occupancy
Occupancy and equipment includes rent expense for our leased facilities, as well as depreciation, maintenance, insurance, and utility expense.
Office
Office includes expenses related to software, computer hardware, bank service charges, credit scoring charges and other office supplies.
Other Costs of Providing Services
Our other costs of providing services includes expenses related to operations such as processing fees, collections expense, security expense, taxes, repairs and professional fees.
Advertising
Advertising includes costs associated with attracting, retaining and/or reactivating customers as well as creating awareness for the brands we promote. Creative, web and print design capabilities exist within the Company and are rarely outsourced. The use of third-party agencies is limited to mass-media production and placement. Advertising expense also includes costs for all marketing activities including paid search, advertising on social networking sites, affiliate programs, direct response television, radio air time and direct mail.
All advertising costs are expensed as incurred. Cost-per-funded loan, or CPF, is a key metric for measuring the effectiveness and efficiency of our advertising spend. CPF is the amount of direct advertising and promotional costs during a period divided by the number of new customer loans originated during the period. New loans to existing or returning customers are not included in the denominator of CPF because we believe little or no incremental cost is incurred to make loans to existing customers or returning customers
Operating Expense
Corporate, District and Other Expenses
Corporate, district and other expenses include costs such as salaries and benefits associated with our corporate and district-level employees, as well as other corporate-related costs such as rent, insurance, professional fees, utilities, travel and entertainment expenses and depreciation expense.
Interest Expense
Interest expense primarily includes interest related to our Notes and our Non-Recourse U.S. SPV Facility.
Other Expenses
Other (income) and expense includes the foreign currency impact to our intercompany balances, gains or losses on foreign currency exchanges and disposals of fixed assets and other miscellaneous income and expense amounts.
Discussion of Revenue by Product and Segment and Related Loan Portfolio Performance
Revenue by Product
Unsecured and Secured Installment revenue includes interest income, CSO fees, and non-sufficient-funds or returned-items fees on late or defaulted payments on past-due loans (to which we refer collectively in this prospectus as late fees). Late fees comprise less than one-half of one percent of Installment revenues.
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Open-End revenues include interest income on outstanding revolving balances and other usage or maintenance fees as permitted by underlying statutes.
Single-Pay revenues represent deferred presentment or other fees as defined by the underlying state, provincial or national regulations.
The following table summarizes revenue by product, including CSO fees, for the periods indicated:
Nine Months Ended September 30, 2017 | Nine Months Ended September 30, 2016 | |||||||||||||||||||||||||||||||
(in thousands) |
United
States |
Canada |
United
Kingdom |
Total |
United
States |
Canada |
United
Kingdom |
Total | ||||||||||||||||||||||||
Unsecured Installment |
$ | 311,884 | $ | 13,244 | $ | 18,237 | $ | 343,365 | $ | 229,358 | $ | 328 | $ | 6,713 | $ | 236,399 | ||||||||||||||||
Secured Installment |
73,249 | | | 73,249 | 60,346 | | | 60,346 | ||||||||||||||||||||||||
Open-End |
52,342 | | | 52,342 | 49,862 | | 3 | 49,865 | ||||||||||||||||||||||||
Single-Pay |
78,961 | 108,676 | 10,289 | 197,926 | 86,300 | 130,862 | 18,481 | 235,643 | ||||||||||||||||||||||||
Ancillary |
15,476 | 13,899 | 386 | 29,761 | 17,241 | 9,662 | 536 | 27,439 | ||||||||||||||||||||||||
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|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total revenue |
$ | 531,912 | $ | 135,819 | $ | 28,912 | $ | 696,643 | $ | 443,107 | $ | 140,852 | $ | 25,733 | $ | 609,692 | ||||||||||||||||
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During the nine months ended September 30, 2017, total lending revenue (excluding revenues from ancillary products) grew $84.6 million, or 14.5%, to $666.9 million, compared to the prior year period, predominantly driven by growth in Secured and Unsecured Installment loan revenue. Unsecured Installment Loan revenues rose 45.2% on related origination increase of 60.8%. Secured Installment revenues increased $12.9 million, or 21.4%, on related origination increase of 43.5%. Single-Pay revenues were affected primarily by regulatory changes in Canada (rate changes in Ontario and British Columbia and product changes in Alberta), but U.S. and U.K. Single-Pay revenues also decreased 8.5% and 44.3%, respectively, because of continued mix shift from Single-Pay to other loan products. Ancillary revenues increased 8.5% versus the same period a year ago primarily due to insurance revenue related to our Canadian installment product, partially offset by a decrease in check cashing fees. U.K. revenue increased by $3.2 million, or 12.4% ($5.8 million or 22.5% on a constant currency basis).
Year Ended December 31, 2016 | Year Ended December 31, 2015 | |||||||||||||||||||||||||||||||
(in thousands) |
United
States |
Canada |
United
Kingdom |
Total |
United
States |
Canada |
United
Kingdom |
Total | ||||||||||||||||||||||||
Unsecured Installment |
$ | 318,460 | $ | 1,143 | $ | 11,110 | $ | 330,713 | $ | 295,007 | $ | 322 | $ | 19,054 | $ | 314,383 | ||||||||||||||||
Secured Installment |
81,453 | | | 81,453 | 86,307 | | 18 | 86,325 | ||||||||||||||||||||||||
Open-End |
66,945 | | 3 | 66,948 | 51,304 | | 7 | 51,311 | ||||||||||||||||||||||||
Single-Pay |
117,609 | 173,779 | 21,888 | 313,276 | 116,714 | 170,852 | 34,031 | 321,597 | ||||||||||||||||||||||||
Ancillary |
22,332 | 13,155 | 719 | 36,206 | 24,331 | 13,686 | 1,498 | 39,515 | ||||||||||||||||||||||||
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Total revenue |
$ | 606,799 | $ | 188,077 | $ | 33,720 | $ | 828,596 | $ | 573,663 | $ | 184,860 | $ | 54,608 | $ | 813,131 | ||||||||||||||||
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Total lending revenue (excluding revenues from ancillary products) increased $18.8 million, or 2.4%, compared to the prior year, driven by growth in Installment and Open-End Loans. Unsecured Installment revenues rose 5.2% on related gross combined loan receivables growth of 29.0%, led by 7.9% growth in the United States (primarily in Texas, California and Missouri). U.K. Unsecured Installment revenues declined 41.7% because we discontinued a longer-term Installment Loan product in late 2015 due to regulatory changes. Secured Installment revenues decreased 5.6% mostly driven by competitive pressures in Nevada and Arizona. Open-End revenues grew 30.5% year-over-year primarily because in Kansas and Tennessee we replaced Single-pay products with Open-End products. Single-Pay revenues declined 2.6%. In the United States, the decline was primarily driven by the aforementioned changes in Kansas and in Tennessee. Ancillary revenues were down 8.4% year-over-year primarily because secular declines in check usage continue to affect check-cashing revenues and we experienced tighter margins on foreign currency exchange. U.K. revenue comparisons
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are also affected meaningfully by a weaker pound. On a constant-currency basis, U.K. revenue declined $16.5 million, or 30.2%, compared to the prior year.
Loan Volume and Portfolio Performance Analysis
We consider first-pay defaults (the number of customers that default on their first payment, or FPD) to be an early leading indicator of customer credit performance. FPD levels are dependent upon underwriting and scoring effectiveness, strategic or tactical management decisions to tighten or expand customer credit availability within scoring bands, seasonality, product terms and structure, origination channel and geography. Following is a recap by channel of origination for the United States and Canada:
| U.S. Online FPD has ranged from 20.1% in the second quarter of 2015 to 13.2% in the first quarter of 2017. FPD for the nine months ended September 30, 2017, 2016 and 2015 has averaged 14.9%, 16.9% and 18.4%, respectively. During 2015, FPD was affected by elevated levels of new customer investment. New customers have higher FPD rates than returning or existing customers. In periods such as the second and third quarters of 2015 when we increased new customer acquisition spend to take advantage of online market disruptions, the percentage of new-customer volume to total-customer volume increases as does FPD. U.S. Online FPD rates were lower in 2016 because the percentage of new customers to total volume decreased year-over-year and the data from the high volume of new customers acquired in 2015 allowed us to improve our scoring models. Through the nine months ended September 30, 2017, we have increased customer acquisition spend versus the same periods in 2016 and have acquired more online customers period-over-period, but FPD has improved primarily because of improved underwriting and scoring. |
| U.S. Store FPD averaged 14.0%, 14.7% and 15.4% for the nine months ended September 30, 2017, 2016, 2015, respectively. New customers as a percentage of total customers has been more stable than U.S. online mix so the improving trends are primarily due to improved underwriting and scoring and product and geographical mix shifts. |
| For Canada, online volume is relatively low and FPD rates are sensitive to product changes and the launch of our LendDirect online Installment product in early-2016. Canadian online FPD rates have trended from an average of 12.8%, 14.9% and 14.3% for the nine months ended September 30, 2017, 2016 and 2015, respectively. |
| Canada Store FPD has remained relatively stable, averaging 7.9%, 8.7% and 9.1%, in the nine months ended September 30, 2017, 2016 and 2015 respectively. Other than Alberta, Canada, store volume is almost entirely Single-Pay Loans for which FPD rates are very stable. |
Cost-per-funded loan, or CPF, is dependent primarily upon marketing channel, seasonality, strategic and tactical objectives for targeted vintage performance, online versus store customer acquisition mix, underwriting and scoring effectiveness and application-to-funded loan conversion rates. Following is a recap of CPF (rounded to the nearest tenth) by country:
| U.S. CPF ranged from $82.40 in the third quarter of 2015 to $33.50 in the first quarter of 2016. CPF for the nine months ended September 30, 2017, 2016 and 2015 has averaged $63.30, $48.20 and $72.90, respectively. CPF for 2015 was affected by the aforementioned high levels of new customer investment, primarily in the online channel. CPF tends to be higher in the online channel because of the relative cost of the marketing channels and lower application-to-funded conversion rates. CPF for 2016 was lower than 2015 because of more stable mix between online and store customer acquisition and improving scoring that resulted in better relative approval rates. CPF in the nine months ended September 30, 2017 has been slightly higher to the same period in 2016 because a higher percentage of new customer volume is online. |
|
Canada CPF ranged from $88.60 in the third quarter of 2017 to $52.80 in the first quarter of 2016. CPF for the nine months ended September 30, 2017, 2016 and 2015 has averaged $73.40, $60.20 and $81.10, respectively. Canada CPF change is due primarily to the same reasons as the U.S. trends described above, |
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but historically has been less sensitive to online versus store mix because online has been a relatively low percentage of total new customer acquisition. |
| U.K. CPF ranged from $125.00 in the third quarter of 2015 to $71.40 in the first quarter of 2017. U.K. CPF for the nine months ended September 30, 2017, 2016 and 2015 has averaged $73.90, $91.70 and $109.70, respectively. U.K. CPF is affected primarily by reformulation of all of our U.K. loan products after 2014 regulatory changes, changes in product terms and mix and rebuilding of the overall executive and marketing and analytics leadership teams and organization. |
We currently have relationships with four unaffiliated third-party lenders. We periodically evaluate the competitive terms of our unaffiliated third-party lender contracts and such evaluation may result transfer of volume and loan balances between lenders. The process does not require significant effort or resources outside the normal course of business and we believe the incremental cost of changing or acquiring new unaffiliated third-party lender relationships to be immaterial.
Unsecured Installment Loans
Unsecured Installment revenue and gross combined loans receivable increased from the prior year quarter due to growth in the United States, primarily in Texas (CSO), California and Ohio (CSO); growth in Canada, primarily in Alberta; and growth in the United Kingdom. Gross combined Unsecured Installment Loan balances (excluding past due loans) grew $79.6 million, or 67.6%, compared to September 30, 2016, on $86.0 million (63.6%) and $212.9 million (60.8%) higher originations during the three and nine months, respectively. Provision expense is higher due to seasonality. Overall provision expense as a percentage of originations is comparable to the same period in prior year.
2017 | 2016 | |||||||||||||||||||
(dollars in thousands, except average loan amount, unaudited) |
Third
Quarter |
Second
Quarter |
First
Quarter |
Fourth
Quarter |
Third
Quarter |
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Unsecured Installment loans: |
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Revenue - Company Owned |
$ | 61,653 | $ | 52,550 | $ | 51,206 | $ | 39,080 | $ | 34,057 | ||||||||||
Provision for losses - Company Owned |
29,079 | 17,845 | 19,309 | 24,557 | 12,523 | |||||||||||||||
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Net revenue - Company Owned |
$ | 32,574 | $ | 34,705 | $ | 31,897 | $ | 14,523 | $ | 21,534 | ||||||||||
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Net charge-offs - Company Owned |
$ | 23,858 | $ | 18,858 | $ | (4,918 | ) | $ | 18,836 | $ | 10,741 | |||||||||
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Revenue - Guaranteed by the Company |
$ | 67,132 | $ | 52,599 | $ | 58,225 | $ | 55,234 | $ | 51,320 | ||||||||||
Provision for losses - Guaranteed by the Company |
36,212 | 23,575 | 19,940 | 22,364 | 26,626 | |||||||||||||||
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Net revenue - Guaranteed by the Company |
$ | 30,920 | $ | 29,024 | $ | 38,285 | $ | 32,870 | $ | 24,694 | ||||||||||
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Net charge-offs - Guaranteed by the Company |
$ | 34,904 | $ | 27,309 | $ | 17,088 | $ | 21,144 | $ | 25,103 | ||||||||||
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Unsecured Installment gross combined loans receivable: |
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Company owned |
$ | 181,831 | $ | 156,075 | $ | 131,386 | $ | 102,090 | $ | 65,746 | ||||||||||
Guaranteed by the Company(1)(2) |
67,438 | 58,289 | 53,978 | 62,360 | 52,079 | |||||||||||||||
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Unsecured Installment gross combined loans receivable(1)(2) |
$ | 249,269 | $ | 214,364 | $ | 185,364 | $ | 164,450 | $ | 117,825 | ||||||||||
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Unsecured Installment Allowance for loan losses(3) |
$ | 46,938 | $ | 41,406 | $ | 42,040 | $ | 17,775 | $ | 12,122 | ||||||||||
Unsecured Installment CSO guarantee liability(3) |
$ | 16,056 | $ | 14,748 | $ | 18,482 | $ | 15,630 | $ | 14,410 | ||||||||||
Unsecured Installment Allowance for loan losses as a percentage of Unsecured Installment gross loans receivable |
25.8 | % | 26.5 | % | 32.0 | % | 17.4 | % | 18.4 | % | ||||||||||
Unsecured Installment CSO guarantee liability as a percentage of Unsecured Installment gross loans guaranteed by the Company |
23.8 | % | 25.3 | % | 34.2 | % | 25.1 | % | 27.7 | % |
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2017 | 2016 | |||||||||||||||||||
(dollars in thousands, except average loan amount, unaudited) |
Third
Quarter |
Second
Quarter |
First
Quarter |
Fourth
Quarter |
Third
Quarter |
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Unsecured Installment past-due balances: |
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Unsecured Installment gross loans receivable(4) |
$ | 41,353 | $ | 33,534 | $ | 28,913 | | | ||||||||||||
Unsecured Installment gross loans guaranteed by the Company(4) |
$ | 10,462 | $ | 8,204 | $ | 11,196 | | | ||||||||||||
Past-due Unsecured Installment gross loans receivablepercentage(2)(4) |
22.7 | % | 21.5 | % | 22.0 | % | | | ||||||||||||
Past-due Unsecured Installment gross loans guaranteed by the Companypercentage(2)(4) |
15.5 | % | 14.1 | % | 20.7 | % | | | ||||||||||||
Unsecured Installment other information: |
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Originations - Company owned(5) |
$ | 137,618 | $ | 119,636 | $ | 98,691 | $ | 111,412 | $ | 71,801 | ||||||||||
Average loan amount - Company owned |
$ | 730 | $ | 697 | $ | 687 | $ | 646 | $ | 512 | ||||||||||
Originations - Guaranteed by the Company(1)(5) |
$ | 83,680 | $ | 68,338 | $ | 55,112 | $ | 71,858 | $ | 63,472 | ||||||||||
Average loan amount - Guaranteed by the Company |
$ | 526 | $ | 485 | $ | 482 | $ | 478 | $ | 463 | ||||||||||
Unsecured Installment ratios: |
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Provision as a percentage of originations - Company Owned |
21.1 | % | 14.9 | % | 19.6 | % | 22.0 | % | 17.4 | % | ||||||||||
Provision as a percentage of gross loans receivable - Company Owned |
16.0 | % | 11.4 | % | 14.7 | % | 24.1 | % | 19.0 | % | ||||||||||
Provision as a percentage of originations - Guaranteed by the Company |
43.3 | % | 34.5 | % | 36.2 | % | 31.1 | % | 41.9 | % | ||||||||||
Provision as a percentage of gross loans receivable - Guaranteed by the Company |
53.7 | % | 40.4 | % | 36.9 | % | 35.9 | % | 51.1 | % |
(1) | Includes loans originated by third-party lenders through CSO programs, which are not included in our consolidated financial statements. |
(2) | Non-GAAP measure. |
(3) | Allowance for loan losses is reported as a contra-asset reducing gross loans receivable while the CSO guarantee liability is reported as a liability on our Consolidated Balance Sheets. |
(4) | As part of the Q1 Loan Loss Recognition Change past-due receivables remain on our balance sheet until charged off. In all prior periods loans were written-off when a customer missed a scheduled payment. |
(5) | We have revised previously-reported origination statistics to conform to current year methodology. |
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Secured Installment Loans
Secured Installment loan revenue and gross combined loans receivable increased from the prior year quarter due primarily to growth in California and Arizona. Gross combined Secured Installment loan balances (excluding past due loans) increased by $12.9 million, or 21.3%, compared to September 30, 2016, driven by $15.3 million, or 40.9% higher originations during the third quarter of 2017 as compared to the third quarter of 2016. Provision as a percentage of originations increased due to improved collection trends on secured installment loans.
2017 | 2016 | |||||||||||||||||||
(dollars in thousands, except average loan amount, unaudited) |
Third
Quarter |
Second
Quarter |
First
Quarter |
Fourth
Quarter |
Third
Quarter |
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Secured Installment Loans: |
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Revenue |
$ | 26,407 | $ | 23,173 | $ | 23,669 | $ | 21,107 | $ | 19,920 | ||||||||||
Provision for losses |
6,512 | 4,955 | 7,436 | 7,159 | 6,897 | |||||||||||||||
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Net revenue |
$ | 19,895 | $ | 18,218 | $ | 16,233 | $ | 13,948 | $ | 13,023 | ||||||||||
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Net charge-offs |
$ | 11,597 | $ | 6,481 | $ | (2,235 | ) | $ | 6,588 | $ | 5,503 | |||||||||
Secured Installment gross combined loan balances: |
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Company owned |
$ | 84,983 | $ | 76,286 | $ | 67,455 | $ | 63,157 | $ | 56,305 | ||||||||||
Guaranteed by the Company(1)(2) |
3,747 | 3,791 | 3,758 | 4,581 | 4,259 | |||||||||||||||
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Secured Installment gross combined loans receivable(1)(2) |
$ | 88,730 | $ | 80,077 | $ | 71,213 | $ | 67,738 | $ | 60,564 | ||||||||||
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Secured Installment Allowance for loan losses(3) |
$ | 14,111 | $ | 19,196 | $ | 20,270 | $ | 10,737 | $ | 10,135 | ||||||||||
Secured Installment CSO guarantee liability(3) |
$ | 834 | $ | 834 | $ | 1,287 | $ | 1,148 | $ | 1,179 | ||||||||||
Secured Installment Allowance for loan losses as a percentage of Secured Installment gross loans receivable |
16.6 | % | 25.2 | % | 30.0 | % | 17.0 | % | 18.0 | % | ||||||||||
Secured Installment CSO guarantee liability as a percentage of Secured Installment gross loans guaranteed by the Company |
22.3 | % | 22.0 | % | 34.2 | % | 25.1 | % | 27.7 | % | ||||||||||
Secured Installment past-due balances: |
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Secured Installment past-due gross loans receivable(4) |
$ | 14,660 | $ | 12,091 | $ | 9,539 | | | ||||||||||||
Secured Installment past-due gross loans receivable guaranteed by the Company(4) |
605 | 539 | 647 | | | |||||||||||||||
Past-due gross Secured Installment gross loans receivable - percentage(2)(4) |
17.3 | % | 15.8 | % | 14.1 | % | | | ||||||||||||
Past-due gross Secured Installment gross loans receivable guaranteed by the Companypercentage(2)(4) |
16.1 | % | 14.2 | % | 17.2 | % | | | ||||||||||||
Secured Installment other information: |
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Originations(1)(5) |
$ | 52,526 | $ | 45,596 | $ | 37,641 | $ | 43,803 | $ | 37,266 | ||||||||||
Average loan amount(1)(5) |
$ | 1,299 | $ | 1,231 | $ | 1,326 | $ | 1,197 | $ | 1,070 | ||||||||||
Secured Installment ratios: |
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Provision as a percentage of originations |
12.4 | % | 10.9 | % | 19.8 | % | 16.3 | % | 18.5 | % | ||||||||||
Provision as a percentage of gross combined loans receivable |
7.3 | % | 6.2 | % | 10.4 | % | 10.6 | % | 11.4 | % |
(1) | Includes loans originated by third-party lenders through CSO programs, which are not included in our consolidated financial statements. |
(2) | Non-GAAP measure. |
(3) | Allowance for loan losses is reported as a contra-asset reducing gross loans receivable while the CSO guarantee liability is reported as a liability on our Consolidated Balance Sheets. |
64
(4) | As part of the Q1 Loan Loss Recognition Change past-due receivables remain on our balance sheet until charged off. In all prior periods loans were written-off when a customer missed a scheduled payment. |
(5) | We have revised certain previously-reported origination statistics to conform to current year methodology. |
Open-End Loans
Net revenue and provision for losses improved compared to the third quarter of 2016. This was mostly due to receivables growth in the Kansas and Tennessee online markets and the maturation of the Tennessee market, which began offering open-end loans in the third quarter of 2015. Overall, Open-End loan balances increased by $4.5 million, or 16.1%, compared to September 30, 2016.
Net revenue was higher but loss rates were higher sequentially primarily due to seasonality in the first quarter.
2017 | 2016 | |||||||||||||||||||
(dollars in thousands, except average loan amount, unaudited) |
Third
Quarter |
Second
Quarter |
First
Quarter |
Fourth
Quarter |
Third
Quarter |
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Open-End Loans: |
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Revenue |
$ | 18,630 | $ | 15,805 | $ | 17,907 | $ | 17,085 | $ | 16,652 | ||||||||||
Provision for losses |
6,348 | 4,298 | 3,265 | 6,283 | 7,295 | |||||||||||||||
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Net revenue |
$ | 12,282 | $ | 11,507 | $ | 14,642 | $ | 10,802 | $ | 9,357 | ||||||||||
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Net charge-offs |
$ | 5,991 | $ | 4,343 | $ | 3,876 | $ | 6,085 | $ | 7,133 | ||||||||||
Open-End gross combined loan balances: |
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Company owned |
$ | 32,133 | $ | 26,771 | $ | 25,626 | $ | 30,462 | $ | 27,678 | ||||||||||
Allowance for loan losses |
$ | 4,880 | $ | 4,523 | $ | 4,572 | $ | 5,179 | $ | 4,981 | ||||||||||
Open-End Allowance for loan losses as a percentage of Open-End gross loans receivable |
15.2 | % | 16.9 | % | 17.8 | % | 17.0 | % | 18.0 | % | ||||||||||
Open-End other information: |
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Originations(1) |
$ | 9,388 | $ | 6,646 | $ | 5,463 | $ | 9,880 | $ | 8,621 | ||||||||||
Average loan amount(1) |
$ | 463 | $ | 451 | $ | 454 | $ | 459 | $ | 448 | ||||||||||
Open-End ratios: |
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Provision as a percentage of originations |
67.6 | % | 64.7 | % | 59.8 | % | 63.6 | % | 84.6 | % | ||||||||||
Provision as a percentage of gross combined loans receivable |
19.8 | % | 16.1 | % | 12.7 | % | 20.6 | % | 26.4 | % |
(1) We have revised certain previously-reported origination statistics to conform to current year methodology.
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Single-Pay
Single-Pay revenue, provision and combined loans receivable during the three and nine months ended September 30, 2017 were affected by regulatory changes in Canada (rate changes in Ontario and British Columbia and product shift from Single-Pay to Installment in Alberta). Single-Pay revenue in the United States also declined compared to the prior year due to the continued shift toward Installment and Open-End products. The improvement in the provision for losses in the third quarter of 2017 as compared to the third quarter of 2016 was primarily due to a lower proportion of Single-Pay Loans in the United Kingdom where loan loss rates are higher than in the United States and Canada.
2017 | 2016 | |||||||||||||||||||
(dollars in thousands, unaudited) |
Third
Quarter |
Second
Quarter |
First
Quarter |
Fourth
Quarter |
Third
Quarter |
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Single-Pay Loans: |
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Revenue |
$ | 70,895 | $ | 63,241 | $ | 63,790 | $ | 77,617 | $ | 82,020 | ||||||||||
Provision for losses |
20,632 | 14,289 | 11,399 | 19,655 | 23,113 | |||||||||||||||
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Net revenue |
$ | 50,263 | $ | 48,952 | $ | 52,391 | $ | 57,962 | $ | 58,907 | ||||||||||
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Net charge-offs |
$ | 20,515 | $ | 13,849 | $ | 12,499 | $ | 20,468 | $ | 22,914 | ||||||||||
Single-Pay gross combined loan balances: |
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Company owned |
$ | 94,476 | $ | 91,230 | $ | 80,375 | $ | 90,487 | $ | 94,873 | ||||||||||
Guaranteed by the Company(1)(2) |
| | 48 | 1,092 | 2,326 | |||||||||||||||
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Single-Pay gross combined loans receivable(1)(2) |
$ | 94,476 | $ | 91,230 | $ | 80,423 | $ | 91,579 | $ | 97,199 | ||||||||||
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Allowance for loan losses(3) |
$ | 5,342 | $ | 5,313 | $ | 4,720 | $ | 5,501 | $ | 6,064 | ||||||||||
CSO guarantee liability(3) |
| | $ | 16 | $ | 274 | $ | 644 | ||||||||||||
Single-Pay Allowance for loan losses as a percentage of Single-pay gross loans receivable |
5.7 | % | 5.8 | % | 5.9 | % | 6.1 | % | 6.4 | % | ||||||||||
Single-Pay CSO guarantee liability as a percentage of Single-Pay gross loans guaranteed by the Company |
| | 33.3 | % | 25.1 | % | 27.7 | % |
(1) | Includes loans originated by third-party lenders through CSO programs, which are not included in our consolidated financial statements. |
(2) | Non-GAAP measure. |
(3) | Allowance for loan losses is reported as a contra-asset reducing gross loans receivable while the CSO guarantee liability is reported as a liability on our Consolidated Balance Sheets. |
Supplemental Non-GAAP Financial Information
Non-GAAP Financial Measures
In addition to the financial information prepared in conformity with U.S. GAAP, we provide certain non-GAAP financial measures as defined under SEC rules, including:
| EBITDA (earnings before interest, income taxes, depreciation and amortization); |
| Adjusted EBITDA (EBITDA plus or minus certain non-cash and other adjusting items); |
| Adjusted Earnings and Adjusted Earnings Per Share, or the Adjusted Earnings Measures (net income plus or minus gain (loss) on extinguishment of debt, restructuring and other costs, goodwill and intangible asset impairments, transaction-related costs, share-based compensation, intangible asset amortization and cumulative tax effect of adjustments, on a total and per share basis); and |
| Gross Combined Loans Receivable (includes loans originated by third-party lenders through CSO programs which are not included in our consolidated financial statements). |
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We believe that presentation of non-GAAP financial information is meaningful and useful in understanding the activities and business metrics of our operations. We believe that these non-GAAP financial measures reflect an additional way of viewing aspects of our business that, when viewed with its GAAP results, provide a more complete understanding of factors and trends affecting our business.
We believe 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 our business that may not otherwise be apparent when relying on financial measures calculated in accordance with GAAP. In addition, we believe that the adjustments shown below are useful to investors in order to allow them to compare our financial results during the periods shown without the effect of each of these income or expense items. In addition, we believe that EBITDA, Adjusted EBITDA and Adjusted Earnings are frequently used by securities analysts, investors and other interested parties in the evaluation of public companies in our industry, many of which present EBITDA, Adjusted EBITDA and/or Adjusted Earnings when reporting their results.
We provide non-GAAP financial information for informational purposes and to enhance understanding of our GAAP consolidated financial statements. EBITDA, Adjusted EBITDA, Adjusted Earnings and Gross Combined Loans Receivable should not be considered as alternatives to income from continuing operations or any other performance measure derived in accordance with U.S. GAAP, or as an alternative to cash flows from operating activities or any other liquidity measure derived in accordance with U.S. GAAP. Rather, these measures should be considered in addition to results prepared in accordance with U.S. GAAP, but should not be considered a substitute for, or superior to, U.S. GAAP results. Readers should consider the information in addition to, but not instead of or superior to, our 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.
Description and Reconciliations of Non-GAAP Financial Measures
EBITDA, Adjusted EBITDA and the Adjusted Earnings Measures
EBITDA, Adjusted EBITDA and the Adjusted Earnings Measures have limitations as analytical tools, and you should not consider these measures in isolation or as a substitute for analysis of our income or cash flows as reported under U.S. GAAP. Some of these limitations are:
| they do not include our cash expenditures or future requirements for capital expenditures or contractual commitments; |
| they do not include changes in, or cash requirements for our working capital needs; |
| they do not include the interest expense, or the cash requirements necessary to service interest or principal payments on our debt; |
| depreciation and amortization are non-cash expense items reported in our statements of cash flows; and |
| other companies in our industry may calculate these measures differently, limiting their usefulness as comparative measures. |
We evaluate our stores based on revenue per store, net charge-offs at each store and EBITDA per store, with consideration given to the length of time a store has been open and its geographic location. We monitor newer stores for their progress to profitability and their rate of revenue growth.
We believe EBITDA and Adjusted EBITDA are used by investors to analyze operating performance and evaluate our ability to incur and service debt and our capacity for making capital expenditures. Adjusted EBITDA is also useful to investors to help assess our estimated enterprise value. The computation of Adjusted EBITDA as presented below may differ from the computation of similarly-titled measures provided by other companies.
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The following table sets forth a reconciliation of our net income to EBITDA and EBITDA to Adjusted EBITDA for the periods indicated:
Nine Months Ended
September 30, (unaudited) |
Year Ended
December 31, |
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(dollars in thousands) |
2017 | 2016 | 2016 | 2015 | ||||||||||||
Net income |
$ | 42,743 | $ | 55,859 | $ | 65,444 | $ | 17,769 | ||||||||
Provision for income taxes |
29,988 | 35,041 | 42,577 | 18,105 | ||||||||||||
Interest expense |
60,694 | 48,179 | 64,334 | 65,020 | ||||||||||||
Depreciation and amortization |
14,120 | 14,244 | 18,905 | 19,112 | ||||||||||||
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EBITDA |
147,545 | 153,323 | 191,260 | 120,006 | ||||||||||||
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(Gain) loss on extinguishment of debt(1) |
12,458 | (6,991 | ) | (6,991 | ) | | ||||||||||
Restructuring and other costs(2) |
7,393 | 2,967 | 3,618 | 4,291 | ||||||||||||
Legal settlement cost(3) |
2,311 | | | | ||||||||||||
Goodwill and intangible asset impairment(4) |
| | | 2,882 | ||||||||||||
Other adjustments(5) |
(733 | ) | (22 | ) | (3 | ) | 1,602 | |||||||||
Share-based cash and non-cash compensation(6) |
1,760 | 837 | 1,148 | 1,271 | ||||||||||||
Transaction-related costs(7) |
2,523 | 146 | 329 | 824 | ||||||||||||
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Adjusted EBITDA |
173,257 | 150,260 | $ | 189,361 | $ | 130,876 | ||||||||||
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Adjusted EBITDA Margin |
24.9 | % | 24.6 | % | 22.9 | % | 16.1 | % |
(1) | For the nine months ended September 30, 2017, the $12.5 million loss from the extinguishment of debt was due to the redemption of CURO Intermediates 10.75% Senior Secured Notes due 2018 and our 12.00% Senior Cash Pay Notes due 2017. For year ended December 31, 2016, the $7.0 million gain resulted from the Companys purchase of CURO Intermediates 10.75% Senior Secured Notes in September 2016. |
(2) | Restructuring costs of $4.3 million for the year ended December 31, 2015 represented the expected costs to be incurred related to the closure of ten underperforming stores in the United Kingdom, restructuring costs of $3.6 million for the year ended December 31, 2016 represented the elimination of certain corporate positions in our Canadian headquarters and the costs incurred related to the closure of seven underperforming stores in Texas. Restructuring costs of $1.5 million for the nine months ended September 30, 2016 primarily represented the expected costs to be incurred related to the closure of six underperforming stores in Texas. Restructuring costs in the nine months ended September 30, 2017 were due to the closure of the remaining 13 U.K. stores. |
(3) | Legal settlement cost relates to the accrual for the settlement of Harrison, et al v. Principal Investments, Inc. et al . See litigation discussion in Note 18, Litigation in the Notes to our Interim Consolidated Financial Statements for further detail. |
(4) | Goodwill and intangible asset impairment charges in 2015 include a non-cash goodwill impairment charge of $0.9 million, and non-cash impairment charges related to the Wage Day trade name intangible asset and customer relationship intangible asset of $1.8 million and $0.2 million, respectively. |
(5) | Other adjustments include deferred rent and the intercompany foreign exchange impact. Deferred rent represents the non-cash component of rent expense. Rent expense is recognized ratably on a straight-line basis over the lease term. |
(6) | The Company approved the adoption of a share-based compensation plan during 2010 for key members of its senior management team. The estimated fair value of share-based awards is recognized as non-cash compensation expense on a straight-line basis over the vesting period. During the second and third quarters of 2017, option holders were paid a bonus in conjunction with the dividend paid during the quarter. The expense recognized during the quarter related to the payment of the dividend on vested options. The remaining bonus will be paid over the vesting period of the unvested stock options. |
(7) | Transaction-related costs include professional fees paid in connection with potential transactions. |
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In addition to reporting financial results in accordance with GAAP, we have provided the Adjusted Earnings Measures. We believe 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 our financial performance, competitive position and prospects for the future.
The following table provides reconciliations between net income and diluted earnings per share calculated in accordance with GAAP to the Adjusted Earnings Measure, which are shown net of tax (in thousands, except per share data):
Nine Months Ended
September 30, (unaudited) |
Year Ended
December 31, |
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(in thousands, except per share data) |
2017 | 2016 | 2016 | 2015 | ||||||||||||
Net income |
$ | 42,743 | $ | 55,859 | $ | 65,444 | $ | 17,769 | ||||||||
Adjustments: |
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Loss (gain) on extinguishment of debt(1) |
12,458 | (6,991 | ) | (6,991 | ) | | ||||||||||
Restructuring costs(2) |
7,393 | 2,967 | 3,618 | 4,291 | ||||||||||||
Legal settlement cost(3) |
2,311 | | | | ||||||||||||
Goodwill and intangible asset impairment(4) |
| | | 2,882 | ||||||||||||
Transaction-related costs(5) |
2,523 | 146 | 329 | 824 | ||||||||||||
Share-based cash and non-cash compensation(6) |
1,760 | 837 | 1,148 | 1,271 | ||||||||||||
Intangible asset amortization |
1,807 | 2,708 | 3,492 | 4,645 | ||||||||||||
Cumulative tax effect of adjustments |
(11,623 | ) | 162 | (629 | ) | (7,026 | ) | |||||||||
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Adjusted Earnings |
$ | 59,372 | $ | 55,688 | $ | 66,411 | $ | 24,656 | ||||||||
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Diluted earnings per share |
$ | 39.50 | $ | 52.01 | $ | 60.71 | $ | 16.45 | ||||||||
Adjustments: |
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Loss (gain) on extinguishment of debt(1) |
11.51 | 6.51 | (6.49 | ) | | |||||||||||
Restructuring costs(2) |
6.83 | 2.76 | 3.36 | 3.97 | ||||||||||||
Legal settlement cost(3) |
2.14 | | | | ||||||||||||
Goodwill and intangible asset impairment(4) |
| | | 2.67 | ||||||||||||
Transaction-related costs(5) |
2.33 | .14 | 0.31 | 0.76 | ||||||||||||
Share-based cash and non-cash compensation(6) |
1.63 | .78 | 1.06 | 1.18 | ||||||||||||
Intangible asset amortization |
1.67 | 2.52 | 3.24 | 4.30 | ||||||||||||
Cumulative tax effect of adjustments |
10.74 | 0.15 | (0.58 | ) | (6.51 | ) | ||||||||||
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Adjusted Earnings per share |
$ | 54.87 | $ | 51.85 | $ | 61.61 | $ | 22.82 | ||||||||
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(1) | For the nine months ended September 30, 2017, the $12.5 million loss from the extinguishment of debt was due to the redemption of CURO Intermediates 10.75% Senior Secured Notes due 2018 and our 12.00% Senior Cash Pay Notes due 2017. For year ended December 31, 2016, the $7.0 million gain resulted from the Companys purchase of CURO Intermediates 10.75% Senior Secured Notes in September 2016. |
(2) | Restructuring costs of $4.3 million for the year ended December 31, 2015 represented the expected costs to be incurred related to the closure of ten underperforming stores in the United Kingdom, restructuring costs of $3.6 million for the year ended December 31, 2016 represented the elimination of certain corporate positions in our Canadian headquarters and the costs incurred related to the closure of seven underperforming stores in Texas. Restructuring costs of $1.5 million for the nine months ended September 30, 2016 primarily represented the expected costs to be incurred related to the closure of six underperforming stores in Texas. Restructuring costs in the nine months ended September 30, 2017 were due to the closure of the remaining 13 U.K. stores. |
(3) | Legal settlement cost relates to the accrual for the settlement of Harrison, et al v. Principal Investments, Inc. et al . See litigation discussion in Note 18, Litigation in the Notes to our Interim Consolidated Financial Statements for further detail. |
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(4) | Goodwill and intangible asset impairment charges in 2015 include a non-cash goodwill impairment charge of $0.9 million, and non-cash impairment charges related to the Wage Day trade name intangible asset and customer relationship intangible asset of $1.8 million and $0.2 million, respectively. |
(5) | Transaction-related costs include professional fees paid in connection with potential transactions. |
(6) | The Company approved the adoption of a share-based compensation plan during 2010 for key members of its senior management team. The estimated fair value of share-based awards is recognized as non-cash compensation expense on a straight-line basis over the vesting period. During the second and third quarters of 2017, option holders were paid a bonus in conjunction with the dividend paid during the quarter. The expense recognized during the quarter related to the payment of the dividend on vested options. The remaining bonus will be paid over the vesting period of the unvested stock options. |
Gross Combined Loans Receivable
In addition to reporting loans receivable information in accordance with U.S. GAAP (see Note 7, Loans Receivable and Revenue in the Notes to Interim Consolidated Financial Statements included elsewhere in this prospectus), we provide below gross combined loans receivable consisting of owned loans receivable plus loans funded by third-party lenders through the CSO programs, which we guarantee but do not include in our Consolidated Financial Statements. Management believes this analysis provides investors with important information needed to evaluate overall lending performance.
The following table reconciles our Company-owned gross loans receivable to gross combined loans receivable.
Three Months Ended | ||||||||||||||||||||||||||||||||
(in millions) |
September 30,
2017 |
June 30,
2017 |
March 31,
2017 |
December 31,
2016 |
September 30,
2016 |
June 30,
2016 |
March 31,
2016 |
December 31,
2015 |
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Company-owned gross loans receivable |
$ | 393.4 | $ | 350.3 | $ | 304.8 | $ | 286.2 | $ | 244.6 | $ | 233.1 | $ | 220.7 | $ | 252.2 | ||||||||||||||||
Gross loans receivable guaranteed by the Company |
71.2 | 62.1 | 57.8 | 68.0 | 58.7 | 52.6 | 45.4 | 60.2 | ||||||||||||||||||||||||
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Gross combined loans receivable |
$ | 464.6 | $ | 412.4 | $ | 362.6 | $ | 354.2 | $ | 303.3 | $ | 285.7 | $ | 266.1 | $ | 312.4 | ||||||||||||||||
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Gross combined loans receivable by product are presented below:
Gross Combined Loans Receivable
Gross combined loans receivable were $464.6 million and $303.3 million at September 30, 2017 and 2016, respectively. The increase was a result of Installment Loan growth from higher originations and the Q1 Loss Recognition Change to include past due loan balances since January 1, 2017. Installment Loans that are up to 90 days past due are included in gross combined loans receivable in amounts disclosed in the table above. Excluding the year-over-year effect of such past-due loans, gross combined loans receivable increased $94.3 million or 31.1% during the nine months ended September 30, 2017 as compared to the nine months ended September 30, 2016.
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Results of Operations
Nine Months Ended September 30, 2017 Compared with Nine Months Ended September 30, 2016
The following table sets forth our results of operations for the nine months ended September 30, 2017 compared to the nine months ended September 30, 2016:
Nine Months Ended
September 30, |
Change | |||||||||||||||
(dollars in thousands) |
2017 | 2016 | $ | % | ||||||||||||
Consolidated Statements of Income Data: |
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Revenue |
$ | 696,643 | $ | 609,692 | $ | 86,951 | 14.3 | % | ||||||||
Provision for losses |
226,523 | 177,756 | 48,767 | 27.4 | % | |||||||||||
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Net revenue |
470,120 | 431,936 | 38,184 | 8.8 | % | |||||||||||
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Advertising costs |
35,599 | 28,925 | 6,674 | 23.1 | % | |||||||||||
Non-advertising costs of providing services |
177,448 | 173,406 | 4,042 | 2.3 | % | |||||||||||
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Total cost of providing services |
213,047 | 202,331 | 10,716 | 5.3 | % | |||||||||||
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Gross margin |
257,073 | 229,605 | 27,468 | 12.0 | % | |||||||||||
Operating expense: |
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Corporate, district and other |
103,797 | 94,550 | 9,247 | 9.8 | % | |||||||||||
Interest expense |
60,694 | 48,179 | 12,515 | 26.0 | % | |||||||||||
Loss (gain) on extinguishment of debt |
12,458 | (6,991 | ) | 19,449 | # | |||||||||||
Restructuring costs |
7,393 | 2,967 | 4,426 | # | ||||||||||||
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Total operating expense |
184,342 | 138,705 | 45,637 | 32.9 | % | |||||||||||
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Net income before taxes |
72,731 | 90,900 | (18,169 | ) | (20.0 | )% | ||||||||||
Provision for income taxes |
29,988 | 35,041 | (5,053 | ) | (14.4 | )% | ||||||||||
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Net income |
$ | 42,743 | $ | 55,859 | $ | (13,116 | ) | (23.5 | )% | |||||||
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Net income |
$ | 42,743 | $ | 55,859 | $ | (13,116 | ) | (23.5 | )% | |||||||
Adjustments: |
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Loss (gain) on extinguishment of debt(1) |
12,458 | (6,991 | ) | 19,449 | # | |||||||||||
Restructuring costs(2) |
7,393 | 2,967 | 4,426 | # | ||||||||||||
Legal settlement costs(3) |
2,311 | | 2,311 | # | ||||||||||||
Transaction-related costs(4) |
2,523 | 146 | 2,377 | # | ||||||||||||
Share-based cash and non-cash compensation(5) |
1,760 | 837 | 923 | # | ||||||||||||
Intangible asset amortization |
1,807 | 2,708 | (901 | ) | (33.3 | )% | ||||||||||
Cumulative tax effect of adjustments |
(11,623 | ) | 162 | (11,785 | ) | # | ||||||||||
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Adjusted Earnings |
$ | 59,372 | $ | 55,688 | $ | 3,684 | 6.6 | % | ||||||||
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# | Variance greater than 100% or not meaningful. |
(1) | For the nine months ended September 30, 2017, the $12.5 million loss from the extinguishment of debt was due to the redemption of CURO Intermediates 10.75% Senior Secured Notes due 2018 and our 12.00% Senior Cash Pay Notes due 2017. For the nine months ended September 30, 2016, the $7.0 million gain resulted from the Companys purchase of CURO Intermediates 10.75% Senior Secured Notes in September 2016. |
(2) | Restructuring costs of $7.4 million for the nine months ended September 30, 2017 relate to the closure of the remaining 13 stores in the U.K. during the third quarter of 2017. Restructuring costs of $1.5 million for the nine months ended September 30, 2016 primarily represented costs related to the closure of six underperforming stores in Texas. |
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(3) | Legal settlement cost relates to the accrual for the settlement of the Harrison, et al v. Principal Investment, Inc. et al . See litigation discussion in Note 18, Litigation in the Notes of our Interim Consolidated Financial Statements included elsewhere in this prospectus for further detail. |
(4) | Transaction-related costs include professional fees paid in connection with potential transactions. |
(5) | The Company approved the adoption of a share-based compensation plan during 2010 for key members of its senior management team. The estimated fair value of share-based awards is recognized as non-cash compensation expense on a straight-line basis over the vesting period. During the second quarter of 2017, option holders were paid a bonus in conjunction with the dividend paid during the quarter. The expense recognized during the quarter related to the payment of the dividend on vested options. The remaining bonus will be paid over the vesting period of the unvested stock options. |
Revenue and Net Revenue
Revenue increased $87.0 million, or 14.3%, to $696.6 million for the nine months ended September 30, 2017 from $609.7 million for the prior year period. U.S. revenue increased $88.8 million on volume growth, U.K. revenue increased $3.2 million, and Canada declined $5.0 million because of regulatory impacts on rates and product mix.
Provision for losses increased $48.8 million, or 27.4%, to $226.5 million for the nine months ended September 30, 2017 from $177.8 million for the prior year period because of higher origination volumes and higher loan balances. This is explained more fully in the segment analysis that follows.
Cost of Providing Services.
The total cost of providing services increased $10.7 million, or 5.3%, to $213.0 million for the nine months ended September 30, 2017, compared to $202.3 million for the nine months ended September 30, 2016 due primarily to 23.1% higher marketing spend as well as increases in occupancy, office and other operating expenses. This is explained more fully in the segment analysis that follows.
Operating Expenses
Corporate, district and other expenses increased $9.2 million primarily because of $2.3 million in legal settlement costs, and higher payroll, collections, office and technology-related costs.
Other changes in operating expenses were impacted by (i) a pretax loss of $12.5 million on the extinguishment of debt, primarily of CURO Intermediate Holdings 10.75% Senior Secured Notes due 2018 during the nine months ended September 30, 2017, (ii) a prior year gain of $7.0 million gain on the extinguishment of debt which resulted from the open-market repurchase of $25.1 million of Senior Secured Notes due 2018, (iii) $7.4 million of restructuring costs related to the closure of the remaining 13 stores in the U.K. during the third quarter of 2017 and (iv) $3.0 million of restructuring costs in the third quarter of 2016 primarily related to Canadian back-office consolidation. Interest expense in the current year period increased by approximately $12.5 million which was the result of accrued interest on the retired notes through the redemption notice period and increased debt outstanding.
Provision for Income Taxes.
Our effective tax rate for the nine months ended September 30, 2017 was 41.2% compared to 38.5% for the prior year. The change in the effective tax rate from the prior year quarter was primarily due to a change in the mix of income by jurisdiction. In the nine months ended September 30, 2017, U.K. results were impacted by the $7.4 million of restructuring costs related to the closure of the remaining 13 United Kingdom stores during the third quarter. We recorded a 100% valuation allowance against the resulting deferred tax.
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Nine Months Ended September 30, 2017 Compared with Nine Months Ended September 30, 2016 - Segment Analysis
We report financial results for three reportable segments: the United States, Canada and the United Kingdom. Following are a recap of results of operations for the segment and period indicated:
U.S. Segment Results |
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Nine Months Ended September 30, | Change | |||||||||||||||
(dollars in thousands, unaudited) |
2017 | 2016 | $ | % | ||||||||||||
Consolidated Statements of Income Data |
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Revenue |
$ | 531,912 | $ | 443,107 | $ | 88,805 | 20.0 | % | ||||||||
Provision for losses |
180,658 | 142,598 | 38,060 | 26.7 | % | |||||||||||
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Net revenue |
351,254 | 300,509 | 50,745 | 16.9 | % | |||||||||||
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Advertising costs |
24,596 | 18,947 | 5,649 | 29.8 | % | |||||||||||
Non-advertising costs of providing services |
125,304 | 121,960 | 3,344 | 2.7 | % | |||||||||||
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Total cost of providing services |
149,900 | 140,907 | 8,993 | 6.4 | % | |||||||||||
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Gross margin |
201,354 | 159,602 | 41,752 | 26.2 | % | |||||||||||
Operating expense |
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Corporate, district and other |
78,299 | 65,532 | 12,767 | 19.5 | % | |||||||||||
Interest expense |
60,563 | 48,127 | 12,436 | 25.8 | % | |||||||||||
Loss on extinguishment of debt |
12,458 | (6,991 | ) | 19,449 | # | |||||||||||
Intercompany interest income |
(3,747 | ) | (3,888 | ) | 141 | (3.6 | )% | |||||||||
Restructuring and other costs |
| 1,528 | (1,528 | ) | # | |||||||||||
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Total operating expense |
147,573 | 104,308 | 43,265 | 41.5 | % | |||||||||||
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Net income before taxes |
53,781 | 55,294 | (1,513 | ) | (2.7 | )% | ||||||||||
Provision for income taxes |
23,722 | 25,250 | (1,528 | ) | (6.1 | )% | ||||||||||
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Net income |
30,059 | 30,044 | 15 | 0.0 | % | |||||||||||
Provision for income taxes |
23,722 | 25,250 | (1,528 | ) | (6.1 | )% | ||||||||||
Interest expense |
56,816 | 44,239 | 12,577 | 28.4 | % | |||||||||||
Depreciation and amortization |
10,200 | 9,801 | 399 | 4.1 | % | |||||||||||
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EBITDA |
120,797 | 109,334 | 11,463 | 10.5 | % | |||||||||||
Loss (gain) on extinguishment of debt |
12,458 | (6,991 | ) | 19,449 | # | |||||||||||
Restructuring and other costs |
2,523 | 1,674 | 849 | # | ||||||||||||
Legal settlement costs |
2,311 | | 2,311 | # | ||||||||||||
Other adjustments |
(47 | ) | 110 | (157 | ) | # | ||||||||||
Share-based cash and non-cash compensation |
1,756 | 837 | 919 | # | ||||||||||||
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Adjusted EBITDA |
$ | 139,798 | $ | 104,964 | $ | 34,834 | 33.2 | % | ||||||||
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#Variance greater than 100% or not meaningful
U.S revenue growth was driven by a $51.9 million, or 21.8%, increase in gross combined loans receivable (excluding past due loans) to $531.9 million at September 30, 2017 compared to $443.1 million in the prior year period. Strong volume growth in our Unsecured Installment originations, which increased year-over-year $106.4 million, or 32.1%. Secured Installment originations grew $41.2 million, or 43.5%, compared to the same period a year ago.
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The increase of $38.1 million, or 26.7%, in provision for losses was primarily driven by a $36.9 million, or 34.1%, increase in Unsecured Installment Loan gross receivables (excluding past due loans), but was also affected by the Q1 Loss Recognition Change as follows:
| Volume impact. Unsecured and Secured Installment Loan origination dollar volume increased $106.4 million and $41.2 million, respectively year-over-year. Applying last years provision rates for the nine months ended September 30, 2017 as a percentage of originations, Unsecured and Secured Installment volume added $27.2 million and $5.8 million, respectively to the provision for losses versus the same period a year ago. |
| Rate impact . The provision rate as a percentage of originations for Unsecured Installment Loans for the nine months ended September 30, 2017 was 29.2% versus 25.6% the same period in the prior year, and the provision rate as a percentage of originations for Secured Installment Loans for the nine months ended September 30, 2017 was 13.9% versus 14.0% in the same period in the prior year. The Unsecured Installment Loan increase is due to two factors. First, historically the first quarter provision rates for all products have been lower seasonally because of higher recoveries from tax refunds and related seasonal decline in loan balances. Prospectively, we would expect less seasonal effect in first quarters. Second, provision rates for the nine months ended September 30, 2017 were adjusted to include accrued interest on past-due loans. The Secured Installment Loans remain flat due to lower provisioning in the current year. The change in provision rate for the Unsecured and Secured Installment Loans origination volume for the nine months ended September 30, 2017 added approximately $11.3 million and $0.2 million, respectively, to the provision for losses. |
| Past-due loan impact. The Q1 Loss Recognition Change added an average of $23.6 million and $8.6 million of Unsecured and Secured Installment past-due principal balances, respectively, that would not have been recognized prior to January 1, 2017 since loans were previously charged off when a scheduled payment was missed. Using current Unsecured and Secured loss provision rates as a percentage of gross combined loans receivable, this change added approximately $4.0 million to the provision for losses. |
This change in estimate resulted in approximately $56.0 million of Installment Loans at September 30, 2017 that remained on our balance sheet that were between 1 and 90 days delinquent, as compared to none in the prior year period. Additionally, the installment allowance for loan losses as of September 30, 2017 of $71.3 million includes an estimated allowance of $36.4 million for the Installment Loans between 1 and 90 days delinquent, as compared to none in the prior year period.
This change in estimate resulted in an approximately $11.1 million of Installment Loans guaranteed by the company at September 30, 2017 that were between 1 and 90 days delinquent, as compared to none in the prior year period. Additionally, the installment CSO guarantee liability as of September 30, 2017 of $16.9 million includes an estimated liability of $7.8 million for the Installment Loans guaranteed by the company that were between 1 and 90 days delinquent, as compared to none in the prior year period.
Recap of year-over-year change in U.S. provision for losses:
Nine Months Ended September 30, 2017 compared to Nine
Months Ended September 30, 2016 |
||||||||||||
(in millions) |
Unsecured
Installment |
Secured
Installment |
Consolidated | |||||||||
Installment Loans impact: |
||||||||||||
Volume impact |
$ | 27.2 | $ | 5.8 | $ | 33.0 | ||||||
Rate impact |
11.3 | 0.2 | 11.5 | |||||||||
Past-due impact |
4.3 | (0.3 | ) | 4.0 | ||||||||
|
|
|
|
|
|
|||||||
Total Installment Loan impact |
42.8 | 5.7 | 48.5 | |||||||||
Other impact (Single Pay, Open-End and Ancillary) |
| | (10.4 | ) | ||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 42.8 | $ | 5.7 | $ | 38.1 | ||||||
|
|
|
|
|
|
75
U.S. cost of providing services for the nine months ended September 30, 2017 were $149.9 million, an increase of $9.0 million, or 6.4% compared to $140.9 million for the nine months ended September 30, 2016. This increase was due primarily to $5.6 million (29.8%) higher marketing spend, as well as increases in volume-driven expenses and increases in store security and maintenance costs.
Operating expenses were $147.6 million for the nine months ended September 30, 2017, an increase of $43.3 million, or 41.5%, compared to $104.3 million in the prior year period primarily due to the following:
| A pretax loss in the current year of $12.5 million on the extinguishment of CURO Intermediates 10.75% Senior Secured Notes due 2018, compared to a gain of $7.0 million on the extinguishment of debt which resulted from the open-market repurchase of $25.1 million of Senior Secured Notes in the prior year period. |
| An increase in interest expense in the current year period of approximately $12.4 million resulting from accrued interest on the retired notes through the redemption notice period, and increased debt outstanding. |
| An increase in corporate, district and other expenses of $12.8 million, primarily for higher payroll costs from increases in technology and analytical headcount. |
| $2.3 million related to the legal settlement in the second quarter of 2017 which increased professional. See litigation discussion in Note 18, Litigation in the Notes of our Interim Consolidated Financial Statements included elsewhere in this prospectus for further detail. |
Canada Segment Results |
||||||||||||||||
Nine Months Ended September 30, | Change | |||||||||||||||
(dollars in thousands, unaudited) |
2017 | 2016 | $ | % | ||||||||||||
Revenue |
$ | 135,819 | $ | 140,852 | $ | (5,033 | ) | (3.6 | )% | |||||||
Provision for losses |
36,246 | 27,793 | 8,453 | 30.4 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Net revenue |
99,573 | 113,059 | (13,486 | ) | (11.9 | )% | ||||||||||
Advertising costs |
6,944 | 6,320 | 624 | 9.9 | % | |||||||||||
Non-advertising costs of providing services |
46,718 | 45,789 | 929 | 2.0 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Total cost of providing services |
53,662 | 52,109 | 1,553 | 3.0 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Gross margin |
45,911 | 60,950 | (15,039 | ) | (24.7 | )% | ||||||||||
Corporate, district and other |
12,407 | 13,693 | (1,286 | ) | (9.4 | )% | ||||||||||
Interest expense |
142 | 73 | 69 | 94.5 | % | |||||||||||
Intercompany interest expense |
3,262 | 3,058 | 204 | 6.7 | % | |||||||||||
Restructuring and other costs |
| 933 | (933 | ) | # | |||||||||||
|
|
|
|
|
|
|||||||||||
Total operating expense |
15,811 | 17,757 | (1,946 | ) | (11.0 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Net income before taxes |
30,100 | 43,193 | (13,093 | ) | (30.3 | )% | ||||||||||
Provision for income taxes |
6,266 | 9,909 | (3,643 | ) | (36.8 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Net income |
23,834 | 33,284 | (9,450 | ) | (28.4 | )% | ||||||||||
Provision for income taxes |
6,266 | 9,909 | (3,643 | ) | (36.8 | )% | ||||||||||
Interest expense |
3,404 | 3,131 | 273 | 8.7 | % | |||||||||||
Depreciation and amortization |
3,389 | 3,762 | (373 | ) | (9.9 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
EBITDA |
36,893 | 50,086 | (13,193 | ) | (26.3 | )% | ||||||||||
Restructuring and other costs |
| 933 | (933 | ) | # | |||||||||||
Other adjustments |
(654 | ) | (359 | ) | (295 | ) | (82.2 | )% | ||||||||
|
|
|
|
|
|
|||||||||||
Adjusted EBITDA |
$ | 36,239 | $ | 50,660 | $ | (14,421 | ) | (28.5 | )% | |||||||
|
|
|
|
|
|
#Variance greater than 100% or not meaningful
76
Revenue in Canada was affected by product transition in Alberta from Single-Pay Loans to Unsecured Installment Loans and the impact of regulatory rate changes in Ontario and British Columbia.
Non-Alberta Single-Pay revenue decreased $1.3 million, or 1.2% to $107.3 million for the nine months ended September 30, 2017 and was affected by lower rates from provincial regulatory changes effective January 1, 2017. The impact of the rate changes was offset by higher origination volumes resulting in a modest increase in related revenue. The year-over-year effect of regulatory rate changes in Ontario and British Columbia would have implied a decline in revenue of $14.1 million. However, higher origination volumes offset the effect of rate changes by approximately $12.1 million. Single-Pay origination dollar volumes in Canada (excluding Alberta) increased $68.0 million, or 13.3%, to $578.1 million from $510.0 million in the prior year, and Single-Pay ending receivables (excluding Alberta) increased $8.8 million, or 21.3%, to $50.1 million from $41.3 million in the prior year period.
In Alberta, Single-Pay receivables in the nine months ended September 30, 2016 averaged $7.3 million and related Single-Pay revenue was $22.2 million. In the nine months ended September 30, 2017, Alberta had $32.0 million in average Unsecured Installment receivables and $10.4 million of related revenue. As of September 30, 2017 $42.5 million of Unsecured Installment receivables were outstanding in Alberta.
The provision for losses rose $8.5 million or 30.4% to $36.2 million for the nine months ended September 30, 2017, compared to $27.8 million in the prior year period. As in the U.S., the increase was due to higher loan volume.
The cost of providing services in Canada increased $1.6 million, or 3.0%, to $53.7 million for the nine months ended September 30, 2017, compared to $52.1 million in the prior year period due primarily to an increase in occupancy expense, based on a higher number of stores in operation during the nine months ended September 30, 2017 as compared to the prior year, as well as an increase in store maintenance costs and higher marketing spend.
77
Operating expenses decreased $1.9 million, or 11.0%, to $15.8 million in the nine months ended September 30, 2017, from $17.8 million in the prior year period, due to the consolidation of certain back-office functions during the third quarter of 2016.
U.K. Segment Results |
||||||||||||||||
Nine Months Ended September 30, | Change | |||||||||||||||
(dollars in thousands, unaudited) |
2017 | 2016 | $ | % | ||||||||||||
Revenue |
$ | 28,912 | $ | 25,733 | $ | 3,179 | 12.4 | % | ||||||||
Provision for losses |
9,619 | 7,365 | 2,254 | 30.6 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Net revenue |
19,293 | 18,368 | 925 | 5.0 | % | |||||||||||
Advertising costs |
4,059 | 3,658 | 401 | 11.0 | % | |||||||||||
Non-advertising costs of providing services |
5,426 | 5,657 | (231 | ) | (4.1 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Total cost of providing services |
9,485 | 9,315 | 170 | 1.8 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Gross margin |
9,808 | 9,053 | 755 | 8.3 | % | |||||||||||
Corporate, district and other |
13,091 | 15,325 | (2,234 | ) | (14.6 | )% | ||||||||||
Interest income |
(11 | ) | (21 | ) | 10 | 47.6 | % | |||||||||
Intercompany interest expense |
485 | 830 | (345 | ) | (41.6 | )% | ||||||||||
Restructuring and other costs |
7,393 | 506 | 6,887 | # | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total operating expense |
20,958 | 16,640 | 4,318 | 25.9 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Net loss before taxes |
(11,150 | ) | (7,587 | ) | (3,563 | ) | (47.0 | )% | ||||||||
Benefit for income taxes |
| (118 | ) | 118 | # | |||||||||||
|
|
|
|
|
|
|||||||||||
Net loss |
(11,150 | ) | (7,469 | ) | (3,681 | ) | (49.3 | )% | ||||||||
Benefit for income taxes |
| (118 | ) | 118 | # | |||||||||||
Interest expense |
474 | 809 | (335 | ) | (41.4 | )% | ||||||||||
Depreciation and amortization |
531 | 681 | (150 | ) | (22.0 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
EBITDA |
(10,145 | ) | (6,097 | ) | (4,048 | ) | (66.4 | )% | ||||||||
Other adjustments |
(28 | ) | 227 | (255 | ) | # | ||||||||||
Restructuring and other costs |
7,393 | 506 | 6,887 | # | ||||||||||||
|
|
|
|
|
|
|||||||||||
Adjusted EBITDA |
$ | (2,780 | ) | $ | (5,364 | ) | $ | 2,584 | 48.2 | % | ||||||
|
|
|
|
|
|
#Variance greater than 100% or not meaningful
U.K. revenue improved $3.2 million, or 12.4% to $28.9 million for the nine months ended September 30, 2017 from $25.7 million in the prior year period. On a constant currency basis, revenue was up $5.8 million, or 22.5%. Provision for losses increased $2.3 million, or 30.6%, and increased $3.1 million, or 41.9% on a constant currency basis, due to growth in Installment Loan receivables.
The cost of providing services in the United Kingdom increased slightly from the prior year period. On a constant currency basis the cost of providing services increased $1.0 million, or 11.2%.
Operating expenses increased $4.3 million, or 25.9%, from the prior year period, and on a constant currency basis increased $6.1 million, or 36.9%, due to restructuring costs of $7.4 million related to the closure of the remaining 13 stores in the United Kingdom during the nine months ended September 30, 2017, compared to $0.5 million in the prior year period. This increase was partially offset by a decline in payroll expense at our U.K. corporate office.
78
Year Ended December 31, 2016 Compared with Year Ended December 31, 2015
The following table sets forth our results of operations for the year ended December 31, 2016 compared with the year ended December 31, 2015:
Year Ended December 31, | Change | |||||||||||||||
(dollars in thousands) |
2016 | 2015 | $ | % | ||||||||||||
Consolidated Statements of Income Data: |
||||||||||||||||
Revenue |
$ | 828,596 | $ | 813,131 | $ | 15,465 | 1.9 | % | ||||||||
Provision for losses |
258,289 | 281,210 | (22,921 | ) | (8.2 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Net revenue |
570,307 | 531,921 | 38,386 | 7.2 | % | |||||||||||
Cost of Providing Services |
277,051 | 293,320 | (16,269 | ) | (5.5 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Gross Margin |
293,256 | 238,601 | 54,655 | 22.9 | % | |||||||||||
Operating Expense |
||||||||||||||||
Corporate, district and other |
124,274 | 130,534 | (6,260 | ) | (4.8 | )% | ||||||||||
Interest expense |
64,334 | 65,020 | (686 | ) | (1.1 | )% | ||||||||||
Goodwill and intangible asset impairment charges |
| 2,882 | 2,882 | # | ||||||||||||
Gain on extinguishment of debt |
(6,991 | ) | | (6,991 | ) | # | ||||||||||
Restructuring costs |
3,618 | 4,291 | (673 | ) | (15.7 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Total operating expense |
185,235 | 202,727 | (17,492 | ) | (8.6 | ) | ||||||||||
|
|
|
|
|
|
|||||||||||
Net Income Before Taxes |
108,021 | 35,874 | 72,147 | # | ||||||||||||
Provision for income taxes |
42,577 | 18,105 | 24,472 | # | ||||||||||||
|
|
|
|
|
|
|||||||||||
Net Income |
$ | 65,444 | $ | 17,769 | $ | 47,675 | # | |||||||||
|
|
|
|
|
|
|||||||||||
Net Income |
$ | 65,444 | $ | 17,769 | $ | 47,675 | # | |||||||||
Adjustments: |
||||||||||||||||
Gain on extinguishment of debt(1) |
(6,991 | ) | | (6,991 | ) | # | ||||||||||
Restructuring costs(2) |
3,618 | 4,291 | (673 | ) | (15.7 | )% | ||||||||||
Goodwill and intangible asset impairment(3) |
| 2,882 | (2,882 | ) | # | |||||||||||
Transaction-related costs(3) |
329 | 824 | (495 | ) | (60.1 | )% | ||||||||||
Share-based compensation(4) |
1,148 | 1,271 | (123 | ) | (9.7 | )% | ||||||||||
Intangible asset amortization |
3,492 | 4,645 | (1,153 | ) | (24.8 | )% | ||||||||||
Cumulative tax effect of adjustments |
(629 | ) | (7,026 | ) | 6,397 | 91.0 | % | |||||||||
|
|
|
|
|
|
|||||||||||
Adjusted Earnings |
$ | 66,411 | $ | 24,656 | $ | 41,755 | # | |||||||||
|
|
|
|
|
|
#Variance greater than 100% or not meaningful
(1) | For the year ended December 31, 2016, the $7.0 million gain on extinguishment of debt resulted from the Companys purchase of CURO Intermediates 10.75% Senior Secured Notes in September 2016. |
(2) | Restructuring costs of $4.3 million for the year ended December 31, 2015 represented the expected costs to be incurred related to the closure of ten underperforming stores in the United Kingdom. Restructuring costs of $3.6 million for the year ended December 31, 2016 represented the elimination of certain corporate positions in our Canadian headquarters and the costs incurred related to the closure of seven under-performing stores in Texas. |
(3) | Transaction-related costs include professional fees paid in connection with potential transactions. |
(4) | The Company approved the adoption of a share-based compensation plan during 2010 for key members of its senior management team. The estimated fair value of share-based awards is recognized as non-cash compensation expense on a straight-line basis over the vesting period. |
Revenue and Net Revenue
Revenue increased $15.5 million, or 1.9%, to $828.6 million for the year ended December 31, 2016 from $813.1 million for the prior year. Volume growth in the United States and revenue growth in Canada driven by de novo store expansion and modest same-store volume growth, were partially offset by a decline in U.K. revenue due to currency translation impact, product mix and volume changes, as well as the closure of nearly half
79
of the U.K. stores in December 2015. A detailed discussion of results by segment is included in the Segment Analysis below.
Provision for losses decreased by $22.9 million, or 8.2%, to $258.3 million in the year ended December 31, 2016 from $281.2 million in the prior year. Improved performance in the United States resulted from continuous refinements and improvements to scoring models, portfolio seasoning, and improved collection efforts. Lower relative customer acquisition spend in 2016 reduced the volume mix attributable to new customers compared to the same period a year ago. In the United Kingdom, loss provisions have improved because of tightened underwriting and seasoning. The increase in the provision for losses in Canada was due to the growth of newer bankline loan products, which have a higher provision rate as a percent of revenue than traditional Canadian single-pay products.
Cost of Providing Services
The total cost of providing services decreased $16.3 million, or 5.5%, to $277.1 million in 2016, compared to $293.3 million in the prior year primarily due to a decline in advertising expense of $21.7 million, or 33.1%, compared to the prior year, as we normalized customer acquisition in 2016 to maintain earning-asset levels but without the elevated levels of new customer investment of 2015. In addition, cost-per-funded loan improved significantly year-over-year so less total spend was necessary to drive similar customer volumes. Salaries and benefits also declined compared to the prior year driven by the closure of ten stores in the United Kingdom in December 2015. These declines were partially offset by an increase in other store operating expense which was attributable to higher collections costs, partially offset by a decline in store maintenance costs associated with store refurbishments that took place in the prior year.
Operating Expense
Corporate, district and other expenses declined 4.8% in the year ended December 31, 2016 primarily because of U.K. store closures in 2015, a decrease in payroll costs at our U.K. corporate office, and declines in U.K. collections and office expense, as well as the impact of Canadian back-office consolidation during 2016, and the impact of certain intangible assets related to the 2011 Cash Money acquisition which became fully amortized. These declines were partially offset by an increase in U.S. corporate expense from higher payroll costs for additional headcount (primarily analytics and technology) and an increase in variable, performance-based compensation, as well as an increase in professional fees and office expense.
Other changes in operating expenses were affected by a pretax gain of $7.0 million related to the discount on the repurchase of $25.1 million of CFTCs outstanding May 2011 10.75% Senior Secured Notes, as well as $3.6 million of restructuring costs related to the elimination of certain positions, primarily Finance and IT, at our Canadian headquarters, and the closure of seven underperforming The Money Box stores in Texas, and one store in Missouri that we were unable to reopen after it was damaged by a fire, and costs related to the 2015 closure of ten U.K. stores.
Results in 2015 were also impacted by a $2.9 million non-cash goodwill and intangible asset impairment charges, and $4.3 million of costs related to the closure of ten U.K. stores mentioned above. These costs primarily consisted of adjustments to lease obligations associated with these locations.
Provision for Income Taxes
Our effective tax rate for the year ended December 31, 2016 was 39.4% compared to 50.5% for the year ended December 31, 2015. Our recorded income tax expense is affected by our mix of domestic and foreign earnings.
80
2016 Compared to 2015Segment Analysis
Following is the detail of the results of operations for the each segment for the years ended December 31, 2016 and 2015:
U.S. Segment Results |
||||||||||||||||
Year Ended December 31, | Change | |||||||||||||||
(dollars in thousands) |
2016 | 2015 | $ | % | ||||||||||||
Revenue |
$ | 606,798 | $ | 573,664 | $ | 33,134 | 5.8 | % | ||||||||
Provision for losses |
207,748 | 222,867 | (15,119 | ) | (6.8 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Net revenue |
399,050 | 350,797 | 48,253 | 13.8 | % | |||||||||||
Cost of providing services |
194,722 | 199,169 | (4,447 | ) | (2.2 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Gross Margin |
204,328 | 151,628 | 52,700 | 34.8 | % | |||||||||||
Operating Expenses |
||||||||||||||||
Corporate, district and other |
75,907 | 69,455 | 6,452 | 9.3 | % | |||||||||||
Interest expense |
64,276 | 64,910 | (634 | ) | (1.0 | )% | ||||||||||
(Gain) Loss on extinguishment of debt |
(6,991 | ) | | (6,991 | ) | # | ||||||||||
Intercompany interest income |
(5,741 | ) | (5,848 | ) | 107 | 1.8 | % | |||||||||
Restructuring costs |
1,726 | | 1,726 | # | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total operating expense |
129,177 | 128,517 | 660 | 0.5 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Net Income before Taxes |
75,151 | 23,111 | 52,040 | # | ||||||||||||
Provision for income taxes |
30,055 | 7,814 | 22,241 | # | ||||||||||||
|
|
|
|
|
|
|||||||||||
Net Income |
$ | 45,096 | $ | 15,297 | $ | 29,799 | # | |||||||||
|
|
|
|
|
|
|||||||||||
Net Income |
$ | 45,096 | $ | 15,297 | $ | 29,799 | # | |||||||||
Adjustments: |
||||||||||||||||
Gain on extinguishment of debt |
(6,991 | ) | | (6,991 | ) | # | ||||||||||
Restructuring costs |
1,726 | | 1,726 | # | ||||||||||||
Transaction-related costs |
329 | 824 | (495 | ) | (60.1 | )% | ||||||||||
Share-based compensation |
1,148 | 1,271 | (123 | ) | (9.7 | )% | ||||||||||
Intangible asset amortization |
2,680 | 2,330 | 350 | 15.0 | % | |||||||||||
Cumulative tax effect of adjustments |
437 | (2,235 | ) | 2,672 | # | |||||||||||
|
|
|
|
|
|
|||||||||||
Adjusted Earnings |
$ | 44,425 | $ | 17,487 | $ | 26,938 | # | |||||||||
|
|
|
|
|
|
#Variance greater than 100% or not meaningful
Total revenue for our U.S. operations was $606.8 million for 2016, an increase of $33.1 million, or 5.8%, compared to the prior year. Revenue growth was driven by our online channel.
Gross margin for our U.S. operations for 2016 was $204.3 million, an increase of $52.7 million, or 34.8%, compared to the prior year. Gross margin as a percent of revenue improved to 33.7%, compared to 26.4% in the prior year from improvement in the provision for losses due to relative new customer mix and growth, related portfolio seasoning, and improved credit scoring and collection trends; as well as a $21.7 million decrease in advertising expense.
Operating expenses in the United States were flat with the prior year. An increase in corporate expense from higher payroll costs for additional headcount (primarily analytics and technology), an increase in variable, performance-based compensation, as well as an increase in professional fees and office expense, was more than
81
offset by a $7.0 million gain on the extinguishment of $25.1 million of CURO Financial Technologies May 2011 10.75% Senior Secured Notes.
Canada Segment Results |
||||||||||||||||
Year Ended December 31, | Change | |||||||||||||||
(dollars in thousands) |
2016 | 2015 | $ | % | ||||||||||||
Revenue |
$ | 188,078 | $ | 184,859 | $ | 3,219 | 1.7 | % | ||||||||
Provision for losses |
39,917 | 37,317 | 2,600 | 7.0 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Net revenue |
148,161 | 147,542 | 619 | 0.4 | % | |||||||||||
Cost of providing services |
69,522 | 70,073 | (551 | ) | (0.8 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Gross Margin |
78,639 | 77,469 | 1,170 | 1.5 | % | |||||||||||
Operating Expenses |
||||||||||||||||
Corporate, district and other |
28,001 | 31,121 | (3,120 | ) | (10.0 | )% | ||||||||||
Interest expense |
85 | 149 | (64 | ) | (43.0 | )% | ||||||||||
Intercompany interest expense |
4,602 | 4,761 | (159 | ) | (3.3 | )% | ||||||||||
Restructuring costs |
898 | | 898 | # | ||||||||||||
|
|
|
|
|
|
|||||||||||
Total operating expense |
33,586 | 36,031 | (2,445 | ) | (6.8 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Net Income Before Taxes |
45,053 | 41,438 | 3,615 | 8.7 | % | |||||||||||
Provision for income taxes |
12,662 | 11,266 | 1,396 | 12.4 | % | |||||||||||
|
|
|
|
|
|
|||||||||||
Net Income |
$ | 32,391 | $ | 30,172 | $ | 2,219 | 7.4 | % | ||||||||
|
|
|
|
|
|
|||||||||||
Net Income |
$ | 32,391 | $ | 30,172 | $ | 2,219 | 7.4 | % | ||||||||
Adjustments: |
||||||||||||||||
Restructuring costs |
898 | | 898 | # | ||||||||||||
Intangible asset amortization |
806 | 1,989 | (1,183 | ) | (59.5 | )% | ||||||||||
Cumulative tax effect of adjustments |
(671 | ) | (1,004 | ) | 333 | 33.2 | % | |||||||||
|
|
|
|
|
|
|||||||||||
Adjusted Earnings |
$ | 33,424 | $ | 31,157 | $ | 2,267 | 7.3 | % | ||||||||
|
|
|
|
|
|
#Variance greater than 100% or not meaningful
Total revenue for our Canadian operations was $188.1 million for 2016, an increase of $3.2 million, or 1.7%, compared to the prior year. Growth in Canada was driven by our de novo store expansion and modest same-store volume growth in Ontario, Nova Scotia, British Columbia and Saskatchewan, which offset a $3.8 million, or 11.8%, decline in Alberta due to the statutory rate change.
The gross margin for our Canadian operations for 2016 was $78.6 million, an increase of $1.2 million, or 1.5%, compared to the prior year. Gross margin as a percent of revenue declined slightly in the current year to 41.8% from 41.9% for the prior year.
82
Operating expenses in Canada decreased $2.4 million, or 6.8%, from the prior year due primarily to the net impact of the elimination of 35 corporate positions in our Canadian headquarters (primarily finance and technology). Amortization expense also declined as certain intangible assets related to the 2011 Cash Money acquisition became fully amortized.
U.K. Segment Results |
||||||||||||||||
Year Ended December 31, | Change | |||||||||||||||
(dollars in thousands) |
2016 | 2015 | $ | % | ||||||||||||
Revenue |
$ | 33,720 | $ | 54,608 | $ | (20,888 | ) | (38.3 | )% | |||||||
Provision for losses |
10,624 | 21,026 | (10,402 | ) | (49.5 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Net revenue |
23,096 | 33,582 | (10,486 | ) | (31.2 | )% | ||||||||||
Cost of providing services |
12,807 | 24,078 | (11,271 | ) | (46.8 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Gross Margin |
10,289 | 9,504 | 785 | 8.3 | % | |||||||||||
Operating Expenses |
||||||||||||||||
Corporate, district and other |
20,366 | 29,958 | (9,592 | ) | (32.0 | )% | ||||||||||
Interest income |
(27 | ) | (39 | ) | 12 | 30.8 | % | |||||||||
Goodwill and impairment charges |
| 2,882 | (2,882 | ) | # | |||||||||||
Intercompany interest expense |
1,139 | 1,087 | 52 | 4.8 | % | |||||||||||
Restructuring costs |
994 | 4,291 | (3,297 | ) | (76.8 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Total operating expense |
22,472 | 38,179 | (15,707 | ) | (41.1 | )% | ||||||||||
|
|
|
|
|
|
|||||||||||
Net Loss Before Taxes |
(12,183 | ) | (28,675 | ) | 16,492 | 57.5 | % | |||||||||
Income tax benefit |
(140 | ) | (975 | ) | 835 | 85.6 | % | |||||||||
|
|
|
|
|
|
|||||||||||
Net Loss |
$ | (12,043 | ) | $ | (27,700 | ) | $ | 15,657 | 56.5 | % | ||||||
|
|
|
|
|
|
|||||||||||
Net Loss |
$ | (12,043 | ) | $ | (27,700 | ) | $ | 15,657 | 56.5 | % | ||||||
Adjustments: |
||||||||||||||||
Goodwill and impairment charges |
| 2,882 | (2,882 | ) | # | |||||||||||
Restructuring costs |
994 | 4,291 | (3,297 | ) | (76.8 | )% | ||||||||||
Intangible asset amortization |
6 | 326 | (320 | ) | (98.2 | )% | ||||||||||
Cumulative tax effect of adjustments |
(394 | ) | (3,787 | ) | 3,393 | 89.6 | % | |||||||||
|
|
|
|
|
|
|||||||||||
Adjusted Earnings |
$ | (11,437 | ) | $ | (23,988 | ) | $ | 12,551 | 52.3 | % | ||||||
|
|
|
|
|
|
#Variance greater than 100% or not meaningful
Total revenue in the United Kingdom was $33.7 million for 2016, a decrease of $20.9 million, or 38.3%. The decline in the British Pound Sterling from an average exchange rate of $1.5282 for the year ended December 31, 2015 to an average exchange rate of $1.3552 for the year ended December 31, 2016, had a negative impact on our consolidated results. On a constant currency basis, revenue in the United Kingdom decreased $16.5 million, or 30.2%, compared to the prior year. Revenue declined in the United Kingdom because of product mix and volume changes, as well as the closure of nearly half of the U.K. stores in December 2015.
The gross margin for our U.K. operations for 2016 was $10.3 million, an increase of $0.8 million, or 8.3%, compared to the prior year. Gross margin as a percent of revenue improved to 30.5% compared to 17.4% in the prior year. Improvement in the provision for losses, lower advertising expense, and the impact of the closure of the ten stores to occupancy and salaries and benefits expense all contributed to gross margin improvement.
83
Unaudited Quarterly Results of Operations
The following table contains our unaudited consolidated quarterly statement of income data for each of the eight quarters preceding and including the quarter ended September 30, 2017. We derived this information from our unaudited consolidated financial statements, which, in the opinion of management have been prepared on the same basis as our audited consolidated financial statements and include all adjustments necessary for the fair presentation of the financial information for the quarters presented. You should read this information in conjunction with the consolidated financial statements and related notes included elsewhere in this prospectus.
Three Months Ended | ||||||||||||||||||||||||||||||||
Sep 30,
2017 |
Jun 30,
2017 |
Mar 31,
2017 |
Dec 31,
2016 |
Sep 30,
2016 |
Jun 30,
2016 |
Mar 31,
2016 |
Dec 31,
2015 |
|||||||||||||||||||||||||
Revenue |
$ | 255,119 | $ | 216,944 | $ | 224,580 | $ | 218,904 | $ | 212,924 | $ | 194,307 | $ | 202,461 | $ | 216,843 | ||||||||||||||||
Provision for losses |
99,341 | 65,446 | 61,736 | 80,987 | 77,024 | 58,029 | 42,249 | 83,996 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Net revenue |
155,778 | 151,498 | 162,844 | 137,917 | 135,900 | 136,278 | 160,212 | 132,847 | ||||||||||||||||||||||||
Cost of providing services |
||||||||||||||||||||||||||||||||
Salaries and benefits |
26,821 | 26,300 | 26,433 | 25,182 | 26,273 | 26,108 | 26,978 | 25,834 | ||||||||||||||||||||||||
Occupancy |
13,815 | 13,511 | 14,095 | 14,141 | 13,345 | 13,864 | 13,159 | 13,780 | ||||||||||||||||||||||||
Office |
5,715 | 4,936 | 4,868 | 6,169 | 4,816 | 4,729 | 4,749 | 6,152 | ||||||||||||||||||||||||
Other costs of providing services |
12,991 | 13,108 | 14,855 | 14,232 | 12,600 | 12,430 | 14,355 | 13,331 | ||||||||||||||||||||||||
Advertising |
16,270 | 11,641 | 7,688 | 14,996 | 11,831 | 10,296 | 6,798 | 14,351 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total cost of providing services |
75,612 | 69,496 | 67,939 | 74,720 | 68,865 | 67,427 | 66,039 | 73,448 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Gross margin |
80,166 | 82,002 | 94,905 | 63,197 | 67,035 | 68,851 | 94,173 | 59,399 | ||||||||||||||||||||||||
Operating (income) expense |
||||||||||||||||||||||||||||||||
Corporate and district |
34,254 | 36,085 | 33,266 | 29,556 | 30,807 | 32,056 | 32,700 | 35,417 | ||||||||||||||||||||||||
Interest expense |
18,844 | 18,484 | 23,366 | 16,155 | 15,987 | 16,039 | 16,153 | 16,415 | ||||||||||||||||||||||||
Loss (gain) on extinguishment of debt |
| | 12,458 | | (6,991 | ) | | | | |||||||||||||||||||||||
Restructuring costs |
7,393 | | | 651 | 1,486 | 186 | 1,295 | 4,257 | ||||||||||||||||||||||||
Other (income)/ expense |
(7 | ) | 472 | (273 | ) | (286 | ) | (114 | ) | (464 | ) | 19 | 2,229 | |||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Total other expense |
60,484 | 55,041 | 68,817 | 46,076 | 41,175 | 47,817 | 50,167 | 58,318 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Net income (loss) before taxes |
19,682 | 26,961 | 26,088 | 17,121 | 25,860 | 21,034 | 44,006 | 1,081 | ||||||||||||||||||||||||
Provision for income tax expense (benefit) |
9,920 | 10,619 | 9,450 | 7,536 | 10,083 | 7,862 | 17,096 | (7,242 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Net income (loss) |
$ | 9,762 | $ | 16,342 | $ | 16,638 | $ | 9,585 | $ | 15,777 | $ | 13,172 | $ | 26,910 | $ | 8,323 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Adjustments to arrive at Adjusted Earnings: |
||||||||||||||||||||||||||||||||
Net income (loss) |
$ | 9,762 | $ | 16,342 | $ | 16,638 | $ | 9,585 | $ | 15,777 | $ | 13,172 | $ | 26,910 | $ | 8,323 | ||||||||||||||||
Loss (gain) on extinguishment of debt |
| | 12,458 | | (6,991 | ) | | | | |||||||||||||||||||||||
Restructuring costs |
7,393 | | | 651 | 1,486 | 186 | 1,295 | 4,257 | ||||||||||||||||||||||||
Legal settlement cost |
361 | 1,950 | | | | | | | ||||||||||||||||||||||||
Transaction-related costs |
123 | 146 | 2,254 | 183 | 146 | | | (46 | ) | |||||||||||||||||||||||
Share-based cash and non-cash compensation |
454 | 1,180 | 126 | 311 | 318 | 213 | 306 | 318 | ||||||||||||||||||||||||
Intangible asset amortization |
634 | 590 | 583 | 784 | 509 | 1,121 | 1,078 | 1,093 | ||||||||||||||||||||||||
Cumulative effect of tax adjustments |
(4,518 | ) | (1,523 | ) | (5,582 | ) | (791 | ) | 1,824 | (623 | ) | (1,039 | ) | (2,839 | ) | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Adjusted Earnings (Loss) |
$ | 14,209 | $ | 18,685 | $ | 26,477 | $ | 10,723 | $ | 13,069 | $ | 14,069 | $ | 28,550 | $ | 11,106 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Adjustments to arrive at Adjusted EBITDA: |
||||||||||||||||||||||||||||||||
Net income (loss) |
$ | 9,762 | $ | 16,342 | $ | 16,638 | $ | 9,585 | $ | 15,777 | $ | 13,172 | $ | 26,910 | $ | 8,323 | ||||||||||||||||
Provision for income taxes |
9,920 | 10,619 | 9,450 | 7,536 | 10,083 | 7,862 | 17,096 | (7,242 | ) | |||||||||||||||||||||||
Interest expense |
18,844 | 18,484 | 23,366 | 16,155 | 15,987 | 16,039 | 16,153 | 16,415 | ||||||||||||||||||||||||
Depreciation and amortization |
4,790 | 4,676 | 4,654 | 4,661 | 3,916 | 5,547 | 4,781 | 4,815 | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
EBITDA |
43,316 | 50,121 | 54,108 | 37,937 | 45,763 | 42,620 | 64,940 | 22,311 | ||||||||||||||||||||||||
Loss (gain) on extinguishment of debt |
| | 12,458 | | (6,991 | ) | | | | |||||||||||||||||||||||
Restructuring costs |
7,393 | | | 651 | 1,486 | 186 | 1,295 | 4,257 | ||||||||||||||||||||||||
Legal settlement cost |
361 | 1,950 | | | | | | | ||||||||||||||||||||||||
Other adjustments |
(218 | ) | (201 | ) | (314 | ) | 19 | 26 | (282 | ) | 234 | 2,268 | ||||||||||||||||||||
Share-based cash and non-cash compensation |
454 | 1,180 | 126 | 311 | 318 | 213 | 306 | 318 | ||||||||||||||||||||||||
Transaction-related costs |
123 | 146 | 2,254 | 183 | 146 | | | (46 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||
Adjusted EBITDA |
$ 51,429 | $ | 53,196 | $ | 68,632 | $ | 39,101 | $ | 40,748 | $ | 42,737 | $ | 66,775 | $ | 29,108 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
84
Store Count
From January 1, 2015 through September 30, 2017 we opened 50 stores: 20 in the United States and 30 in Canada. During the same period we closed 38 stores: 13 stores in Texas that were primarily underperforming former Money Box stores, one store in Missouri that we were unable to reopen due to fire damage, one store in Canada due to a lease that was not renewed, and 23 store locations in the United Kingdom as part of a plan to reduce operating losses in the wake of ongoing regulatory and market changes in the United Kingdom.
United States | Canada | United Kingdom | Total | |||||||||||||
January 1, 2015 store count |
209 | 161 | 23 | 393 | ||||||||||||
De novo store openings |
19 | 23 | | 42 | ||||||||||||
Closed stores |
(5 | ) | | (10 | ) | (15 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2015 store count |
223 | 184 | 13 | 420 | ||||||||||||
De novo store openings |
1 | 7 | | 8 | ||||||||||||
Closed stores |
(8 | ) | | | (8 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
December 31, 2016 store count |
216 | 191 | 13 | 420 | ||||||||||||
De novo store openings |
| | | | ||||||||||||
Closed stores |
(1 | ) | (1 | ) | (13 | ) | (15 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
September 30, 2017 store count |
215 | 190 | | 405 | ||||||||||||
|
|
|
|
|
|
|
|
Currency Information
We operate in the United States, Canada and the United Kingdom and report our consolidated results in U.S. dollars.
Changes in our reported revenues and net income include the effect of changes in currency exchange rates. All balance sheet accounts are translated into U.S. dollars at the currency exchange rate in effect at the end of each period. The income statement is translated at the average rates of exchange for the period. Currency translation adjustments are recorded as a component of Accumulated Other Comprehensive Income in stockholders equity.
Constant Currency Analysis
We have operations in the United States, Canada and the United Kingdom. In the nine months ended September 30, 2017 and 2016, approximately 23.6% and 27.4%, respectively, of our revenues were originated in currencies other than the U.S. Dollar. For the years ended December 31, 2016 and 2015, approximately 26.8% and 29.5%, respectively, of our revenues were originated in currencies other than the U.S. Dollar. As a result, changes in our reported results include the impacts of changes in foreign currency exchange rates for the Canadian Dollar and the British Pound Sterling.
Nine Months Ended September 30, 2017 and 2016
Average Exchange Rates | ||||||||||||||||
Nine Months Ended September 30, | Change | |||||||||||||||
2017 | 2016 | $ | % | |||||||||||||
Canadian Dollar |
$ | 0.7656 | $ | 0.7571 | $ | 0.0085 | 1.1 | % | ||||||||
British Pound Sterling |
$ | 1.2754 | $ | 1.3927 | $ | (0.1173 | ) | (8.4 | )% |
85
Year Ended December 31, 2016 and 2015
Average Exchange Rates | ||||||||||||||||
Year Ended December 31, | Change | |||||||||||||||
2016 | 2015 | $ | % | |||||||||||||
Canadian Dollar |
$ | 0.7551 | $ | 0.7832 | $ | (0.0281 | ) | (3.6 | )% | |||||||
British Pound Sterling |
1.3552 | 1.5282 | (0.1730 | ) | (11.3 | ) |
As additional information, we have provided a constant currency analysis below to remove the impact of the fluctuation in foreign exchange rates and utilize constant currency results in our analysis of segment performance. All conversion rates below are based on the U.S. Dollar equivalent to one of the applicable foreign currencies. We believe that the constant currency assessment below is a useful measure in assessing the comparable growth and profitability of our operations.
The revenues and gross margin below for the nine months ended September 30, 2017 were calculated using the actual average exchange rate for the nine months ended September 30, 2016:
Nine Months Ended
September 30, |
Change | |||||||||||||||
(dollars in thousands) |
2017 | 2016 | $ | % | ||||||||||||
Revenuesconstant currency basis: |
||||||||||||||||
Canada |
$ | 134,132 | $ | 140,852 | $ | (6,720 | ) | (4.8 | )% | |||||||
United Kingdom |
31,535 | 25,733 | 5,802 | 22.5 | % | |||||||||||
Gross marginconstant currency basis: |
||||||||||||||||
Canada |
$ | 45,438 | $ | 60,950 | $ | (15,512 | ) | (25.5 | )% | |||||||
United Kingdom |
10,719 | 9,053 | 1,666 | 18.4 | % |
The revenues and gross margin below for the year ended December 31, 2016 were calculated using the actual average exchange rate for the year ended December 31, 2015.
Year Ended
December 31, |
Change | |||||||||||||||
(dollars in thousands) |
2016 | 2015 | $ | % | ||||||||||||
Revenuesconstant currency basis: |
||||||||||||||||
Canada |
$ | 194,974 | $ | 184,859 | $ | 10,115 | 5.5 | % | ||||||||
United Kingdom |
38,110 | 54,608 | (16,498 | ) | (30.2 | )% | ||||||||||
Gross marginconstant currency basis: |
||||||||||||||||
Canada |
$ | 81,447 | $ | 77,469 | $ | 3,978 | 5.1 | % | ||||||||
United Kingdom |
11,518 | 9,504 | 2,014 | 21.2 | % |
Liquidity and Capital Resources
Our principal sources of liquidity to fund the loans we make to our customers are cash provided by operations, funds from third-party lenders under our CSO programs and our Non-Recourse U.S. SPV Facility, which finances the origination of eligible U.S. Unsecured and Secured Installment Loans at an advance rate of 80%. In February 2017, we issued our 12.00% Senior Secured Notes due 2022 to refinance similar notes that were nearing maturity and whose proceeds had been used primarily for acquisitions and general corporate purposes. As of September 30, 2017, we were in compliance with all financial ratios, covenants and other requirements set forth in our debt agreements. We anticipate that our primary use of cash will be to fund growth in our working capital, finance capital expenditures and meet our debt obligations. Our level of cash flow provided by operating activities typically experiences some seasonal fluctuation related to our levels of net income and changes in working capital levels, particularly loan receivables.
86
Unexpected changes in our financial condition or other unforeseen factors may result in our inability to obtain third-party financing or could increase our borrowing costs in the future. We have the ability to adjust our volume of lending to consumers which would reduce cash outflow requirements while increasing cash inflows through loan repayments to the extent we experience any short-term or long-term funding shortfalls. We may also sell or securitize our assets, draw on our available line of credit, enter into additional refinancing agreements and reduce our capital spending in order to generate additional liquidity. We believe our cash on hand and available borrowings provide us with sufficient liquidity for at least the next twelve months.
Borrowings
Our long-term debt consisted of the following as of September 30, 2017, December 31, 2016 and December 31, 2015 (net of deferred financing costs):
(in thousands) |
September 30,
2017 (unaudited) |
December 31,
2016 |
December 31,
2015 |
|||||||||
12.00% Senior Secured Notes |
$ | 449,737 | $ | | $ | | ||||||
May 2011 10.75% Senior Secured Notes due 2018 |
| 223,164 | 246,692 | |||||||||
May 2012 10.75% Senior Secured Notes due 2018 |
| 89,734 | 89,406 | |||||||||
February 2013 10.75% Senior Secured Notes due 2018 |
| 101,184 | 101,937 | |||||||||
Senior Cash Pay Notes |
| 124,365 | 123,640 | |||||||||
Non-Recourse U.S. SPV Facility |
112,135 | 63,054 | | |||||||||
ABL Facility |
| 23,406 | | |||||||||
Revolving credit facility |
| | 8,050 | |||||||||
|
|
|
|
|
|
|||||||
Total long-term debt, including current portion |
561,872 | 624,907 | 569,725 | |||||||||
Less: current maturities of long-term debt |
| 147,771 | 8,050 | |||||||||
|
|
|
|
|
|
|||||||
Long-term debt |
$ | 561,872 | $ | 477,136 | $ | 561,675 | ||||||
|
|
|
|
|
|
Available Credit Facilities and Other Resources
12.00% Senior Secured Notes
On February 15, 2017, CFTC issued $470.0 million aggregate principal amount of 12.00% Senior Secured Notes due March 1, 2022, or the 12.00% Senior Secured Notes. Interest on the 12.00% Senior Secured Notes is payable semiannually, in arrears, on March 1 and September 1 of each year, beginning on September 1, 2017. The proceeds from the 12.00% Senior Secured Notes were used, together with available cash, to (i) redeem the outstanding 10.75% Senior Secured Notes due 2018 of our wholly-owned subsidiary, CURO Intermediate, (ii) redeem our outstanding 12.00% Senior Cash Pay Notes due 2017, or the Senior Cash Pay Notes and (iii) pay fees, expenses, premiums and accrued interest in connection with the offering. The extinguishment of all of the 10.75% Senior Secured Notes due 2018 and the Senior Cash Pay Notes resulted in a pretax loss of $12.5 million in the nine months ended September 30, 2017.
In connection with this debt issuance we capitalized financing costs of approximately $14.0 million, the balance of which are included in the Interim Consolidated Balance Sheets as a component of Long-Term Debt, and are being amortized over the term of the Senior Secured Notes and included as a component of interest expense.
The 12.00% Senior Secured Notes rank senior in right of payment to all of our and our guarantor entities existing and future subordinated indebtedness and equal in right of payment with all our and our guarantor entities existing and future senior indebtedness of the Company, including borrowings under our revolving credit facilities. The 12.00% Senior Secured Notes and the guarantees are effectively subordinated to our credit facilities and certain other indebtedness to the extent of the value of the assets securing such indebtedness and to liabilities of our subsidiaries that are not guarantors.
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The 12.00% Senior Secured Notes are secured by liens on substantially all of our and the guarantors assets, subject to certain exceptions. On or after March 1, 2019, we may redeem some or all of the Notes at a premium that will decrease over time, plus accrued and unpaid interest, if any to the applicable date of redemption. Prior to March 1, 2019, we will be able to redeem up to 40% of the Notes at a redemption price of 112% of the principal amount of the Notes redeemed, plus accrued and unpaid interest to the redemption date with the net cash proceeds of certain equity offerings. Prior to March 1, 2019, subject to certain terms and conditions, we may redeem the Notes, in whole or in part, by paying a make-whole premium plus accrued and unpaid interest to the redemption date.
On October 27, 2017, CFTC agreed to sell $135 million aggregate principal amount of additional Senior Secured Notes in a private offering exempt from the registration requirements of the Securities Act. See Recent Developments for additional information.
Non-Recourse U.S. SPV Facility
On November 17, 2016, CURO Receivables Finance I, LLC, a Delaware limited liability company, and our wholly-owned subsidiary, which we refer to in this prospectus as the SPV Borrower, entered into a five-year revolving credit facility with Victory Park Management, LLC and certain other lenders, or our Non-Recourse U.S. SPV Facility. This facility provides for an $80.0 million term loan and $45.0 million of initial revolving borrowing capacity, with the ability to expand the revolving borrowing capacity over time and an automatic expansion to $70.0 million on the six-month anniversary of the closing date, May 17, 2017. On November 17, 2016, CURO Intermediate entered into a six-month recourse credit facility with Victory Park Management, LLC and certain other lenders, or the ABL Facility, which provided for $25.0 million of borrowing capacity. The ABL Facility matured in May 2017 and was fully converted to the Non-Recourse SPV Facility. See Note 11, Long-Term Debt of our Notes to Interim Consolidated Financial Statements included elsewhere in this prospectus for further detail.
Senior Revolver
On September 1, 2017, we closed a $25 million Senior Secured Revolving Loan Facility, or the Senior Revolver. The negative covenants of the Senior Revolver generally conform to the related provisions in the Indenture for our 12.00% Senior Secured Notes. We believe this facility complements our other financing sources, while providing seasonal short-term liquidity. Under the Senior Revolver, there is $25 million maximum availability, including up to $5 million of standby letters of credit, for a one-year term, renewable for successive terms following annual review. The Senior Revolver accrues interest at the one-month LIBOR (which may not be negative) plus 5.00% per annum and is repayable on demand. The terms of the Senior Revolver require that the outstanding balance be reduced to $0 for at least 30 consecutive days in each calendar year. The Senior Revolver is guaranteed by all subsidiaries of CURO that guarantee our 12.00% Senior Secured Notes and is secured by a lien on substantially all assets of CURO and the guarantor subsidiaries that is senior to the lien securing our 12.00% Senior Secured Notes. The Senior Revolver was undrawn at September 30, 2017.
Cash Money Revolving Credit Facility
On November 4, 2011, one of our Canadian subsidiaries, Cash Money, entered into a CAD 7.5 million revolving credit facility, or the Cash Money Revolving Credit Facility, which is intended to afford us an additional element of liquidity to meet the short-term working capital needs of our Canadian operations. Aggregate draws on the Cash Money Revolving Credit Facility are limited to the lesser of: (i) the borrowing base, which is defined as a percentage of cash, deposits in transit and accounts receivable, and (ii) CAD 7.5 million.
The Cash Money Revolving Credit Facility is collateralized by substantially all of Cash Moneys assets and contains various covenants that include, among other things, that the aggregate borrowings outstanding under the
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facility not exceed the borrowing base, restrictions on the encumbrance of assets and the creation of indebtedness. Borrowings under the Cash Money Revolving Credit Facility are subject to compliance with these covenants. Borrowings under the Cash Money Revolving Credit Facility bear interest (per annum) at the prime rate of a Canadian chartered bank plus 1.95%.
The Cash Money Revolving Credit Facility was undrawn at September 30, 2017 and December 31, 2016. On September 30, 2016, the CAD 7.5 million borrowing capacity under our revolving credit facility was reduced by $0.2 million in stand-by letters of credit.
Balance Sheet Changes September 30, 2017 compared to December 31, 2016
Cash Cash decreased from 2016 year-end primarily because of the redemption of the Companys 10.75% Senior Secured Notes due 2017 and CURO Intermediates 10.75% Senior Secured Notes due 2018, or the Former Senior Secured Notes. On February 15, 2017, the Company issued $470 million of 12.00% Senior Secured Notes due March 1, 2022. The proceeds were used to redeem the $539.9 million outstanding of Former Senior Secured Notes. In total, the redemption of the Former Senior Secured Notes required $122.5 million of our cash after including accrued interest, prepayment penalties, transaction costs and original-issue discount. The decrease in cash from the refinancing was offset partially by cash generated by operations in the first nine months of 2017.
Restricted Cash Restricted cash increased from 2016 year-end because of increased cash in our consolidated wholly-owned, bankruptcy-remote special purpose subsidiaries, or VIEs, from underlying Installment Loan volume growth.
Gross Loans Receivable and Allowance for Loan Losses Changes in Gross Loans Receivable and related Allowance for Loan Losses are due to high customer demand and loan origination volumes during the first nine months of 2017, concentrated in Installment Loans. The Company originated $563.1 million and $135.8 million of Unsecured and Secured Installment Loans, respectively, in the first nine months of 2017.
Other Assets Other assets increased primarily because of our $5.0 million investment in Cognical Holdings, Inc. preferred stock. For additional information, see Note 14, Financial Instruments and Concentrations of our Notes to Interim Consolidated Financial Statements included elsewhere in this prospectus.
Long-term debt (including current maturities) and Accrued Interest Changes from year-end 2016 are due to the refinancing of the Former Senior Secured Notes and the conversion of the ABL Facility to the Non-Recourse U.S. SPV Facility. See Note 11, Long-Term Debt of our Notes to Interim Consolidated Financial Statements included elsewhere in this prospectus for detailed discussion of changes in debt balances.
Cash Flows
The following highlights our cash flow activity and the sources and uses of funding during the periods indicated:
Nine Months Ended | Year Ended | |||||||||||||||
(in thousands) |
September 30,
2017 (unaudited) |
September 30,
2016 (unaudited) |
December 31,
2016 |
December 31,
2015 |
||||||||||||
Net cash provided by operating activities |
$ | 29,412 | $ | 85,829 | $ | 47,712 | $ | 17,114 | ||||||||
Net cash (used in) provided by investing activities |
(16,252 | ) | (3,811 | ) | (12,922 | ) | (26,255 | ) | ||||||||
Net cash (used in) provided by financing activities |
(115,555 | ) | (8,050 | ) | 59,382 | (12,321 | ) |
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Nine Months Ended September 30, 2017 and 2016
Cash flows provided by operating activities
During the nine months ended September 30, 2017 our operating activities provided net cash of $29.4 million. Contributing to current year net cash provided by operating activities were net income of $42.7 million, and non-cash expenses, such as depreciation and amortization, the provision for loan losses, and a loss on debt extinguishment for a total of $256.9 million, partially offset by changes in our operating assets and liabilities of $270.2 million. The most significant change within operating assets and liabilities was a $295.1 million increase in loans receivable.
Cash flows used in investing activities
During the nine months ended September 30, 2017, we used cash of $16.3 million to increase our restricted cash balances by approximately $3.4 million to purchase approximately $7.9 million of property and equipment, including software licenses and to purchase $5.0 of Cognical Holdings preferred shares. The increase in restricted cash was primarily attributable to our Non-Recourse U.S. SPV Facility.
Cash flows used in financing activities
Net cash used for the nine months ended September 30, 2017 was $115.6 million. During this period we extinguished our 10.75% Senior Secured Notes for $426.0 million (which included $8.9 million of call premium) and extinguished our Senior Cash Pay Notes for $130.1 million. These payments were partially financed by proceeds of $447.6 million (net of $14.0 million of debt issuance costs and $8.5 million of discount on notes issued) from the issuance of 12.00% Senior Secured Notes due 2022. We also had net borrowings of $24.9 million from our Non-Recourse U.S. SPV Facility and our ABL Facility. We also paid dividends of $36.5 million to our stockholders.
Years Ended December 31, 2016 and 2015
Cash flows provided by operating activities
During the year ended December 31, 2016 our operating activities provided net cash of $47.7 million, compared to $17.1 million in net cash used in operating activities during the year ended December 31, 2015. Contributing to net cash provided by operating activities in 2016 were net income of $65.4 million, and non-cash expenses, such as depreciation and amortization, the provision for loan losses, and a benefit related to deferred income taxes, of $278.7 million; non-cash restructuring costs of $0.5 million, partially offset by a $7.0 million non-cash benefit from a gain on debt extinguishment and a $290.0 million net decrease in cash resulting from changes in operating assets and liabilities. The most significant change within operating assets and liabilities was a $287.8 million increase in loans receivable, net of provision for losses.
Loans receivable will fluctuate from period to period depending on the timing of loan issuances and collections. A seasonal decline in consumer loans receivable typically takes place during the first quarter of the year and is driven by income tax refunds in the United States. Customers receiving income tax refunds will use the proceeds to pay outstanding loan balances, resulting in an increase of our net cash balances and a decrease of our consumer loans receivable balances. Consumer loans receivable balances typically reflect growth during the remainder of the year.
Cash flows used in investing activities
During the year ended December 31, 2016 we used net cash of $16.0 million for the purchase of property and equipment, including software licenses, partially offset by a $3.1 million decrease in our restricted cash
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balance. This compared to $26.3 million in net cash used in investing activities during the year ended December 31, 2015. The growth in property and equipment was driven primarily by capital expenditures associated with new store openings in Canada, store refreshes in the United States, and expenditures for software licenses. For the year ended December 31, 2016 we also received £1.4 million ($1.9 million) of funds previously placed in a collateral account with a U.K. banking institution, and received $4.0 million of funds previously placed in a collateral account with a U.S. banking institution. As a result of the borrowings from the Non-Recourse U.S. SPV Facility, approximately $2.8 million of cash was restricted.
Cash flows provided by (used in) financing activities
During the year ended December 31, 2016, net cash provided by financing activities was $59.4 million, compared to $12.3 million in net cash used in financing activities during the year ended December 31, 2015. The change was primarily due to $91.7 million of proceeds received from new borrowings from our newly created Non-Recourse U.S. SPV Facility and ABL Facility. In addition, we incurred additional deferred financing costs associated with this debt. During the year ended December 31, 2016, CURO Intermediate used cash of $18.9 million to purchase $25.1 million of outstanding May 2011 10.75% Senior Secured Notes at 71.25% of the principal, plus accrued and unpaid interest of $1.0 million via an open-market purchase. During the year, we also received proceeds from draws on our credit facilities of $30.0 million, and repaid $38.1 million of the outstanding balance of borrowings on our credit facilities. Borrowings under our credit facilities provided us with short-term liquidity and were used for working capital requirements and to fund capital expenditures.
Contractual Obligations
As discussed in Liquidity and Capital ResourcesBorrowings, on February 15, 2017, CFTC issued $470.0 million of 12.00% Senior Secured Notes. Interest on the notes is payable semiannually, in arrears, on March 1 and September 1 of each year, beginning on September 1, 2017. The proceeds from the notes and available cash were used to (i) redeem 10.75% Senior Secured Notes due 2018 of our subsidiary, CURO Intermediate, (ii) redeem our 12.00% Senior Cash Pay Notes due 2017, and (iii) pay fees, expenses, premiums and accrued interest in connection with the offering.
On September 1, 2017, we closed a $25.0 million Senior Secured Revolving Loan Facility, or the Senior Revolver. The negative covenants of the Senior Revolver generally conform to the related provisions of the Indenture dated February 15, 2017 for our 12.00% Senior Secured Notes and complements our other financing sources, while providing seasonal short-term liquidity. The Senior Revolver was undrawn at September 30, 2017.
Additional Notes Offering and Dividend
On October 27, 2017, CFTC agreed to sell $135 million principal amount of additional 12.00% Senior Secured Notes due 2022 in a private offering exempt from the registration requirements of the Securities Act, or the Additional Notes Offering. We will use the proceeds from the Additional Notes Offering, together with available cash, to (i) pay a cash dividend, or the Proposed Dividend, in an amount not to exceed $140 million, and (ii) pay fees and expenses, in connection therewith. CFTC sought the consent of the holders holding a majority in the outstanding principal amount outstanding of the current 12.00% Senior Secured Notes due 2022 to a one-time waiver with respect to the restrictions contained in Section 5.07(a) of the indenture governing the Senior Secured Notes to permit the Proposed Dividend. The offering is expected to be completed on November 2, 2017, subject to the satisfaction or waiver of customary closing conditions.
Other than the above transactions, or as otherwise disclosed in this prospectus, there have been no significant developments with respect to our contractual obligations since December 31, 2016.
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Historical
The following table sets forth a summary of our principal future legal obligations and commitments, as well as the interest payable on our senior secured notes and cash pay notes, as of December 31, 2016, prior to the issuance and redemption discussed above:
Payments Due by Period | ||||||||||||||||||||
(in thousands) |
Total |
Less Than
One Year |
One to
Three Years |
Three to
Five Years |
More
Than Five Years |
|||||||||||||||
Long-term obligations(1) |
$ | 633,826 | $ | 148,406 | $ | 417,109 | $ | 68,311 | $ | | ||||||||||
Interest on long-term obligations |
135,914 | 70,738 | 44,401 | 20,775 | | |||||||||||||||
Operating leases |
116,135 | 26,296 | 39,357 | 24,628 | 25,854 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 885,875 | $ | 245,440 | $ | 500,867 | $ | 113,714 | $ | 25,854 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Includes principal payment on our Senior Cash Pay Notes, which we redeemed in 2017; our ABL Facility, which matured in 2017; our 10.75% Senior Secured Notes due 2018, which we redeemed in 2017; the present value of the escrow note related to the Cash Money acquisition, which matures in 2019; and our Non-Recourse U.S. SPV Facility, which matures in 2021. |
Pro Forma
In February 2017, CFTC issued $470.0 million of 12.00% Senior Secured Notes and we redeemed two other series of outstanding notes. Additionally, in May 2017 our ABL Facility matured, and our Non-Recourse U.S. SPV Facility expanded by $70.0 million to a total capacity of $150.0 million. On October 27, 2017, CFTC agreed to sell $135 million principal amount of additional 12.00% Senior Secured Notes due 2022. The following table presents our principal future legal obligations and commitments, as of December 31, 2016, after giving pro forma impact to the above mentioned items.
Pro FormaPayments Due by Period | ||||||||||||||||||||
(in thousands) |
Total |
Less
Than One Year |
One to
Three Years |
Three to
Five Years |
More
Than Five Years |
|||||||||||||||
Long term obligations(1) |
$ | 698,944 | $ | 23,406 | $ | 2,227 | $ | 68,311 | $ | 605,000 | ||||||||||
Interest on long-term obligations |
408,914 | 39,338 | 167,301 | 165,975 | 36,300 | |||||||||||||||
Operating leases |
116,135 | 26,296 | 39,357 | 24,628 | 25,854 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total |
$ | 1,223,993 | $ | 89,040 | $ | 208,885 | $ | 258,914 | $ | 667,154 | ||||||||||
|
|
|
|
|
|
|
|
|
|
(1) | Includes the present value of the escrow note related to the Cash Money acquisition, which matures in 2019; our Non-Recourse U.S. SPV Facility, which matures in 2021; and principal payments on CFTCs Senior Secured Notes, which mature in 2022. |
Operating Leases
We have entered into operating lease agreements for the buildings in which we operate that expire at various times through 2030. The majority of the leases have an original term of five years with two, five-year renewal options. Most of the leases have escalation clauses and several also require payment of certain period costs including maintenance, insurance and property taxes.
Some of the leases are with related parties and have terms similar to the non-related party leases previously described. Rent expense on unrelated third-party leases for the years ended December 31, 2016, 2015 and 2014
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was $23.1 million, $23.3 million, and $22.3 million, respectively; and for related-party leases was $3.3 million, $3.2 million, and $3.2 million, respectively.
Future minimum lease payments that we are contractually obligated to make under operating leases are as follows at December 31, 2016.
(in thousands) |
Third Party | Related-Party | Total | |||||||||
2017 |
$ | 22,933 | $ | 3,363 | $ | 26,296 | ||||||
2018 |
20,382 | 1,115 | 21,497 | |||||||||
2019 |
17,030 | 830 | 17,860 | |||||||||
2020 |
13,307 | 725 | 14,032 | |||||||||
2021 |
9,921 | 675 | 10,596 | |||||||||
Thereafter |
24,330 | 1,524 | 25,854 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 107,903 | $ | 8,232 | $ | 116,135 | ||||||
|
|
|
|
|
|
Off-Balance Sheet Arrangements
We originate loans in all of our store locations and online, except for our operations in Texas and Ohio. In these states, we operate as a Credit Services Organization, or CSO, through three of our operating subsidiaries. Our CSO program in Texas is licensed as a Credit Access Business, or CAB, under Texas Finance Code Chapter 393 and regulated by the Texas Office of the Consumer Credit Commissioner. Our CSO program in Ohio is registered under the Credit Services Organization Act, Ohio Revised Code Sections 4712.01 to 4712.99, and regulated by the Ohio Department of Commerce Division of Financial Institutions. As a CAB, we charge our customers a fee, or CSO fee, for arranging an unrelated third-party to make a loan to that customer. When a customer executes an agreement with us under our CSO programs, we agree, for a CSO fee payable to us by the customer, to provide certain services to the customer, one of which is to guarantee the customers obligation to repay the loan the customer receives from the third-party lender. For CSO loans, each lender is responsible for providing the criteria by which the customers application is underwritten and, if approved, determining the amount of the customer loan. We in turn are responsible for assessing whether or not we will guarantee the loan. This guarantee represents an obligation to purchase specific loans if they go into default. Since the loans are made by a third-party lender, they are not included in our Consolidated Balance Sheets as loans receivable.
As of September 30, 2017, the maximum amount payable under all such guarantees was $59.1 million, compared to $59.6 million at December 31, 2016. Should we be required to pay any portion of the total amount of the loans we have guaranteed, we will attempt to recover the amount we pay from the customers. We hold no collateral in respect of the guarantees. The initial measurement of this guarantee liability is recorded at fair value and reported in the Credit services organization guarantee liability line in our Consolidated Balance Sheets. The fair value of the guarantee is measured by assessing the nature of the loan products, the credit worthiness of the borrowers in the customer base, the Companys historical loan default history for similar loans, industry loan default history, and historical collection rates on similar products, current default trends, past-due account roll rates, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. Our guarantee liability was $16.9 million and $17.1 million at September 30, 2017 and December 31, 2016, respectively.
Additionally, we enter into operating leases in the normal course of business. Our operating lease obligations are discussed in Note 18, Operating Leases of our Notes to Consolidated Financial Statements included elsewhere in this prospectus, and are also included in the table under Contractual Obligations above.
Critical Accounting Policies
We consider our accounting policies related to revenue recognition, provision for loan losses, allowance for loan losses and CSO guarantee liability, share-based compensation, goodwill, business combination accounting,
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identifiable intangible assets, and income taxes to be critical policies in understanding our historical and future performance.
Revenue Recognition
We offer a variety of loan products including Installment, Open-End and Single-Pay Loans. Product offerings differ by jurisdiction and are governed by the laws in each separate jurisdiction.
Installment Loans, which include secured auto title installment loans and Unsecured Installment Loans, require periodic payments of principal and interest. Installment Loans are fully amortized loans with a fixed payment amount, which includes principal and accrued interest, due each period during the term of the loan. The loan terms for Installment Loans can range up to 48 months depending on state regulations. We record revenue from Installment loans on a simple-interest basis. Unpaid and accrued interest and fees are included in gross loans receivable in the Consolidated Balance Sheets.
Open-End Loans function much like a revolving line-of-credit, whereby the periodic payment is a set percentage of the customers outstanding loan balance, and there is no defined loan term. We record revenue from Open-End Loans on a simple interest basis. Unpaid and accrued interest and fees are included in gross loans receivable in the Consolidated Balance Sheets.
Single-Pay Loans are primarily payday loans and auto title loans. A Single-Pay auto title loan allows a customer to obtain a loan using their car as collateral for the loan with a typical loan term of 30 days. Revenues from Single-Pay Loan products are recognized each period on a constant-yield basis ratably over the term of each loan. We defer recognition of the unearned fees we expect to collect based on the remaining term of the loan at the end of each reporting period.
Check cashing fees, money order fees and other fees from ancillary products and services are generally recognized at the point-of-sale when the transaction is completed. We also earn revenue from the sale of credit protection insurance in the Canadian market. Insurance revenues are recognized ratably over the term of the loan.
Current and Past-Due Loans Receivable
We classify our loans receivable as either current or past-due. Single-Pay and Open-End Loans are considered past-due when a customer misses a scheduled payment and charged-off to the allowance for loan losses. The charge-off of Unsecured Installment and Secured Installment Loans was impacted by a change in accounting estimate in the nine months ended September 30, 2017.
Effective January 1, 2017, we modified the timeframe in which Installment Loans are charged-off and made related refinements to our loss provisioning methodology. Prior to January 1, 2017, we deemed all loans uncollectible and charged-off when a customer missed a scheduled payment and the loan was considered past-due. Because of the Companys continuing shift from Single-Pay to Installment Loan products and analysis of the timing and quantity of payments on early-stage versus late-stage delinquencies, we have revised our estimates and now consider Installment Loans uncollectible when the loan has been past-due for 90 consecutive days. Consequently, past-due Installment Loans remain in loans receivable, with disclosure of past-due balances, for 90 days before being charged-off against the allowance for loan losses. Subsequently, all recoveries on charged-off loans are credited to the allowance for loan losses.
In the income statement, the provision for losses for Installment Loans is based on an assessment of the cumulative net losses inherent in the underlying loan portfolios, by vintage, and other quantitative and qualitative factors. The resulting loss provision rate is applied to loan originations to determine the provision for losses. In addition to improving estimated collectability and loss recognition for Installment Loans, we also believe these refinements are better aligned with industry comparisons and practices.
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The aforementioned change was treated as a change in accounting estimate. In accordance with Accounting Standards Codification 250 which addresses a change in accounting estimate, the change is being applied prospectively and is effective January 1, 2017. As a result, some credit quality metrics for the nine months ended September 30, 2017 may not be comparable to historical periods. Throughout the remainder of this report, we refer to the change in as the Q1 Loss Recognition Change.
Installment Loans generally are considered past-due when a customer misses a scheduled payment. Loans zero to 90 days past-due included in gross loans receivable. The Company accrues interest on past-due loans until charged off. The amount of the resulting charge-off includes unpaid principal, accrued interest and any uncollected fees, if applicable. Consequently, net loss rates that include accrued interest will be higher than under the methodology applied prior to January 1, 2017.
In addition to the revised loss provision rates to accommodate the change in estimate, $56.0 million of past-due Installment Loans were included in gross loans receivable as of September 30, 2017. Before the Q1 Loss Recognition Change, no past-due loans were included in gross loans receivable.
Allowance for Loan Losses
The allowance for loan losses is primarily based on back-testing of subsequent collections history by product and cumulative aggregate net losses by product and by vintage. We do not specifically reserve for any individual loan but rather segregate loans into separate pools based upon loan portfolios containing similar risk characteristics. Additional quantitative factors, such as current default trends, past-due account roll rates (expected future cash collections by past-due aging category based on current trends) and changes to underwriting and portfolio mix are also considered in evaluating the adequacy of the allowance and current provision rates. Qualitative factors such as the impact of new loan products, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions impact managements judgment on the overall adequacy of the allowance for loan losses.
In addition to the effect on Installment provision rates and loan balances, the Q1 Loss Recognition Change affected comparability of activity in the related allowance for loan losses. Specifically, no Unsecured Installment or Secured Installment Loans were charged-off to the allowance for loan losses in the three months ended March 31, 2017 because charge-off effectively occurs on day 91 under the revised methodology and no affected loans originated during the period reached day 91 until April 2017. Actual charge-offs and recoveries on defaulted/charged-off loans from the three months ended March 31, 2017 will affect the allowance for loan losses in prospective periods. But, as discussed previously, the related net losses were recognized in the Interim Consolidated Statement of Income during the nine months ended September 30, 2017 by applying expected net loss provision rates to the related loan originations .
Credit Services Organization
Through our CSO programs, we act as a credit services organization/credit access business on behalf of customers in accordance with applicable state laws. We currently offer loans through CSO programs in stores and online in the state of Texas and online in the state of Ohio. In Texas we offer Unsecured Installment Loans and Secured Installment Loans with a maximum term of 180 days. In Ohio we offer an Unsecured Installment Loan product with a maximum term of 18 months. As a CSO we earn revenue by charging the customer a fee (the CSO fee) for arranging an unrelated third-party to make a loan to that customer. When a customer executes an agreement with us under our CSO programs, we agree, for a CSO fee payable to us by the customer, to provide certain services to the customer, one of which is to guarantee the customers obligation to repay the loan the customer receives from the third-party lender. CSO fees are calculated based on the amount of the customers loan. For CSO loans, each lender is responsible for providing the criteria by which the customers
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application is underwritten and, if approved, determining the amount of the customer loan. We in turn are responsible for assessing whether or not we will guarantee the loan. This guarantee represents an obligation to purchase specific loans if they go into default.
These guarantees are performance guarantees as defined in ASC Topic 460. Performance guarantees are initially accounted for pursuant to ASC Topic 460 and recognized at fair value, and subsequently pursuant to ASC Topic 450 as contingent liabilities when we incur losses as the guarantor. The initial measurement of the guarantee liability is recorded at fair value and reported in the Credit services organization guarantee liability line in our Consolidated Balance Sheets. The initial fair value of the guarantee is the price we would pay to a third party market participant to assume the guarantee liability. There is no active market for transferring the guarantee liability. Accordingly, we determine the initial fair value of the guarantee by estimating the expected losses on the guaranteed loans. The expected losses on the guaranteed loans are estimated by assessing the nature of the loan products, the credit worthiness of the borrowers in the customer base, our historical loan default history for similar loans, industry loan default history, and historical collection rates on similar products, current default trends, past-due account roll rates, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. We review the factors that support estimates of expected losses and the guarantee liability monthly. In addition, because the majority of the underlying loan customers make bi-weekly payments, loan-pool payment performance is evaluated more frequently than monthly.
Our guarantee liability represents the unamortized portion of the guarantee obligation required to be recognized at inception of the performance guarantee in accordance with ASC Topic 460 and a contingent liability for those performance guarantees where it is probable that we will be required to purchase the guaranteed loan from the lender in accordance with ASC Topic 450.
CSO fees are calculated based on the amount of the customers loan. We comply with the applicable jurisdictions Credit Services Organization Act or a similar statute. These laws generally define the services that we can provide to consumers and require us to provide a contract to the customer outlining our services and the cost of those services to the customer. For services we provide under our CSO programs, we receive payments from customers on their scheduled loan repayment due dates. The CSO fee is earned ratably over the term of the loan as the customers make payments. If a loan is paid off early, no additional CSO fees are due or collected. The maximum CSO loan term is 180 days and 18 months in Texas and Ohio, respectively.
Since CSO loans are made by a third party lender, we do not include them in our Consolidated Balance Sheets as loans receivable. CSO fees receivable are included in Prepaid expense and other in our Consolidated Balance Sheets. We receive payments from customers for these fees on their scheduled loan repayment due dates.
Share-Based Compensation
In accordance with applicable accounting standards, we account for share-based compensation expense for awards to our employees and directors at the estimated fair value on the grant date. The fair value of stock option
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grants is determined using the Black-Scholes option pricing model, which requires us to make several highly subjective and complex assumptions including, but not limited to, risk-free interest rate and expected life, changes to which can materially affect the fair value estimate. Since our common stock is not publicly traded, the performance of the common stock of public traded companies from our industry sector, which we determined to include the alternative financial sector, were used to estimate the expected volatility of our stock. Our expected option term is calculated using the average of the vesting period and the original contractual term. The estimated fair value of share-based awards is recognized as compensation expense on a straight-line basis over the vesting period. Additionally, the recognition of share-based compensation expense requires an estimation of the number of awards that will ultimately vest and the number of awards that will ultimately be forfeited.
Goodwill
Goodwill is initially valued based on the excess of the purchase price of a business combination over the fair value of the acquired net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Intangible assets other than goodwill are initially valued at fair value. When appropriate, we utilize independent valuation experts to advise and assist us in determining the fair value of the identified intangible assets acquired in connection with a business acquisition and in determining appropriate amortization methods and periods for those intangible assets. Any contingent consideration included as part of the purchase is recognized at its fair value on the acquisition date. A liability resulting from contingent consideration is remeasured to fair value at each reporting date until the contingency is resolved. Changes in the fair value of contingent consideration are recognized in earnings.
Our annual impairment review for goodwill consists of performing a qualitative assessment to determine whether it is more likely than not that a reporting units fair value is less than its carrying amount as a basis for determining whether or not further testing is required. We may elect to bypass the qualitative assessment and proceed directly to the two-step process, for any reporting unit, in any period. We can resume the qualitative assessment for any reporting unit in any subsequent period. If we determine, on the basis of qualitative factors, that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, we will then apply a two-step process of determining the fair value of the reporting unit and comparing it to the carrying value of the net assets allocated to the reporting unit. When performing the two-step process, if the fair value of the reporting unit exceeds its carrying value, no further analysis or write-down of goodwill is required. In the event the estimated fair value of a reporting unit is less than the carrying value, additional analysis is required. The additional analysis compares the carrying amount of the reporting units goodwill with the implied fair value of the goodwill. The use of external independent valuation experts may be required to assist management in determining the fair value of the reporting unit. The implied fair value of the goodwill is the excess of the fair value of the reporting unit over the fair value amounts assigned to all of the assets and liabilities of that unit as if the reporting unit was acquired in a business combination and the fair value of the reporting unit represented the purchase price. If the carrying value of goodwill exceeds its implied fair value, an impairment loss equal to such excess is recognized, which could significantly and adversely impact reported results of operations and stockholders equity. During the fourth quarter of 2016, we performed the first step of the two-step process and determined that the implied fair value of our reporting units exceed their carrying values, and therefore, the second step was not performed and no further analysis or write-down of goodwill is required.
During the third quarter of 2015, due to the declines in our overall financial performance in the United Kingdom, we determined that a triggering event had occurred requiring an impairment evaluation of our goodwill and other intangible assets in the United Kingdom. As a result, during the third quarter of 2015, we recorded non-cash impairment charges of $2.9 million which were comprised of a $1.8 million charge related to the Wage Day trade name, a $0.2 million charge related to the customer relationships acquired as part of the acquisition of Wage Day, and a $0.9 million non-cash goodwill impairment charge in our U.K. reporting segment.
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For the U.K. reporting unit, the estimated fair value as determined by the Discounted Cash Flow, or DCF, model was lower than the associated carrying value. As a result, management performed the second step of the impairment analysis in order to determine the implied fair value of the U.K.s goodwill. The results of the second-step analysis indicated that the implied fair value of goodwill was £17.7 million. Therefore, in 2015, we recorded a non-cash goodwill impairment charge of £0.6 million ($0.9 million). The key assumptions used to determine the fair value of the U.K. reporting unit included the following: (i) the discount rate was 11%; (ii) terminal period growth rate of 2.0%; and (iii) effective combined tax rate of 20%.
During the 2015 annual review of goodwill, we performed the qualitative assessment for our U.S. and Canada reporting units. Management concluded that it was not more likely than not that the estimated fair values of these two reporting units were less than their carrying values. As such, no further analysis was required for these reporting units. As part of this annual impairment test in the fourth quarter, we reviewed our analysis done in the third quarter for the United Kingdom and updated projections as appropriate. Management concluded as a result of this analysis that it was not more likely than not that the estimated fair values of the reporting units were less than their carrying values.
The impairment of the goodwill on our U.K. reporting unit resulted primarily from changes to the regulatory environment in the United Kingdom that resulted in managements downward revision of its cash flow projections for the U.K. reporting unit. The primary driver of decreased volumes in the United Kingdom was the direct result of recent regulatory changes, primarily the new Financial Conduct Authority, or FCA, rules that took effect on July 1, 2014, which reduced loan refinancing transactions from three to two and reduced the number of continuous payment authority attempts from three to two. Additionally, the FCA implemented a rate cap on high-cost short-term credit products that took effect on January 2, 2015. This price cap includes three components: (i) an initial cap of 0.8% of the outstanding principal per day; (ii) a default fee fixed rate of £15; and (iii) a total cost of credit cap of 100% of the total amount borrowed applying to all interest, fees and charges. With the imposition of the new rate cap, we ceased offering any new Installment Loan products in the United Kingdom in favor of a new rate capped single pay loan product. Additionally, the increase in compliance requirements has driven up the administrative costs necessary to operate in the United Kingdom. We modeled the impact of all of these regulatory changes in the projections used in our second-step analysis.
Business combination accounting
We have acquired businesses in the past, and we may acquire additional businesses in the future. Business combination accounting requires us to determine the fair value of all assets acquired, including identifiable intangible assets, liabilities assumed, and contingent consideration issued in a business combination. The cost of the acquisition is allocated to these assets and liabilities in amounts equal to the estimated fair value of each asset and liability, and any remaining acquisition cost is classified as goodwill. This allocation process requires extensive use of estimates and assumptions, including estimates of future cash flows to be generated by the acquired assets. We engage third-party appraisal firms to assist in fair value determination when appropriate. Our acquisitions may also include contingent consideration, or earn-out provisions, which provide for additional consideration to be paid to the seller if certain future conditions are met. These earn-out provisions are estimated and recognized at fair value at the acquisition date based on projected earnings or other financial metrics over specified periods after the acquisition date. These estimates are reviewed during each reporting period and adjusted based upon actual results. Acquisition-related costs for potential and completed acquisitions are expensed as incurred, and are included in corporate expense in the Consolidated Statements of Income.
Income Taxes
A deferred tax asset or liability is recognized for the anticipated future tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements and for operating loss and tax credit carryforwards. A valuation allowance is provided when, in the opinion of management, it is more likely than not that some portion or all of a deferred tax asset will not be realized.
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Realization of the deferred tax assets is dependent on our ability to generate sufficient future taxable income and, if necessary, execution of our tax planning strategies. In the event we determine that sufficient future taxable income, taking into consideration tax planning strategies, may not generate sufficient taxable income to fully realize net deferred tax assets, we may be required to establish or increase valuation allowances by a charge to income tax expense in the period such a determination is made. This charge may have a material impact on recognized income tax expense on our Consolidated Statements of Income. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. The recognition of a change in enacted tax rates may have a material impact on recognized income tax expense and on our Consolidated Statements of Income.
We follow accounting guidance which prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under this guidance, tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Application of this guidance requires numerous estimates based on available information. We consider many factors when evaluating and estimating our tax positions and tax benefits, and our recognized tax positions and tax benefits may not accurately anticipate actual outcomes. As we obtain additional information, we may need to periodically adjust our recognized tax positions and tax benefits. These periodic adjustments may have a material impact on our Consolidated Statements of Income. For additional information related to uncertain tax positions, see Note 13 Income Taxes of our Notes to Consolidated Financial Statements included elsewhere in this prospectus.
Recent Accounting Pronouncements
See Note 1, Summary of Significant Accounting Policies and Nature of Operations of our Notes to Consolidated Financial Statements included elsewhere in this prospectus for a discussion of recent accounting pronouncements.
Quantitative and Qualitative Disclosures About Market Risk
Concentration Risk
Revenues originated in Texas, Ontario, and California represented approximately 26.1%, 14.4%, and 15.1%, respectively, of our consolidated total revenues for the year ended December 31, 2016. Revenues originated in Texas, Ontario, and California represented approximately 26.1%, 15.1% and 13.7%, respectively, of our consolidated total revenues for the year ended December 31, 2015. Revenues originated in Texas, Ontario, and California represented approximately 25.7%, 13.1% and 17.6%, respectively, of our consolidated total revenues for the nine months ended September 30, 2017. Revenues originated in Texas, Ontario, and California represented approximately 25.8%, 15.0% and 15.0%, respectively, of our consolidated total revenues for the nine months ended September 30, 2016.
We hold cash at major financial institutions that often exceed FDIC insured limits. We manage our concentration risk by placing our cash deposits in high quality financial institutions and by periodically evaluating the credit quality of the financial institutions holding such deposits. Historically, we have not experienced any losses due to such cash concentration.
Financial instruments that potentially subject us to concentrations of credit risk primarily consist of our consumer loans receivable. Concentrations of credit risk with respect to consumer loans receivable are limited due to the large number of customers comprising our customer base.
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Regulatory Risk
We are subject to regulation by federal, state and provincial governmental authorities that affect the products and services that we provide, particularly payday advance loans. The level and type of regulation for payday advance loans varies greatly by jurisdiction, ranging from jurisdictions with moderate regulations or legislation, to other jurisdictions having very strict guidelines and requirements.
To the extent that laws and regulations are passed that affect the manner in which we conduct business in any one of those markets, our financial position, results of operations and cash flows could be adversely affected. Additionally, our ability to meet the financial covenants included in our credit agreement could be negatively impacted.
Interest Rate Risk
We are exposed to interest rate risk on our Cash Money Revolving Credit Facility and our Non-Recourse U.S. SPV Facility. As of December 31, 2016, we were also exposed to interest rate risk on our ABL Facility, which matured in May 2017 and was repaid through a sale of the underlying collateral to the Non-Recourse U.S. SPV Facility. Our variable interest expense is sensitive to changes in the general level of interest rates. We may from time to time enter into interest rate swaps, collars or similar instruments with the objective of reducing our volatility in borrowing costs. We do not use derivative financial instruments for speculative or trading purposes. We had no derivative financial instruments related to interest rate risk outstanding as of December 31, 2016 or December 31, 2015.
All of our customer loan portfolios have fixed interest rates and fees that do not fluctuate over the life of the loan. Notwithstanding that, we support fixed rate lending in part with variable rate borrowing. We do not believe there is any material interest rate sensitivity associated with our customer loan portfolio. This is because of both the very high rates of return on our loans and their short duration.
The weighted average interest rate on the $91.7 million of variable debt outstanding on the Non-Recourse U.S. SPV Facility and ABL Facility, which matured in May 2017, as of December 31, 2016 was approximately 11.5%. The weighted average interest rate on the $8.1 million of variable debt outstanding on the Cash Money Revolving Credit Facility as of December 31, 2015 was approximately 7.0%. There was no debt outstanding under the Cash Money Revolving Credit Facility as of December 31, 2016.
Foreign Currency Exchange Rate Risk
As foreign currency exchange rates change, translation of the financial results of the United Kingdom and Canadian operations into U.S. Dollars will be impacted. Our operations in Canada and the United Kingdom represent a significant portion of our total operations, and as a result, a material change in foreign currency exchange rates in either country could have a significant impact on our consolidated financial position, results of operations or cash flows. From time to time, we may elect to purchase financial instruments as hedges against foreign exchange rate risks with the objective of protecting our results of operations in the United Kingdom and/or Canada against foreign currency fluctuations. We typically hedge anticipated cash flows between our foreign subsidiaries and domestic subsidiaries. As of December 31, 2016 we had entered into a cash flow hedge in which the hedging instrument is a forward extra ( which is a common zero cost strategy that allows the client to be fully protected at a predetermined budget rate while allowing for some profit participation if the spot rate moves in favor of the client) to sell GBP 4,800,000. This contract completed in April 2017.
We have performed an assessment that determined that all critical terms of the hedging instrument and the hedged transaction match and as such have qualitatively concluded that changes in the options intrinsic value will completely offset the change in the expected cash flows based on changes in the spot rate. In making that determination, the guidance in ASC 815-20-25-84 was used. Future assessment will be performed utilizing the
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guidance in ASC 815-20-35-9 through 35-13, Relative Ease of Assessing Effectiveness . Additionally, in accordance with ASC 815-20-25-82, since the effectiveness of this hedge is assessed based on changes in the options intrinsic value, the change in the time value of the contract would be excluded from the assessment of hedge effectiveness.
We record derivative instruments at fair value on the balance sheet as either an asset or liability on the balance sheet. Changes in the options intrinsic value, to the extent that they are effective as a hedge, are recorded in other comprehensive income (loss). For derivatives that qualify and have been designated as cash flow or fair value hedges for accounting purposes, changes in fair value have no net impact on earnings, to the extent the derivative is considered perfectly effective in achieving offsetting changes in fair value or cash flows attributable to the risk being hedged, until the hedged item is recognized in earnings (commonly referred to as the hedge accounting method). The contract completed in April 2017 and in the second quarter of 2017 we recorded a transaction loss of $0.3 million associated with this hedge. At December 31, 2015 we did not hold any financial instruments as hedges against foreign exchange rate risks.
Potential Future Impact of CFPB Rule
Prospects for Effectiveness of the CFPB Rule
The CFPB Rule was adopted by the CFPB on or about October 4, 2017 but has not yet been published in the Federal Register. Most of its provisions are scheduled to become effective 21 months after such publicationin August 2019 if publication is made in November 2017. See Regulatory Environment and ComplianceU.S. RegulationsU.S. Federal RegulationsCFPB Rule for a summary of the CFPB Rule. The CFPB Rule could potentially have a material adverse impact on our results of operations. See Risk FactorsRisks Relating to the Regulation of Our IndustryThe CFPB promulgated new rules applicable to our loans that could have a material adverse effect on our business and results of operations.
Even though the CFPB Rule has been approved as a final rule, we think there is a reasonable chance that the new Rule will not become effective in its current form. There is a possibility that Congress will override the Rule under the Congressional Review Act, just as it did to the CFPB Anti-Arbitration Rule. It is more likely, perhaps, that the CFPB Rule will be withdrawn, modified or indefinitely extended by a new director of the CFPB, or defeated in litigation.
Anticipated Impact of CFPB Rule on U.S. Single-Payment Short-Term Loans
One major aspect of the CFPB Rule is its ATR provisions, together with the related provisions applicable to alternative Section 1041.6 Loans. These provisions apply to our U.S. single-payment loans and lines of credit. We cannot predict the precise impact of these provisions on us but can provide some perspective.
As to our lines of credit, we are confident that we can make modifications that will render the CFPB Rule inapplicable. We do not believe that these modifications will have a material adverse impact on us.
Our U.S. single-payment loans represented 10.9% of total revenues for the quarter ending September 30, 2017, down from the same quarter in 2016. This percentage reduction reflects growth in our other loan products and an 11.2% decline in U.S. single-payment loan revenues in the third quarter of 2017 versus the prior year. In part in response to the CFPB Rule, we will continue to focus on longer-term installment and line of credit products in states with laws that accommodate such products. However, certain states, such as California, which currently accounts for 60% of our single-pay revenue, do not permit a small-dollar installment loan alternative, and complying with the CFPB Rule could substantially reduce single-payment loan revenue in these states, perhaps by more than 50% from current levels.
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Anticipated Impact of CFPB Rule on Payments
The penalty fee prevention provision of the CFPB Rule mandate that if we initiate two consecutive unsuccessful payment attempts from the same bank account, whether by Automated Clearing House, or ACH, post-dated check, or payment card, we must obtain from our borrowers a new payment authorization before initiating a new payment attempt. Additionally, the penalty fee prevention provisions will require the lender generally to give the consumer at least three business days advance notice before attempting to collect payment by accessing a consumers checking, savings, or prepaid account.
While we are currently subject to NACHA restrictions on ACH payments and separate card network restrictions on presentments made on debit cards, these restrictions do not have the force of law and are significantly more liberal than the limit of two unsuccessful attempts articulated in the CFPB Rule. While the overwhelming majority of our electronic payments are collected in the first two attempts, depending on the type of loan and the timing of the payments, we currently make three or more attempts without obtaining a new payment authorization from the customer. We believe that enhanced customer relationship management, or CRM, tools to help obtain new payment authorizations, together with a more targeted, predictive approach to presenting electronic payments against customers bank accounts, will mitigate the impact of the penalty fee restrictions. As with the other requirements, we have until late 2019 to manage the transition. However, to the extent that we are unable to develop new and effective CRM tools and/or are unsuccessful in improving the timing of the permitted electronic payments, the implementation of the CFPB Rule on payments could have a material adverse effect on our results of operations.
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Company Overview
We are a growth-oriented, technology-enabled, highly-diversified consumer finance company serving a wide range of underbanked consumers in the United States, Canada and the United Kingdom and are a market leader in our industry based on revenues. We believe that we have the only true omni-channel customer acquisition, onboarding and servicing platform that is integrated across store, online, mobile and contact center touchpoints. Our IT platform, which we refer to as the Curo Platform, seamlessly integrates loan underwriting, scoring, servicing, collections, regulatory compliance and reporting activities into a single, centralized system. We use advanced risk analytics powered by proprietary algorithms and over 15 years of loan performance data to efficiently and effectively score our customers loan applications. Since 2010, we have extended $13.9 billion in total credit across approximately 36.5 million total loans, and our revenue of $828.6 million in 2016 represents a 26.3% compound annual growth rate, or CAGR, over the same time period.
We operate in the United States under two principal brands, Speedy Cash and Rapid Cash, and launched our new brand Avio Credit in the United States in the second quarter of 2017. In the United Kingdom we operate online as Wage Day Advance and, prior to their closure in the third quarter of 2017, our stores were branded Speedy Cash. In Canada our stores are branded Cash Money and, we offer LendDirect installment loans online. As of September 30, 2017, our store network consisted of 405 locations across 14 U.S. states and seven Canadian provinces. As of September 30, 2017, we offered our online services in 26 U.S. states, five Canadian provinces and the United Kingdom.
We offer a broad range of consumer finance products, including Unsecured Installment Loans, Secured Installment Loans, Open-End Loans and Single-Pay Loans. We have tailored our products to fit our customers particular needs as they access and build credit. Our product suite allows us to serve a broader group of potential borrowers than most of our competitors. The flexibility of our products, particularly our installment and open-end products, allows us to continue serving customers as their credit needs evolve and mature. Our broad product suite creates a diversified revenue stream and our omni-channel platform seamlessly delivers our products across all contact pointswe refer to it as Call, Click or Come In. We believe these complementary channels drive brand awareness, increase approval rates, lower our customer acquisition costs and improve customer satisfaction levels and customer retention.
We serve the large and growing market of individuals who have limited access to traditional sources of consumer credit and financial services. We define our addressable market as underbanked consumers in the United States, Canada and the United Kingdom. According to a study by CFSI, there are as many as 121 million Americans who are currently underserved by financial services companies. According to studies by ACORN Canada and PWC, the statistics in Canada and the United Kingdom are similar, with an estimated 15% of Canadian residents (approximately 5 million individuals) and an estimated 20 to 25% of United Kingdom residents (approximately 10 to 14 million individuals) classified as underbanked. Given our international footprint, this translates into an addressable market of approximately 140 million individuals. We believe that with our scalable omni-channel platform and diverse product offerings, we are well positioned to gain market share as sub-scale players struggle to keep pace with the technological evolution taking place in the industry.
Industry Overview
We operate in a segment of the financial services industry that provides lending products to underbanked consumers in need of convenient and flexible access to credit and other financial products. Up to 140 million individuals fall within the definition of our target market. In the United States alone, according to a study by CFSI, these underserved consumers spent an estimated $126.5 billion on fees and interest related to credit products similar to those we offer.
We believe our target consumers have a need for tailored financing products to cover essential expenses. According to a study by the Federal Reserve, 44% of American adults could not cover an emergency expense
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costing $400 or would cover it by selling an asset or borrowing money. Additionally, a study conducted by JPMorgan Chase & Co., which analyzed the transaction information of 2.5 million of its account holders, found that 41% of those sampled experienced month-to-month income swings of more than 30%.
We compete against a wide variety of consumer finance providers including online and branch-based consumer lenders, credit card companies, pawnshops, rent-to-own and other financial institutions that offer similar financial services. A study by CFSI has estimated that spending on credit products offered by our industry exhibited a 10.0% CAGR from 2010 to 2015. This growth has been accompanied by shrinking access to credit for our customer base as evidenced by an estimated $142 billion reduction in the availability of non-prime consumer credit from the 2008 to 2009 credit crisis to 2015 (based on analysis of master pool trust data of securitizations for major credit card issuers).
In addition to the beneficial secular trends broadly impacting the consumer finance landscape, we believe we are well positioned to grow our market share as a result of several changes we have observed related to consumer preferences within alternative financial services. Specifically, we believe that a combination of evolving consumer preferences, increasing use of mobile devices and overall adoption rates for technology are driving significant change in our industry.
| Shifting preference towards installment loans We believe from our experience in offering installment loan products since 2008 that single-pay loans are becoming less popular or less suitable for a growing portion of our customers. Customers generally have shown a preference for our Installment Loan products, which typically have longer terms, lower periodic payments and a lower relative cost. Offering more flexible terms and lower payments also significantly expands our addressable market by broadening our products appeal to a larger proportion of consumers in the market. |
| Increasing adoption of online channels Our experience is that customers prefer service across multiple channels or touch points. Approximately 63% of respondents in a recent study by CFI Group said they conducted more than half of their banking activities electronically. That same group of respondents reported an overall level of satisfaction that met or exceeded the average. In 2017, our online revenue of $257 million represented 37% of our total 2017 revenues through September 30, 2017. |
| Increasing adoption of mobile apps and devices With the proliferation of pay-as-you-go and other smartphone plans, many of our underbanked customers have moved directly to mobile devices for loan origination and servicing. According to a study by the Pew Research Center involving the United States, the United Kingdom and Canada, smartphone penetration is 72%, 68% and 67%, respectively. Additionally, 43% of respondents to a 2016 study by CFI Group said they conduct transactions using a mobile banking app. Five years ago, less than 30% of our U.S. customers reached us with via a mobile device. In the third quarter of 2017, that percentage was over 80%. |
Our Strengths
We believe the following competitive strengths differentiate us and serve as barriers for others seeking to enter our market.
| Unique omni-channel platform / site-to-store capability We believe we have the only fully-integrated store, online, mobile and contact center platform to support omni-channel customer engagement. We offer a seamless Call, Click or Come In capability for customers to apply for loans, receive loan proceeds, make loan payments and otherwise manage their accounts in store, online or over the phone. Customers can utilize any of our three channels at any time and in any combination to obtain a loan, make a payment or manage their account. In addition, we have our Site-to-Store capability in which online customers that do not qualify for a loan online are referred to a store to complete a loan transaction with one of our associates. These aspects of our platform enable us to source a larger number of customers, serve a broader range of customers and continue serving these customers for longer periods of time while lowering cost-per-funded loan. |
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| Industry leading product and geographic diversification In addition to channel diversification, we have increased our diversification by product and geography allowing us to serve a broader range of customers with a flexible product offering. As part of this effort, we have also developed and launched new brands and will continue to develop new brands with differentiated marketing messages. These initiatives have helped diversify our revenue streams, enabling us to appeal to a wider array of borrowers. |
| Leading analytics and information technology drives strong credit risk management We have developed a bespoke, proprietary IT platform, referred to as the Curo Platform, which is a unified, centralized platform that seamlessly integrates activities related to customer acquisition, underwriting, scoring, servicing, collections, compliance and reporting. Our IT platform is underpinned by over 15 years of continually updated customer data comprising over 71 million loan records used to formulate our robust, proprietary underwriting algorithms. This platform then automatically applies multi-algorithmic analysis to a customers loan application to produce a Curo Score which drives our underwriting decision. Globally, as of September 30, 2017 we had 183 employees who write code and manage our networks and infrastructure for our IT platform. This fully-integrated IT platform enables us to make real-time, data-driven changes to our acquisition and risk models which yield significant benefits in terms of customer acquisition costs and credit performance. |
| Multi-faceted marketing strategy drives low customer acquisition costs Our marketing strategy includes a combination of strategic direct mail, television advertisements and online and mobile-based digital campaigns, as well as strategic partnerships. Our global Marketing, Risk and Credit Analytics team, consisting of 72 professionals as of September 30, 2017, uses our integrated IT platform to cross reference marketing spend, new customer account data and granular credit metrics to optimize our marketing budget across these channels in real time to produce higher quality new loans. Besides these diversified marketing programs, our stores play a critical role in creating brand awareness and driving new customer acquisition. From January 2015 through the end of September 2017, we acquired nearly 1.9 million new customers in North America. For the first nine months of 2017 compared to the first nine months of 2015, our average first-pay defaults in the United States improved by 203 bps, while our average cost per funded loan decreased from $72.90 to $63.30. |
| Focus on customer experience We focus on customer service and experience and have designed our stores, website and mobile application interfaces to appeal to our customers needs. We continue to augment our web and mobile app interfaces to enhance our Call, Click or Come In strategy, with a focus on adding functionality across all our channels. Our stores are branded with distinctive and recognizable signage, conveniently located and typically open seven days a week. Furthermore, we have highly experienced managers in our stores, which we believe is a critical component to driving customer retention, lowering acquisition costs and driving store-level margins. For example, the average tenure for our U.S. store managers is over nine years and over 11 years for regional directors. |
| Strong compliance culture with centralized collections operations We seek to consistently engage in proactive and constructive dialogue with regulators in each of our jurisdictions and have made significant investments in best-practice automated tools for monitoring, training and compliance management. As of September 30, 2017 our compliance group consisted of 28 individuals based in all of the countries in which we operate, and our compliance management systems are integrated into our proprietary IT platform. Additionally, our in-house centralized collections strategy, supported by our proprietary back-end customer database and analytics team, drives an effective, compliant and highly-scalable model. |
| Demonstrated access to capital markets and diversified funding sources We have raised over $1.1 billion of debt financing in six separate offerings since 2008, most recently in October 2017. We also closed a $150 million nonrecourse installment loan financing facility in 2016 and have routinely accessed banks and other lenders for revolving credit capacity. We believe this is a significant differentiator from our peers who may have trouble accessing capital markets to fund their business models if credit markets tighten. For more information, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital Resources. |
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| Experienced and innovative management team and sponsor Our senior leadership team is among the most experienced in the industry with over a century of collective experience and an average tenure at CURO of over eight years. We also have deep bench strength across key functional areas including accounting, compliance, IT and legal. Our equity sponsor, FFL Partners, has been our partner since 2008 and has contributed significant resources to helping define our growth strategy. |
| History of growth and profitability Throughout our operating history we have maintained strong profitability and growth. Between 2010 and 2016 we grew revenue, Adjusted EBITDA and net income at a CAGR of 26.3%, 25.4% and 21.9%, respectively. At the same time, we have grown our product offerings to better serve our growing and expanding customer base. |
Growth Strategy
| Leverage our capabilities to continue growing installment and open-end products Installment and open-end products accounted for 58% of our consolidated revenue for the year ending December 31, 2016, up from 19% in 2010, and we believe that our customers greatly prefer these products. We believe that these products will continue to account for a greater share of our revenue and provide us a competitive advantage versus other consumer lenders with narrower product focus. We believe that our ability to continue to be successful in developing and managing new products is based upon our capabilities in three key areas. |
| Underwriting: Installment and open-end products generally have lower yields than single-pay products, which necessitates more stringent credit criteria supported by more sophisticated credit analytics. Our industry leading analytics platform combines data from over 71 million records associated with loan information from third-party reporting agencies and has helped to reduce average first-pay defaults in the United States by approximately 203 bps for the first nine months of 2017 compared to the first nine months of 2015. |
| Collections and Customer Service: Installment and open-end products have longer terms than single-pay loans, in some cases up to 48 months. These longer terms drive the need for a more comprehensive collection and default servicing strategy that emphasizes curing a default and putting the customer back on a track to repay the loan. We utilize a centralized collection model that prevents our branch management personnel from ever having to contact customers to resolve a delinquency. We have also invested in building new contact centers in all of the countries in which we operate, each of which utilize sophisticated dialer technologies to help us contact our customers in a scalable, efficient manner. |
| Funding: The shift to larger balance installment loans with extended terms and open-end loans with revolving terms requires more substantial and more diversified funding sources. Given our deep and successful track record in accessing diverse sources of capital, we believe that we are well-positioned to support future new product transition. |
| Serve additional types of borrowers In addition to growing our existing suite of installment and open-end lending products, we are focused on expanding the total number of customers that we are able to serve through product, geographic and channel expansion. This includes expansion of our online channel, particularly in the United Kingdom, as well as continued targeted additions to our physical store footprint. We also continue to introduce additional products to address our customers preference for longer term products that allow for greater flexibility in managing their monthly payments. |
| In the second quarter of 2017, we launched Avio Credit, a new online product branded in the United States targeting individuals in the 600-675 FICO band. This product is structured as an Unsecured Installment Loan with varying principal amounts and loan terms up to 48 months. As of April 2017, 10% of U.S. consumers had FICO scores between 600 and 649. A further 13.2% of U.S. consumers had FICO scores between 650 and 699, a portion of whom would fall into the credit profile targeted by our Avio Credit product. |
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| We expect to expand our LendDirect brand in Canada to include additional provinces and increase acquisition efforts in existing markets. We also plan to open LendDirect stores in Canada during the fourth quarter of 2017. Seven million Canadians have a FICO score below 700. We estimate that the consumer credit opportunity for this customer segment exceeds C$165 billion. We believe these customers represent a highly-fragmented market with low penetration. |
| In the United Kingdom, we expect to launch online longer-term loans, some supported by a guarantor. According to a study by the Financial Conduct Authority, in 2016 the U.K. guarantor market alone comprised £300 million in loans outstanding and had annual originations of approximately £200 million in 2016. A report by L.E.K. Consulting found that this market experienced double digit percentage growth from 2008 to 2017. We believe it is currently dominated by one lender but otherwise largely made up of smaller participants with growth challenges. |
| Continue to bolster our core business through enhancement of our proprietary risk scoring models We continuously refine and update our credit models to drive additional improvements in our performance metrics. By regularly updating our credit underwriting algorithms we can continue to expand the value of each of our customer relationships through improved credit performance. By combining these underwriting improvements with data driven marketing spend, we believe our optimization efforts will produce margin expansion and earnings growth. |
| Expand credit for our borrowers Through extensive testing and our proprietary underwriting, we have successfully increased credit limits for customers, enabling us to offer the right loan to the right customer. The favorable take rates and successful credit performance have improved overall vintage and portfolio performance. For the first nine months of 2017, our average loan amount for Unsecured and Secured Installment Loans rose by $128 (a 26% increase) and $247 (a 24% increase), respectively, versus the same period in 2016. |
| Continue to improve the customer journey and experience We have projects in our development pipeline to enhance our Call, Click or Come In customer experience and execution, ranging from redesign of web and app interfaces to enhanced service features to payments optimization. |
| Enhance our network of strategic partnerships Our strategic partnership network generates applicants that we then close through our diverse array of marketing channels. By further leveraging these existing networks and expanding the reach of our partnership platform to include new relationships, we can increase the number of overall leads we receive. |
Customers
Our customers require essential financial services and value timely, transparent, affordable and convenient alternatives to banks, credit card companies and other traditional financial services companies. According to a recent study by FactorTrust, underbanked customers in the United States tend to have the following characteristics:
| average age of 39 for applicants and 41 for borrowers; |
| applicants are 47% male and 53% female; |
| 41% are homeowners; |
| 45% have a bachelors degree or higher; and |
| the top five employment segments are Retail, Food Service, Government, Banking/Finance and Business Services. |
In the United States, our customers generally earn between $25,000 and $75,000 annually. In Canada, our customers generally earn between C$25,000 and C$60,000 annually. In the United Kingdom our customers generally earn between £18,000 and £31,000 annually.
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Our customers utilize the services provided by our industry for a variety of reasons, including that they often:
| have immediate need for cash between paychecks; |
| have been rejected for traditional banking services; |
| maintain sufficient account balances to make a bank account economically efficient; |
| prefer and trust the simplicity, transparency and convenience of our products; |
| need access to financial services outside of normal banking hours; and |
| reject complicated fee structures in bank products (e.g., credit cards and overdrafts). |
Products and Services
We provide Unsecured Installment Loans, Secured Installment Loans, Open-End Loans, Single-Pay Loans and a number of ancillary financial products, including check cashing, proprietary reloadable prepaid debit cards (Opt+), credit protection insurance in the Canadian market, gold buying, retail installment sales and money transfer services. We have designed our products and customer journey to be consumer-friendly, accessible and easy to understand. Our platform and product suite enable us to provide several key benefits that appeal to our customers:
| transparent approval process; |
| flexible loan structure, providing greater ability to manage monthly payments; |
| simple, clearly communicated pricing structure; and |
| full account management online and via mobile devices. |
Our centralized underwriting platform and its proprietary algorithms are used for every aspect of underwriting and scoring of our loan products. The customer application, approval, origination and funding processes differ by state, country and by channel. Our customers typically have an active phone number, open checking account, recurring income and a valid government-issued form of identification. For in-store loans, the customer presents required documentation, including a recent pay stub or support for underlying bank account activity for in-person verification. For online loans, application data is verified with third-party data vendors, our proprietary algorithms and/or tech-enabled account verification. Our proprietary, highly scalable, scoring system employs a champion/challenger process whereby models compete to produce the most successful customer outcomes and profitable cohorts. Our algorithms use data relevancy and machine learning techniques to identify approximately 60 variables from a universe of approximately 11,600 that are the most predictive in terms of credit outcomes. The algorithms are continuously reviewed and refreshed and are focused on a number of factors related to disposable income, expense trends and cash flows, among other factors, for a given loan applicant. The predictability of our scoring models is driven by the combination of application data, purchased third-party data and our robust internal database of nearly over 71 million records associated with loan information. These variables are then combined in a series of algorithms to create a score that allows us to scale lending decisions.
Geography and Channel Mix
For the nine months ending September 30, 2017, our revenue distribution in the United States, Canada and United Kingdom was 76.4%, 19.5% and 4.1%, respectively.
Stores: As of September 30, 2017, we had 405 stores in 14 U.S. states and seven provinces in Canada, which included the following:
| 215 United States locations: Texas (92), California (36), Nevada (18), Arizona (13), Tennessee (11), Kansas (10), Illinois (8), Alabama (7), Missouri (5), Louisiana (5), Colorado (3), Oregon (3), Washington (2) and Mississippi (2); |
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| 190 Canadian locations: Ontario (121), Alberta (27), British Columbia (26), Saskatchewan (6), Nova Scotia (5), Manitoba (4) and New Brunswick (1). |
Online: We lend online in 26 states in the United States, five provinces in Canada and in England, Wales, Scotland and Northern Ireland in the United Kingdom. During the third quarter of 2017, we began offering loans online in Virginia.
The following charts reflect the revenue contribution, including CSO fees, of the products and services that we currently offer and the revenues from these services in each of the regions in which we operate.
Year Ended December 31, 2016 $829 million |
Nine Months Ended September 30, 2017 $697 million |
|
|
|
For the year ended December 31, 2016 and the period ending September 30, 2017, revenue generated through our online channel was 33% and 37%, respectively.
Overview of Loan Products
Below is an outline of the primary products we offered as of September 30, 2017.
Installment |
||||||||
Unsecured |
Secured |
Open-End |
Single-Pay |
|||||
Channel |
Online and in-store: 15 U.S. states, Canada and the United Kingdom(1) | Online and in-store: 7 U.S. states |
Online: KS, TN, ID, UT, VA, DE and RI. In-store: KS and TN |
Online and in-store: 12 U.S. states, Canada and the United Kingdom(1) | ||||
Approximate Average Loan Size (2) |
$636 | $1,299 | $463 | $335 | ||||
Duration |
Up to 48 months | Up to 42 months | Revolving/Open-ended | Up to 62 days | ||||
Pricing |
13.2% average monthly interest rate(3) | 10.6% average monthly interest rate(3) | Daily interest rates ranging from 0.74% to 0.99% | Fees ranging from $13 to $25 per $100 borrowed |
(1) | Online only in the United Kingdom. |
(2) | Includes CSO loans. |
(3) | Weighted average of the contractual interest rates for the portfolio as of September 30, 2017. Excludes CSO fees. |
Unsecured Installment Loans
Unsecured Installment Loans are fixed-term, fully-amortizing loans with a fixed payment amount due each period during the term of the loan. These loans are originated and owned by us or by third-party lenders pursuant to credit services organization and credit access business statutes, which we refer to as our CSO programs. For
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CSO programs, we arrange, service and guarantee the loans. Payments are due bi-weekly or monthly to match the customers pay cycle. Customers may prepay without penalty or fees. Unsecured Installment Loan terms are governed by enabling state legislation in the United States, provincial and federal legislation in Canada and national regulations in the United Kingdom. Unsecured Installment Loans comprised 49.3%, and 40.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. We believe that the flexible terms and lower payments associated with Installment Loans significantly expands our addressable market by allowing us to serve a broader range of customers with a variety of credit needs.
Secured Installment Loans
Secured Installment Loans are similar to Unsecured Installment Loans but are also secured by a vehicle title. These loans are originated and owned by us or by third-party lenders through our CSO programs. For these loans the customer provides clear title or security interest in the vehicle as collateral. The customer receives the benefit of immediate cash but retains possession of the vehicle while the loan is outstanding. The loan requires periodic payments of principal and interest with a fixed payment amount due each period during the term of the loan. Payments are due bi-weekly or monthly to match the customers pay cycle. Customers may prepay without penalty or fees. Secured Installment Loan terms are governed by enabling state legislation in the United States. Secured Installment Loans comprised 10.5% and 9.8% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
Open-End Loans
Open-End Loans are a line of credit for the customer without a specified maturity date. Customers may draw against their line of credit, repay with minimum, partial or full payments and redraw as needed. We report and earn interest on the outstanding loan balances drawn by the customer against their approved credit limit. Typically, customers do not draw the full amount of their credit limit. Customers may prepay without penalty or fees. Loan terms are governed by enabling state legislation in the United States. Unsecured Open-End Loans comprised 6.6% and 7.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively. Secured Open-End Loans are offered as part of our product mix in states with enabling legislation and accounted for approximately 0.9% and 1.0% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
Single-Pay Loans
Single-Pay Loans are generally unsecured short-term, small-denomination loans whereby a customer receives cash in exchange for a post-dated personal check or a pre-authorized debit from the customers bank account. These loans are originated and owned by us or by third-party lenders through our CSO programs. We agree to defer deposit of the check or debiting of the customers bank account until the loan due date which typically falls on the customers next pay date. Single-Pay Loans are governed by enabling state legislation in the United States, federal and provincial regulations in Canada and national regulation in the United Kingdom. Single-Pay Loans comprised 28.4% and 37.8% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
Ancillary products
We also provide a number of ancillary financial products including check cashing, proprietary reloadable prepaid debit cards (Opt+), credit protection insurance in the Canadian market, gold buying, retail installment sales and money transfer services. We had 112,607 active Opt+ cards as of September 30, 2017, which includes any card with a positive balance or transaction in the past 90 days. Opt+ customers have loaded over $1.5 billion to their cards since we started offering this product.
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CSO Programs
Through our CSO programs, we act as a credit services organization/credit access business on behalf of customers in accordance with applicable state laws. We currently offer loans through CSO programs in stores and online in the state of Texas and online in the state of Ohio. In Texas we offer Unsecured Installment Loans and Secured Installment Loans with a maximum term of 180 days. In Ohio we offer an Unsecured Installment Loan product with a maximum term of 18 months. As a CSO we earn revenue by charging the customer a fee (the CSO fee) for arranging an unrelated third-party to make a loan to that customer. When a customer executes an agreement with us under our CSO programs, we agree, for a CSO fee payable to us by the customer, to provide certain services to the customer, one of which is to guarantee the customers obligation to repay the loan the customer receives from the third-party lender. CSO fees are calculated based on the amount of the customers loan. For CSO loans, each lender is responsible for providing the criteria by which the customers application is underwritten and, if approved, determining the amount of the customer loan. We in turn are responsible for assessing whether or not we will guarantee the loan. This guarantee represents an obligation to purchase specific loans if they go into default.
As of September 30, 2017, the maximum amount payable under all such guarantees was $59.1 million, compared to $59.6 million at December 31, 2016. Should we be required to pay any portion of the total amount of the loans we have guaranteed, we will attempt to recover the amount we pay from the customers. We hold no collateral in respect of the guarantees. Our guarantee liability was $16.9 million and $17.1 million at September 30, 2017 and December 31, 2016, respectively.
The majority of revenue generated through our CSO programs was for Unsecured Installment Loans, which comprised 96.2% and 91.6% of total CSO revenue for the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
Total revenue generated through our CSO programs comprised 26.5% and 26.1% of our consolidated revenue during the nine months ended September 30, 2017 and the year ended December 31, 2016, respectively.
Sales and Marketing
We are focused on capturing new accounts as demonstrated by the nearly 1.9 million new customers we acquired between January 2015 and the end of September 2017 in our U.S. market. For the first nine months of 2017 compared to the first nine months of 2015, our average first-pay defaults improved by 203 bps, while our average cost per funded loan decreased from $72.90 to $63.30. In 2015, we experienced an increase in advertising expense as a result of a strategy to gain market share during a period of time when we believed the online market was disrupted. We returned to more normalized spend levels in 2016 and first quarter of 2017 following the surge in advertising expense in 2015, but with better efficiency because of improved analytics and an accelerating shift to mobile and online.
United States
Our marketing efforts focus on a variety of targeted, direct response strategies. We use various forms of media to build brand awareness and drive customer traffic in stores, online and to our contact centers. These strategies include direct response spot television in each operating market, radio campaigns, point-of-purchase materials, a multi-listing and directory program for print and online yellow pages, local store marketing activities, prescreen direct mail campaigns, robust online marketing strategies and send a friend and word-of-mouth referrals from satisfied customers. We also utilize our unique capability to drive customers originated online to our store locationsa program we call Site-to-Store.
Canada
The Cash Money platform has built strong brand awareness as a leading provider of alternative financial solutions in Canada. Cash Moneys marketing efforts have historically included high frequency television buys, print media and targeted publications, as well as local advertising in the communities we serve.
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The charts below set forth the trends in advertising spending and new customers acquired, cost-per-funded loan, or CPF, and first-pay defaults, or FPD, for North America for the periods indicated. These trends are primarily attributable to our continually-improving analytics and channel-management capabilities that enable us to balance and manage dynamically the relationships between total marketing spend, application-to-funded conversion rates, new customers acquired and credit performance (expressed here as FPD). The tables also highlight the seasonality of customer acquisition strategies, especially in the United States where acquisition and performance in the first quarter of the year is affected by federal income tax refunds. Finally, we believe these metrics support our proven capability of maintaining strong new customer counts while improving credit quality and CPF.
Direct Advertising Spend and New Customers AcquiredNorth America
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Cost-per-Funded Loan
First-Pay Defaults
United Kingdom
Wage Day has built a strong brand name as a leading on-line provider of short-term consumer loans to individuals in the United Kingdom. Wage Days marketing efforts include direct marketing of its existing customer base through a variety of channels, including email and text messaging, and new customer acquisition through leads purchased through its affiliates.
Over the past several years, we have redesigned and reformulated our loan products, including the introduction of a new installment product in 2016, and enhanced our customer acquisition, underwriting and collection capabilities.
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The table below sets forth CPF information in the United Kingdom (in local currency) for the periods indicated:
United Kingdom: Cost-per-Funded Loan
Information Systems
The Curo Platform is our proprietary IT platform, which is a unified, centralized platform that seamlessly integrates activities related to customer acquisition, underwriting, scoring, servicing, collections, compliance and reporting. The Curo Platform is also designed to enable us to support and monitor compliance with regulatory and other legal requirements applicable to the financial products we offer. Our platform captures transactional history by store and by customer, which allows us to track loan originations, payments, defaults and payoffs, as well as historical collection activities on past-due accounts. In addition, our stores perform automated daily cash reconciliation at each store and every bank account in the system. This fully-integrated IT platform enables us to make real-time, data-driven changes to our acquisition and risk models, which yield significant benefits in terms of customer acquisition costs and credit performance. Each of our stores has secure, real-time access to corporate servers and the most up to date information to maintain consistent underwriting standards. All loan applications are scanned and electronic copies are centrally stored for convenient access and retrieval. Our IT platform is built upon by over 15 years of continually updated customer data comprising over 71 million loan records to formulate our robust, proprietary underwriting algorithms. This platform then automatically applies multi-algorithmic analysis to a customers loan application to produce a Curo Score, which drives our underwriting decision. Globally, as of September 30, 2017 we had 183 employees who write code and manage our networks and infrastructure for our IT platform.
The Curo Platform is scalable and has been successfully implemented in Canada and the United Kingdom. We modified the Curo Platform to calculate foreign exchange rates and interest rate calculations in the methodology commonly used in Canada and the United Kingdom, and to meet Canadian and U.K. standards for electronic card capture and approval.
Collections
To enable store-level employees to focus on customer service and to improve effectiveness and compliance management, we operate centralized collection facilities in the United States, Canada and the United Kingdom. Our collections personnel are trained to optimize regulatory-compliant loan repayment while treating our customers fairly. Our collections personnel contact customers after a missed payment, primarily via phone calls, letters and emails and help the customer understand available payment arrangements or alternatives to satisfy the
% ancillary revenue 7% 5% 5% % ancillary revenue 5% 4% 4% % online revenue 28% 30% 33% % online revenue 30% 35% 39%
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deficiency. We use a variety of collections strategies, including payment plans, settlements and adjustments to due dates. Collections teams are trained to apply different strategies and tools for the various stages of delinquency and also vary methodologies by product type.
Our collections centers in Wichita, Kansas, Toronto, Ontario and Nottingham, United Kingdom employed 117, 79 and 61 collection professionals as of September 30, 2017, respectively.
We assign all our delinquent loan accounts in the United States to an affiliated third-party collection agency once they are 91 to 121 days past due. Under our policy, the precise number of days past due to trigger a referral varies by state and product and requires, among other things, that proper notice be delivered to the customer. Once a loan meets the criteria set forth in the policy, it is automatically referred for collection. We make changes to our policy periodically in response to various factors, including regulatory developments and market conditions. Our policy is established and implemented by our chief operating officer, senior vice president in charge of collections and our chief executive officer. As delinquent accounts are paid, the Curo Platform updates these accounts in real time. This ensures that collection activity will cease the moment a customers account is brought current or paid in full and considered in good standing. See Certain Relationships and Related-Party Transactions for a description of our relationship with our third-party collection agency.
One of the primary metrics we use to measure collections effectiveness is Return on Collections, or ROC. ROC is total delinquent payments collected divided by total delinquent payments entering collections during a period. Through continuous enhancements in technology, processes and talent, we improved U.S. ROC from 65.8% for 2015 to 70.8% for 2016. For the same periods, ROC in Canada was stable in the range of 61.3% to 61.0%.
Competition
We believe that the primary factors upon which we compete are:
| range of services; |
| flexibility of product offering; |
| convenience; |
| reliability; |
| fees; and |
| speed. |
Our underbanked customers tend to value service that is quick and convenient, lenders that can provide the most appropriate structure and terms and payments that are affordable. We face competition in all of our markets from other alternative financial services providers, banks, savings and loan institutions, short-term consumer lenders and other financial services entities. Generally, the landscape is characterized by a small number of large, national participants with a significant presence in markets across the country and a significant number of smaller localized operators. Our competitors in the alternative financial services industry include monoline operators (both public and private) specializing in short-term cash advances, multiline providers offering cash advance services in addition to check cashing and other services and subprime specialty finance and consumer finance companies, as well as businesses conducting operations online and by phone.
Employees
We are committed to building and nurturing a distinctive corporate culture. Our core company values are:
| Winning with integrity. We compete hard and do what is right. |
| Thriving on change. We embrace change from a proactive stance with flexibility and responsiveness. |
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| Building relationships based on trust, honesty and respect. We approach all people with openness and candor. |
| Executing with urgency and passion. We move fast with a sense of excitement and an entrepreneurial spirit. |
| Keeping our commitments. We walk our talk and do what we say we will do. |
| Leading with humility . Check your ego; best idea wins. Ours is a shared success. |
As of September 30, 2017, we had a total of approximately 4,200 employees worldwide, approximately 3,000 of whom work in our stores. None of our employees is unionized or covered by a collective bargaining agreement, and we consider our current employee relations to be good.
We believe that customer service is critical to our continued success and growth. As such, we have staffed each of our stores with a full-time Store Manager or Branch Manager, or SM, that runs the day-to-day operations of the store. The SM is typically supported by a Senior Assistant Manager, or SAM, and/or an Assistant Manager, or AM, and nine to 12 full-time Customer Advocates. A newer store will typically ramp up with a SM, a SAM, two AMs and two Customer Advocates. Customer Advocates conduct the point-of-sale activities and greet and interact with customers from a secured area behind expansive windows. We believe staff continuity is critical to our business. We believe that our pay rates are equal to or better than all of our major competitors and we constantly evaluate our benefit plans to maintain their competitiveness.
STORE LEVEL ORGANIZATION |
||||||||||
POSITION |
DESCRIPTION/RESPONSIBILITY |
SEPTEMBER 30, 2017
HEADCOUNT |
AVERAGE
TENURE |
|||||||
Regional Director |
Oversee operations and supervise District Managers Responsible for compliance and overall performance |
9 | 11.7 | |||||||
District Manager |
Supervise up to nine stores Responsible for hiring, training and compliance |
61 | 10.8 | |||||||
Store Manager |
Responsible for day-to-day store operations Supervise store-level employees |
414 | 7.6 | |||||||
Senior Assistant Manager/Assistant Manager/Shift Lead |
Assist in supervising operations Monitor customer service and a resource for Advocates |
|
901
|
|
|
3.8
|
|
|||
Customer Advocate |
Conduct point-of-sale activities Responsible for individual transactions |
1,487 | 1.8 |
Property
As of September 30, 2017, the Company leased 215 stores in the United States and 190 stores in Canada. Our operating lease agreements for the buildings in which we operate expire at various times through 2030, and the majority of the leases have an original term of five years with two, five-year renewal options. Most of the leases have escalation clauses and several also require payment of certain period costs including maintenance,
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insurance and property taxes. We lease our principal executive offices, which are located in Wichita, Kansas. The leases cover approximately 52,000 square feet of office space. See Certain Relationships and Related Party Transactions for additional information regarding operating lease agreements with real estate entities that are related to the Company through common ownership.
Legal Proceedings
Harrison, et al v. Principal Investments, Inc. et al
During the period relevant to this class action litigation, the Company pursued in excess of 16,000 claims in the limited actions and jurisdiction court in Clark County, Nevada, seeking repayment of loans on which customers had defaulted. The Company utilized outside counsel to file these debt collection lawsuits. On Scene Mediations, a process serving company, was employed to serve the summons and petitions in the majority of these cases. In an unrelated matter, the principal of On Scene Mediations was convicted of multiple accounts of perjury and filing false affidavits to obtain judgments on behalf of a Las Vegas collection agency. In September 2010, we were sued by four former customers in a proposed class action suit filed in the District Court in Clark County, Nevada. The plaintiffs in this case claimed that they, and others in the proposed class, were not properly served notice of the debt collection lawsuits by the Company.
On June 7, 2017, the parties reached a settlement in this matter. The Company accrued approximately $2.0 million as a result of this settlement as of September 30, 2017. At a hearing before the District Court in Clark County, Nevada, on July 24, 2017 the court granted preliminary approval of the settlement. On October 30, 2017, the court issued final approval of the class settlement.
City of Austin
We were cited on July 5, 2016 by the City of Austin, Texas for alleged violations of the Austin, Texas ordinance addressing products offered by CSOs. The Texas ordinances regulate aspects of products offered under our CAB programs, including loan sizes and repayment terms. We believe that: (1) the Austin ordinance (like its counterparts elsewhere in the state) conflicts with Texas state law and (2) our product in any event complies with the ordinance, when it is properly construed. An Austin trial court agreed with our position that the ordinance conflicts with Texas law and, accordingly, did not address our second argument. In August 2017, an Austin appellate court reversed a trial courts decision and remanded the case to trial court for further proceedings. We appealed the appellate decision in October 2017, and the appeal is currently pending. We will not have a final determination of the lawfulness of our CAB program under the Austin ordinance (and similar ordinances in other Texas cities) for some time. A final adverse decision could potentially result in material monetary liability in Austin and elsewhere and would force us to restructure the loans we arrange in Texas.
Other
We are also a defendant in certain routine litigation matters encountered in the ordinary course of our business. Certain of these matters may be covered to an extent by insurance. In the opinion of management, based upon the advice of legal counsel, the likelihood is remote that the impact of any pending legal proceedings and claims, either individually or in the aggregate, would have a material adverse effect on our consolidated financial condition, results of operations or cash flows. For more information, see Note 18, Litigation of our Notes to Interim Consolidated Financial Statements included elsewhere in this prospectus. The resolution of these matters is not expected to have a material adverse effect on our financial position, results of operations or liquidity.
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REGULATORY ENVIRONMENT AND COMPLIANCE
Regulations
The alternative financial services industry is regulated at the federal, state and local levels in the United States; at the federal and provincial levels in Canada; and at the central government level in the United Kingdom. In general, these regulations are designed to protect consumers and the public, while providing standard guidelines for business operations. Laws and regulations typically impose restrictions and requirements, such as governing interest rates and fees, maximum loan amounts, the number of simultaneous or consecutive loans, required waiting periods between loans, loan extensions and refinancings, payment schedules (including maximum and minimum loan durations), required repayment plans for borrowers claiming inability to repay loans, disclosures, security for loans and payment mechanisms, licensing, and in certain jurisdictions database reporting and loan utilization information. We are also subject to federal, state, provincial and local laws and regulations relating to our other financial products, including laws and regulations governing recording and reporting certain financial transactions, identifying and reporting suspicious activities and safeguarding the privacy of customers non-public personal information. For more information regarding the regulations applicable to our business and the risks to which they subject us, see the section entitled Risk Factors.
The legal environment is constantly changing as new laws and regulations are introduced and adopted, and existing laws and regulations are repealed, amended, modified and reinterpreted. We regularly work with authorities, both directly and through our active memberships in industry trade associations, to support our industry and to promote the development of laws and regulations that are equitable to businesses and consumers alike.
Regulatory authorities at various levels of government and voters have enacted, and will likely continue to propose, new rules and regulations impacting our industry. Due to the evolving nature of laws and regulations, further rulemaking could result in new or expanded regulations that may adversely impact current product offerings or alter the economic performance of our existing products and services. For example, a rule recently adopted by the CFPB threatens to do just that if and when it becomes effective. In addition, the CFPB is expected to propose a rule that will restrict debt collector communications with consumers. Although the rule is not expected to apply directly to the Companys activities, such a rule might impact third party debt collection on behalf of the Company and the CFPB might use its supervisory authority to impose similar restrictions on the Company. We cannot provide any assurances that additional federal, state, provincial or local statutes or regulations will not be enacted in the future in any of the jurisdictions in which we operate. It is possible that future changes to statutes or regulations will have a material adverse effect on our results of operations and financial condition.
U.S. Regulations
U.S. Federal Regulations
The U.S. federal government and its respective agencies possess significant regulatory authority over consumer financial services. The body of laws to which we are subject has a significant impact on our operations. Recently, the CFPB adopted two new rules that are likely to have such an impact if and when they become effective(i) a rule designed to preclude arbitration agreements from interfering with class actions against providers of consumer financial products and services, or the CFPB Anti-Arbitration Rule, and (ii) a rule specifically targeted at payday, vehicle title and certain high-cost installment loans, or the CFPB Rule.
Dodd-Frank: In 2010, the U.S. Congress passed the Dodd-Frank Act. Title X of this legislation created the CFPB, which became operational in July 2011. Title X provides the CFPB with broad rule-making, supervisory and enforcement powers with regard to consumer financial services. Title X of Dodd-Frank also contains so-called UDAAP provisions declaring unlawful unfair, deceptive and abusive acts and practices in connection with the delivery of consumer financial services and giving the CFPB the power to enforce UDAAP
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prohibitions and to adopt UDAAP rules defining unlawful acts and practices. Additionally, the FTC Act prohibits unfair and deceptive acts and practices and gives the FTC enforcement authority to prevent and redress violations of this prohibition.
CFPB Rule: Pursuant to its authority to adopt UDAAP rules, the CFPB adopted a new rule applicable to payday, title and certain high-cost installment loans in October 2017. The provisions of this CFPB Rule directly applicable to us are scheduled to become effective 21 months after the CFPB Rule is published in the Federal Register (no earlier than July 2019, and later if the publication occurs after October 2017) . However, the CFPB Rule remains subject to potential override by congressional disapproval pursuant to the Congressional Review Act. Moreover, after the current CFPB Director leaves office, either at the end of his scheduled term in July 2018 or sooner, his successor could suspend, delay, modify or withdraw the CFPB Rule. Further, we expect that important elements of the CFPB Rule will be subject to legal challenge by trade groups or other private parties. Thus, it is impossible to predict whether and when the CFPB Rule will go into effect and, if so, whether and how it might be modified.
In its current form, the CFPB Rule establishes ability-to-repay, or ATR, requirements for covered short-term loans and covered longer-term balloon-payment loans, as well as payment limitations on these loans and covered longer-term loans. Covered short-term loans are consumer loans with a term of 45 days or less. Covered longer-term balloon payment loans include consumer loans with a term of more than 45 days where (i) the loan is payable in a single payment, (ii) any payment is more than twice any other payment, or (iii) the loan is a multiple advance loan that may not fully amortize by a specified date and the final payment could be more than twice the amount of other minimum payments. Covered longer-term loans are consumer loans with a term of more than 45 days where (i) the total cost of credit exceeds an annual rate of 36%, and (ii) the lender obtains a form of leveraged payment mechanism giving the lender a right to initiate transfers from the consumers account. Post-dated checks, authorizations to initiate ACH payments and authorizations to initiate prepaid or debit card payments are all leveraged payment mechanisms under the CFPB Rule.
The CFPB Rule excludes from coverage, among other loans: (1) purchase-money credit secured by the vehicle or other goods financed (but not unsecured purchase-money credit or credit that finances services as opposed to goods); (2) real property or dwelling-secured credit if the lien is recorded or perfected; (3) credit cards; (4) student loans; (5) non-recourse pawn loans; and (6) overdraft services and overdraft lines of credit. These exclusions do not apply to our loans.
Under the provisions of the CFPB Rule applicable to covered short-term loans and covered longer-term balloon-payment loans, to make a conforming loan a lender will need to choose between the following two options.
| A full payment test, under which the lender must make a reasonable determination of the consumers ability to repay the loan in full and cover major financial obligations and living expenses over the term of the loan and the succeeding 30 days. Under this test, the lender must take account of the consumers basic living expenses and obtain and generally verify evidence of the consumers income and major financial obligations. However, in circumstances where a lender determines that a reliable income record is not reasonably available, such as when a consumer receives and spends income in cash, the lender may reasonably rely on the consumers statements alone as evidence of income. Further, unless a housing debt obligation appears on a national consumer report, the lender may reasonably rely on the consumers written statement regarding his or her housing expense. As part of the ATR determination, the CFPB Rule permits lenders and consumers in certain circumstances to rely on income from third parties, such as spouses, to which the consumer has a reasonable expectation of access, and to consider whether another person is regularly contributing to the payment of major financial obligations or basic living expenses. A 30-day cooling off period applies after a sequence of three covered short-term or longer-term balloon payment loans. |
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A principal-payoff option, under which the lender may make up to three sequential loans, or so-called Section 1041.6 Loans, without engaging in an ATR analysis. The first Section 1041.6 Loan in any |
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sequence of Section 1041.6 Loans without a 30-day cooling off period between loans is limited to $500, the second is limited to a principal amount that is at least one-third smaller than the principal amount of the first, and the third is limited to a principal amount that is at least two-thirds smaller than the principal amount of the first. A lender may not use this option if (i) the consumer had in the past 30 days an outstanding covered short-term loan or an outstanding longer-term balloon payment loan that is not a Section 1041.6 Loan, or (ii) the new Section 1041.6 Loan would result in the consumer having more than six covered short-term loans (including Section 1041.6 Loans) during a consecutive 12-month period or being in debt for more than 90 days on such loans during a consecutive 12-month period. For Section 1041.6 Loans, the lender cannot take vehicle security or structure the loan as open-end credit. |
Covered longer-term loans that are not balloon loans will not be subject to the foregoing requirements. However, these loans will be subject to the CFPB Rules penalty fee prevention provisions, which will apply to all covered loans. Under these provisions:
| If two consecutive attempts to collect money from a particular account of the borrower, made through any channel ( e.g., paper check, ACH, prepaid card) are unsuccessful due to insufficient funds, the lender cannot make any further attempts to collect from such account unless and until the lender has provided a new notice to the borrower and the borrower has provided a new and specific authorization for additional payment transfers. The CFPB Rule contains specific requirements and conditions for the authorization. While the CFPB has explained that these provisions are designed to limit bank penalty fees to which consumers may be subject, and while banks do not charge penalty fees on card authorization requests, the CFPB Rule nevertheless treats card authorization requests as payment attempts subject to these limitations. |
| A lender generally must give the consumer at least three business days advance notice before attempting to collect payment by accessing a consumers checking, savings, or prepaid account. The notice must include information such as the date of the payment request, payment channel and payment amount (broken down by principal, interest, fees, and other charges), as well as additional information for unusual attempts, such as when the payment is for a different amount than the regular payment, initiated on a date other than the date of a regularly scheduled payment or initiated in a different channel that the immediately preceding payment attempt. |
The CFPB Rule also requires the CFPBs registration of consumer reporting agencies as registered information systems to whom lenders must furnish information about covered short-term and longer-term balloon loans and from whom lenders must obtain consumer reports for use in extending such credit. If there is no registered information system or if no registered information system has been registered for at least 180 days, lenders will be unable to make Section 1041.6 Loans. The CFPB expects that there will be at least one registered information system in time for lenders to avail themselves of the option to make Section 1041.6 Loan by the effective date of the CFPB Rule.
The CFPB Rule remains subject to possible Congressional override by disapproval pursuant to the Congressional Review Act and possible invalidation in legal challenges by trade groups or other private parties. We cannot predict at this time whether Congress will allow the rule to stand or whether private legal challenges will be successful.
For a discussion of the potential impact of the CFPB Rule on the Company, see Risk FactorsRisks Relating to the Regulation of Our IndustryThe CFPB promulgated new rules applicable to our loans that could have a material adverse effect on our business and results of operations.
CFPB Enforcement: In addition to the Dodd-Frank Acts grant of rule-making authority, the Dodd-Frank Act gives the CFPB authority to pursue administrative proceedings or litigation for violations of federal consumer financial laws (including Dodd-Franks UDAAP provisions and the CFPBs own rules). In these proceedings, the CFPB can obtain cease and desist orders (which can include orders for restitution or rescission
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of contracts, as well as other kinds of affirmative relief) and monetary penalties ranging from $5,000 per day for ordinary violations of federal consumer financial laws to $25,000 per day for reckless violations and $1 million per day for knowing violations. Also, where a company has violated Title X of the Dodd-Frank Act or CFPB regulations promulgated thereunder (such as the CFPB Rule), the Dodd-Frank Act empowers state attorneys general and state regulators to bring civil actions for the kind of cease and desist orders available to the CFPB (and possibly also for the civil penalties available to the CFPB). Potentially, if the CFPB, the FTC or one or more state officials believe we have violated the foregoing laws, they could exercise their enforcement powers in ways that would have a material adverse effect on us.
CFPB Supervision and Examination: Additionally, the CFPB has supervisory powers over many providers of consumer financial products and services, including explicit authority to examine (and require registration) of payday lenders. The CFPB released its Supervision and Examination Manual, which includes a section on Short-Term, Small-Dollar Lending Procedures, and began field examinations of industry participants in 2012. The CFPB commenced its first supervisory examination of us in October 2014. The scope of the CFPBs examination included a review of our Compliance Management System, our Short-Term Small Dollar lending procedures, and our compliance with Federal consumer financial protection laws. The 2014 examination had no material impact on our financial condition or results of operations, and we received the final CFPB Examination Report in September 2015.
The CFPB commenced its second examination of us in February 2017 and completed the related field work in June 2017. The scope of the 2017 examination included a review of our Consumer Compliance Management System, our substantive compliance with applicable federal laws and certain select matters requiring attention. The CFPB has not yet provided us with its final report of examination. However, we have received and responded to preliminary findings.
Reimbursement Offer; Possible Changes in Payment Practices: During 2017 it was determined that a limited universe of borrowers may have incurred bank overdraft or non-sufficient funds fees because of possible borrower confusion about certain electronic payments we initiated on their loans. As a result, we have decided to reimburse those fees through payments or credits against outstanding loan balances, subject to per-customer dollar limitations, upon receipt of (i) claims from potentially affected borrowers stating that they were in fact confused by our practices and (ii) bank statements from such borrowers showing that they incurred these fees at a time that they might reasonably have been confused about our practices. Based on the terms of the reimbursement offer we are currently considering, we do not expect the net financial cost of this offer to exceed $4 million.
While we do not expect that matters arising from the CFPB examinations will have a material impact on the Company, at least in part to meet CFPB expectations, the Company has made in recent years, and is continuing to make, certain enhancements to its compliance procedures and consumer disclosures. For example, we are in the process of evaluating our payment practices. Even in advance of the effective date of the CFPB Rule (and even if the CFPB Rule does not become effective), we may make changes to these practices in a manner that will increase costs and/or reduce revenues.
Anti-Arbitration Rule. Under its authority to regulate pre-dispute arbitration provisions pursuant to Section 1028 of Dodd-Frank, in July 2017 the CFPB issued a final rule prohibiting the use of mandatory arbitration clauses with class action waivers in agreements for consumer financial products and services, effective as to arbitration agreements entered into on or after March 19, 2018. However, the Anti-Arbitration Rule was overturned by Congress on October 24, 2017, subject to the Presidents approval. If the President consents to this action, the rule will not become effective, and, pursuant to the Congressional Review Act, substantially similar rules may only be reissued with specific legislative authorization.
We currently include pre-dispute arbitration provisions in our loan agreements. In the event that the President does not consent to the override and legal challenges to the rule prove unsuccessful, we will likely
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discontinue or limit their use to individual lawsuits, effective as to loan agreements entered into on or after March 19, 2018.
We can give no assurance that the Anti-Arbitration Rule will not have a material impact on our U.S. operations.
MLA: The Military Lending Act, or MLA, enacted in 2006 and implemented by the Department of Defense, or DoD, imposes a 36% cap on the all-in annual percentage rates charged on certain loans to active-duty members of the U.S. military, reserves and National Guard and their respective dependents. As initially adopted, the MLA and related DoD rules applied to our loans with terms up to 90 days. However, in 2016, the DoD expanded its MLA regulations, effective in October 2016, to encompass some of our longer-term Installment Loans that were not previously covered. As a result, we ceased offering short-term consumer loans to these applicants in 2007 and all loans to these applicants in 2016.
Enumerated Consumer Financial Services Laws, TCPA and CAN-SPAM: Federal law imposes additional requirements on us with respect to our consumer lending. These requirements include disclosure requirements under the Truth in Lending Act, or TILA, and Regulation Z. TILA and Regulation Z require creditors to deliver disclosures to borrowers prior to consummation of both closed-end and open-end loans and, additionally for open-end credit products, periodic statements and change in terms notices. For closed-end loans, the annual percentage rate, the finance charge, the amount financed, the total of payments, the number and amount of payments and payment due dates, late fees and security interests must all be disclosed. For open end credit, the borrower must be provided with key information that includes annual percentage rates and balance computation methods, various fees and charges, and security interests.
Under the Equal Credit Opportunity Act, or ECOA, and Regulation B, we may not discriminate on various prohibited bases, including race, gender, national origin, marital status and the receipt of government benefits, retirement or part-time income, and we must also deliver notices specifying the basis for credit denials, as well as certain other notices. The Fair Credit Reporting Act, or FCRA, regulates the use of consumer reports and reporting of information to credit reporting agencies. These laws limit the permissible uses of credit reports and require us to provide notices to customers when we take adverse action or increase interest rates based on information obtained from third parties, including credit bureaus. We are also subject to additional federal requirements with respect to electronic signatures and disclosures under the Electronic Signatures In Global And National Commerce Act, or ESIGN; and requirements with respect to electronic payments under the Electronic Funds Transfer Act, or EFTA, and Regulation E. EFTA and Regulation E requirements also have an important impact on our prepaid debit card services business. These rules and regulations protect consumers engaging in electronic fund transfers and contain restrictions, require disclosures and provide consumers certain rights relating to electronic fund transfers, including requiring a written authorization, signed or similarly authenticated, in connection with certain credit transactions payable through payments that recur at substantially equal intervals. Additionally we are subject to compliance with the Telephone Consumer Protection Act, or the TCPA, and CAN-SPAM Act, and the regulations of the FCC, which include limitations on telemarketing calls, auto-dialed calls, pre-recorded calls, text messages and unsolicited faxes. While the Company believes that its practices comply with the TCPA, the TCPA has given rise to a spate of litigation nationwide.
The Company applies the rules under the Fair Debt Collection Practices Act, or FDCPA, as a guide to conducting its collections activities for delinquent loan accounts, as well as complying with applicable state collections laws.
Bank Secrecy Act and Anti-Money Laundering Laws: Under regulations of the U.S. Department of the Treasury, or the Treasury Department, adopted under the Bank Secrecy Act of 1970, or BSA, we must report currency transactions in an amount greater than $10,000 by filing a Currency Transaction Report, or CTR, and we must retain records for five years for purchases of monetary instruments for cash in amounts from $3,000 to $10,000. Multiple currency transactions must be treated as a single transaction if we have knowledge that the
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transactions are by, or on behalf of, the same person and result in either cash in or cash out totaling more than $10,000 during any one business day. We will file a CTR for any transaction which appears to be structured to avoid the required filing and the individual transaction or the aggregate of multiple transactions would otherwise meet the threshold and require the filing of a CTR.
The BSA also requires us to register as a money services business with the Financial Crimes Enforcement Network of the Treasury Department, or FinCEN. This registration is intended to enable governmental authorities to better enforce laws prohibiting money laundering and other illegal activities. We are registered as a money services business with FinCEN and must re-register with FinCEN by December 31 every other year. We must also maintain a list of names and addresses of, and other information about, our stores and must make that list available to FinCEN and any requesting law enforcement or supervisory agency. That store list must be updated at least annually.
Federal anti-money-laundering laws make it a criminal offense to own or operate a money transmittal business without the appropriate state licenses, which we maintain. In addition, the USA PATRIOT Act of 2001 and its corresponding federal regulations require us, as a financial institution, to establish and maintain an anti-money-laundering program. Such a program must include: (1) internal policies, procedures and controls designed to identify and report money laundering; (2) a designated compliance officer; (3) an ongoing employee-training program; and (4) an independent audit function to test the program. Because our compliance with other federal regulations has essentially a similar purpose, we do not believe compliance with these requirements has had or will have any material impact on our operations. In addition, federal regulations require us to report suspicious transactions involving at least $2,000 to FinCEN. The regulations generally describe four classes of reportable suspicious transactions-one or more related transactions that the money services business knows, suspects, or has reason to suspect (1) involve funds derived from illegal activity or are intended to hide or disguise such funds, (2) are designed to evade the requirements of the BSA (3) appear to serve no business or lawful purpose or (4) involve the use of the money service business to facilitate criminal activity.
The Office of Foreign Assets Control, or OFAC, publishes a list of individuals and companies owned or controlled by, or acting for or on behalf of, targeted or sanctioned countries. It also lists individuals, groups and entities, such as terrorists and narcotics traffickers, designated under programs that are not country-specific. Collectively, such individuals and companies are called Specially Designated Nationals. Their assets are blocked and we are generally prohibited from dealing with them.
Privacy Laws: The Gramm-Leach-Bliley Act of 1999 and its implementing federal regulations require us generally to protect the confidentiality of our customers nonpublic personal information and to disclose to our customers our privacy policy and practices, including those regarding sharing the customers nonpublic personal information with third-parties. That disclosure must be made to customers at the time the customer relationship is established and, subject to an exception, at least annually thereafter.
State and Local Regulation in the United States
Short-term consumer loans must comply with extensive laws of the states where our stores are located or, in the case of our online loans, where the borrower resides. These laws impose, among other matters, restrictions and requirements governing interest rates and fees; maximum loan amounts; the number of simultaneous or consecutive loans, and required waiting periods between loans; loan extensions and refinancings; payment schedules (including maximum and minimum loan durations); required repayment plans for borrowers claiming inability to repay loans; collections; disclosures; security for loans and payment mechanisms; licensing; and (in certain jurisdictions) database reporting and loan utilization information. While the federal FDCPA does not typically apply to our activities, comparable, and in some cases more rigorous, state laws do apply.
In the event of serious or systemic violations of state law by us or, in certain instances, our third-party service providers when acting on our behalf, we would be subject to a variety of regulatory and private sanctions.
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These could include license suspension or revocation (not necessarily limited to the state or product to which the violation relates); orders or injunctive relief, including orders providing for rescission of transactions or other affirmative relief; and monetary relief. Depending upon the nature and scope of any violation and/or the state in question, monetary relief could include restitution, damages, fines for each violation and/or payments to borrowers equal to a multiple of the fees we charge and, in some cases, principal as well. Thus, violations of these laws could potentially have a material adverse effect on our results of operations and financial condition.
The California Finance Lenders Law caps rates on loans under $2,500 but imposes no limit on loans valued $2,500 or higher. The DBO is currently evaluating whethercontrary to both our practice and general industry practicethe interest rate cap applies to loans in an original principal amount of $2,500 or more that are partially prepaid shortly after origination to reduce the principal balance to $2,500 or less. We provided the DBO with a detailed submission on this issue in September 2016, but the DBOs response remains pending.
During the past few years, legislation, ballot initiatives and regulations have been proposed or adopted in various states that would prohibit or severely restrict our short-term consumer lending. We, along with others in the short-term consumer loan industry, intend to continue to inform and educate legislators and regulators and to oppose legislative or regulatory action that would prohibit or severely restrict short-term consumer loans. Nevertheless, if legislative or regulatory action with that effect were taken in states in which we have a significant number of stores (or at the federal level), that action could have a material adverse effect on our loan-related activities and revenues.
In some states, check cashing companies or money transmission agents are required to meet minimum bonding or capital requirements and are subject to record-keeping requirements and/or fee limits.
Currently, approximately 30 states in the United States have enabling legislation that specifically allows direct loans of the type that we make. In Texas and Ohio, we operate under a CSO model. In Texas this model is expressly authorized under Section 393 of the Texas Finance Code. As a CSO, we serve as arranger for consumers to obtain credit from independent, non-bank consumer lending companies and we guaranty the lender against loss. As required by Texas law, we are registered as a CSO and also licensed as a CAB. Texas law subjects us to audit by the States Office of Consumer Credit Commissioner and requires us to provide expanded disclosures to customers regarding credit service products.
The Texas cities of Austin, Dallas, San Antonio, Houston and several others (nearly 45 cities in total as of September 30, 2017) have passed substantially similar local ordinances addressing products offered by credit access businesses or CABs. These local ordinances place restrictions on the amounts that can be loaned to customers and the terms under which the loans can be repaid. As of September 30, 2017, the Company operated 70 stores in cities with local ordinances. We have been cited by the City of Austin for alleged violations of the Austin ordinance but believe that: (i) the ordinance conflicts with Texas state law and (ii) our product in any event complies with the ordinance, when it is properly construed. An Austin trial court agreed with our position that the ordinance conflicts with Texas law and, accordingly, did not address our second argument. In August 2017, an Austin appellate court reversed this decision and remanded the case to the trial court for further proceedings consistent with its opinion (including, presumably, a decision on our second argument). However, in October 2017 we appealed this appellate decision. Accordingly, we will not have a final determination of the lawfulness of our CAB program under the Austin ordinance (and similar ordinances in other Texas cities) for some time. A final adverse decision could potentially result in material monetary liability in Austin and elsewhere and would force us to restructure the loans we arrange in Texas.
Our credit services organization or CSO company in Ohio is registered under the Ohio Credit Services Organization Act and regulated by the Ohio Department of Commerce Division of Financial Institutions. As a CSO, we provide credit services to our customers in accordance with the Credit Services Organization Act. Unlike Texas law, however, the Ohio Credit Services Organization Act does not expressly authorize the loan program we offer. Operating as a CSO allows us to charge a fee for arranging loans to our customers from
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unaffiliated third-party lenders, for assisting customers in preparing and completing the information and documents that the unaffiliated third-party lenders require the customers to submit in order to obtain loans and for providing guarantees of customer obligations to the unaffiliated third-party lenders. We determine whether we are prepared to guarantee the loans, using our own underwriting guidelines, and the lender applies its own underwriting guidelines in determining whether to make the loan. We obtain assurances from lenders that they comply with applicable federal and Ohio laws when setting loan terms. We offer loans online in Ohio.
Our businesses are regulated by state authorities in each state where we operate, whether through storefronts or online. We are subject to regular state examinations and audits and must address with the appropriate state agency any findings or criticisms resulting from these examinations and audits.
In addition to state laws governing our lending activities, most states have laws and regulations governing check cashing and money transmission, including licensing and bonding requirements and laws regarding maximum fees, recordkeeping and/or posting of fees, and our business is subject to various local rules, such as local zoning and occupancy regulations. These local rules and regulations are subject to change and vary widely from state to state and city to city.
We cannot provide any assurances that additional state or local statutes or regulations will not be enacted in the future in any of the jurisdictions in which we operate. Additionally, we cannot provide any assurances that any future changes to statutes or regulations will not have a material adverse effect on our results of operations and financial condition.
Canadian Regulations
In May 2007, Canadian federal legislation was enacted that exempts from the criminal rate of interest provisions of the Criminal Code (which prohibit receiving (or entering into an agreement to receive) interest at an effective annual rate that exceeds 60% on the credit advanced under the loan agreement) cash advance loans of $1,500 or less if the term of the loan is 62 days or less (payday loans) and the person is licensed under provincial legislation as a short-term cash advance lender and the province has been designated under the Criminal Code . Currently, Ontario, Alberta, British Columbia, Manitoba, Nova Scotia, Prince Edward Island and Saskatchewan have provincial enabling legislation allowing for payday loans and have also been designated under the Criminal Code. New Brunswicks enabling legislation will come into force on January 1, 2018, at which time it will become a designated province under the Criminal Code. Newfoundland has proposed enabling legislation, but such legislation is not yet in force. Under the provincial payday lender legislation there are generally cost of borrowing disclosure requirements, collection activity requirements, caps on the cost of borrowing that may be recovered from borrowers and restrictions on certain types of lending practices, such as extending more than one payday loan to a borrower at any one time.
Canadian provinces periodically review the regulations for payday loan products. Some provinces specify a time period within the Act while other provinces are silent or simply note that reviews will be periodic.
Nova Scotia
On March 30, 2015, Nova Scotia completed its review process and reduced the maximum cost of borrowing from C$25 per C$100 to C$22 per C$100 effective in May of 2015. The remaining recommendations of the review Board, mainly an extended payment plan offering, are still with the respective minister for consideration. Cash Money operated five retail store locations as of September 30, 2017 and has an internet presence in Nova Scotia. We do not expect that any of the proposed changes will materially impact our operating results in Nova Scotia.
British Columbia
On September 21, 2016, the British Columbia Ministry of Public Safety and Solicitor General, or the Ministry, announced a reduction in the total cost of borrowing from C$23 per C$100 lent to C$17 per C$100 lent
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effective January 1, 2017. At the same time, the Ministry also announced a consultation titled Consumer Protection for British Columbians who use high-cost alternative financial services, seeking input on whether, and what additional, regulation may be warranted. The consultation concluded October 20, 2016 and the process and timing following this consultation are unknown.
As of September 30, 2017, the Company operated 26 of its 190 Canadian stores and conducted online lending in British Columbia. Revenues in British Columbia were approximately 10.3% of Canadian revenues and 2.0% of total consolidated revenues for the nine months ended September 30, 2017.
Ontario
On April 20, 2016, the Ontario Ministry of Government and Consumer Services, or the Ministry, published a 30-day consultation to consider the total cost of borrowing for payday lending in Ontario, which was C$21 per C$100 lent. The consideration is whether the rate should remain at C$21 or be lowered to C$19, C$17 or C$15 per C$100 lent. On August 30, 2016, the Ministry published another 30-day consultation seeking public input on a two stage reduction in the total cost of borrowing, proposing a maximum rate of C$18 per C$100 lent effective January 1, 2017 and a further reduction to C$15 per C$100 lent effective January 1, 2018.
On November 3, 2016, the Ministry held a press conference and issued a press release announcing the introduction of new legislation and also announcing a reduction in the total cost of borrowing to C$18 per C$100 lent effective January 1, 2017. While the proposed further reduction to C$15 per C$100 lent was updated in the posted regulations, it is our understanding that the Ministrys decisions on further reductions to the total cost of borrowing beyond January 1, 2017 are still under review and consideration.
In December 2015, Bill 156 titled the Alternative Financial Services Statute Law Amendment Act was introduced. This legislation proposed additional consumer protections such as a cooling-off period and extended repayment plan. This legislation also provided the Ministry with the authority, subject to a regulatory process, to impose additional requirements such as establishing a maximum loan amount. The Alternative Financial Services Statute Law Amendment Act passed second reading before the Parliament recessed in June of 2016.
Upon the Ontario Parliament returning from summer recess in September of 2016, the Premier of Ontario prorogued the legislature therefore all prior bills died and new legislation would need to be introduced. On November 3, 2016, the Ministry introduced Bill 59 titled Putting Consumers First Act (the Act). The Act encompassed many of the provisions of the previous legislation (the Alternative Financial Services Statute Law Amendment Act). The Ministry also incorporated the provisions of three other previous, unrelated pieces of legislation in the Act. Bill 59 officially received Royal Assent on April 13, 2017. A majority of the Single-Pay-loan-related provisions in the Act, including but not limited to installment repayment plans, advertising requirements, prohibitions on number of loans in a year and disclosure requirements are subject to a further regulatory process.
With respect to the regulatory process for the authorities granted to the Ministry in Bill 59, the Ministry of Government and Consumer Services issued a consultation document on July 7, 2017 requesting feedback on whether and how regulations should change regarding most notably extended payment plans, maximum loan amounts, a cooling off period between loans, and limits on fees charged to cash government checks. Responses to the July 7, 2017 consultation document were due by August 21, 2017. The Ministry summary accompanying the consultation document stated that it intends to enact regulations based on the outcome of the consultation in early 2018. A further consultation document that will address required disclosures for payday loans, among other things, is planned for fall 2017. The Ministry currently plans to enact regulations based on the outcome of this second consultation in early 2019. While we expect the various steps of the regulatory process to occur over the next few months, the specific timeline is unknown.
We currently conduct online lending and operate 121 of our 190 Canadian stores in Ontario. Revenues originated in Ontario represented approximately 65.7% of revenue generated in Canada and 14.9% of our total
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consolidated revenues for the year ended December 31, 2016. Revenues originated in Ontario represented approximately 67.0% of revenue generated in Canada and 13.1% of our total consolidated revenues for the nine months ended September 30, 2017. Until these procedures have concluded, we cannot speculate on the potential changes to regulations. Depending on the magnitude of the changes adopted, they could have a material adverse effect on our Ontario operations.
Alberta
On May 12, 2016, the Alberta Government introduced Bill 15 titled An Act to End Predatory Lending. The most notable provisions of this Bill included for loans in scope a reduction in the maximum cost of borrowing from C$23 to C$15 per C$100 lent and a requirement that all loans are repaid in installments. For customers paid semi-monthly, bi-weekly or on a more frequent basis, at least three installment payments would be required. For customers paid on a monthly basis, at least two installment payments would be required. All covered loan terms must be no less than 42 days and no greater than 62 days with no penalty for early repayment. Additionally, the Bill included a provision for a reduction in the cost of borrowing to 60% APR when alternative options for credit exist and are being utilized by a sufficient number of individuals.
On May 27, 2016, Bill 15 received Royal Assent. The maximum cost of borrowing of C$15 per C$100 lent became effective on August 1, 2016. On November 25, 2016, the Alberta Government issued the regulations for the installment payments, effective November 30, 2016.
The Company currently operates 27 of its 190 Canadian stores and conducts online lending in Alberta. Revenues in Alberta were approximately 15.1% of Canadian revenues and 3.4% of total consolidated revenues for the year ended December 31, 2016, and were approximately 12.8% of Canadian revenues and 2.5% of total consolidated revenues for the nine months ended September 30, 2017. If we are unable to replace a significant portion of the affected revenues with other product offerings, this change could have a material adverse effect on our results for our Canadian operations.
Manitoba
On January 12, 2016, the province of Manitoba announced a Public Utilities Board, or PUB, hearing from April 12, 2016 through April 19, 2016 to specifically review and consider a reduction in the rate from C$17 per C$100 lent to C$15 per C$100 lent and a reduction in the maximum amount borrowers can loan from 30% of net pay to 25% of net pay. On June 17, 2016, the PUB issued its report to the government recommending that these proposed changes not be made. It is unknown if and when the government may adopt the recommendations of the PUB. As of September 30, 2017, the Company operated four stores in Manitoba.
Saskatchewan
Saskatchewan has amended its Payday Loan Regulations such that as of February 15, 2018, the maximum rate that may be charged to a borrower will be reduced from C$23 per C$100 lent to C$17 and the maximum fee for a dishonoured check will be reduced from C$50 to C$25. As of September 30, 2017, the Company operated six stores in Saskatchewan.
Installment loans are subject to the Criminal Code interest rate cap of 60%. Providers of these types of loans are also subject to provincial legislation that requires lenders to provide certain disclosures, prohibits the charging of certain default fees and extends certain rights to borrowers, such as prepayment rights. These laws are harmonized in many Canadian provinces. However, in Ontario, Bill 59 titled Putting Consumers First Act, which received Royal Assent on April 13, 2017, provides the Ontario Ministry with the authority to impose additional restrictions on lenders who offer installment loans, subject to a regulatory process, including: (i) requiring a lender to take into account certain factors with respect to the borrower before entering into a credit agreement with that borrower; (ii) capping the amount of credit that may be extended; (iii) prohibiting a lender from initiating contact with a
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borrower for the purpose of offering to refinance a loan; and (iv) capping the amount of certain fees that do not form part of the cost of borrowing. On July 7, 2017, the Ministry of Government and Consumer Services issued a consultation document requesting feedback on questions regarding a new regime for high-cost credit and limits on optional services, such as optional insurance. The proposed high-cost credit regime would apply to loans with an annual interest rate that exceeds 35%. The Ministry summary accompanying the consultation document stated that a further consultation paper would be issued this fall on those matters. The Ministry expects that regulation would be enacted in early 2019.
In Canada, the federal government generally does not regulate check cashing businesses, except in respect of federally regulated financial institutions (and other than the Criminal Code of Canada provisions noted above in respect of charging or receiving in excess of 60% interest on the credit advanced in respect of the fee for a check cashing transaction) nor do most provincial governments generally impose any regulations specific to the check cashing industry. The exceptions are the provinces of Quebec, where check cashing stores are not permitted to charge a fee to cash a government check; Manitoba, where the province imposes a maximum fee to be charged to cash a government check; and British Columbia and Ontario, where there is proposed legislation which will either restrict or impose a maximum fee that can be charged to cash a government check or any other check that may be designated by regulation. The province of Saskatchewan also regulates the check cashing business but only in respect of provincially regulated loan, trust and financing corporations. Cash Money does not operate in the province of Quebec.
The Financial Transaction and Reports Analysis Centre of Canada is responsible for ensuring that money services businesses comply with the legislative requirements of the Proceeds of Crime (Money Laundering) and Terrorist Financing Act, or the PCMLTFA. The PCMLTFA requires the reporting of large cash transactions involving amounts of $10,000 or more received in cash and international electronic funds transfer requests or receipts of $10,000 or more. The PCMLTFA also requires submitting suspicious transactions reports when there are reasonable grounds to suspect that a transaction or attempted transaction is related to the commission of a money laundering offense or to the financing of a terrorist activity, and the submission of terrorist financing reports where a person has possession or control of property that they know or believe to be owned or controlled by or on behalf of a terrorist or terrorist group. The PCMLTFA also imposes obligations on money services businesses in respect of record keeping, identity verification, and implementing a compliance policy.
U.K. Regulation
In the United Kingdom, consumer lending is governed by The Consumer Credit Act 1974, which was amended by the Consumer Credit Act 2006, or the CCA, and related rules and regulations supplemented by guidance. On April 1, 2014, the Financial Conduct Authority, or FCA, assumed responsibility for regulating consumer credit from the Office of Fair Trading, or OFT, as enacted under the Financial Services Act 2012. The FCA is the regulatory body in the United Kingdom that is responsible for the regulation and oversight of the consumer credit industry. Firms operating with consumer credit licenses originally issued by the OFT were required to register with the FCA in the fall of 2013 to obtain interim permission to conduct consumer credit activities from April 1, 2014 until they had applied for and obtained full authorization from the FCA. In February 2016, the Company was notified that its two lending businesses in the United Kingdom, SRC Transatlantic Limited and Wage Day Advance Limited, had received full authorization from the FCA to undertake certain categories of regulated consumer credit business under the Financial Services and Markets Act 2000.
While U.K. consumer credit businesses are principally regulated by the FCA, there is additional legislation and regulation that governs consumer credit, including the CCA. The CCA imposes various obligations on lenders, and any person who exercises the rights and duties of lenders to correctly document credit agreements and guarantees and indemnities, give borrowers rights to withdraw, provide post contract information such as statements of account, notices of sums in arrears and default notices, protect consumers who purchase a good or service from a linked supplier and not to take certain recovery or enforcement action until prescribed forms of post-contractual notices have been served and prescribed time periods have elapsed. Any failure to comply with
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such legislation or regulation may have serious consequences for our U.K. operations, as well as a risk that the FCA may revoke or suspend our authorization.
The FCA and its predecessor, the OFT, have already taken action against, and have imposed requirements on, a number of well-known U.K. financial institutions. In addition, our U.K. operations are subject to various regulations concerning consumer protection and data protection, among others. We are also subject to the powers of the U.K. Information Commissioners Office, or the ICO, to take enforcement action in relation to data protection.
Financial Conduct Authority Regulation
The FCAs strategic objective is to ensure that its relevant markets function well. The FCA also has three operational objectives:
| to secure an appropriate degree of protection for consumers; |
| to protect and enhance the integrity of the U.K. financial system; and |
| to promote effective competition in the interests of consumers for regulated financial services or services carried out by regulated investment exchanges. |
Its supervisory approach is risk based and directly linked to customer outcomes; in particular, it will focus on factors that influence the delivery of its statutory objectives.
The FCA Handbook sets out the FCA rules and other provisions, which have been made under powers given to the FCA under the Financial Services and Markets Act 2000 (Regulated Activities) Order 2001 (as amended). Firms wishing to carry on regulated consumer credit activities must comply with all applicable sections of the FCA Handbook, as well as the applicable consumer credit laws and regulations.
The FCA Handbook provides both general sourcebooks (that all authorized firms must comply with) and specialist sourcebooks (that apply to firms carrying out a specific regulated activity). The FCA Handbook has a specialist consumer credit sourcebook, or CONC, for the consumer credit sector, which includes rules and guidance in relation to, inter alia, financial promotions, pre-contract responsibilities and disclosure, affordability and creditworthiness assessments, the handling of vulnerable customers, communications with customers, arrears, default and recovery of debt, debt advice and statute barred debt.
By virtue of doing business with financial institutions and other FCA regulated companies in the United Kingdom, subsidiaries of the Group are typically contractually obligated to comply with certain other requirements, such as the U.K. Lending Standards Boards Standards of Lending Practice (which financial institutions usually comply with on a voluntary basis), the Finance and Leasing Associations Lending Code and the Credit Services Associations Code of Practice.
The FCA has applied its rules to consumer credit firms in a number of areas, including its high level principles and conduct of business standards. The FCA has substantially greater powers than the OFT and given the FCA has only been responsible for regulating consumer credit since April 2014, it is likely that the regulatory requirements applicable to our industry will continue to increase, as the FCA deepens its understanding of the industry through the authorization process. In addition, it is likely that the compliance framework that will be needed to continue to satisfy the FCA requirements will demand incremental investment and resources in our compliance governance framework. For example, it is currently expected that as of 2018, the U.K. Senior Managers and Certification Regime, or SMCR, will be extended to all sectors of the financial services industry (including consumer credit firms, such as SRC Transatlantic Limited and Wage Day Advance Limited), at which point the majority of the senior management team below the executive committee is expected to become certified persons. One result of this may be that we incur additional costs from putting in place systems to ensure all
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employees are appropriately notified of, and receive suitable training in, the rules of conduct which will apply to them. We have commenced planning for this, with the details to be finalized once the FCA issues its final rules, expected to be published during the second half of 2017. There is also a risk that we could become subject to additional or new regulatory obligations (such as FCA approval of senior managers and anti-money laundering and fraud prevention), or that those requirements to which we are currently subject could become more stringent.
Pursuant to statutory requirements, all authorized entities must be able to demonstrate that they meet the threshold conditions for authorization and comply on an ongoing basis with the FCAs high level standards for authorized firms, such as its Principles for Business (including the requirements to treat customers fairly); Threshold Conditions; Senior Management Arrangements, Systems and Controls; Statements of Principle and Code of Practice for Approved Persons; and Training and Competence and General Provisions, as well as CONC. In addition, certain individuals within an FCA authorized firm who exercise a significant influence over the business of the firm must be approved by the FCA and these individuals have to demonstrate that they are fit and proper and competent to hold the position of an approved person.
The FCA regards lending and collections of loans as a high risk activity and therefore dedicates special resources to more intensive monitoring of businesses in this sector. CONC provides that firms that undertake consumer credit regulated activities should, for example, be required to treat a customer in default or arrears difficulties with forbearance and consideration and may consider suspending, reducing or waiving any further interest payments or charges from that customer or accepting token payments from the customer for a reasonable period. Regarding statute barred debt, a firm which undertakes consumer credit regulated activities must not mislead a customer by suggesting that said customer could be subject to court action for the sum of the statute barred debt, when that firm knows, or reasonably ought to know, that the relevant limitation period has expired.
The Money Laundering Regulations 2017 implement the European Union 4th Money Laundering Directive (2015/849/EU) and apply to lenders and specify that all lenders must be supervised for money laundering compliance. Both our U.K. lending businesses are currently supervised by the FCA for these purposes.
In the United Kingdom, a bank that clears a fraudulent check must refund the drawer. For this reason, banks have invoked more stringent credit inspection and indemnity criteria for businesses such as ours.
In 2009, the European Union Payment Services Directive, or the PSD1, was implemented in the United Kingdom, requiring money transfer and foreign currency exchange providers (among others) to be authorized by or registered with the FCA; SRC Transatlantic Limited duly registered with effect from December 8, 2010. PSD1 will be replaced by Directive 2015/2366/EU, or PSD2, beginning in January 2018. PSD2 will be implemented via the U.K. Payment Services Regulations 2017. Under the new regime, SRC Transatlantic Limited will be required to re-register with the FCA in order to continue providing payment services.
In June 2013, the U.K. Competition & Markets Authority (CMA) commenced a market investigation into payday lending to investigate whether certain features of the industry prevented, restricted or distorted competition and if so to recommend suitable remedies.
The Equality Act 2010 protects nine characteristics from direct or indirect discrimination and harassment of applicants and customers when conducting lending services. These characteristics are age, disability, gender reassignment, marriage and civil partnership, pregnancy and maternity, race, religion or belief, sex and sexual orientation.
We are required to self-report suspicious activities and to appoint a designated anti-money laundering officer with the overall responsibility for the compliance of the business and employees under the Proceeds of Crime Act 2002 and the Money Laundering Regulations 2017.
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The CMA published its final report in February 2015; its recommendations were implemented under the Payday Lending Market Investigation Order 2015, under which:
| online lenders must provide details of their products on at least one FCA authorized price comparison website, or PCW, and include a hyperlink from their website to the relevant PCW; and |
| payday lenders must provide existing customers with a summary of their cost of borrowing. |
These changes, which are reflected in FCA rules, came into effect on December 1, 2016.
Failure to comply with any rules or guidance issued by the FCA is likely to have serious consequences; for example:
| The FCA may take enforcement action against a firm which could result in fines and/or remediation action for consumers. Any such enforcement action would be publicly known and would involve severe reputational damage, with vendors of debt portfolios and creditors outsourcing collection activity likely to remove their business from a debt collector that is the subject of such enforcement action. |
| Firms can be subject to a section 166 notice by the FCA, which may ensue where the FCA has identified issues within the firm regarding compliance with the FCA rules and guidance and commissions a skilled persons report. A skilled persons report is performed by an independent firm, usually one of the five large accountancy firms or a law firm that is deemed by the FCA to have the necessary skills and expertise to review the areas of concern. The report is shared with the firm being reviewed and the FCA. Remedial action highlighted is tracked by the FCA through close liaison with the firm. Failure to remedy points raised and/or do so in sufficient time can lead to further enforcement action, including fines. The cost of such a review is borne by the firm. Any enforcement proceeding that might follow from the issue of a section 166 notice may become public at the stage of issuance of a final notice. If our U.K. operations become subject to such a notice, originators that currently do business with us may cease to do so, and our ability to conduct our U.K. operations, along with our reputation, and consequently, our ability to win future business may be adversely affected. We might also have to introduce changes to our business practices in the United Kingdom in response to enforcement action taken against certain of our competitors. |
The FCA is undertaking various reviews relevant to consumer credit businesses, which may affect us. For example, in December 2016, the FCA published a report on its thematic review on arrears management in unsecured lending which assessed the manner in which consumer credit financial institutions collect and recover debt and how customers were being treated by such firms. The review focused on whether firms have due regard to the interests of their customers and exercise appropriate forbearance in compliance with the existing FCA rules, including the Principles for Businesses. We were not directly involved with the review; however, we reviewed the report and no major changes to our current policy and processes were required.
Data Protection
As a consumer finance business, we must comply with the requirements established by the Data Protection Act in relation to processing the personal data of our customers. Any business controlling the processing of personal data (that is, determining the purposes of the processing and the manner in which it is carried out), such as consumer credit firms, must in particular maintain a data protection registration with the ICO for each of its companies. The ICO is an independent governmental authority responsible for maintaining, upholding and promoting the best business practices and legislative requirements for processing personal data and safeguarding the information rights of individuals and their rights to access their personal data.
We control the processing of significant amounts of personal data; therefore, we have a data protection registration for each relevant subsidiary which controls the processing of personal data, a data protection policy and have established data protection processes, which are reviewed and updated from time to time for the
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purposes of compliance with the requirements of the Data Protection Act and the applicable guidance issued from time to time by the ICO, such as the handling of data subject access requests from individuals. The ICO is empowered to impose requirements through enforcement notices (in effect, stop orders), issue monetary fines and prosecute criminal offences under the Data Protection Act. As of the date of this prospectus we have not received any such notices from the ICO.
Furthermore, we receive third-party data from sources governed by the Steering Committee on Reciprocity, or SCOR, such as mainstream credit bureaux, and from private sources such as closed user groups, or CUGs. CUGs operate by a CUG host taking responsibility for housing the underlying data, matching the records and for compliance with data protection regulations. If one of the contributors of the CUG were to violate data protection laws or other regulatory requirements, it could harm our business or result in penalties being imposed on us. Our ability to obtain, retain and otherwise manage such data is governed by data protection and privacy requirements and regulatory rules and guidance issued by, among others, the ICO and influenced by SCOR.
The EU Data Protection Regulation came into effect in May 2016 and is directly applicable in Member States (including the United Kingdom). It will apply to all affected businesses, which are required to be compliant by May 25, 2018, when enforcement of that regulation begins. The EU Data Protection Regulation introduces substantial changes to the EU data protection regime and will impose a substantially higher compliance burden on us, may increase our data protection costs and may restrict our ability to use data. Examples of this higher burden include expanding the requirement for informed opt in consent by customers to processing of personal data, where we rely on customer consent to process personal data, and granting customers a right to be forgotten, restrictions on the use of personal data for profiling purposesdisclosure requirements of data sources to customers, the possibility of having to deal with a higher number of subject access requests, among other requirements. The EU Data Protection Regulation also increases the maximum level of fine for the most serious compliance failures in the case of a business to the greater of four per cent of annual worldwide turnover or 20,000,000. As the EU Data Protection Regulation is directly applicable, and directly effective, the United Kingdom does not have control over its manner of implementation (except to the extent that the EU Data Protection Regulation expressly grants such control to EU Member States). The ICO is currently consulting on its draft written guidance on consent under the EU Data Protection Regulation. There is a memorandum of understanding in place between the ICO and the FCA which (among other things) provides for information-sharing between the two bodies.
The U.K. government has also published the Data Protection Bill 2017, which it is anticipated will become law in 2018. This will substantially replace the Data Protection Act and address further detail and increase the regulation which will be brought in by the EU Data Protection Regulation. The current published version of the Data Protection Rule does not increase the regulatory penalties regime which will become effective under the EU Data Protection Regulation.
In addition, the Privacy and Electronic Communications (EC Directive) Regulations 2003 originating as the implementation of European Directive 2002/58/EC, also known as the E-Privacy Directive, impose obligations on U.K. businesses in respect of electronic marketing by email and marketing by telephone. It is anticipated that a new wider scope EU regulation will come into force in 2018.
It remains to be seen what impact the recent vote by the United Kingdom in favor of leaving the EU will have on the regulatory environment in the EU and the United Kingdom and on the applicability of EU law in the United Kingdom.
We continue to monitor the evolving regulatory activity in the United Kingdom. We cannot provide any assurances that additional statutes or regulations will not be enacted in the future in the United Kingdom. Additionally, we cannot provide any assurances that any future changes to statutes or regulations will not have a material adverse effect on our results of operations and financial condition.
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Executive Officers and Directors
The following table sets forth the names, ages and positions of our executive officers and directors as of the date of this prospectus:
Name |
Age |
Position |
||||
Doug Rippel |
51 | Executive Chairman of Board of Directors | ||||
Don Gayhardt |
53 | President, Chief Executive Officer and Director | ||||
William Baker |
37 | Executive Vice President and Chief Operating Officer | ||||
Roger Dean |
55 | Treasurer, Executive Vice President and Chief Financial Officer | ||||
Terry Pittman |
60 | Executive Vice President and Chief Information Officer | ||||
Vin Thomas |
40 | Secretary and Chief Legal Officer | ||||
Chad Faulkner |
50 | Director | ||||
Mike McKnight |
51 | Director | ||||
Christopher A. Masto |
50 | Director | ||||
Andrew Frawley (1) |
55 | Director | ||||
Dale E. Williams (2) |
54 | Director | ||||
Karen Winterhof |
30 | Director |
(1) | Mr. Frawleys appointment to our Board of Directors will be effective upon the listing of our shares of common stock on the NYSE. |
(2) | Mr. Williams appointment to our Board of Directors will be effective upon the listing of our shares of common stock on the NYSE. |
Executive Officers
Doug Rippel co-founded the Company and has served as our Executive Chairman of the Board of Directors since 2012. Mr. Rippel was our Chairman of the Board of Directors from 2008 to 2012, our Chief Executive Officer from 1997 to January 2012 and our Secretary and Treasurer from 1997 to 2008. As one of our founders, he has led the Company in its entire geographic and product expansion. Mr. Rippel serves as a director of several private companies. Mr. Rippel also serves as a director and officer of each of our wholly owned subsidiaries. Mr. Rippel shares, together with the other Founder Holders, 100% ownership of Ad Astra, which we employ to provide third-party collection activities for our U.S. operations. Mr. Rippel also co-owns with the other Founder Holders certain real estate companies from which we lease some of our corporate stores and offices. For more information, see Certain Relationships and Related-Party TransactionsRelated-Party Transactions. Mr. Rippel has also served as the Chief Executive Officer of American First Finance since 2013. Mr. Rippel holds a Bachelor of Science degree in Electrical Engineering from Kansas State University and a Master of Business Administration from Wichita State University.
Don Gayhardt has served as the Companys Chief Executive Officer since January 2012, as the Companys President since July 2013 and on our Board of Directors since December 2012. Prior to joining the Company, Mr. Gayhardt served in various capacities at Dollar Financial Corp., (now known as DFC Global Corp.,) from 1990 to 2008, including President and a member of the board of directors from 1998 to 2008. During his time with Dollar, the company expanded from 60 stores to over 1,100 and revenue increased from $14 million to over $550 million. Since 2008, Mr. Gayhardt has been an investor and advisor to a number of finance, financial technology and retail businesses, and currently serves on the board of directors of Beneficial Bancorp. Mr. Gayhardt earned his Bachelor of Business Administration degree in Accounting from the University of Notre Dame.
William Baker has served as the Companys Chief Operating Officer since February 2016. Mr. Baker was our Companys Chief Marketing Officer from September 2011 until 2016 and Vice President of Marketing and Business Development from April 2007 until September 2011. Mr. Baker also serves on the Board of Directors for the Companys U.K. subsidiaries SRC Transatlantic LTD and CURO Transatlantic Limited. Mr. Baker earned a Bachelor of Science Degree in Integrated Marketing Communications from Gannon University.
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Roger Dean has served as an Executive Vice President and our Chief Financial Officer since joining CURO in May 2016. Prior to joining the Company, Mr. Dean was Senior Vice PresidentController with Fifth Third Bancorp and Senior Manager with Deloitte. Most recently, Mr. Dean served as Chief Financial Officer for CNG Holdings, Inc. from 2005 to 2016. Mr. Dean earned his Bachelor of Science in Accountancy from Miami University, Oxford, Ohio.
Terry Pittman joined the Company as our Chief Information Officer in 2003, and has been an Executive Vice President since March 2016. Mr. Pittman is responsible for overseeing all aspects of Information Technology for operations, processes, security, application development and infrastructure across the global reach of the Company. Mr. Pittman has over 30 years in technology management and his background includes a wide range of industries including retail, rental and consumer lending companies managing the growth to over thousands of locations. Mr. Pittman holds a Bachelor of Science degree from Wichita State University in Computer Science.
Vin Thomas joined the Company in September 2014 as Chief Legal Officer and has served as our Secretary since 2016. Mr. Thomas also serves on the Board of Directors for the Companys U.K. subsidiaries, SRC Transatlantic LTD and CURO Transatlantic Limited. Prior to joining the Company, Mr. Thomas served as General Counsel and Assistant Secretary at TMX Finance LLC from May 2009 to September 2014. Prior to his tenure with TMX Finance LLC, Mr. Thomas was in the private practice of law. Mr. Thomas holds a Bachelor of Arts, cum laude, from the University of Georgia, and a juris doctor degree from the Mercer University School of Law.
Directors
Chad Faulkner co-founded the Company and has served on our Board of Directors since 1997. Mr. Faulkner served as our President and Chief Operating Officer from 1997 to 2013. As one of our founders, he has led the Company in its entire geographic and product expansion. Mr. Faulkner serves as a director of several private companies. Mr. Faulkner also serves as a director of each of our wholly-owned subsidiaries. Most recently, Mr. Faulkner has served as Chief Executive Officer of Sports Academy since 2015. Mr. Faulkner shares, together with the other Founder Holders, 100% ownership of Ad Astra, which we employ to provide third-party collection activities for our U.S. operations. Mr. Faulkner also co-owns with the other Founder Holders certain real estate companies from which we lease some of our corporate stores and offices. For more information, see Certain Relationships and Related-Party TransactionsRelated-Party Transactions. Mr. Faulkner holds a Bachelor of Science degree from Kansas State University and is a graduate of the Executive Program at the Anderson School of BusinessUniversity of California Los Angeles.
Mike McKnight co-founded the Company and has served on our Board of Directors since 1997. From 1997 to 2008, Mr. McKnight served as Vice President of the Company. He was involved with the Companys strategic direction and governmental affairs. He initially managed loan office operations, and then later directed the real estate, construction, media and marketing arms of the Company, utilizing his prior career as a radio advertising executive to build a successful advertising campaign. Mr. McKnight shares, together with the other Founder Holders, 100% ownership of Ad Astra, which we employ to provide third-party collection activities for our U.S. operations. Mr. McKnight also co-owns with the other Founder Holders certain real estate companies from which we lease some of our corporate stores and offices. For more information, see Certain Relationships and Related-Party TransactionsRelated-Party Transactions. From 2010 until 2014, Mr. McKnight served as the Managing Member of Gusto, LLC, a Dominos Pizza franchisee in Kansas and Western Missouri. Since 2011, Mr. McKnight serves as a director of Gusto, LLC, Decorus Investments, LLC, and CDM Development, LLC, and has been a Partner of Tacoma Capital since 2016. Mr. McKnight earned a Bachelor of Science degree in Journalism from Kansas State University.
Christopher A. Masto has served on our Board of Directors since 2008. Mr. Masto is Co-Founder and Senior Advisor at FFL Partners, a private equity firm, which he co-founded in 1997 and where, until 2017, he served as a Partner, member of the Investment Committee, and member of firm leadership. He transitioned to a Senior Advisor role in 2017. Prior to co-founding FFL Partners, he worked as a management consultant with
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Bain & Company. Prior to that, Mr. Masto was employed at Morgan Stanley & Co., where he worked as an investment banker. Mr. Masto also currently serves on the board of directors of Enjoy Beer LLC. He was previously a director of Tempur Sealy International and Chairman of TriTech Software Systems. Mr. Masto graduated magna cum laude from Brown University with an Sc.B. in Electrical Engineering, and received an Master of Business Administration from Harvard Business School.
Karen Winterhof has served on our Board of Directors since March 2016. Ms. Winterhof currently serves as a Vice President with FFL Partners. Prior to joining FFL Partners in June 2015, Ms. Winterhof was an associate at Highbridge Principal Strategies from August 2013 to February 2015 in the Specialty Loan Fund, where she participated in evaluating and executing senior debt investments and had ongoing responsibilities with portfolio investments across a variety of industries. Prior to that, she was a private equity associate at Clayton, Dubilier & Rice in New York from July 2011 to July 2013. Ms. Winterhof also currently serves on the board of directors of Crisis Prevention Institute and Icynene. Ms. Winterhof received a Bachelor of Science in Engineering in Operations Research and Financial Engineering from Princeton University.
Andrew Frawley will become a member of our Board of Directors upon the listing of our shares of common stock on the NYSE in connection with this offering. Mr. Frawley currently serves as the Chief Executive Officer of AJ Frawley & Associates LLC. Most recently, from December 2014 to September 2016, Mr. Frawley served as Chief Executive Officer of Epsilon, a segment of Alliance Data Systems Corporation. Prior to that, he served as Epsilons President from January 2012 to December 2014 and as its President of Marketing Technology from January 2009 to December 2011. Mr. Frawley also currently serves on the board of directors of the Data & Marketing Association, and has been the Chairman of the board of directors of Cybba Inc. since September 2017. Mr. Frawley earned a Master of Business Administration from Babson College and a Bachelor of Science in Finance from The University of Maine.
Dale E. Williams will become a member of our board of directors upon the listing of our shares of common stock on the NYSE in connection with this offering. From July 2003 to September 2015, Mr. Williams served as Executive Vice President and Chief Financial Officer of Tempur Sealy International. From 2001 through 2002, Mr. Williams served as Vice President and Chief Financial Officer of Honeywell Control Products, a division of Honeywell International, Inc. From 2000 to 2001, Mr. Williams served as Vice President and Chief Financial Officer of Saga Systems, Inc./Software AG, Inc. Prior to that, Mr. Williams spent 15 years in various management positions at General Electric Company. Mr. Williams also currently serves on the board of directors of Intralink-Spine and Xooker, LLC. Mr. Williams received a Bachelor of Science in Finance from Indiana University.
Corporate Governance
Composition of the Board of Directors
In connection with this offering, we will be amending and restating our certificate of incorporation to provide for a classified board of directors of eight directors, which may be increased or decreased in size, with two directors in Class I (expected to be Don Gayhardt and Mike McKnight), three directors in Class II (expected to be Chad Faulkner, Andrew Frawley and Karen Winterhof) and three directors in Class III (expected to be Doug Ruppel, Christopher Masto and Dale E. Williams). Each director will serve staggered three-year terms. Only one class of directors will be elected at each annual meeting of our stockholders, with the other classes continuing for the remainder of their respective three-year terms. Any increase or decrease in the number of directors will be distributed among the three classes so that, as nearly as possible, each class will consist of one-third of the directors. See Description of Capital StockAnti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and BylawsClassified Board.
Background and Experience of Directors
When considering whether directors and nominees have the experience, qualifications, attributes or skills, taken as a whole, to enable our board of directors to satisfy its oversight responsibilities effectively in light of our
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business and structure, the board of directors focused primarily on each persons background and experience as reflected in the information discussed in each of the directors individual biographies set forth above. We believe our directors provide an appropriate mix of experience and skills relevant to the size and nature of our business.
Director Independence
Our board of directors has evaluated the independence of its members based upon the rules of NYSE and the SEC. Applying these standards, our board of directors has affirmatively determined that is an independent director.
Board Leadership Structure
Our board of directors includes our Chief Executive Officer. Our Executive Chairman is not an officer or employee of the Company. Our board of directors understands that there is no single, generally accepted approach to providing board leadership and that given the dynamic and competitive environment in which we operate, the right board leadership structure may vary as circumstances warrant. The board of directors will discuss and consider the matter from time to time as circumstances change and, subject to our amended and restated bylaws, will have the flexibility to modify our board structure as it deems appropriate.
Board Committees
Upon the completion of this offering, the board of directors will establish an Audit Committee, a Compensation Committee and a Nominating and Corporate Governance Committee. Our Chief Executive Officer and other executive officers will regularly report to the non-executive directors and the board committees to ensure effective and efficient oversight of our activities and to assist in proper risk management and the ongoing evaluation of management controls.
Audit Committee
The Audit Committee will be responsible for, among other things, assisting the board of directors in reviewing: our financial reporting and other internal control processes; our financial statements; the independent auditors qualifications, independence and compensation; the performance of our internal audit function and independent auditors; and our compliance with legal and regulatory requirements and our Code of Business Conduct and Ethics.
Upon the completion of this offering, the Audit Committee will consist of Dale Williams, Andrew Frauley and Karen Winterhof. Rule 10A-3 under the Exchange Act and the NYSE rules require us to have one independent Audit Committee member upon the listing of our common stock, a majority of independent directors on our Audit Committee within 90 days of the date of this prospectus and an Audit Committee composed entirely of independent directors within one year of the date of this prospectus. Our board of directors has affirmatively determined that each of Dale E. Williams, Andrew Frawley and Karen Winterhof meet the definition of independent director for purposes of serving on an audit committee under Rule 10A-3 under the Exchange Act and the NYSE rules. We intend to comply with the other independence requirements within the time periods specified. We have identified Dale E. Williams as our audit committee financial expert as that term is defined in the rules and regulations of the SEC. The Audit Committee will have adopted a written charter that, among other things, specifies the scope of its rights and responsibilities and satisfies the applicable standards of the SEC and NYSE. Upon the completion of this offering, the charter of the Audit Committee will be available on our website. The information contained in, or that can be accessed through, our website is not incorporated by reference and is not a part of this prospectus. The responsibilities of our Audit Committee will include, among other things:
| appointing, as well as reviewing and approving the compensation, retention and termination of, the independent registered public accounting firm engaged to audit our financial statements; |
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| helping to ensure the independence of and overseeing the performance of the independent registered public accounting firm; |
| reviewing and pre-approving audit and non-audit services and fees; |
| reviewing financial statements and discussing with management and the independent registered public accounting firm our annual audited and quarterly financial statements, the results of the independent audit and the quarterly reviews and the reports and certifications regarding internal controls over financial reporting and disclosure controls; |
| preparing the Audit Committee report that the SEC requires be included in an annual proxy statement; |
| assisting the board of directors in overseeing our internal audit function; |
| reviewing reports and communications from the independent registered public accounting firm; |
| reviewing the adequacy and effectiveness of our internal control over financial reporting (on which our management will be required to provide a report for our second annual report on Form 10-K); |
| reviewing and overseeing related-party transactions; and |
| establishing and maintaining procedures for the receipt, retention and treatment of complaints regarding accounting, internal accounting controls, auditing matters, or federal and state rules and regulations, and the confidential, anonymous submission by our employees of concerns regarding questionable accounting or auditing matters. |
Compensation Committee
The Compensation Committee will be responsible for, among other things, determining the compensation of our executive officers, reviewing our executive compensation policies and plans, administering and implementing our equity compensation plans, and preparing a report on executive compensation for inclusion in our proxy statement for our annual meeting.
Upon the completion of this offering, the Compensation Committee will consist of Andrew Frawley, Doug Rippel and Christopher Masto. The Compensation Committee will have adopted a written charter that, among other things, specifies the scope of its rights and responsibilities and satisfies the applicable standards of the SEC and NYSE. Upon the completion of this offering, the charter of the Compensation Committee will be available on our website. The information contained in, or that can be accessed through, our website is not incorporated by reference and is not a part of this prospectus. The responsibilities of our Compensation Committee will include, among other things:
| overseeing our overall compensation philosophy, compensation policies, compensation plans and benefit programs; |
| reviewing and approving for our executive officers: the annual base salary, annual incentive compensation (including the specific goals and amounts), equity compensation, employment agreements, severance or termination agreements, change in control arrangements and any other benefits, compensation or arrangements; and |
| reviewing and making recommendations to our Board of Directors with respect to employee compensation and benefit plans. |
Nominating and Corporate Governance Committee
The Nominating and Corporate Governance Committee will be responsible for, among other things, reviewing board structure, composition and practices and making recommendations on these matters to our board of directors reviewing, soliciting and making recommendations to our board of directors and stockholders with
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respect to candidates for election to the board of directors, overseeing our board of directors performance and self-evaluation process, reviewing the compensation payable to board and committee members and providing recommendations to our board of directors in regard thereto, and developing and reviewing a set of corporate governance principles.
Upon the completion of this offering, the Nominating and Corporate Governance Committee will consist of Christopher Masto, Dale E. Williams and Chad Faulkner. The Nominating and Corporate Governance Committee will have adopted a written charter that, among other things, specifies the scope of its rights and responsibilities and satisfies the applicable standards of the SEC and NYSE. Upon the completion of this offering, the charter of the Nominating and Corporate Governance Committee will be available on our website. The information contained in, or that can be accessed through, our website is not incorporated by reference and is not a part of this prospectus.
Corporate Governance Guidelines
The board of directors has developed and adopted a set of corporate governance principles to provide the framework for the governance of CURO and to assist our board in the exercise of its responsibilities. These guidelines reflect the boards commitment to monitoring the effectiveness of policy and decision making both at the board and management level, with a view to enhancing stockholder value over the long term. Following the completion of this offering, the corporate governance guidelines will be available on our website. We expect that any amendments to the guidelines, or any waivers of its requirements, will be disclosed on our website. The information contained in, or that can be accessed through, our website is not incorporated by reference and is not a part of this prospectus.
Compensation Committee Interlocks and Insider Participations
None of the members of our Compensation Committee is, or has at any time during the past year been, one of our officers or employees. None of our executive officers currently serves, or in the past year has served, as a member of the board of directors or compensation committee of any entity that has one or more executive officers serving on our board of directors or Compensation Committee.
Code of Business Conduct and Ethics
Upon the completion of this offering, we will adopt a code of business conduct and ethics that applies to all of our employees, officers and directors, including our Chief Executive Officer, Chief Financial Officer, controller or principal accounting officer, or other persons performing similar functions, which fulfills applicable guidelines issued by the SEC. Following the completion of this offering, the code of business conduct and ethics will be available on our website. We expect that any amendments to the code, or any waivers of its requirements, will be disclosed on our website within four business days the extent required by the rules and regulations of the SEC. The information contained in, or that can be accessed through, our website is not incorporated by reference and is not a part of this prospectus.
Director Compensation
We reimburse our directors for their reasonable travel and accommodation expenses incurred in connection with attending board and committee meetings and fulfilling their duties as members of our board of directors. See Executive CompensationDirector Compensation for a discussion of the compensation and reimbursement policies for our directors upon the completion of this offering.
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Compensation of our Named Executive Officers
The following table sets forth information regarding the compensation awarded to, earned by or paid to certain of our executive officers during the fiscal year ended December 31, 2016. As an emerging growth company, we have chosen to comply with the executive compensation disclosure rules applicable to smaller reporting companies as such term is defined in the rules promulgated under the Securities Act, which require compensation disclosure for our principal executive officer and our next two other most highly compensated executive officers. Throughout this prospectus, these three officers are referred to as our named executive officers.
The compensation reported in this Summary Compensation Table below is not necessarily indicative of how we will compensate our named executive officers in the future. We expect that we will continue to review, evaluate and modify our compensation framework as a result of becoming a publicly-traded company and our compensation program following the completion of this offering could vary significantly from our historical practices.
Summary Compensation Table
Year(1) | Salary(2) | Bonus(3) |
Stock
Awards |
Option
Awards(4) |
Non-Equity
Incentive Plan Compensation(5) |
Nonqualified
Deferred Compensation Earnings(6) |
All Other
Compensation(7) |
Total | ||||||||||||||||||||||||||||
Don Gayhardt |
2016 | $ | 726,458 | $ | 461,884 | | $ | 11,452 | $ | 555,788 | | $ | 229,443 | $ | 1,985,025 | |||||||||||||||||||||
President, Chief Executive Officer and Director |
||||||||||||||||||||||||||||||||||||
William Baker |
2016 | $ | 568,750 | $ | 105,850 | | $ | 190,339 | $ | 268,125 | | $ | 117,785 | $ | 1,250,849 | |||||||||||||||||||||
Executive Vice President and Chief Operating Officer |
||||||||||||||||||||||||||||||||||||
Terry Pittman |
2016 | $ | 419,192 | $ | 52,194 | | $ | 61,085 | $ | 205,871 | | $ | 78,734 | $ | 817,076 | |||||||||||||||||||||
Executive Vice President and Chief Information Officer |
(1) | Mr. Baker became our Executive Vice President and Chief Operating Officer and Mr. Pittman became our Executive Vice President and Chief Information Officer on March 5, 2016. Prior to such date, Mr. Baker served as our Chief Marketing Officer and Mr. Pittman served as our Chief Information Officer. |
(2) | The amount reported as earned in this column by Mr. Baker includes a catch-up payment of $83,333 paid in March 2016 for the increase in Mr. Bakers base salary from $400,000 to $500,000 that was approved and made effective in May 1, 2015, but not implemented until March 6, 2016. |
(3) | The amounts reported as earned in this column represent the following bonuses earned with respect to 2016 by each executive officer: |
| Don Gayhardt . The amounts reported represent (i) a $411,884 bonus paid pursuant to a special bonus declared in 2013 further described in 2013 Special Bonus Notices below, the aggregate value of which was initially $2,339,348, paid in installments over a four year period subject to the executives continued employment with the Company through the applicable payment dates, and (ii) a one-time $50,000 discretionary bonus, further described in 2016 Leadership Bonus, below. |
| William Baker. The amounts reported represent (i) a $55,850 bonus paid pursuant to a special bonus declared in 2013 further described in 2013 Special Bonus Notices below, the aggregate value of which was initially $467,825, paid in installments over a four year period subject to the executives continued employment with the Company through the applicable payment dates, and (ii) a one-time $50,000 discretionary bonus, further described in 2016 Leadership Bonus, below. |
|
Terry Pittman. The amounts reported represent (i) a $27,194 bonus paid pursuant to a special bonus declared in 2013 further described in 2013 Special Bonus Notices below, the aggregate value of which was initially $467,825, paid in |
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installments over a four year period subject to the executives continued employment with the Company through the applicable payment dates, and (ii) a one-time $25,000 discretionary bonus, further described in 2016 Leadership Bonus, below. |
For additional information, please see Compensation of our Named Executive OfficersNarrative to Summary Compensation Table below.
(4) | Represents the aggregate grant date fair value of options granted to our named executive officers in 2016, determined under FASB ASC Topic 718. With respect to time-vesting options, the grant date fair value was determined using a Black-Scholes option-pricing model. For additional information with respect to options granted during 2016, including a discussion of the assumptions made in such valuation, see Note 12, Share-Based Compensation of our Notes to Consolidated Financial Statements included elsewhere in this prospectus. The amounts above reflect our aggregate accounting expense for these awards and do not necessarily correspond to the actual value that will be recognized by our named executive officers, which depends on the market value of our common stock on a date in the future. |
(5) | The amounts reported as earned in this column represent the bonuses earned with respect to 2016 by each executive, with respect to Mr. Gayhardt, pursuant to his employment agreement, and with respect to Messrs. Baker and Pittman, pursuant to the 2016 Annual Corporate Incentive Plan. These amounts were paid in December 2016. For additional information, please see Compensation of our Named Executive OfficersNarrative to Summary Compensation Table below. |
(6) | Our named executive officers had no above-market or preferential earnings on deferred compensation during 2016. |
(7) | The amounts reported as earned by each named executive officer in this column include the cost of the following perquisites and other benefits received by our named executive officers: |
| Don Gayhardt. The amount reported represents: (i) employer contributions equal to $185,263 made to our non-qualified deferred compensation plan with respect to 2016; (ii) reimbursement for $25,000 in life insurance premiums; (iii) reimbursements for travel expenses incurred while commuting between the executives primary residence and our corporate office in Wichita, Kansas, equal to $16,600; and (iv) payments by us equal to $1,260 for executive life insurance premiums and $1,320 for executive long term disability benefits. |
| William Baker . The amount reported represents: (i) matching contributions equal to $7,950 made to our tax qualified retirement plan during 2016; (ii) employer contributions equal to $89,375 made to our non-qualified deferred compensation plan with respect to 2016; (iii) reimbursements for travel expenses incurred while commuting between the executives primary residence and our corporate office in Wichita, Kansas, equal to $18,300; and (iv) payments by us equal to $840 for executive life insurance premiums and $1,320 for executive long term disability benefits. |
| Terry Pittman . The amount reported represents (i) matching contributions equal to $7,950 made to our tax qualified retirement plan with respect to 2016; (ii) employer contributions equal to $68,624 made to our non-qualified deferred compensation plan during 2016; and (iii) payments by us equal to $840 for executive life insurance premiums and $1,320 for executive long term disability benefits. |
Executive Employment Agreements
Certain of the compensation paid to our named executive officers reflected in the Summary Compensation Table was provided pursuant to employment agreements, which are summarized below. For a discussion of the severance pay and other benefits to be provided to our named executive officers in connection with a termination of employment and/or a change in control under arrangements with each of our named executive officers, please see Potential Payments Upon Termination or Change in Control below.
Don Gayhardt
New Employment Agreement . We entered into an amended and restated employment agreement with Mr. Gayhardt, effective as of January 1, 2017, pursuant to which he serves as our President and Chief Executive Officer. The agreement provides for an indefinite term, subject to earlier termination upon death, disability, a termination by the Company or Mr. Gayhardts resignation. Pursuant to his employment agreement, Mr. Gayhardt is entitled to a base salary, which was increased, effective as of December 15, 2016, to $760,000 from $725,000. In addition, Mr. Gayhardt is eligible to earn the following bonuses for each calendar year: (i) a bonus equal to 75% of his base salary if our (a) revenue, less provision for loan losses and (b) EBITDA targets for the year are met, and (ii) an additional bonus in an amount equal to 3% of Mr. Gayhardts base salary multiplied by the number of percentage points by which our actual EBITDA for such calendar year exceeds the EBITDA target established by our board of directors in the annual budget for the applicable fiscal year, up to a maximum of 60% of base salary if our base revenue targets are achieved.
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In addition, Mr. Gayhardt is entitled to reimbursements for up to $25,000, per annum, of documented personal life insurance premiums and is eligible to participate in the Companys non-qualified deferred compensation plan on terms consistent with other executives. Mr. Gayhardts agreement also provides that we will split the costs for Mr. Gayhardts documented expenditures for private aircraft charters for flights taken for legitimate business purposes, up to a maximum aggregate reimbursement of $125,000 in each calendar year. For a discussion of Mr. Gayhardts severance entitlements pursuant to his employment agreement, see Potential Payments Upon Termination or Change in Control below.
Prior Employment Agreement . Prior to January 1, 2017, Mr. Gayhardt was subject to an employment agreement entered into in January of 2012, the initial term for which expired in January 2017. Pursuant to Mr. Gayhardts employment agreement, he was eligible to earn a base salary, equal to $725,000 for 2016, which was increased, effective as of December 15, 2016, to $760,000. In addition, Mr. Gayhardt was eligible to earn, for each calendar year: (i) a bonus equal to 75% of his base salary if our revenue and EBITDA targets for the year were met and (ii) an additional bonus in an amount equal to 3% of Mr. Gayhardts base salary multiplied by the number of percentage points by which our actual EBITDA for such calendar year exceeded the EBITDA target established by our board of directors in the annual budget for the applicable fiscal year, up to a maximum of 60% of base salary if our base revenue targets are achieved.
During 2016, our target revenue was $823.4 million and our EBITDA target was $179.9 million. Actual revenue totaled $828.6 million, while actual EBITDA totaled $191.3 million.
William Baker
We have entered into an employment agreement with Mr. Baker, dated March 5, 2016, pursuant to which he serves as our Executive Vice President and Chief Operating Officer. Prior to entering into such agreement, Mr. Baker was not a party to an employment agreement with CURO. The agreement provides for an initial term of three years, with automatic renewals for additional one year terms thereafter, unless terminated by either party upon 45 days advance written notice prior to the expiration of the applicable term. Pursuant to his employment agreement, Mr. Baker is entitled to a base salary, which was increased from $500,000 to $550,000, effective as of December 15, 2016. In addition, Mr. Baker is eligible to earn an annual bonus in an amount equal to 50% of his base salary based on the satisfaction of performance criteria agreed to by Mr. Baker and our Chief Executive Officer at the beginning of each year. For a discussion of Mr. Bakers severance entitlements pursuant to his employment agreement, see Potential Payments Upon Termination or Change in Control below.
Terry Pittman
We have entered into an employment agreement with Mr. Pittman, dated April 10, 2017, pursuant to which he serves as our Executive Vice President and Chief Information Officer. Prior to entering into such agreement, Mr. Pittman was not a party to an employment agreement with CURO. The agreement provides for an initial term of three years, with automatic renewals for additional one year terms thereafter, unless terminated by either party upon 45 days advance written notice prior to the expiration of the applicable term. Pursuant to his employment agreement, Mr. Pittman is entitled to a base salary of $422,300. In addition, Mr. Pittman is eligible to earn an annual bonus in an amount equal to 50% of his base salary for each calendar year if: (i) our EBITDA targets for the applicable calendar year are met and (ii) he achieves specified non-financial performance objectives agreed to by Mr. Pittman and our Chief Executive Officer at the beginning of each year. For a discussion of Mr. Pittmans severance entitlements pursuant to his employment agreement, see Potential Payments Upon Termination or Change in Control below.
2016 Annual Corporate Incentive Plan
Certain executives designated by us were eligible to participate in the 2016 Annual Corporate Incentive Plan for fiscal year 2016, or the 2016 Annual Plan, pursuant to which such executives were eligible to receive a bonus
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with respect to such year. Each employees target bonus was equal to a specified percentage of his base salary, and the actual bonus paid was based on the achievement of certain financial and personal performance objectives for the year. Bonus payments for 2016 were paid in December 2016. Employees were required to be employed at the time of calculation to receive any portion of the bonus.
Our financial performance objective under the 2016 Annual Plan was based on achieving an Adjusted EBITDA goal, which was $180.7 million. Actual Adjusted EBITDA for 2016 was $189.4 million. See Managements Discussion and Analysis of Financial Condition and Results of OperationsSupplemental Non-GAAP Financial Information for more information on how we define and calculate Adjusted EBITDA and for reconciliation of net income, the most comparable GAAP measure, to Adjusted EBITDA. If the target was met, then the maximum amount payable with respect to our financial performance would be paid. Accomplishment of stated individual or departmental goals would determine the percentage of the yearly bonus to be awarded with respect to personal performance objectives for the year. Not all goals and objectives would need to be met to receive a portion of the bonus.
During 2016, each of Messrs. Baker and Pittman were eligible to earn a target bonus under the 2016 Annual Plan equal to 50% of his base compensation. One-half of such bonus was tied to the achievement of the Adjusted EBITDA goal discussed above, and the remaining one-half was tied to the achievement of certain specified personal performance objectives, each of which were subjective in nature.
2017 Annual Corporate Incentive Plan
Certain executives designated by us are eligible to participate in the 2017 Annual Corporate Incentive Plan for fiscal year 2017, or the 2017 Annual Plan, pursuant to which such executives are eligible to receive a bonus with respect to such year. Each employees target bonus is equal to a specified percentage of his base salary, and the actual bonus paid will be based on the achievement of certain financial and personal performance objectives for the year. Employees are required to be employed at the time of calculation to receive any portion of the bonus.
Our financial performance objective under the 2017 Annual Plan will be based on achieving an Adjusted EBITDA goal. If the target is met, then the maximum amount payable with respect to our financial performance will be paid. Accomplishment of stated individual or departmental goals will determine the percentage of the yearly bonus to be awarded with respect to personal performance objectives for the year. Not all goals and objectives will need to be met to receive a portion of the bonus.
During 2017, each of Messrs. Baker and Pittman are eligible to earn a target bonus under the 2017 Annual Plan equal to 50% of his base compensation. One-half of such bonus will be tied to the achievement of CUROs Adjusted EBITDA goal, and the remaining one-half will be tied to the achievement of certain specified personal performance objectives, each of which will be subjective in nature.
2016 Leadership Bonus
During 2016, our board of directors granted a one-time discretionary bonus to certain members of our management team in recognition of their exceptional performance and the Companys positive performance during the first half of the fiscal year, referred to herein as the 2016 Leadership Bonus. Specifically, Messrs. Gayhardt, Baker and Pittman were each paid a bonus equal to $50,000, $50,000 and $25,000, respectively, in September, July and August of 2016, respectively.
2013 Special Bonus Notices
In 2013, in connection with a dividend paid to our stockholders, we granted holders of our stock options a cash bonus, or the 2013 Special Bonuses, payable over four years, in each case, subject to the award holders
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continued employment through such date. The final portion of the 2013 Special Bonuses were paid in 2017. Each of Messrs. Gayhardt, Baker and Pittman was entitled to receive an aggregate 2013 Special Bonus of $2,339,348, $467,825, and $467,825, respectively, of which $411,884, $55,850 and $27,194 was paid during 2016, respectively.
2017 Special Bonus Notices
On May 15, 2017, we granted holders of our stock options a cash bonus, or, the 2017 Special Bonuses, a portion of which was payable immediately and the remainder of which was payable on the last day of each calendar quarter during 2017 through 2022 following the date of grant, in each case, subject to the award holders continued employment through such date. The portion of the 2017 Special Bonus paid in May 2017 was equal to $26.60 times the number of vested stock options held by the bonus recipient as of May 15, 2017, or $562,084.60, $129,196 and $118,317 for each of Messrs. Gayhardt, Baker and Pittman, respectively. In addition, on the last day of each calendar quarter thereafter, the bonus recipient will receive a payment equal to $26.60 times the number of stock options held by the bonus recipient that become vested during the applicable calendar quarter, other than due to a disposition event (as defined in the stock option agreements granted pursuant to the Companys 2010 Equity Incentive Plan). Upon a disposition event, the 2017 Special Bonus recipient will be entitled to a bonus equal to $26.60 times the number of stock options that become vested solely as a result of the disposition event pursuant to the terms of the award holders individual award agreement, provided that the award holder is employed by the Company on the consummation of the disposition event. The recipients of the bonus were provided the opportunity to defer their bonus compensation pursuant to our non-qualified deferred compensation plan. The aggregate 2017 Special Bonus granted to each of Messrs. Gayhardt, Baker and Pittman that will become payable in respect of unvested stock options is equal to $11,704, $70,037, and $26,147, respectively.
On August 10, 2017, we granted holders of our stock options a cash bonus, or, the August 2017 Special Bonuses, a portion of which was payable immediately and the remainder of which is payable on the last day of each calendar quarter during 2017 through 2022 following the date of grant, in each case, subject to the award holders continued employment through such date. The portion of the August 2017 Special Bonus paid in August 2017 was equal to $8.07 times the number of vested stock options held by the bonus recipient as of August 10, 2017, or $170,633, $39,220 and $35,918 for each of Messrs. Gayhardt, Baker and Pittman, respectively. In addition, in each calendar quarter thereafter, the bonus recipient will receive a payment equal to $8.07 times the number of stock options held by the bonus recipient that become vested during the applicable calendar quarter, other than due to a disposition event (as defined in the stock option agreements granted pursuant to the Companys 2010 Equity Incentive Plan). Upon a disposition event, the August 2017 Special Bonus recipient will be entitled to a bonus equal to $8.07 times the number of stock options that become vested solely as a result of the disposition event pursuant to the terms of the award holders individual award agreement, provided that the award holder is employed by the Company on the consummation of the disposition event. The recipients of the bonus may elect to defer their bonus compensation pursuant to our non-qualified deferred compensation plan. The aggregate August 2017 Special Bonus granted to each of Messrs. Gayhardt, Baker and Pittman that will become payable in respect of unvested stock options is equal to $3,550, $21,248, and $7,932, respectively.
On October 16, 2017, we granted holders of our stock options a cash bonus, or, the October 2017 Special Bonuses, a portion of which was payable immediately and the remainder of which is payable on the last day of each calendar quarter during 2017 through 2022 following the date of grant, in each case, subject to the award holders continued employment through such date. The portion of the October 2017 Special Bonus paid in October 2017 was equal to $5.22 times the number of vested stock options held by the bonus recipient as of October 13, 2017, or $110,409, $25,378 and $23,241 for each of Messrs. Gayhardt, Baker and Pittman, respectively. In addition, in each calendar quarter thereafter, the bonus recipient will receive a payment equal to $5.22 times the number of stock options held by the bonus recipient that become vested during the applicable calendar quarter, other than due to a disposition event (as defined in the stock option agreements granted pursuant to the Companys 2010 Equity Incentive Plan). Upon a disposition event, the October 2017 Special
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Bonus recipient will be entitled to a bonus equal to $5.22 times the number of stock options that become vested solely as a result of the disposition event pursuant to the terms of the award holders individual award agreement, provided that the award holder is employed by the Company on the consummation of the disposition event. The recipients of the bonus may elect to defer their bonus compensation pursuant to our non-qualified deferred compensation plan. The aggregate October 2017 Special Bonus granted to each of Messrs. Gayhardt, Baker and Pittman that will become payable in respect of unvested stock options is equal to $2,299, $13,757 and $5,136, respectively.
In connection with our Additional Notes Offering, we granted holders of our stock options a cash bonus, or, the Additional Notes Bonus, a portion of which was payable immediately and the remainder of which is payable on the last day of each calendar quarter during 2017 through 2022 following the date of grant, in each case, subject to the award holders continued employment through such date. The portion of the Additional Notes Bonus paid in November 2017 was equal to $133 times the number of vested stock options held by the bonus recipient as of October 31, 2017, or $2,810,422, $645,981 and $591,584 for each of Messrs. Gayhardt, Baker and Pittman, respectively. In addition, in each calendar quarter thereafter, the bonus recipient will receive a payment equal to $133 times the number of stock options held by the bonus recipient that become vested during the applicable calendar quarter, other than due to a disposition event (as defined in the stock option agreements granted pursuant to the Companys 2010 Equity Incentive Plan). Upon a disposition event, the Additional Notes Bonus recipient will be entitled to a bonus equal to $133 times the number of stock options that become vested solely as a result of the disposition event pursuant to the terms of the award holders individual award agreement, provided that the award holder is employed by the Company on the consummation of the disposition event. The recipients of the bonus may elect to defer their bonus compensation pursuant to our non- qualified deferred compensation plan. The aggregate Additional Notes Bonus granted to each of Messrs. Gayhardt, Baker and Pittman that will become payable in respect of unvested stock options is equal to $58,520, $350,189, and $130,739, respectively.
In connection with this offering, our board of directors will approve the acceleration and payment in full of all remaining amounts payable to each 2017 Special Bonus, August 2017 Special Bonus, October 2017 Special Bonus and Additional Notes Bonus recipient.
Stock Plans, Health and Welfare Plans, and Retirement Plans
Stock Plan
We currently provide grants of equity based awards to eligible service providers under our 2010 Equity Incentive Plan, or the 2010 EIP. In 2016, we granted options to members of our management team, including to each of our named executive officers, under the 2010 EIP. The options granted to our named executive officers are subject to time-based vesting, as described in each individual award agreement. For a summary of the principal features of the 2010 EIP, see Additional Incentive Compensation Plans and Awards Equity Incentive Plans below and for a summary of the vesting terms of the stock option granted to our named executive offices, see Outstanding Equity Awards at Fiscal Year End below.
Immediately prior to this offering, our board of directors intends to adopt, and we expect our shareholders to approve, the 2017 Incentive Plan, or the 2017 Incentive Plan. For a summary of the 2017 Incentive Plan, see Additional Incentive Compensation Plans and Awards Equity Incentive Plans below.
Non-Qualified Deferred Compensation Plan
In 2015 we instituted our Nonqualified Deferred Compensation Plan, as amended, that provides certain of our employees with the opportunity to elect to defer his or her base salary and performance-based compensation, which upon such election, will be credited to the applicable participants deferred compensation account. Participant contributions are fully vested at all times. Each deferred compensation account will be notionally invested in one or more investment funds made available by us and selected by the participant. We may make
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discretionary contributions to the individual deferred compensation accounts, which amount, if any, will be determined annually by us. Company contributions generally vest over a term of three years, however, vesting with respect to company contributions made on behalf of each of our named executive officers will be accelerated upon the occurrence of a disposition event. A disposition event for these purposes is defined as: (a)(i) the sale of all or substantially all of the assets of CURO and its subsidiaries in a single transaction or series of related transactions whether by liquidation, dissolution, merger, consolidation or sale or (ii) the sale or other transfer of at least a majority of the outstanding shares of our common stock in a single transaction or a series of related transactions, in either case to any person who is not an affiliate of CURO, or of a stockholder thereof, immediately prior to such transaction or transactions, or (b) the effective time of any merger, share exchange, consolidation or other business combination of CURO if immediately after such transaction persons who hold a majority of the outstanding voting securities entitled to vote generally in the election of directors of the surviving entity (or the entity owning 100% of such surviving entity) are not persons who, immediately prior to such transaction, held the securities of CURO entitled to vote generally in the election of directors; provided, however, that such sale, transfer or other event described in (a) and (b) results in a change in the ownership or effective control, or a change in the ownership of a substantial portion of the assets, of CURO within the meaning of Section 409A of the Code.
Each vested deferred compensation account will be paid out in a lump sum upon a participants separation from service with the Company. Each of our named executive officers contributes to our non-qualified deferred compensation plan. For a discussion of the employer contributions made to our non-qualified deferred compensation plan on behalf of each of our named executive officers with respect to 2016, please see the Summary Compensation Table, above.
Health and Welfare Plans
Our named executive officers are generally eligible to participate in our employee benefit plans, including medical, dental, vision, life, disability, health and dependent care flexible spending accounts and accidental death and dismemberment benefit plans, in each case on the same basis as all of our other employees. Executive employees are provided with company paid life insurance equal to two times base pay, up to $750,000, and company paid long term disability benefits equal to 60% of earnings, up to $15,000 per month.
Tax-Qualified Retirement Plan
We sponsor a retirement plan intended to qualify for favorable tax treatment under Section 401(a) of the Internal Revenue Code of 1986, as amended, or the Code, which contains a cash or deferred feature that is intended to meet the requirements of Section 401(k) of the Code. We match the employee contribution at a rate of 50% of the first 6% of compensation contributed to the plan. Employee contributions vest immediately. Employer contributions vest in full after three years of employment. Each of Messrs. Baker and Pittman contributes to our qualified retirement plan.
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Outstanding Equity Awards at Fiscal Year End
The following table sets forth outstanding equity awards to acquire shares of common stock held by each of our named executive officers as of December 31, 2016. The following table does not give effect to the for split of our common stock to occur immediately prior to the completion of this offering.
Name |
Grant date | Option awards | Stock awards | |||||||||||||||||||||||||||||||||
Number of
securities underlying unexercised options exercisable (#) |
Number of
securities underlying unexercised options unexercisable (#) |
Equity
incentive plan awards: number of securities underlying unexercised unearned options (#) |
Option
exercise price ($) |
Option
expiration date |
Number
of shares or units of stock that have not vested (#) |
Market
Value of shares or units of stock that have not vested ($) |
Incentive
plan awards: number of unearned shares, units or other rights that have not vested (#) |
Incentive
plan awards: market or payout value of unearned shares, units or other rights that have not vested ($) |
||||||||||||||||||||||||||||
Don Gayhardt |
May 7, 2012(1) | | 21,057 | | 96.41 | January 1, 2022 | | | | | ||||||||||||||||||||||||||
March 28, 2016(2) | | 223 | | 122.00 | January 1, 2026 | | | | | |||||||||||||||||||||||||||
William Baker |
December 9, 2010(3) | | 1,579 | | 30.59 | January 1, 2019 | | | | | ||||||||||||||||||||||||||
October 24, 2011(3) | | 2,632 | | 96.41 | September 1, 2021 | | | | | |||||||||||||||||||||||||||
March 28, 2016(2) | | 138 | | 122.00 | January 1, 2026 | | | | | |||||||||||||||||||||||||||
June 30, 2016(3) | | 3,000 | | 133.94 | May 1, 2026 | | | | | |||||||||||||||||||||||||||
Terry Pittman |
December 9, 2010(3) | | 4,211 | | 30.59 | January 1, 2019 | | | | | ||||||||||||||||||||||||||
March 28, 2016(2) | | 112 | | 122.00 | January 1, 2026 | | | | | |||||||||||||||||||||||||||
June 30, 2016(3) | | 1,000 | | 133.94 | May 1, 2026 | | | | |
(1) | 20% of the options vest on each of the first five anniversaries beginning on January 1, 2012, subject to the option holders continued employment through such date; however, the options are only exercisable upon the first of the following events to occur: (i) upon the first disposition event to occur (as defined in the stock option agreement); (ii) at any time after an initial public offering of our common stock; (iii) following a termination of employment for any reason other than by us for cause; or (iv) on the 30th day prior to the expiration date. Options must be exercised during the 30-day period following an exercise event described in (iii) and (iv). Upon the occurrence of a disposition event prior to a termination of employment, all of the unvested options will become vested. |
(2) | Options vest in three equal installments on December 31 st of each of 2016, 2017 and 2018, subject to the option holders continued employment through such date; however, the options are only exercisable upon the first of the following events to occur: (i) upon the first disposition event to occur (as defined in the stock option agreement); (ii) at any time after an initial public offering of our common stock; (iii) following a termination of employment for any reason other than by us for cause; or (iv) on the 30 th day prior to the expiration date. Options must be exercised during the 30-day period following an exercise event described in (iii) and (iv). Upon the occurrence of a disposition event prior to a termination of employment, all of the unvested options will become vested. |
(3) | 20% of the options vest on each of the first five anniversaries of the applicable vesting commencement date set forth in the option agreement, subject to the option holders continued employment through such date; however, the options are only exercisable upon the first of the following events to occur: (i) upon the first disposition event to occur; (ii) at any time after an initial public offering of our common stock; (iii) following a termination of employment for any reason other than by us for cause; or (iv) on the 30th day prior to the expiration date. Options must be exercised during the 30-day period following an exercise event described in (iii) and (iv). Upon the occurrence of a disposition event prior to a termination of employment, all of the unvested options will become vested. |
Potential Payments Upon Termination or Change in Control
The following summaries describe the potential payments and benefits that we would provide to our named executive officers in connection with a termination of employment and/or a change in control.
Severance Benefits
We have entered into an employment agreement with each of our named executive officers, which provides for certain payments to be made in connection with certain terminations of service. Other than as set forth below, we do not offer or have in place for our named executive officers any formal retirement, severance or similar compensation programs providing for additional benefits or payments in connection with a termination of employment, change in job responsibility or change in control (other than our tax-qualified and non-qualified contributory defined contribution plans).
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Don Gayhardt . Mr. Gayhardts amended and restated employment agreement provides that if his employment is terminated by us without cause or by him for good reason (each as defined in the employment agreement), subject to his timely execution of a release of claims, he would be entitled to severance benefits equal to: (i) continued payment of his base salary for a two-year period; (ii) any bonus earned for a completed calendar year, but not yet paid, payable at such times as bonuses are paid; (iii) a pro-rated bonus for the year of termination (based on actual performance), payable at such times as bonuses are paid; (iv) reimbursement for the cost of maintaining his personal life insurance premiums, up to $25,000 per year, for a period of two years; and (v) continued participation in our benefit plans for a period of two years. Upon a termination due to the executives death or disability, a termination by the Company for cause, or a resignation without good reason, Mr. Gayhardt is entitled to receive his base salary through the date of termination. Mr. Gayhardts agreement subjects him to an indefinite confidentiality provision, an inventions assignment provision, a covenant not to compete with us while employed with us and for a two year period thereafter, and a covenant not to solicit our employees while employed with us and for a two year period thereafter.
William Baker . Mr. Bakers employment agreement provides that if his employment is terminated by us without cause, by him for good reason (each as defined in the employment agreement) or following a non-renewal of his term, subject to his timely execution of a release of claims, Mr. Baker would be entitled to severance equal to continued payment of his base salary for a twelve month period. Mr. Bakers employment agreement subjects him to an indefinite confidentiality provision, an inventions assignment provision, a covenant not to compete with us while employed with us and for an eighteen-month period thereafter, and a covenant not to solicit our employees while employed with us and for an eighteen-month period thereafter.
Terry Pittman . Mr. Pittmans employment agreement provides that if his employment is terminated by us without cause, by him for good reason (each as defined in the employment agreement) or following a non-renewal of his term, subject to his timely execution of a release of claims, Mr. Pittman would be entitled to severance equal to continued payment of his base salary for a twelve month period. Upon a termination due to the executives death or disability, the expiration of the term, a termination by the Company for cause, or a resignation without good reason, Mr. Pittman is entitled to receive his base salary through the date of termination. Mr. Pittmans employment agreement subjects him to an indefinite confidentiality provision, an inventions assignment provision, a covenant not to compete with us while employed with us and for an eighteen-month period thereafter, and a covenant not to solicit our employees while employed with us and for an eighteen-month period thereafter.
Vesting of Outstanding Equity Awards
We maintain the 2010 EIP, further described under Additional Incentive Compensation Plans and Awards below. Upon the occurrence of a disposition event prior to a termination of employment, all of the unvested options granted to our named executive officers will become vested. For purposes of each option agreement, a disposition event is defined as: (a)(i) the sale of all or substantially all of the assets of CURO and its subsidiaries in a single transaction or series of related transactions whether by liquidation, dissolution, merger, consolidation or sale or (ii) the sale or other transfer of at least a majority of the outstanding shares of our common stock in a single transaction or a series of related transactions, in either case to any person who is not an affiliate of CURO, or of a stockholder thereof, immediately prior to such transaction or transactions, or (b) the effective time of any merger, share exchange, consolidation, or other business combination of CURO if immediately after such transaction persons who hold a majority of the outstanding voting securities entitled to vote generally in the election of directors of the surviving entity (or the entity owning 100% of such surviving entity) are not persons who, immediately prior to such transaction, held the securities of CURO entitled to vote generally in the election of directors; provided, however, that such sale, transfer or other event described in (a) and (b) results in a change in the ownership or effective control, or a change in the ownership of a substantial portion of the assets, of CURO within the meaning of Section 409A of the Code.
Non-Qualified Deferred Compensation Plan
We maintain the Non-Qualified Deferred Compensation Plan, the material terms of which are described under Narrative to Summary Compensation Table, above. Company contributions to the Non-Qualified Deferred Compensation Plan generally vest
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over a term of three years; however, vesting with respect to Company contributions made on behalf of each of our named executive officers will be accelerated upon the occurrence of a disposition event. A disposition event for these purposes is defined above. Each vested deferred compensation account will be paid out in a lump sum upon a participants separation from service with the Company. Each of our named executive officers contribute to our non-qualified deferred compensation plan.
Equity Incentive Plans
We currently maintain the 2010 EIP, pursuant to which we may grant various forms of equity compensation to our service providers, including our key employees, non-employee directors and consultants. We have historically granted options to service providers under the 2010 EIP. In connection with this offering, our board of directors intends to adopt, and we expect our shareholders to approve, the 2017 Incentive Plan, which will be effective immediately prior to the completion of the offering. The principal features of the 2010 EIP and the 2017 Incentive Plan are summarized below. This summary is qualified in its entirety by reference to the actual text of the 2010 EIP and the 2017 Incentive Plan, which are filed as exhibits to the registration statement of which this prospectus is a part.
2010 EIP
In 2010, our board of directors approved the 2010 EIP. Under the 2010 EIP, we may grant stock options, restricted shares and other stock-based awards to our key employees, directors and consultants.
There are 60,000 shares of our common stock reserved for issuance under the 2010 EIP. This number is subject to additional adjustment in the event of a corporate transaction, distribution or similar event, as determined by the compensation committee of the board of directors. As of July 5, 2017, options in respect of 54,929 shares of common stock, were outstanding under the 2010 EIP. Our compensation committee has full power and authority to determine the terms of awards granted pursuant to the 2010 EIP, including, without limitation, which key employees, directors and consultants will be granted awards and the number of shares of common stock subject to awards.
Our board of directors may amend or discontinue the 2010 EIP at any time and may amend or cancel any outstanding award. No such amendment may adversely affect the rights under any outstanding award without the holders consent.
2017 Incentive Plan
Introduction
In connection with this offering, we intend to adopt, and we expect our stockholders to approve, the 2017 Stock Incentive Plan, or the 2017 Incentive Plan. The 2017 Incentive Plan will authorize the grant of stock options, restricted stock awards, restricted stock units, stock appreciation rights, performance awards and other awards that may be settled in or based upon our common stock. The 2017 Incentive Plan will become effective immediately prior to the effective date of the offering and no further grants will be made under any other stock incentive plan maintained by us, including the 2010 EIP.
Purpose
The purpose of the 2017 Incentive Plan is to give us the ability to attract, retain, motivate and reward certain officers, employees, directors and consultants and to provide a means whereby officers, employees, directors and/or consultants can acquire and maintain ownership of our common stock or be paid incentive compensation measured by reference to the value of our common stock, thereby strengthening their commitment to our welfare and that of our affiliates and promoting an identity of interest between our stockholders and these persons and encouraging such eligible people to expend maximum effort in the creation of stockholder value.
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The following summary is not a complete description of all provisions of the 2017 Incentive Plan and is qualified in its entirety by reference to the 2017 Incentive Plan, the final version of which is subject to further internal discussion and review, and possible revision.
Plan Administration
The 2017 Incentive Plan will be administered by our compensation committee. Our compensation committee will have the authority, among other things, to select participants, grant awards, determine types of awards and terms and conditions of awards for participants, prescribe rules and regulations for the administration of the plan and make all decisions and determinations as deemed necessary or advisable for the administration of the 2017 Incentive Plan. Our compensation committee may delegate certain of its authority as it deems appropriate, pursuant to the terms of the 2017 Incentive Plan and to the extent permitted by applicable law, to our officers or employees, although any award granted to any person who is not our employee, who is subject to Section 16 of the Exchange Act, or who is granted an award that is intended to qualify as performance-based compensation under Section 162(m) of the Code must be expressly approved by the compensation committee. Our compensation committees actions will be final, conclusive and binding.
Authorized Stock
A total of shares of common stock will be reserved and available for issuance under the 2017 Incentive Plan, subject to adjustment in accordance with the terms of the 2017 Incentive Plan. The number of shares of common stock reserved and available for issuance under the 2017 Incentive Plan is subject to adjustment, as described below. The maximum number of shares of common stock that may be issued in respect of incentive stock options will be . Common stock issued under the 2017 Incentive Plan may consist of authorized but unissued stock or previously issued common stock. Common stock underlying awards that are settled in cash, expire or are canceled, forfeited, or otherwise terminated without delivery to a participant, will again be available for issuance under the 2017 Incentive Plan. Common stock withheld or surrendered in connection with the payment of an exercise price of an award or to satisfy tax withholding will again become available for issuance under the 2017 Incentive Plan.
Individual Limits
At all times that we are subject to Section 162(m) of the Code, the maximum number of shares of common stock subject to stock options, stock appreciation rights or performance-based awards intended to qualify as qualified performance-based compensation (within the meaning of Section 162(m) of the Code), in each case, that may be granted to any individual in any one calendar year is , subject to adjustment, as described below. The maximum value of performance-based awards intended to qualify as qualified performance-based compensation (within the meaning of Section 162(m) of the Code) that is valued in dollars that an individual may receive in respect of any annual performance period is $ million, and for any performance period in excess of one year, such amount multiplied by a fraction, the numerator of which is the number of months in the performance period and denominator of which is 12. The maximum value of any awards granted to any non-employee director in any one calendar year during such calendar year, may not exceed .
Types of Awards
The types of awards that may be available under the 2017 Incentive Plan are described below. All of the awards described below will be subject to the terms and conditions determined by our compensation committee in its sole discretion, subject to certain limitations provided in the 2017 Incentive Plan. Each award granted under the 2017 Incentive Plan will be evidenced by an award agreement, which will govern that awards terms and conditions.
Non-qualified Stock Options . A non-qualified stock option is an option that is not intended to meet the qualifications of an incentive stock option, as described below. An award of a non-qualified stock option grants a
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participant the right to purchase a certain number of shares of our common stock during a specified term in the future, or upon the achievement of performance or other conditions, at an exercise price set by our compensation committee on the grant date. The term of a non-qualified stock option will be set by our compensation committee but may not exceed ten years from the grant date. The exercise price may be paid using any of the following payment methods: (i) immediately available funds in U.S. dollars or by certified or bank cashiers check, (ii) by delivery of stock having a value equal to the exercise price, (iii) a broker assisted cashless exercise, or (iv) by any other means approved by our compensation committee. The 2017 Incentive Plan provides that unless otherwise specifically determined by the compensation committee, vesting of non-qualified stock options will be suspended during the period of any approved leave of absence by a participant following which the participant has a right to reinstatement and will resume upon such participants return to employment. The 2017 Incentive Plan also provides that participants terminated for cause (as such term is defined in the 2017 Incentive Plan) will forfeit all of their non-qualified stock options, whether or not vested. Participants terminated for any other reason will forfeit their unvested non-qualified stock options, retain their vested non-qualified stock options, and will have one year (in the case of a termination by reason of death or disability) or 90 days (in all other cases) following their termination date to exercise their vested non-qualified stock options. The 2017 Incentive Plan authorizes our compensation committee to provide for different treatment of non-qualified stock options upon termination than that described above, as determined in its discretion.
Incentive Stock Options . An incentive stock option is a stock option that meets the requirements of Section 422 of the Code. Incentive stock options may be granted only to our employees or employees of certain of our subsidiaries and must have an exercise price of no less than 100% of the fair market value (or 110% with respect to a 10% shareholder) of a share of common stock on the grant date and a term of no more than ten years (or five years with respect to a 10% shareholder). The aggregate fair market value, determined at the time of grant, of our common stock subject to incentive stock options that are exercisable for the first time by a participant during any calendar year may not exceed $100,000. The 2017 Incentive Plan provides that unless otherwise specifically determined by the compensation committee, vesting of incentive stock options will be suspended during the period of any approved leave of absence by a participant following which the participant has a right to reinstatement and will resume upon such participants return to employment. The 2017 Incentive Plan also provides that participants terminated for cause will forfeit all of their incentive stock options, whether or not vested. Participants terminated for any other reason will forfeit their unvested incentive stock options, retain their vested incentive stock options, and will have one year (in the case of a termination by reason of death or disability) or 90 days (in all other cases) following their termination date to exercise their vested incentive stock options, unless such appreciation right expires sooner. The 2017 Incentive Plan authorizes our compensation committee to provide for different treatment of incentive stock options upon termination than that described above, as determined in its discretion.
Stock Appreciation Rights . A stock appreciation right entitles the participant to receive an amount equal to the difference between the fair market value of our common stock on the exercise date and the base price of the stock appreciation right that is set by our compensation committee on the grant date, multiplied by the number of shares of common stock subject to the stock appreciation right. The term of a stock appreciation right will be set by our compensation committee but may not exceed ten years from the grant date. Payment to a participant upon the exercise of a stock appreciation right may be either in cash, stock or property as specified in the award agreement or as determined by our compensation committee. The 2017 Incentive Plan provides that unless otherwise specifically determined by the compensation committee, vesting of stock appreciation rights will be suspended during the period of any approved leave of absence by a participant following which the participant has a right to reinstatement and will resume upon such participants return to employment. The 2017 Incentive Plan provides that participants terminated for cause will forfeit all of their stock appreciation rights, whether or not vested. Participants terminated for any other reason will forfeit their unvested stock appreciation rights, retain their vested stock appreciation rights, and will have one year (in the case of a termination by reason of death or disability) or 90 days (in all other cases) following their termination date to exercise their vested stock appreciation rights. The 2017 Incentive Plan authorizes our compensation committee to provide for different treatment of stock appreciation rights upon termination than that described above, as determined in its discretion.
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Restricted Stock . A restricted stock award is an award of restricted common stock that does not vest until a specified period of time has elapsed and/or upon the achievement of performance or other conditions determined by our compensation committee, and which will be forfeited if the conditions to vesting are not met. During the period that any restrictions apply, transfer of the restricted common stock is generally prohibited. Unless otherwise specified in their award agreement, participants generally have all of the rights of a stockholder as to the restricted common stock, including the right to vote such common stock. However, any cash or stock dividends with respect to the restricted common stock will be withheld by us and will be subject to forfeiture to the same degree as the restricted common stock to which such dividends relate. The 2017 Incentive Plan provides that unless otherwise specifically determined by the compensation committee, vesting of restricted stock awards will be suspended during the period of any approved leave of absence by a participant following which the participant has a right to reinstatement and will resume upon such participants return to employment. Except as otherwise provided by our compensation committee, in the event a participant is terminated for any reason, the vesting with respect to the participants restricted stock will cease, and as soon as practicable following the termination, we will repurchase all of such participants unvested restricted stock at a purchase price equal to the original purchase price paid for the restricted stock, or if the original purchase price is equal to $0, the unvested restricted stock will be forfeited by the participant to us for no consideration.
Restricted Stock Units . A restricted stock unit is an unfunded and unsecured obligation to issue common stock (or an equivalent cash amount) to the participant in the future. Restricted stock units become payable on terms and conditions determined by our compensation committee and will vest and be settled at such times in cash, common stock, or other specified property, as determined by our compensation committee. Participants have no rights of a stockholder as to the restricted stock units, including no voting rights or rights to dividends, until the underlying common stock is issued or becomes payable to the participant. The 2017 Incentive Plan provides that unless otherwise specifically determined by the compensation committee, vesting of restricted stock units will be suspended during the period of any approved leave of absence by a participant following which the participant has a right to reinstatement and will resume upon such participants return to employment. Except as otherwise provided by our compensation committee, in the event a participant is terminated for any reason, the vesting with respect to the participants restricted stock units will cease, each of the participants outstanding unvested restricted stock units will be forfeited for no consideration as of the date of such termination, and any stock remaining undelivered with respect to the participants vested restricted stock units will be delivered on the delivery date specified in the applicable award agreement.
Performance Awards . Performance awards (which may be classified as performance stock, performance units or cash awards) represent the right to receive certain amounts based on the achievement of pre-determined performance goals during a designated performance period. The terms of each performance award will be set forth in the applicable award agreement. Our compensation committee will be responsible for setting the applicable performance goals, which will be limited to specific levels of or increases in one or more of the following business criteria (alone or in combination with any other criterion, whether gross or net, before or after taxes, and/or before or after other adjustments, as determined by our compensation committee): (i) earnings, including net earnings, total earnings, operating earnings, earnings growth, operating income, earnings before or after taxes, earnings before or after interest, depreciation, amortization, or unusual, non-recurring or special items or book value per share (which may exclude nonrecurring items), tangible book value or growth in tangible book value per share; (ii) pre-tax income or after tax income; (iii) earnings per share (basic or diluted); (iv) operating profit; (v) revenue, revenue growth, or rate of revenue growth; (vi) return on assets (gross or net), return on investment, return on capital, return on equity, financial return ratios, or internal rates of return; (vii) returns on sales or revenues; (viii) operating expenses; (ix) stock price appreciation; (x) cash flow (including, but not limited to, operating cash flow and free cash flow), cash flow return on investment (discounted or otherwise), net cash provided by operations or cash flow in excess of cost of capital, or working capital turnover; (xi) implementation or completion of critical projects or processes; (xii) economic value created; (xiii) balance sheet measurements; (xiv) cumulative earnings per share growth; (xv) operating margin, profit margin, or gross margin; (xvi) stock price or total stockholder return; (xvii) cost or expense targets, reductions and savings, productivity and efficiencies; (xviii) sales or sales growth; (xix) strategic business criteria, consisting of one or
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more objectives based on meeting specified market penetration, market share, geographic business expansion, customer satisfaction, employee satisfaction, human resources management, supervision of litigation, information technology, and goals relating to acquisitions, divestitures, joint ventures, and similar transactions, and budget comparisons; (xx) personal professional objectives, including any of the foregoing performance goals, the implementation of policies and plans, the negotiation of transactions, the development of long term business goals, the formation of joint ventures, and the completion of other corporate transactions; (xxi) billings, billings growth, or rate of billings growth; (xxii) underwriting income or profit; (xxiii) loss ratio or combined ratio; and (xxiv) for any period of time in which Section 162(m) of the Code is not applicable to us, or in the case of persons whose compensation is not subject to Section 162(m) of the Code, such other criteria as may be determined by our compensation committee. The business criteria may be combined with cost of capital, assets, invested capital and stockholder equity to form an appropriate measure of performance and will have any reasonable definitions that our compensation committee may specify.
Performance goals may be established on a company-wide basis, project or geographical basis or, as the context permits, with respect to one or more of our business units, divisions, lines of business or business segments, subsidiaries, products, regions, or other operational units or administrative departments (or in combination thereof) or may be related to the performance of an individual participant and may be expressed in absolute terms, or relative or comparative to (i) current internal targets or budgets, (ii) our past performance (including the performance of one or more of our subsidiaries, divisions, or operating units), (iii) the performance of one or more similarly situated companies, (iv) the performance of an index covering multiple companies, or (v) other external measures of the selected performance criteria. Performance goals may be in either absolute terms or relative to the performance of one or more comparable companies or an index covering multiple companies.
Our compensation committee will make appropriate adjustments in the method of calculating the attainment of applicable performance goals to provide for objectively determinable adjustments, modifications or amendments, as determined in accordance with generally accepted accounting principles, to any of the business criteria described above for one or more of the following items of gain, loss, profit or expense: (i) determined to be items of an unusual nature or of infrequency of occurrence or non-recurring items; (ii) related to changes in accounting principles under generally accepted accounting principles or tax laws; (iii) related to currency fluctuations; (iv) related to financing activities (such as effect on earnings per share of issuing convertible debt securities); (v) related to restructuring, divestitures, productivity initiatives or new business initiatives; (vi) related to discontinued operations that do not qualify as a segment of business under generally accepted accounting principles; (vii) attributable to the business operations of any entity acquired by us during the fiscal year; (viii) non-operating items; and (ix) acquisition or divestiture expenses.
Performance awards which have been earned as a result of the relevant performance goals being achieved may be paid in the form of cash, common stock or other awards under the 2017 Incentive Plan (or some combination thereof). The 2017 Incentive Plan provides that unless otherwise specifically determined by the compensation committee, a participant will only be eligible to earn a performance award while the participant is employed or rendering services, and that vesting of performance awards will be suspended during the period of any approved leave of absence by a participant following which the participant has a right to reinstatement and will resume upon such participants return to employment. Except as otherwise provided by the compensation committee, if a participant is terminated for any reason, the participant will forfeit all performance awards held by such participant.
Other Stock-Based Compensation . Under the 2017 Incentive Plan, our compensation committee may grant other types of equity-based awards subject to such terms and conditions that our compensation committee may determine. Such awards may include the grant of dividend equivalents, which generally entitle the participant to receive amounts equal to the dividends that are paid on the stock underlying the award.
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Adjustments
The aggregate number of shares of common stock reserved and available for issuance under the 2017 Incentive Plan, the individual limitations, the number of shares of common stock covered by each outstanding award and the price per share of common stock underlying each outstanding award will be equitably and proportionally adjusted or substituted, as determined by our compensation committee in its sole discretion, as to the number, price or kind of stock or other consideration subject to such awards in connection with stock dividends, extraordinary cash dividends, stock splits, reverse stock splits, recapitalizations, reorganizations, mergers, amalgamations, consolidations, combinations, exchanges, or other relevant changes in our capitalization affecting our common stock or our capital structure which occurs after the date of grant of any award, in connection with any extraordinary dividend declared and paid in respect of stock or in the event of any change in applicable law or circumstances that results in or could result in, as determined by the compensation committee in its sole discretion, any substantial dilution or enlargement of the rights intended to be granted to, or available for, participants in the 2017 Incentive Plan.
Corporate Events
In the event of a merger, amalgamation or consolidation involving us in which we are not the surviving corporation or in which we are the surviving corporation but the holders of our common stock receive securities of another corporation or other property or cash, a change in control (as defined in the 2017 Incentive Plan) or a reorganization, dissolution or liquidation of us, our compensation committee may, in its discretion, provide for the assumption or substitution of outstanding awards, accelerate the vesting of outstanding awards, cash-out outstanding awards or replace outstanding awards with a cash incentive program that preserves the value of the awards so replaced. With respect to any award that is assumed or substituted in connection with a change in control, the vesting, payment, purchase or distribution of such award will not be accelerated by reason of the change in control for any participant unless the participants employment is involuntarily terminated as a result of the change in control during the two-year period commencing on the change in control.
Transferability
Awards under the 2017 Incentive Plan may not be sold, transferred, pledged, or assigned other than by will or by the applicable laws of descent and distribution, unless (for awards other than incentive stock options) otherwise provided in an award agreement or determined by our compensation committee.
Amendment
Our board of directors or our compensation committee may amend the 2017 Incentive Plan or outstanding awards at any time. Our stockholders must approve any amendment if their approval is required pursuant to applicable law or the applicable rules of each national securities exchange on which our common stock is traded. No amendment to the 2017 EIP or outstanding awards which materially impairs the right of a participant is permitted unless the participant consents in writing.
Termination
The 2017 Incentive Plan will terminate on the day before the tenth anniversary of the date our stockholders approve the 2017 Incentive Plan, although incentive stock options may not be granted following the earlier of the tenth anniversary of (i) the date the 2017 Incentive Plan is adopted by our board of directors and (ii) the date our stockholders approve the 2017 Incentive Plan. In addition, our board of directors or our compensation committee may suspend or terminate the 2017 Incentive Plan at any time. Following any such suspension or termination, the 2017 Incentive Plan will remain in effect to govern any then outstanding awards until such awards are forfeited, terminated or otherwise canceled or earned, exercised, settled or otherwise paid out, in accordance with their terms.
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Clawback; Sub-Plans
All awards under the 2017 Incentive Plan will be subject to any incentive compensation clawback or recoupment policy currently in effect, or as may be adopted by our board of directors (or any committee or subcommittee thereof) and, in each case, as may be amended from time to time. In addition, our compensation committee may adopt such procedures and sub-plans as are necessary or appropriate to permit participation in the 2017 Incentive Plan by individuals who are non-U.S. nationals or are primarily employed or providing services outside the United States, and may modify the terms of any awards granted to such participants in a manner deemed by our compensation committee to be necessary or appropriate in order that such awards conform with the laws of the country or countries where such participants are located.
No-Repricing of Awards
No awards under the 2017 Incentive Plan may be repriced without stockholder approval. For purposes of the 2017 Incentive Plan, repricing means any of the following (or any other action that has the same effect as any of the following): (i) changing the terms of the award to lower its exercise price or base price (other than on account of capital adjustments resulting from stock splits), (ii) any other action that is treated as a repricing under generally accepted accounting principles and (iii) repurchasing for cash or canceling an award in exchange for another award at a time when its exercise price or base price is greater than the fair market value of the underlying stock.
Equity Awards Pursuant to the 2017 Incentive Plan
Our board of directors will approve the grant of restricted stock units to certain employees and non-employee directors. The restricted stock units will be granted effective and contingent upon the execution and delivery of the underwriting agreement relating to this offering. Restricted stock unit grants to our executive officers and other non-executive officer employees will vest ratably over a three year period, subject to the award holders continued service with us through the applicable vesting date.
Our non-employee directors will receive an initial award of restricted stock units with respect to the number of shares of our common stock determined by dividing $200,000 by the IPO price (rounded down to the nearest whole share), which will vest in two equal installments, with one-half vesting upon the occurrence of the our annual meeting of shareholders in 2018 and the remainder vesting upon the occurrence of our annual meeting of shareholders in 2019.
The following table sets forth information concerning these grants of restricted stock units. The number of shares of our common stock subject to such restricted stock unit awards will be determined by dividing the applicable dollar value of such award by the IPO price (rounded down to nearest whole share):
Name |
Dollar Value
of Restricted Stock Units |
|||
Don Gayhardt |
$ | 3,420,000 | ||
William Baker |
$ | 1,650,000 | ||
Terry Pittman |
$ | 1,266,900 | ||
Executive Group(1) |
$ | 2,497,350 | ||
Non-Employee Director Group(2) |
$ | 1,600,000 | ||
Non-Executive Officer Employee Group(3) |
$ | 11,218,858 |
(1) | Consists of grants to our Chief Legal Officer and Chief Financial Officer. |
(2) | Consists of grants to our 8 non-employee directors. |
(3) | Consists of grants to 25 non-executive officer employees. |
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Employee Stock Purchase Plan
In connection with this offering, we intend to adopt, and we expect our stockholders to approve, a 2017 Employee Stock Purchase Plan, or the ESPP. We do not expect to grant purchase rights under our ESPP until after the completion of this offering.
Share Reserve
The maximum number of shares of our common stock that will be available for purchase under the ESPP is shares. Shares subject to purchase rights granted under our ESPP that terminate without having been exercised in full will not reduce the number of shares available for issuance under the ESPP.
Administration
Our compensation committee, or such other duly authorized committee or subcommittee of our board of directors, will administer our ESPP.
Limitations
Our employees, including executive officers, directors and the employees of any of our parent or subsidiary corporations will be eligible to participate in the ESPP, provided that they may have to satisfy one or more of the following service requirements before participating in the ESPP, as determined by the compensation committee: (i) customary employment with us or one of our parents or subsidiaries for more than 20 hours per week and more than five months per calendar year; or (ii) continuous employment with us or one of our subsidiaries for a minimum period of time, not to exceed two years, prior to the first date of an offering. An employee may not be granted rights to purchase stock under the ESPP (x) if such employee immediately after the grant would own stock representing 5% or more of the total combined voting power or value of all classes of our common stock or the common stock of any of our parent or subsidiary corporations or (y) to the extent that such rights would accrue at a rate that exceeds $25,000 worth of our stock for each calendar year that the rights remain outstanding, provided that no such employee may purchase more than 5,000 shares of our common stock in any purchase period in which purchase rights are outstanding.
Our ESPP is intended to qualify as an employee stock purchase plan under Section 423 of the Code. The compensation committee may specify offerings with a duration of not more than 27 months, and may specify one or more shorter purchase periods within each offering. Each offering will have one or more purchase dates on which shares of our common stock will be purchased for the employees who are participating in the offering. The compensation committee, in its discretion, will determine the terms of offerings under our ESPP.
A participant may not transfer purchase rights under the ESPP other than by will, the laws of descent and distribution or as otherwise provided under the ESPP.
Holding Period
Our ESPP permits our compensation committee to establish a holding period for any shares of our common stock purchased in a particular offering, during which such shares will be subject to a resale restriction barring the holder from selling such shares. The holding period, if any, will commence on the purchase date and will end automatically on the earliest of (i) the termination of the participants employment, (ii) the occurrence of a change in control or (iii) the twelve month anniversary of the purchase date or such earlier date as established by our compensation committee.
Payroll Deductions
Our ESPP permits participants to purchase shares of our common stock through payroll deductions up to 15% of their earnings. Subject to other limitations determined by the compensation committee, the purchase
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price of the shares will be not less than 85% of the fair market value of our common stock on the date of purchase. Participants may end their participation at any time during an offering and will be paid their accrued contributions that have not yet been used to purchase shares. Participation ends automatically upon termination of employment with us.
Corporate Transactions
In the event of a change in control, a successor corporation may assume, continue or substitute each outstanding purchase right. If the successor corporation does not assume, continue or substitute for the outstanding purchase rights, then employees accumulated payroll deductions will be used to purchase shares of our common stock within ten business days prior to any such change in control. The participants purchase rights will be exercised on the new exercise date and such purchase rights will terminate immediately thereafter.
Amendment and Termination
Our board of directors or our compensation committee has the authority to amend, suspend or terminate our ESPP, at any time and for any reason, provided certain types of amendments will require the approval of our stockholders. Our ESPP will remain in effect until terminated by our board of directors or our compensation committee in accordance with the terms of the ESPP.
Director Compensation
Director Compensation Policy
For 2016, members of our board of directors received no cash, equity or other non-equity compensation for services rendered. We currently have no other formal arrangements under which our directors receive compensation for service to the board of directors or its committees. For compensation paid in 2016 to Don Gayhardt, our President, Chief Executive Officer and director, see the Summary Compensation Table.
All Other Compensation
We reimburse our directors for reasonable and necessary out-of-pocket expenses incurred in attending board and committee meetings or performing other services for us in their capacities as directors. We do not provide tax gross-up payments to members of our board of directors. Our board of directors will approve a new compensation policy that will become effective upon the execution and delivery of the underwriting agreement related to this offering and will be applicable to all of our non-employee directors. This compensation policy provides that each such non-employee director will receive the following compensation for service on our board of directors:
| annual cash retainer of $65,000 for each non-employee director; |
| additional annual cash retainer for the Chairman of $40,000 for service as chairperson of the board; |
| additional cash retainer for the Chair of the Audit Committee of $15,000 for service as chairperson of the Audit Committee; |
| additional annual cash retainer for all members of the Audit Committee of $10,000 to compensate for serving on the Audit Committee; |
| additional cash retainer for the Chair of the Compensation Committee of $13,000 for service as chairperson of the Compensation Committee; |
| additional annual cash retainer for all members of the Compensation Committee of $9,000 to compensate for serving on the Compensation Committee; |
| additional cash retainer for the Chair of the Nominating and Corporate Governance Committee of $10,000 for service as chairperson of the Nominating and Corporate Governance Committee; |
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| additional annual cash retainer for all members of the Nominating and Corporate Governance Committee of $7,500 to compensate for serving on the Nominating and Corporate Governance Committee; and |
| commencing with the Companys annual meeting of stockholders in calendar year 2019, an annual award of restricted stock units following election or reelection, as applicable, at the Companys annual meeting of stockholders with a value expected to be approximately $100,000 as of the date of grant, vesting over a one year period corresponding to each year of service as a director. |
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Policies and Procedures for Related-Party Transactions
Upon the completion of this offering, we intend to adopt a policy applicable to our transactions with related parties, which we define to include our executive officers, directors and nominees for director, any immediate family member or affiliated entity of any of our executive officers, directors or nominees for director and any person (and his or her immediate family members and affiliated entities) or entity (including affiliates) that is a beneficial owner of 5% or more of any class of our outstanding voting securities. Pursuant to this policy, an appropriate committee of our board of directors must approve the terms, arrangements and policies of, and provide ongoing oversight over, all transactions with a related party in which the amount involved exceeds $120,000. This committee, which may be our Audit Committee, will consist of directors independent from the related party in question. In conducting its initial and ongoing reviews, the committee will take into account, among other factors it deems appropriate, the terms of the transaction, including whether the transaction is on terms no less favorable than terms generally available to an unaffiliated third-party under the same or similar circumstances, the extent of the related-partys interest in the transaction, the qualifications and performance of the related party and other business considerations that would be applied to similar arrangements with unaffiliated parties. To perform its ongoing review of related party transactions, the committee will meet to discuss and review the relevant transaction at least once every twelve months. All of our directors, executive officers and employees will be required to report to an appropriate committee of our board any such related-party transaction. Under the policy, if we should discover related-party transactions that have not been approved, this committee will determine the appropriate action, including ratification, rescission or amendment of the transaction. Upon completion of this offering, we will make a copy of our related-party transactions policy available on our website.
Related-Party Transactions
Services Provided by Ad Astra
We employ the services of Ad Astra Recovery Services, Inc., or Ad Astra, which is owned by the Founder Holders. Ad Astra is our exclusive provider of third-party collection services for our U.S. operations. Generally, once loans are between 91 and 121 days delinquent we refer them to Ad Astra for collections. See BusinessCollections. Ad Astra earns a commission fee equal to 30% of any amounts they successfully recover (as well as reimbursement for any third party legal work incurred in connection with its collection activities). We net settle payments Ad Astra collects on our behalf and our commissions payable to Ad Astra on a one month lag. The net amounts receivable from Ad Astra at September 30, 2017, December 31, 2016 and December 31, 2015 were $0.8 million, $0.6 million and $0.2 million, respectively. These amounts are included in prepaid expenses and other in our consolidated balance sheets. We paid commission expense to Ad Astra for the nine months ended September 30, 2017 and 2016, and the years ended December 31, 2016, 2015 and 2014 of $9.5 million, $9.6 million, $12.1 million, $10.6 million and $8.9 million, respectively, and these amounts are included in other store operating expenses in our consolidated statements of income. Our relationship with Ad Astra is to be overseen in a manner consistent with our policy regarding related party transactions detailed above. We believe that our relationship with Ad Astra is on terms that are at least as favorable as would be available from unaffiliated parties.
Operating Leases
We have entered into several operating lease agreements for our corporate office, collection office and stores in which we operate, with several real estate entities that are related through common ownership.
We are party to lease agreements and arrangements with Doug Rippel, CDM Development LLC, Dimensions Real Estate Group LLC, Foresome Real Estate LLC and Summit Real Estate LLC pursuant to which we lease corporate offices and stores. The aggregate annual base rent pursuant to the terms of these agreements is
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approximately $3.1 million per year, and the leases have an average term of five years with two renewal options, each for an additional five-year term. Payments made under these leases and the related rent expenses for the nine months ended September 30, 2017 and the years ended December 31, 2016, 2015 and 2014 were $2.4 million, $3.3 million, $3.2 million and $3.2 million, respectively. Mr. Rippel is a co-founder of the Company, serves as our Executive Chairman of the board of directors and holds approximately 18% of the outstanding common stock of the Company. CDM Development LLC, Dimensions Real Estate Group LLC, Foresome Real Estate LLC and Summit Real Estate LLC are each entities owned by one or more of the Founder Holders. Our relationship with Mr. Rippel and these entities is to be overseen in a manner consistent with our policy regarding related-party transactions described above. We believe that the operating lease agreements and arrangements to which we are party are on terms that are at least as favorable as would be available from unaffiliated parties.
12.00% Senior Secured Notes Placement
On February 15, 2017 we issued $470.0 million aggregate principal amount of 12.00% Senior Secured Notes due March 1, 2022. $6.0 million of these notes were privately placed by us directly with certain members of the board of directors of CURO Financial Technologies Corp., namely Doug Rippel and Mike McKnight. The notes issued to these board members contain the same terms as those issued to other investors in the offering. For more information, see Managements Discussion and Analysis of Financial Condition and Results of OperationsLiquidity and Capital ResourcesBorrowings.
Amended and Restated Investors Rights Agreement
In connection with the completion of this offering, we will enter into an amended and restated investors rights agreement with certain of our current holders, including the Founder Holders and the FFL Holders, whom we collectively refer to as the principal holders. Pursuant to the amended and restated investors rights agreement, we will agree to register the sale of shares of our common stock held by the principal holders under certain circumstances.
Demand Rights
At any time after the 180-day lock-up restriction described in Underwriting, and subject to certain limitations, including those described below, any principal holder who beneficially owns at least 8% of the Companys then-outstanding common stock may make a written request that we prepare and file a registration statement under the Securities Act registering the offer and sale of shares of its common stock. Once we are eligible to effect a registration on Form S-3, any such demand registration may be for a shelf registration statement. Generally, we are required to file a demand registration statement on Form S-1 within 90 days of a written request and to file a demand registration statement on Form S-3 within 30 days of a written request.
We are not required to effect any demand registration in which the amount of common stock to be registered has an anticipated aggregate public price of less than $10 million (in the case of a registration on Form S-1) or $5 million (in the case of a registration on Form S-3). In addition, the Company is not required to effect a demand registration on Form S-1 if the Company has already effected three registrations in response to a demand by such party or if the Company has effected a registration on Form S-1 in the prior twelve months, or effect a demand registration on Form S-3 if the Company has effected a registration on Form S-3 in response to a demand by such party in the prior six months.
Piggyback Rights
Subject to certain exceptions, any time we propose to register any of our securities for public sale, whether or not for our own account, we must notify each principal holder of such proposal and, if applicable, permit them an opportunity to include shares of their common stock in such registration.
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Expenses
We will pay all reasonable expenses incident to our performance of the registration rights described above, including certain reasonable fees and disbursements (not including underwriting discounts and commissions).
Certain Conditions and Limitations
The registration rights described above are subject to certain conditions and limitations, including the right of the underwriters of an underwritten offering to limit the number of shares to be included in a registration and our right to delay or withdraw a registration statement under certain circumstances.
Indemnification
In certain circumstances we will indemnify, to the extent permitted by law, each principal holder, and each underwriter, if any, and certain other persons against claims arising in connection with any prospectus or other similar or incident document, or any violation or alleged violation of applicable securities laws, rules or regulations by us in an offering that includes common stock being sold by a participating holder. Similarly, each such principal holder will, if common stock held by such principal holder is included in the securities to be registered, indemnify us, each underwriter, if any, each other principal holder and certain other persons, against similar claims arising in connection with and to the extent made in reliance upon and in conformity with written information furnished by such principal holder and stated to be specifically for use in any such prospectus or document.
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PRINCIPAL AND SELLING STOCKHOLDERS
The following table sets forth the beneficial ownership of our common stock as of , 2017 for each of our directors, our named executive officers, all directors and named executive officers as a group, each stockholder known by us to be the beneficial owner of more than 5% of our outstanding common stock and each selling shareholder. The table gives effect to the application of a for split of our common stock and the filing of our amended and restated certificate of incorporation.
To our knowledge, each person named in the table has sole voting and investment power with respect to all of the securities shown as beneficially owned by such person, subject to community property laws and except as otherwise set forth in the notes to the table. The number of securities shown represents the number of securities the person beneficially owns, as determined by the rules of the SEC. The SEC has defined beneficial ownership of a security to mean the possession, directly or indirectly, of voting power and/or investment power. A security holder is also deemed to be, as of any date, the beneficial owner of all securities that such security holder has the right to acquire within 60 days after that date through (i) the exercise of any option, warrant or right or the vesting of restricted stock units, (ii) the conversion of a security, (iii) the power to revoke a trust, discretionary account or similar arrangement or (iv) the automatic termination of a trust, discretionary account or similar arrangement. Shares beneficially owned by a person pursuant to a right to acquire the shares within 60 days are deemed to be outstanding for the purpose of computing the percentage ownership of such person, but are not deemed to be outstanding and to be beneficially owned for the purpose of computing the percentage ownership of any other person. Certain of the selling stockholders have granted the underwriters a 30-day option to purchase up to shares of common stock.
The percentages reflect beneficial ownership immediately prior to and immediately after the completion of this offering as determined in accordance with Rule 13d-3 under the Exchange Act and are based on the number of shares of our common stock outstanding as of , 2017. Unless otherwise noted below, each stockholders address is c/o CURO Group Holdings Corp., 3527 North Ridge Road, Wichita, Kansas 67205.
Shares
Beneficially Owned Prior to Offering |
Number of
Shares to be Sold in the Offering(1) |
Shares Beneficially Owned
After the Offering Assuming the Underwriters Option Is Not Exercised |
Shares Beneficially Owned
After the Offering Assuming the Underwriters Option Is Fully Exercised(2) |
|||||||||||||||||||||||||
Name and Address |
# of
Shares |
% of
Total Common Stock and Voting Power |
# of
Shares |
# of
Shares |
% of Total
Common Stock and Voting Power |
# of
Shares |
% of Total
Common Stock and Voting Power |
|||||||||||||||||||||
5% Stockholders |
||||||||||||||||||||||||||||
FFL Holders(3) |
367,000 | 34.86 | % | 367,000 | % | % | ||||||||||||||||||||||
J.P. Genova Family Trust(4) |
52,632 | 5.00 | 52,632 | |||||||||||||||||||||||||
Directors and Named Executive Officers |
||||||||||||||||||||||||||||
Chad Faulkner(5) |
191,209 | 18.16 | 191,209 | |||||||||||||||||||||||||
Mike McKnight(6) |
191,209 | 18.16 | 191,209 | |||||||||||||||||||||||||
Doug Rippel(7) |
191,209 | 18.16 | 191,209 | |||||||||||||||||||||||||
Don Gayhardt |
| * | | |||||||||||||||||||||||||
William Baker |
| * | | |||||||||||||||||||||||||
Terry Pittman |
| * | | |||||||||||||||||||||||||
Christopher A. Masto(8) |
| * | | |||||||||||||||||||||||||
Karen Winterhof(9) |
| * | | |||||||||||||||||||||||||
All directors and executive officers as a group (10 persons) |
573,627 | 54.50 | % | 573,627 | % | % |
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* | Represents beneficial ownership of less than 1%. |
(1) | Assumes that the underwriters fully exercise their option to purchase additional shares. The selling stockholders are only selling shares pursuant to that option, so if it is not exercised, the selling stockholders will not sell any shares in this offering. |
(2) | If the underwriters partially exercise their option to purchase additional shares, the shares sold by the selling stockholders will be decreased on a pro rata basis. |
(3) | Amounts shown reflect 347,335 shares of common stock held by Friedman Fleischer & Lowe Capital Partners II, L.P., 13,001 shares of common stock held by FFL Executive Partners II, L.P. and 6,664 shares of common stock held by FFL Parallel Fund II, L.P. or the FFL Holders. The FFL Holders are controlled by Friedman Fleischer & Lowe GP II, LP, their general partner, which may be deemed a beneficial owner of the shares of common stock, with shared voting and dispositive over such shares. The address of the FFL Holders is c/o FFL Partners, LLC, One Maritime Plaza, Suite 2200, San Francisco, California 94111. |
(4) | The address of the J.P. Genova Family Trust is 145 Haist Avenue, Unit 8, Vaughan, Ontario Canada L4L 5V1. |
(5) | Amounts shown reflect the aggregate number of shares of common stock held by Mr. Faulkner and the Chadwick Faulkner 2014 GRAT. |
(6) | Amounts shown reflect the number of shares of common stock held by McKnight Holdings, LLC of which Mr. McKnight is the sole member. |
(7) | Amounts shown reflect the number of shares of common stock held by Rippel Holdings, LLC of which Mr. Rippel is the sole member. |
(8) | The address of Mr. Masto is c/o FFL Partners, LLC, One Maritime Plaza, Suite 2200, San Francisco, California 94111. |
(9) | The address of Ms. Winterhof is c/o FFL Partners, LLC, One Maritime Plaza, Suite 2200, San Francisco, California 94111. |
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General
The following description summarizes the most important terms of our capital stock, as they will be in effect following the completion of this offering. Because it is only a summary, it does not contain all the information that may be important to you. Immediately prior to the completion of this offering, we will adopt and file an amended and restated certificate of incorporation, adopt amended and restated bylaws and effect a for split of our common stock. This description summarizes provisions that will be included in the amended and restated certificate of incorporation and bylaws. For a complete description, you should refer to our amended and restated certificate of incorporation, amended and restated bylaws and amended and restated investors rights agreement, which are included as exhibits to the registration statement of which this prospectus forms a part, and to the applicable provisions of Delaware law. Upon the completion of this offering, pursuant to the terms of our amended and restated certificate of incorporation, our authorized capital stock will consist of shares of common stock, $0.001 par value per share, and shares of blank check preferred stock, $0.001 par value per share.
Upon completion of this offering and the stock split, there will be shares of our common stock outstanding.
Common Stock
Voting rights
Holders of shares of our common stock will be entitled to one vote for each share of common stock held on all matters submitted to a vote of the stockholders. Generally, holders of shares of our common stock will vote together as a single class on all matters (including the election of directors) submitted to a vote of the stockholders, unless otherwise required by law or with respect to the matters described in the immediately following paragraph. Generally, all matters to be voted on by the stockholders must be approved by a majority (or, in the case of the election of directors, by a plurality) of the votes entitled to be cast by all shares of common stock present in person or represented by proxy, voting together as a single class.
Notwithstanding the foregoing paragraph, amendments to our amended and restated certificate of incorporation, including as a result of a statutory merger, that would alter or change the powers, preferences or rights of the common stock so as to affect them adversely must also be approved by a majority of the votes entitled to be cast by the holders of the shares affected by the amendment, voting as a separate class. Upon the completion of this offering, under our amended and restated certificate of incorporation, we may not increase or decrease the authorized number of shares of common stock without the affirmative vote of the holders of a majority of the voting power of the outstanding shares of our capital stock entitled to vote, voting together as a single class.
Dividend rights
Subject to preferences that may apply to any shares of preferred stock outstanding at the time, the holders of our common stock are entitled to receive dividends out of funds legally available if our board of directors, in its discretion, determines to issue dividends and then only at the times and in the amounts that our board of directors may determine. See Dividend Policy for additional information.
No preemptive or similar rights
Our common stock is not entitled to preemptive rights and is not subject to redemption or sinking fund provisions.
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Right to receive liquidation distributions
Upon our liquidation, dissolution or winding-up, the assets legally available for distribution to our stockholders would be distributable ratably among the holders of shares of our common stock and any participating preferred stock outstanding at that time, subject to prior satisfaction of all outstanding debt and liabilities and the preferential rights of, and the payment of liquidation preferences on, if any, any outstanding shares of preferred stock.
All of the shares of our common stock to be issued pursuant to this offering will be fully paid and non-assessable.
Preferred Stock
Under the terms of our amended and restated certificate of incorporation, our board of directors will be authorized to issue shares of preferred stock in one or more series without stockholder approval. Our board of directors will have the discretion to determine the rights, preferences, privileges and restrictions, including voting rights, dividend rights, conversion rights, redemption privileges and liquidation preferences, of each series of preferred stock.
The purpose of authorizing our board of directors to issue preferred stock and determine its rights and preferences is to eliminate delays associated with a stockholder vote on specific issuances. The issuance of preferred stock, while providing flexibility in connection with possible future acquisitions and other corporate purposes, will affect, and may adversely affect, the rights of holders of common stock. It is not possible to state the actual effect of the issuance of any shares of preferred stock on the rights of holders of common stock until the board of directors determines the specific rights attached to that preferred stock. The effects of issuing preferred stock could include one or more of the following:
| restricting dividends on the common stock; |
| diluting the voting power of the common stock; |
| impairing the liquidation rights of the common stock; or |
| delaying or preventing changes in control or management of us. |
We have no preferred stock outstanding and no present plans to issue any shares of preferred stock.
Anti-Takeover Effects of Delaware Law and Our Certificate of Incorporation and Bylaws
The provisions of Delaware law and the amended and restated certificate of incorporation and amended and restated bylaws that we expect to adopt in connection with the completion of this offering may have the effect of delaying, deferring or discouraging another person from acquiring control of the Company. These provisions, which are summarized below, may have the effect of hampering takeover bids. They are also designed, in part, to encourage persons seeking to acquire control of us to negotiate first with our board of directors. We believe that the benefits of increased protection of our potential ability to negotiate with an unfriendly or unsolicited acquirer outweigh the disadvantages of discouraging a proposal to acquire us, because negotiation of these proposals could result in an improvement of their terms.
Delaware Anti-Takeover Statute
Section 203 of the General Corporation Law of the State of Delaware prohibits a publicly held Delaware corporation from engaging, under certain circumstances, in a business combination with an interested stockholder for a period of three years following the date the person became an interested stockholder unless:
| prior to the date of the transaction, the board of directors of the corporation approved either the business combination or the transaction which resulted in the stockholder becoming an interested stockholder; |
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| upon completion of the transaction that resulted in the stockholder becoming an interested stockholder, the interested stockholder owned at least 85% of the voting stock of the corporation outstanding at the time the transaction commenced, calculated as provided under Section 203; or |
| at or subsequent to the date of the transaction, the business combination is approved by the board of directors of the corporation and authorized at an annual or special meeting of the stockholders, and not by written consent, by the affirmative vote of at least two-thirds of the outstanding voting stock which is not owned by the interested stockholder. |
Generally, a business combination includes a merger, asset or stock sale or other transaction resulting in a financial benefit to the interested stockholder. An interested stockholder is a person who, together with affiliates and associates, owns or, within three years prior to the determination of interested stockholder status, did own, 15% or more of a corporations outstanding voting stock.
The provisions of Delaware law and the provisions of our amended and restated certificate of incorporation and amended and restated bylaws, could have the effect of discouraging others from attempting hostile takeovers and, as a consequence, they might also inhibit temporary fluctuations in the market price of our common stock that often result from actual or rumored hostile takeover attempts. These provisions might also have the effect of preventing changes in our management. It is possible that these provisions could make it more difficult to accomplish transactions that stockholders might otherwise deem to be in their best interests.
Classified Board
Our board of directors will be classified into three classes of directors, and directors may be removed from office only for cause. The existence of a classified board of directors could delay a successful tender offeror from obtaining majority control of our board of directors, and the prospect of that delay might deter a potential offeror. See ManagementCorporate GovernanceComposition of the Board of Directors for additional information.
Undesignated Preferred Stock
As discussed above in Preferred Stock, our board of directors will have the ability to issue preferred stock with voting or other rights or preferences that could impede the success of any attempt to change control of us. These and other provisions may have the effect of deterring hostile takeovers or delaying changes in control or management of us.
No Cumulative Voting
Under Delaware law, the right to vote cumulatively does not exist unless the certificate of incorporation specifically authorizes cumulative voting. Our amended and restated certificate of incorporation will not authorize cumulative voting. Therefore, stockholders holding a majority in voting power of the shares of our stock entitled to vote generally in the election of directors will be able to elect all our directors.
Action by Written Consent
Our amended and restated certificate of incorporation will provide that actions by our stockholders may not be taken by written consent. Actions to be taken by our stockholders may be taken only at an annual or special meeting of our stockholders.
Ability of Stockholders to Call a Special Meeting
Our amended and restated bylaws will provide that special meetings of the stockholders may be called only by the chairperson of the board of directors, our Chief Executive Officer or a majority of our board of directors. Stockholders may not otherwise call a special meeting, which may delay the ability of our stockholders to force consideration of a proposal.
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Requirements for Advance Notification of Stockholder Nominations and Proposals
Our amended and restated bylaws will establish advance notice procedures with respect to stockholder proposals and the nomination of candidates for election as directors, other than nominations made by or at the direction of our board of directors or a committee of our board of directors. These provisions may have the effect of precluding the conduct of certain business at a meeting if the proper procedures are not followed. These provisions may also discourage or deter a potential acquirer from conducting a solicitation of proxies to elect the acquirers own slate of directors or otherwise attempting to obtain control of us.
Amendment of Charter Provisions
The amendment of the above provisions of our amended and restated certificate of incorporation and amended and restated bylaws will require approval by holders of at least a majority of our outstanding capital stock entitled to vote generally in the election of directors. In addition, amendments to our amended and restated certificate of incorporation, including as a result of a statutory merger, that would alter or change the powers, preferences or rights of the common stock so as to affect them adversely must also be approved by a majority of the votes entitled to be cast by the holders of the shares affected by the amendment, voting as a separate class. Upon the completion of this offering, under our amended and restated certificate of incorporation, we may not increase or decrease the authorized number of shares of common stock without the affirmative vote of the holders of a majority of the voting power of the outstanding shares of our capital stock entitled to vote, voting together as a single class.
Choice of Forum
Our amended and restated certificate of incorporation will provide that the Court of Chancery of the State of Delaware will be the exclusive forum for: (i) any derivative action or proceeding brought on our behalf; (ii) any action asserting a breach of fiduciary duty; (iii) any action asserting a claim against us arising pursuant to the General Corporation Law of the State of Delaware, our certificate of incorporation or bylaws; and (iv) any action asserting a claim against us that is governed by the internal affairs doctrine.
Corporate Opportunity
Our amended and restated certificate of incorporation will provide that we renounce any interest or expectancy in, or in being offered an opportunity to participate in, any business opportunity that may from time to time be presented to the FFL Holders or any of their respective officers, directors, agents, stockholders, members, managers, partners, affiliates and subsidiaries (other than us and our subsidiaries) and that may be a business opportunity for the FFL Holders, even if the opportunity is one that we might reasonably have pursued or had the ability or desire to pursue if granted the opportunity to do so. No such person will be liable to us for breach of any fiduciary or other duty, as a director or officer or otherwise, to the fullest extent permitted by law, by reason of the fact that such person pursues or acquires any such business opportunity, directs any such business opportunity to another person or fails to present any such business opportunity, or information regarding any such business opportunity, to us. Neither the FFL Holders nor any of their respective representatives has any duty to refrain from engaging directly or indirectly in the same or similar business activities or lines of business as us or any of our subsidiaries.
Limitation on Director and Officer Liability and Indemnification
Our amended and restated certificate of incorporation will contain provisions that limit the liability of our directors and officers for monetary damages to the fullest extent permitted by Delaware law. Consequently, our directors and officers will not be personally liable to us or our stockholders for monetary damages for any breach of fiduciary duties as directors or officers, except liability for:
| any breach of the duty of loyalty to us or our stockholders; |
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| any act or omission not in good faith or that involves intentional misconduct or a knowing violation of law; |
| unlawful payments of dividends or unlawful stock repurchases or redemptions as provided in Section 174 of the General Corporation Law of the State of Delaware; or |
| any transaction from which an improper personal benefit is derived. |
Our amended and restated certificate of incorporation and amended and restated bylaws will provide that we are required to indemnify our directors and officers, in each case to the fullest extent permitted by Delaware law. Our amended and restated bylaws will also provide that we are obligated to advance expenses incurred by a director or officer in advance of the final disposition of any action or proceeding, and permit us to secure insurance on behalf of any officer, director, employee or other agent for any liability arising out of his or her actions in that capacity regardless of whether we would otherwise be permitted to indemnify him or her under the provisions of Delaware law.
We expect to enter into agreements to indemnify our directors, and executive officers. With specified exceptions, these agreements will provide for indemnification for related expenses including, among other things, attorneys fees, judgments, fines and settlement amounts incurred by any of these individuals in any action or proceeding. We believe these bylaw provisions and indemnification agreements are necessary to attract and retain qualified persons as directors and officers. We also maintain directors and officers liability insurance.
The limitation of liability and indemnification provisions in our certificate of incorporation and bylaws may discourage stockholders from bringing a lawsuit against our directors and officers for breach of their fiduciary duty. They may also reduce the likelihood of derivative litigation against our directors and officers, even though an action, if successful, might benefit us and other stockholders. Further, a stockholders investment may be adversely affected to the extent that we pay the costs of settlement and damage awards against directors and officers as required by these indemnification provisions. At present, there is no pending litigation or proceeding involving any of our directors, officers or employees for which indemnification is sought, and we are not aware of any threatened litigation that may result in claims for indemnification.
Registration Rights
The Amended and Restated Investor Rights Agreement provides certain holders of our common stock, subject to certain conditions, certain registration rights following this offering and the expiration of any related lock-up period. See Certain Relationships and Related-Party TransactionsRelated-Party TransactionsAmended and Restated Investor Rights Agreement.
Market Listing
We have applied to list our common stock on NYSE under the symbol CURO.
Transfer Agent and Registrar
The transfer agent and registrar for our common stock is American Stock Transfer & Trust Company, LLC. The transfer agents address is 6201 15 th Avenue, Brooklyn, New York 11219 and telephone number is (800)-937-5449.
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SHARES ELIGIBLE FOR FUTURE SALE
Immediately prior to this offering, there was no public market for our common stock. Sales of substantial amounts of shares of our common stock in the public market could adversely affect the prevailing market price of our common stock. Certain shares of our common stock will not be eligible for sale for a certain period of time after this offering because they are subject to contractual and legal restrictions on resale, some of which are described below. Sales of substantial amounts of shares of our common stock in the public market after these restrictions lapse, or the perception that these sales could occur, could adversely affect the prevailing market price of our common stock and our ability to raise equity capital in the future.
Sales of Restricted Securities
After this offering, shares of our common stock will be outstanding. Of these shares, all of the shares of common stock sold in this offering will be freely tradable without restriction under the Securities Act, other than shares purchased by our affiliates, as that term is defined in Rule 144 under the Securities Act. Our remaining shares outstanding will be restricted securities, which means they may be sold in the public market only if they are registered under the Securities Act or are sold pursuant to an exemption from registration, including, among others, those under Rule 144 or Rule 701 under the Securities Act, which are summarized below. Subject to the lock-up agreements described below, shares held by non-affiliates that are not restricted securities or that have been owned for more than one year may be sold under Rule 144 without restriction.
As a result of lock-up agreements described below, and the provisions of Rule 144 under the Securities Act, the restricted securities will be available for sale in the public market as follows:
Lock-up Agreements
We, our executive officers and directors and certain of our significant stockholders, who together hold an aggregate of % of our common stock, have agreed with the underwriters not to dispose of or hedge any of the shares of our common stock or securities convertible into or exchangeable for shares of our common stock during the period from the date of this prospectus continuing through the date that is 180 days after the date of this prospectus, except with the prior written consent of Credit Suisse Securities (USA) LLC and Jefferies LLC . These agreements are described below under Underwriting.
Rule 144
Non-Affiliates
Under Rule 144, a person may sell shares of our common stock acquired from us immediately upon the completion of this offering without regard to volume limitations or the availability of public information about us, if:
| the person is not our affiliate and has not been our affiliate at any time during the preceding three months; and |
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| the person has beneficially owned the shares to be sold for at least one year, including the holding period of any prior owner other than one of our affiliates. |
Approximately shares of our common stock that are not subject to the lock-up agreements described above, will be eligible for sale under Rule 144 immediately upon the completion of this offering.
In addition, beginning 90 days after the date of this prospectus, Rule 144 will entitle a person who is not our affiliate and has not been our affiliate at any time during the preceding three months to sell any shares that such person has beneficially owned for at least six months, including the holding period of any prior owner other than one of our affiliates. These non-affiliated holders would be able to make these sales without regard to any volume limitations. Sales of shares of our common stock by any such person would be subject to the availability of current public information about us.
Affiliates
Beginning 90 days after the date of this prospectus, and subject to the lock-up agreements described above, our affiliates who have beneficially owned shares of our common stock for at least six months, including the holding period of any prior owner other than one of our affiliates, would be entitled to sell within any three-month period a number of shares that does not exceed the greater of:
| 1% of the number of shares of our common stock then outstanding, which will equal shares immediately after this offering; and |
| the average weekly trading volume in our common stock on NYSE during the four calendar weeks preceding the date of filing of a Notice of Proposed Sale of Securities Pursuant to Rule 144 with respect to the sale. |
Sales under Rule 144 by our affiliates are also subject to certain manner of sale provisions and notice requirements and to the availability of current public information about us.
Rule 701
Any of our employees, officers or directors who acquired shares under a written compensatory plan or contract may be entitled to sell them in reliance on Rule 701. Rule 701 permits affiliates to sell their Rule 701 shares under Rule 144 without complying with the holding period requirements of Rule 144. Rule 701 further provides that non-affiliates may sell these shares in reliance on Rule 144 without complying with the holding period, public information, volume limitation or notice provisions of Rule 144. All holders of Rule 701 shares are required to wait until 90 days after the date of this prospectus before selling those shares. However, all shares issued under Rule 701 are subject to lock-up agreements and will only become eligible for sale when the 180-day lock-up agreements expire.
Equity Incentive Plans
We intend to file a registration statement on Form S-8 under the Securities Act to register shares of our common stock reserved for future issuance under our equity incentive plans. We expect to file this registration statement on, or as soon as practicable after, the effective date of this prospectus. The registration statement on Form S-8 will become effective automatically upon filing. However, the shares registered on Form S-8 will not be eligible for resale until expiration of the lock-up agreements and market standoff provisions to which they are subject, and will be subject to vesting provisions and Rule 144 volume limitations applicable to affiliates.
Registration Rights
The Amended and Restated Investor Rights Agreement provides the holders of up to shares of our common stock, subject to certain conditions, certain registration rights following this offering and the expiration of any related lock-up period. See Certain Relationships and Related-Party TransactionsRelated-Party TransactionsAmended and Restated Investor Rights Agreement.
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MATERIAL TAX CONSEQUENCES TO NON-U.S. HOLDERS
The following is a discussion of material U.S. federal income tax and estate tax consequences to non-U.S. holders relating to the ownership and disposition of our common stock issued pursuant to this offering, but does not purport to be a complete analysis of all the potential tax considerations relating thereto. This summary is based upon the provisions of the Internal Revenue Code of 1986, as amended, or the Internal Revenue Code, existing final, temporary and proposed Treasury Regulations promulgated thereunder, administrative rulings and judicial decisions, all as in effect on the date hereof. These authorities may be changed, possibly retroactively, so as to result in U.S. federal income or estate tax consequences different from those set forth below. We have not sought any ruling from the Internal Revenue Service, or the IRS, with respect to the statements made and the conclusions reached in the following summary, and there can be no assurance that the IRS will agree with such statements and conclusions.
This summary also does not address the tax considerations arising under the laws of any non-U.S., state or local jurisdiction, or under U.S. federal gift and estate tax laws, except to the limited extent below. In addition, this discussion does not address tax considerations applicable to a non-U.S. holders particular circumstances or to non-U.S. holders that may be subject to special tax rules, including, without limitation:
| banks, insurance companies and other financial institutions; |
| persons subject to the alternative minimum tax; |
| tax-exempt or governmental organizations, agencies or instrumentalities; |
| controlled foreign corporations, passive foreign investment companies and corporations that accumulate earnings to avoid U.S. federal income tax; |
| partnerships or other entities treated as pass-through entities for U.S. federal income tax purposes; |
| brokers, dealers or traders in securities, commodities or currencies; |
| persons that elect to use a mark-to-market method of accounting for their securities holdings; |
| persons that own, or are deemed to own, more than 5% of our common stock, except to the extent specifically set forth below; |
| real estate investment trusts or regulated investment companies; |
| certain former citizens or long-term residents of the United States; |
| persons who hold our common stock as part of a straddle, hedge, conversion, constructive sale or other integrated security transaction; |
| persons who hold or receive our common stock as compensation; and |
| persons who do not hold our common stock as a capital asset (within the meaning of Section 1221 of the Internal Revenue Code). |
If a partnership, or entity treated as a partnership for U.S. federal income tax purposes, holds our common stock, the tax treatment of a partner generally will depend on the status of the partner and upon the activities of the partnership. Accordingly, partnerships that hold our common stock, and partners in such partnerships, should consult their tax advisors.
You are urged to consult your tax advisor with respect to the application of the U.S. federal income tax laws to your particular situation, as well as any tax consequences of the purchase, ownership and disposition of our common stock arising under the U.S. federal estate or gift tax rules or under the laws of any state, local, non-U.S. or other taxing jurisdiction or under any applicable tax treaty.
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Non-U.S. Holder Defined
For purposes of this discussion, a non-U.S. holder is a beneficial owner of shares of our common stock that is not, for U.S. federal income tax purposes:
| an individual citizen or resident of the United States; |
| a corporation (or other entity treated as a corporation for U.S. federal income tax purposes) created or organized in or under the laws of the United States, any state or political subdivision thereof or the District of Columbia; |
| a partnership; |
| an estate whose income is subject to U.S. federal income tax regardless of its source; or |
| a trust (x) whose administration is subject to the primary supervision of a U.S. court and which has one or more U.S. persons who have the authority to control all substantial decisions of the trust or (y) which has made a valid election to be treated as a U.S. person. |
Distributions
If we make a distribution of cash or other property (other than certain pro rata distributions of our common stock) in respect of our common stock, the distribution will be treated as a dividend to the extent it is paid from our current or accumulated earnings and profits (as determined under U.S. federal income tax principles). If the amount of a distribution exceeds our current and accumulated earnings and profits, such excess first will be treated as a tax-free return of capital to the extent of the non-U.S. holders adjusted tax basis in our common stock, and thereafter will be treated as capital gain. Distributions treated as dividends on our common stock held by a non-U.S. holder generally will be subject to U.S. federal withholding tax at a rate of 30%, or at a lower rate if provided by an applicable income tax treaty and the non-U.S. holder has provided the documentation required to claim benefits under such treaty. Generally, to claim the benefits of an income tax treaty, a non-U.S. holder will be required to provide a properly executed IRS Form W-8BEN or IRS Form W-8BEN-E (or applicable successor form).
If, however, a dividend is effectively connected with the conduct of a trade or business in the United States by the non-U.S. holder (and, if an applicable tax treaty so provides, is attributable to a permanent establishment or fixed base maintained by the non-U.S. holder in the United States), the dividend will not be subject to the 30% U.S. federal withholding tax (provided the non-U.S. holder has provided the appropriate documentation, generally an IRS Form W-8ECI (or applicable successor form), to the withholding agent), but the non-U.S. holder generally will be subject to U.S. federal income tax in respect of the dividend on a net income basis, and at graduated rates, in substantially the same manner as U.S. persons. Dividends received by a non-U.S. holder that is a corporation for U.S. federal income tax purposes and which are effectively connected with the conduct of a U.S. trade or business may also be subject to a branch profits tax at the rate of 30% (or a lower rate if provided by an applicable tax treaty).
A non-U.S. holder that is eligible for a reduced rate of U.S. federal withholding tax under an income tax treaty may obtain a refund or credit of any excess amounts withheld by timely filing an appropriate claim for a refund, together with the required information, with the IRS.
Gain on Disposition of Common Stock
Subject to the discussion below of the Foreign Account Tax Compliance Act, or FATCA, and backup withholding, a non-U.S. holder generally will not be subject to U.S. federal income or withholding tax on any gain realized on the sale or other disposition of our common stock unless:
| such non-U.S. holder is an individual who is present in the United States for 183 days or more in the taxable year of such sale or disposition, and certain other conditions are met; |
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| such gain is effectively connected with the conduct by the non-U.S. holder of a trade or business in the United States (and, if an applicable tax treaty so provides, is attributable to a permanent establishment or a fixed base maintained by the non-U.S. holder in the United States); or |
| our common stock constitutes a U.S. real property interest by reason of our status as a United States real property holding corporation for U.S. federal income tax purposes, or a USRPHC, at any time within the shorter of the five-year period preceding the disposition or the non-U.S. holders holding period for our common stock. |
A non-U.S. holder who is an individual and that is present in the United States for 183 days or more in the taxable year of such sale or disposition, if certain other conditions are met, will be subject to tax at a rate of 30% on the amount by which such non-U.S. holders taxable capital gains allocable to U.S. sources, including gain from the sale or other disposition of our common stock, exceed capital losses allocable to U.S. sources, except as otherwise provided in an applicable income tax treaty.
Gain realized by a non-U.S. holder that is effectively connected with such non-U.S. holders conduct of a trade or business in the United States generally will be subject to U.S. federal income tax on a net income basis, and at graduated rates, in substantially the same manner as a U.S. person (except as provided by an applicable tax treaty). In addition, if such non-U.S. holder is a corporation for U.S. federal income tax purposes, it may also be subject to a branch profits tax at the rate of 30% (or a lower rate if provided by an applicable tax treaty).
Generally, a corporation is a USRPHC if the fair market value of its U.S. real property interests equals or exceeds 50% of the sum of the fair market value of its worldwide real property interests and its other assets used or held for use in a trade or business (all as determined for U.S. federal income tax purposes). We do not expect to be treated as a USRPHC as of the date hereof; however, there can be no assurances that we are not now or will not become in the future a USRPHC. If we were a USRPHC during the applicable testing period, as long as our common stock is regularly traded on an established securities market, our common stock will be treated as a U.S. real property interest only for a non-U.S. holder who actually or constructively holds (at any time within the shorter of the five-year period preceding the disposition or the non-U.S. holders holding period) more than 5% of such regularly traded stock. Please note, though, that we can provide no assurance that our common stock will remain regularly traded.
Federal Estate Tax
Our common stock beneficially owned by an individual who is not a citizen or resident of the United States (as defined for U.S. federal estate tax purposes) at the time of death will generally be includable in the decedents gross estate for U.S. federal estate tax purposes, unless an applicable estate tax treaty provides otherwise.
Withholdable Payments to Foreign Financial Entities and Other Foreign Entities
A 30% withholding tax may be imposed on certain payments to certain foreign financial institutions and other foreign entities, including intermediaries, or FATCA withholding. Such payments will include U.S.-source dividends and, after December 31, 2018, the gross proceeds from the sale or other disposition of property that can produce certain U.S.-source interest or dividends. FATCA withholding may be imposed on such payments to a foreign financial institution unless such foreign financial institution enters into (or is deemed to have entered into) an agreement with the IRS to, among other things, undertake to identify accounts held by certain U.S. persons or U.S.-owned foreign entities, annually report certain information about such accounts and withhold 30% of payments to such account holders whose actions prevent the financial institution from complying with these reporting and other requirements. FATCA withholding is imposed on similar types of payments to a non-financial foreign entity unless the entity certifies that it does not have any substantial U.S. owners or furnishes identifying information regarding each substantial U.S. owner. Certain countries have entered into, and other countries are expected to enter into, agreements with the United States to facilitate the type of information reporting required to avoid FATCA withholding. You should consult your own tax advisors regarding the relevant U.S. law and other official guidance on FATCA withholding.
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Backup Withholding and Information Reporting
Generally, we must report annually to the IRS the amount of dividends paid to a non-U.S. holder, the non-U.S. holders name and address and the amount of tax withheld, if any. A similar report is sent to the non-U.S. holder. Pursuant to applicable income tax treaties or other agreements, the IRS may make these reports available to tax authorities in the non-U.S. holders country of residence.
Payments of dividends or of proceeds on the disposition of stock made to a non-U.S. holder may be subject to information reporting and backup withholding unless the non-U.S. holder establishes an exemption, for example by properly certifying the non-U.S. holders status on an IRS Form W-8BEN, W-8BEN-E or another appropriate version of IRS Form W-8. Notwithstanding the foregoing, backup withholding and information reporting may apply if either we or our paying agent has actual knowledge, or reason to know, that the non-U.S. holder is a U.S. person.
Backup withholding is not an additional tax; rather, the U.S. income tax liability of persons subject to backup withholding will be reduced by the amount of tax withheld. If withholding results in an overpayment of taxes, a refund or credit may generally be obtained from the IRS, provided that the required information is furnished to the IRS in a timely manner.
The preceding discussion of U.S. federal income and estate tax considerations is for general information only. It is not tax advice. Each prospective investor should consult its own tax advisor regarding the particular U.S. federal, state and local and non-U.S. tax consequences of purchasing, holding and disposing of our common stock, including the consequences of any proposed change in applicable laws.
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Under the terms and subject to the conditions contained in an underwriting agreement dated , 2017, we and the selling stockholders have agreed to sell to the underwriters named below, for whom Credit Suisse Securities (USA) LLC, Jefferies LLC and Stephens Inc. are acting as representatives, the following respective numbers of shares of common stock:
Underwriter |
Number
of Shares |
|||
Credit Suisse Securities (USA) LLC |
||||
Jefferies LLC |
||||
Stephens Inc. |
||||
William Blair & Company, L.L.C. |
||||
Janney Montgomery Scott LLC |
||||
|
|
|||
Total |
||||
|
|
The underwriting agreement provides that the underwriters are obligated to purchase all the shares of common stock in the offering if any are purchased, other than those shares covered by the over-allotment option described below. The underwriting agreement also provides that if an underwriter defaults, the purchase commitments of non-defaulting underwriters may be increased or the offering may be terminated.
We have agreed to indemnify the underwriters and certain of their controlling persons against certain liabilities, including liabilities under the Securities Act, and to contribute to payments that the underwriters may be required to make in respect of those liabilities.
The selling stockholders have granted to the underwriters a 30-day option to purchase on a pro rata basis up to additional shares from the selling stockholders at the initial public offering price less the underwriting discounts and commissions. The option may be exercised by Credit Suisse Securities (USA) LLC and Jefferies LLC only to cover any over-allotments of common stock.
The underwriters propose to offer the shares of common stock initially at the public offering price on the cover page of this prospectus and to selling group members at that price less a selling concession of up to $ per share. After the initial public offering the representatives may change the public offering price and selling concession.
The following table summarizes the compensation and estimated expenses we and the selling stockholders will pay:
Per Share | Total | |||||||||||||||
Without
Over-allotment |
With
Over-allotment |
Without
Over-allotment |
With
Over-allotment |
|||||||||||||
Underwriting discounts and commissions paid by us |
$ | $ | $ | $ | ||||||||||||
Expenses payable by us |
||||||||||||||||
Underwriting discounts and commissions paid by selling stockholders |
||||||||||||||||
Expenses payable by the selling stockholders |
$ | $ | $ | $ |
We have also agreed to reimburse the underwriters for their FINRA counsel fee. In accordance with FINRA Rule 5110, this reimbursed fee is deemed underwriting compensation for this offering.
Solebury Capital, or Solebury, has acted as our financial advisor in connection with this offering. Solebury is not acting as an underwriter in connection with this offering, and accordingly, Solebury is neither purchasing
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shares of common stock nor offering shares of common stock to the public in connection with this offering. With gross offering proceeds of $ million, the maximum aggregate compensation that Solebury is eligible to receive in connection with this offering, including reimbursement of out-of-pocket expenses, is $ (or $ if the underwriters exercise in full their option to purchase additional shares).
We have agreed that we will not, subject to certain exceptions, offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, or file with the Securities and Exchange Commission a registration statement under the Securities Act relating to, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, or publicly disclose the intention to make any offer, sale, pledge, disposition or filing, without the prior written consent of Credit Suisse Securities (USA) LLC and Jefferies LLC for a period of 180 days after the date of this prospectus.
Our officers, directors and stockholders have agreed that, subject to certain exceptions, they will not offer, sell, contract to sell, pledge or otherwise dispose of, directly or indirectly, any shares of our common stock or securities convertible into or exchangeable or exercisable for any shares of our common stock, enter into a transaction that would have the same effect, or enter into any swap, hedge or other arrangement that transfers, in whole or in part, any of the economic consequences of ownership of our common stock, whether any of these transactions are to be settled by delivery of our common stock or other securities, in cash or otherwise, or publicly disclose the intention to make any offer, sale, pledge or disposition, or to enter into any transaction, swap, hedge or other arrangement, without, in each case, the prior written consent of Credit Suisse Securities (USA) LLC and Jefferies LLC for a period of 180 days after the date of this prospectus.
The underwriters have reserved for sale at the initial public offering price up to shares of the common stock for employees, directors and other persons associated with us who have expressed an interest in purchasing common stock in the offering. If purchased by these persons, these shares will be subject to a 180-day lock-up restriction. The number of shares available for sale to the general public in the offering will be reduced to the extent these persons purchase the reserved shares. Any reserved shares not so purchased will be offered by the underwriters to the general public on the same terms as the other shares.
We have applied to list the shares of common stock on NYSE under the symbol CURO.
In connection with the listing of the common stock on NYSE, the underwriters will undertake to sell in the United States round lots of 100 shares or more to a minimum of 400 U.S. holders.
Prior to this offering, there has been no public market for our common stock. The initial public offering price was determined by negotiations among us and the representatives and will not necessarily reflect the market price of the common stock following this offering. The principal factors that were considered in determining the initial public offering price included:
| the information presented in this prospectus and otherwise available to the underwriters; |
| the history of, and prospects for, the industry in which we will compete; |
| the ability of our management; |
| the prospects for our future earnings; |
| the present state of our development, results of operations and our current financial condition; |
| the general condition of the securities markets at the time of this offering; |
| the recent market prices of, and the demand for, publicly traded common stock of generally comparable companies; and |
| other factors deemed relevant by the underwriters and us. |
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We cannot assure you that the initial public offering price will correspond to the price at which the common stock will trade in the public market subsequent to this offering or that an active trading market for the common stock will develop and continue after this offering.
In connection with the offering the underwriters may engage in stabilizing transactions, over-allotment transactions, syndicate-covering transactions, penalty bids and passive market making in accordance with Regulation M under the Exchange Act.
| Stabilizing transactions permit bids to purchase the underlying security so long as the stabilizing bids do not exceed a specified maximum. |
| Over-allotment involves sales by the underwriters of shares in excess of the number of shares the underwriters are obligated to purchase, which creates a syndicate short position. The short position may be either a covered short position or a naked short position. In a covered short position, the number of shares over-allotted by the underwriters is not greater than the number of shares that they may purchase in the over-allotment option. In a naked short position, the number of shares involved is greater than the number of shares in the over-allotment option. The underwriters may close out any covered short position by either exercising their over-allotment option and/or purchasing shares in the open market. |
| Syndicate-covering transactions involve purchases of the common stock in the open market after the distribution has been completed in order to cover syndicate short positions. In determining the source of shares to close out the short position, the underwriters will consider, among other things, the price of shares available for purchase in the open market as compared to the price at which they may purchase shares through the over-allotment option. If the underwriters sell more shares than could be covered by the over-allotment option, which is a naked short position, the position can only be closed out by buying shares in the open market. A naked short position is more likely to be created if the underwriters are concerned that there could be downward pressure on the price of the shares in the open market after pricing that could adversely affect investors who purchase in the offering. |
| Penalty bids permit the representatives to reclaim a selling concession from a syndicate member when the common stock originally sold by the syndicate member is purchased in a stabilizing or syndicate-covering transaction to cover syndicate short positions. |
| In passive market making, market makers in the common stock who are underwriters or prospective underwriters may, subject to limitations, make bids for or purchases of our common stock until the time, if any, at which a stabilizing bid is made. |
These stabilizing transactions, syndicate-covering transactions and penalty bids may have the effect of raising or maintaining the market price of our common stock or preventing or retarding a decline in the market price of the common stock. As a result, the price of our common stock may be higher than the price that might otherwise exist in the open market. These transactions may be effected on NYSE or otherwise and, if commenced, may be discontinued at any time.
A prospectus in electronic format may be made available on the web sites maintained by one or more of the underwriters, or selling group members, if any, participating in this offering and one or more of the underwriters participating in this offering may distribute prospectuses electronically. The representatives may agree to allocate a number of shares to underwriters and selling group members for sale to their online brokerage account holders. Internet distributions will be allocated by the underwriters and selling group members that will make internet distributions on the same basis as other allocations.
Conflicts of Interest
The underwriters and their respective affiliates are full-service financial institutions engaged in various activities, which may include securities trading, commercial and investment banking, financial advisory,
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investment management, investment research, principal investment, hedging, financing and brokerage activities. Certain of the underwriters and their respective affiliates have, from time to time, performed, and may in the future perform, various financial advisory and investment banking services for us, for which they received or will receive customary fees and expenses.
The representatives have informed us that they do not expect sales to accounts over which the underwriters have discretionary authority to exceed 5.0% of the shares of common stock being offered.
In addition, in the ordinary course of their business activities, the underwriters and their affiliates may make or hold a broad array of investments and actively trade debt and equity securities (or related derivative securities) and financial instruments (including bank loans) for their own account and for the accounts of their customers. These investments and securities activities may involve securities and/or instruments of ours or our affiliates. The underwriters and their affiliates may also make investment recommendations and/or publish or express independent research views in respect of such securities or financial instruments and may hold, or recommend to clients that they acquire, long and/or short positions in such securities and instruments.
Selling Restrictions Outside the United States
This prospectus does not constitute an offer to sell to, or a solicitation of an offer to buy from, anyone in any country or jurisdiction (i) in which such an offer or solicitation is not authorized, (ii) in which any person making such offer or solicitation is not qualified to do so or (iii) in which any such offer or solicitation would otherwise be unlawful. No action has been taken that would, or is intended to, permit a public offer of the shares of common stock or possession or distribution of this prospectus or any other offering or publicity material relating to the shares of common stock in any country or jurisdiction (other than the United States) where any such action for that purpose is required. Accordingly, each underwriter has undertaken that it will not, directly or indirectly, offer or sell any shares of common stock or have in its possession, distribute or publish any prospectus, form of application, advertisement or other document or information in any country or jurisdiction except under circumstances that will, to the best of its knowledge and belief, result in compliance with any applicable laws and regulations and all offers and sales of shares of common stock by it will be made on the same terms.
Notice to Canadian Residents
Resale Restrictions
The distribution of shares of common stock in Canada is being made only in the provinces of Ontario, Quebec, Manitoba, Alberta and British Columbia on a private placement basis exempt from the requirement that we prepare and file a prospectus with the securities regulatory authorities in each province where trades of shares of common stock are made. Any resale of the shares of common stock in Canada must be made under applicable securities laws which may vary depending on the relevant jurisdiction, and which may require resales to be made under available statutory exemptions or under a discretionary exemption granted by the applicable Canadian securities regulatory authority. Purchasers are advised to seek legal advice prior to any resale of shares of common stock.
Representations of Canadian Purchasers
By purchasing shares of common stock in Canada and accepting delivery of a purchase confirmation, a purchaser is representing to us and the dealer from whom the purchase confirmation is received that:
| the purchaser is entitled under applicable provincial securities laws to purchase shares of common stock without the benefit of a prospectus qualified under those securities laws as it is an accredited investor as defined under National Instrument 45-106 Prospectus Exemptions or subsection 73.3(1) of the Securities Act (Ontario), as applicable, |
| the purchaser is a permitted client as defined in National Instrument 31-103 Registration Requirements, Exemptions and Ongoing Registrant Obligations , |
| where required by law, the purchaser is purchasing as principal and not as agent, and |
| the purchaser has reviewed the text above under Resale Restrictions. |
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Conflicts of Interest
Canadian purchasers are hereby notified that the Underwriters are relying on the exemption set out in section 3A.3 of National Instrument 33-105 Underwriting Conflicts from having to provide certain conflict of interest disclosure in this document.
Statutory Rights of Action
Securities legislation in certain provinces or territories of Canada may provide a purchaser with remedies for rescission or damages if an offering memorandum (including any amendment thereto) such as this prospectus contains a misrepresentation, provided that the remedies for rescission or damages are exercised by the purchaser within the time limit prescribed by the securities legislation of the purchasers province or territory. The purchaser of shares of common stock in Canada should refer to any applicable provisions of the securities legislation of the purchasers province or territory for particulars of these rights or consult with a legal advisor.
Enforcement of Legal Rights
All of our directors and executive officers as well as the experts named herein may be located outside of Canada and, as a result, it may not be possible for Canadian purchasers to effect service of process within Canada upon us or those persons. All or a substantial portion of our assets and the assets of those persons may be located outside of Canada and, as a result, it may not be possible to satisfy a judgment against us or those persons in Canada or to enforce a judgment obtained in Canadian courts against us or those persons outside of Canada.
Taxation and Eligibility for Investment
Canadian purchasers of shares of common stock should consult their own legal and tax advisors with respect to the tax consequences of an investment in the shares of common stock in their particular circumstances and about the eligibility of the shares of common stock for investment by the purchaser under relevant Canadian legislation.
European Economic Area
In relation to each Member State of the European Economic Area which has implemented the Prospectus Directive (each, a Relevant Member State) an offer to the public of any common stock which are the subject of the offering contemplated herein may not be made in that Relevant Member State, except that an offer to the public in that Relevant Member State of any common stock may be made at any time under the following exemptions under the Prospectus Directive, if they have been implemented in that Relevant Member State:
| to legal entities which are qualified investors as defined under the Prospectus Directive; |
| by the underwriters to fewer than 100, or, if the Relevant Member State has implemented the relevant provisions of the 2010 PD Amending Directive, 150, natural or legal persons (other than qualified investors as defined in the Prospectus Directive), as permitted under the Prospectus Directive, subject to obtaining the prior consent of the representatives of the underwriters for any such offer; or |
| in any other circumstances falling within Article 3(2) of the Prospectus Directive, provided that no such offer of common stock shall result in a requirement for us, the selling stockholders or any underwriter to publish a prospectus pursuant to Article 3 of the Prospectus Directive or supplement a prospectus pursuant to Article 16 of the Prospectus Directive. |
Each person in a Relevant Member State who receives any communication in respect of, or who acquires any common stock under, the offers contemplated here in this prospectus will be deemed to have represented, warranted and agreed to and with each underwriter, the selling stockholders and us that:
| it is a qualified investor as defined under the Prospectus Directive; and |
178
| in the case of any common stock acquired by it as a financial intermediary, as that term is used in Article 3(2) of the Prospectus Directive, (i) the common stock acquired by it in the offering have not been acquired on behalf of, nor have they been acquired with a view to their offer or resale to, persons in any Relevant Member State other than qualified investors, as that term is defined in the Prospectus Directive, or in the circumstances in which the prior consent of the representatives of the underwriters has been given to the offer or resale or (ii) where common stock have been acquired by it on behalf of persons in any Relevant Member State other than qualified investors, the offer of such common stock to it is not treated under the Prospectus Directive as having been made to such persons. |
For the purposes of this representation and the provision above, the expression an offer of common stock to the public in relation to any common stock in any Relevant Member State means the communication in any form and by any means of sufficient information on the terms of the offer and any common stock to be offered so as to enable an investor to decide to purchase or subscribe for the common stock, as the same may be varied in that Relevant Member State by any measure implementing the Prospectus Directive in that Relevant Member State, the expression Prospectus Directive means Directive 2003/71/EC (and amendments thereto, including the 2010 PD Amending Directive, to the extent implemented in the Relevant Member State), and includes any relevant implementing measure in each Relevant Member State and the expression 2010 PD Amending Directive means Directive 2010/73/EU.
United Kingdom
This prospectus has only been communicated or caused to have been communicated and will only be communicated or caused to be communicated as an invitation or inducement to engage in investment activity (within the meaning of Section 21 of the Financial Services and Markets Act of 2000 (the FSMA)) as received in connection with the issue or sale of the common stock in circumstances in which Section 21(1) of the FSMA does not apply to us. All applicable provisions of the FSMA will be complied with in respect to anything done in relation to the common stock in, from or otherwise involving the United Kingdom.
Switzerland
The shares of common stock may not be publicly offered in Switzerland and will not be listed on the SIX Swiss Exchange (SIX) or on any other stock exchange or regulated trading facility in Switzerland. This prospectus has been prepared without regard to the disclosure standards for issuance prospectuses under art. 652a or art. 1156 of the Swiss Code of Obligations or the disclosure standards for listing prospectuses under art. 27 ff. of the SIX Listing Rules or the listing rules of any other stock exchange or regulated trading facility in Switzerland. Neither this prospectus nor any other offering or marketing material relating to the shares of common stock or the offering may be publicly distributed or otherwise made publicly available in Switzerland.
Neither this prospectus nor any other offering or marketing material relating to the offering, the Company or the shares of common stock have been or will be filed with or approved by any Swiss regulatory authority. In particular, this prospectus will not be filed with, and the offer of the shares of common stock will not be supervised by, the Swiss Financial Market Supervisory Authority FINMA, and the offer of the shares of common stock has not been and will not be authorized under the Swiss Federal Act on Collective Investment Schemes (CISA). The investor protection afforded to acquirers of interests in collective investment schemes under the CISA does not extend to acquirers of the shares of common stock.
179
The validity of the shares of common stock offered hereby will be passed upon for us by Willkie Farr & Gallagher LLP, New York, New York. Certain legal matters in connection with this offering will be passed upon for the underwriters by White & Case LLP, New York, New York.
The audited consolidated financial statements included in this prospectus and elsewhere in the registration statement have been so included in reliance upon the report of Grant Thornton LLP, independent registered public accountants, upon the authority of such firm as experts in accounting and auditing.
WHERE YOU CAN FIND ADDITIONAL INFORMATION
We have filed with the SEC a registration statement on Form S-1, including exhibits, schedules and amendments filed with the registration statement, under the Securities Act with respect to the shares of common stock being offered. This prospectus, which constitutes a part of the registration statement, does not contain all of the information described in the registration statement and the related exhibits and schedules, portions of which have been omitted as permitted by the rules and regulations of the SEC. For further information with respect to us and the shares of common stock being offered, reference is made to the registration statement and the related exhibits and schedules. With respect to statements contained in this prospectus regarding the contents of any contract or any other document, reference is made to the copy of the contract or other document filed as an exhibit to the registration statement. Statements concerning the contents of any contract or other document filed as an exhibit are qualified by reference to such filed exhibit.
As a result of this offering, we will become subject to the full informational requirements of the Exchange Act. We will fulfill our obligations with respect to such requirements by filing periodic reports, proxy statements and other information with the SEC. A copy of the registration statement and the related exhibits, schedules and amendments, as well as any documents we file with or furnish to the SEC, may be inspected without charge at the public reference facilities maintained by the SEC in Washington D.C. at 100 F Street, N.E., Room 1580, Washington, D.C. 20549. Such documents may be obtained from these offices upon the payment of the fees prescribed by the SEC. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330. The SEC maintains a website that contains reports, proxy and information statements and other information regarding registrants that file electronically with the SEC. The address of the site is http://www.sec.gov. Document requests may be directed to CURO Group Holdings Corp. at 3527 North Ridge Road, Wichita, Kansas 67205. We also maintain a corporate website at www.curo.com. Any information available on, or accessible through, our website is not incorporated by reference in this prospectus.
180
INDEX TO CONSOLIDATED FINANCIAL STATEMENTS
Unaudited Consolidated Financial Statements for the three and nine months ended September 30, 2017 and 2016 |
||||
F-2 | ||||
F-3 | ||||
F-4 | ||||
F-5 | ||||
F-6 | ||||
Consolidated Financial Statements for the years ended December 31, 2016 and 2015 |
||||
F-43 | ||||
F-44 | ||||
F-45 | ||||
F-46 | ||||
F-47 | ||||
F-48 | ||||
F-49 |
F-1
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
September 30,
2017 |
December 31,
2016 |
|||||||
(Unaudited) | ||||||||
ASSETS |
||||||||
Cash |
$ | 95,545 | $ | 193,525 | ||||
Restricted cash (includes restricted cash of consolidated VIEs of $6,258 and $2,770 as of September 30, 2017 and December 31, 2016, respectively) |
11,474 | 7,828 | ||||||
Gross loans receivable (includes loans of consolidated VIEs of $198,210 and $130,199 as of September 30, 2017 and December 31, 2016, respectively) |
393,423 | 286,196 | ||||||
Less: allowance for loan losses (includes allowance for losses of consolidated VIEs of $43,127 and $22,134 as of September 30, 2017 and December 31, 2016, respectively) |
(71,271 | ) | (39,192 | ) | ||||
|
|
|
|
|||||
Loans receivable, net |
322,152 | 247,004 | ||||||
Deferred income taxes |
14,032 | 12,635 | ||||||
Income taxes receivable |
2,233 | 9,378 | ||||||
Prepaid expenses and other |
40,345 | 39,248 | ||||||
Property and equipment, net |
88,820 | 95,896 | ||||||
Goodwill |
145,677 | 141,554 | ||||||
Other intangibles, net of accumulated amortization of $41,257 and $37,670 |
33,021 | 30,901 | ||||||
Other |
8,840 | 2,829 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 762,139 | $ | 780,798 | ||||
|
|
|
|
|||||
LIABILITIES AND STOCKHOLDERS EQUITY |
||||||||
Accounts payable and accrued liabilities |
$ | 55,479 | $ | 42,663 | ||||
Deferred revenue |
12,509 | 12,342 | ||||||
Income taxes payable |
10,008 | 1,372 | ||||||
Current maturities of long-term debt |
| 147,771 | ||||||
Accrued interest (includes accrued interest of consolidated VIEs of $1,113 and $775 as of September 30, 2017 and December 31, 2016, respectively) |
5,500 | 8,183 | ||||||
Credit services organization guarantee liability |
16,890 | 17,052 | ||||||
Deferred rent |
11,757 | 11,868 | ||||||
Long-term debt (includes long-term debt and issuance costs of consolidated VIEs of $116,590 and $4,455 and $68,311 and $5,257 as of September 30, 2017 and December 31, 2016, respectively) |
561,872 | 477,136 | ||||||
Subordinated shareholder debt |
2,401 | 2,227 | ||||||
Other long-term liabilities |
4,628 | 5,016 | ||||||
Deferred tax liabilities |
15,205 | 14,313 | ||||||
|
|
|
|
|||||
Total Liabilities |
696,249 | 739,943 | ||||||
|
|
|
|
|||||
Commitments and contingencies |
||||||||
Stockholders Equity |
||||||||
Common stock$0.001 par value; 3,000 shares authorized; issued and outstanding 100 shares |
1 | 1 | ||||||
Dividends in excess of paid-in capital |
(35,686 | ) | (35,996 | ) | ||||
Retained earnings |
143,079 | 136,835 | ||||||
Accumulated other comprehensive loss |
(41,504 | ) | (59,985 | ) | ||||
|
|
|
|
|||||
Total Stockholders Equity |
65,890 | 40,855 | ||||||
|
|
|
|
|||||
Total Liabilities and Stockholders Equity |
$ | 762,139 | $ | 780,798 | ||||
|
|
|
|
See accompanying Notes to Interim Consolidated Financial Statements.
F-2
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF INCOMEUNAUDITED
(in thousands)
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Revenue |
$ | 255,119 | $ | 212,924 | $ | 696,643 | $ | 609,692 | ||||||||
Provision for losses |
99,341 | 77,024 | 226,523 | 177,756 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net revenue |
155,778 | 135,900 | 470,120 | 431,936 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Cost of providing services |
||||||||||||||||
Salaries and benefits |
26,821 | 26,273 | 79,554 | 79,359 | ||||||||||||
Occupancy |
13,815 | 13,345 | 41,421 | 40,368 | ||||||||||||
Office |
5,715 | 4,816 | 15,519 | 14,294 | ||||||||||||
Other costs of providing services |
12,991 | 12,600 | 40,954 | 39,385 | ||||||||||||
Advertising |
16,270 | 11,831 | 35,599 | 28,925 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total cost of providing services |
75,612 | 68,865 | 213,047 | 202,331 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross margin |
80,166 | 67,035 | 257,073 | 229,605 | ||||||||||||
Operating (income) expense |
||||||||||||||||
Corporate and district |
34,254 | 30,807 | 103,605 | 95,109 | ||||||||||||
Interest expense |
18,844 | 15,987 | 60,694 | 48,179 | ||||||||||||
(Gain) loss on extinguishment of debt |
| (6,991 | ) | 12,458 | (6,991 | ) | ||||||||||
Restructuring costs |
7,393 | 1,486 | 7,393 | 2,967 | ||||||||||||
Other (income)/expense |
(7 | ) | (114 | ) | 192 | (559 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Total operating expense |
60,484 | 41,175 | 184,342 | 138,705 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income before income taxes |
19,682 | 25,860 | 72,731 | 90,900 | ||||||||||||
Provision for income taxes |
9,920 | 10,083 | 29,988 | 35,041 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net income |
$ | 9,762 | $ | 15,777 | $ | 42,743 | $ | 55,859 | ||||||||
|
|
|
|
|
|
|
|
See accompanying Notes to Interim Consolidated Financial Statements.
F-3
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEUNAUDITED
(in thousands)
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Net income |
$ | 9,762 | $ | 15,777 | $ | 42,743 | $ | 55,859 | ||||||||
Other comprehensive income (loss): |
||||||||||||||||
Cash flow hedges |
| (92 | ) | 333 | (92 | ) | ||||||||||
Foreign currency translation adjustment |
8,397 | (2,628 | ) | 18,148 | 1,181 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Other comprehensive income (loss) |
8,397 | (2,720 | ) | 18,481 | 1,089 | |||||||||||
|
|
|
|
|
|
|
|
|||||||||
Comprehensive income |
$ | 18,159 | $ | 13,057 | $ | 61,224 | $ | 56,948 | ||||||||
|
|
|
|
|
|
|
|
See accompanying Notes to Interim Consolidated Financial Statements.
F-4
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
INTERIM CONSOLIDATED STATEMENTS OF CASH FLOWSUNAUDITED
(in thousands)
Nine Months Ended
September 30, |
||||||||
2017 | 2016 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 42,743 | $ | 55,859 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
14,120 | 14,244 | ||||||
Provision for loan losses |
226,523 | 177,756 | ||||||
Restructuring costs |
1,495 | 523 | ||||||
Amortization of debt issuance costs |
2,637 | 2,405 | ||||||
Amortization of bond discount/(premium) |
809 | (1,143 | ) | |||||
Deferred income tax benefit |
(811 | ) | (448 | ) | ||||
Loss on disposal of property and equipment |
403 | 39 | ||||||
Loss (gain) on extinguishment of debt |
12,458 | (6,991 | ) | |||||
Increase in cash surrender value of life insurance |
(1,045 | ) | (608 | ) | ||||
Share-based compensation expense |
311 | 837 | ||||||
Changes in operating assets and liabilities: |
||||||||
Loans receivable |
(295,127 | ) | (170,479 | ) | ||||
Prepaid expenses and other assets |
1,466 | (111 | ) | |||||
Accounts payable and accrued liabilities |
11,055 | (2,773 | ) | |||||
Deferred revenue |
(870 | ) | (1,517 | ) | ||||
Income taxes payable |
11,387 | 1,562 | ||||||
Income taxes receivable |
4,590 | 131 | ||||||
Deferred rent |
(250 | ) | 323 | |||||
Other liabilities |
(2,482 | ) | 16,220 | |||||
|
|
|
|
|||||
Net cash provided by operating activities |
29,412 | 85,829 | ||||||
|
|
|
|
|||||
Cash flows from investing activities |
||||||||
Purchase of property, equipment and software |
(7,917 | ) | (9,739 | ) | ||||
Cash paid for Cognical Holdings, Inc. preferred shares |
(4,975 | ) | | |||||
Changes in restricted cash |
(3,360 | ) | 5,928 | |||||
|
|
|
|
|||||
Net cash (used in) investing activities |
(16,252 | ) | (3,811 | ) | ||||
|
|
|
|
|||||
Cash flows from financing activities |
||||||||
Proceeds from Non-Recourse U.S. SPV Facility and ABL Facility |
52,130 | | ||||||
Payments on Non-Recourse U.S. SPV Facility and ABL Facility |
(27,258 | ) | | |||||
Proceeds from issuance of 12.00% Senior Secured Notes |
461,329 | | ||||||
Payments on 10.75% Senior Secured Notes |
(426,034 | ) | | |||||
Payments on 12.00% Senior Cash Pay Notes |
(125,000 | ) | | |||||
Debt issuance costs paid |
(14,222 | ) | | |||||
Dividends paid to CURO Group Holdings Corp. |
(166,583 | ) | | |||||
Dividends received from CURO Group Holdings Corp. |
166,583 | | ||||||
Proceeds from credit facilities |
33,028 | 30,000 | ||||||
Payments on credit facilities |
(33,028 | ) | (38,050 | ) | ||||
Dividends paid to stockholders |
(36,500 | ) | | |||||
|
|
|
|
|||||
Net cash (used in) financing activities |
(115,555 | ) | (8,050 | ) | ||||
|
|
|
|
|||||
Effect of exchange rate changes on cash |
4,415 | 889 | ||||||
|
|
|
|
|||||
Net (decrease) increase in cash |
(97,980 | ) | 74,857 | |||||
Cash at beginning of period |
193,525 | 100,561 | ||||||
|
|
|
|
|||||
Cash at end of period |
$ | 95,545 | $ | 175,418 | ||||
|
|
|
|
See accompanying Notes to Interim Consolidated Financial Statements.
F-5
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED
NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES AND NATURE OF OPERATIONS
Basis of Presentation
The terms CURO, we, our, us, and the Company, refer to CURO Group Holdings Corp. and its directly and indirectly owned subsidiaries as a combined entity, except where otherwise stated.
We have prepared the accompanying unaudited Interim Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (US GAAP), and with the accounting policies described in our 2016 consolidated financial statements. Certain information and note disclosures normally included in our annual financial statements prepared in accordance with US GAAP have been condensed or omitted, although we believe that the disclosures are adequate to enable a reasonable understanding of the information presented.
The unaudited Interim Consolidated Financial Statements and the accompanying notes (the Interim Statements) reflect all adjustments, which are, in the opinion of management, necessary to present fairly our results of operations, financial position and cash flows for the periods presented. The adjustments consist solely of normal recurring adjustments. The Interim Statements should be read in conjunction with the Consolidated Financial Statements and related Notes included in our 2016 consolidated financial statements. Interim results of operations are not necessarily indicative of results that may be expected for future interim periods or for the entire year ending December 31, 2017.
The Company evaluated and disclosed subsequent events through November 1, 2017, which represents the date as of which the financial statements were available to be issued.
Principles of Consolidation
The Interim Consolidated Financial Statements include the accounts of CURO and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of interim consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the periods reported. Some of the significant estimates that we have made in the accompanying Interim Consolidated Financial Statements include allowances for loan losses, certain assumptions related to goodwill and intangibles, accruals related to self-insurance, Credit Services Organization (CSO) guarantee liability and estimated tax liabilities. Actual results may differ from those estimates.
Nature of Operations
We are a growth-oriented, technology-enabled, highly-diversified consumer finance company serving a wide range of underbanked consumers in the United States, the United Kingdom and Canada.
Revenue Recognition
We offer a broad range of consumer finance products including Unsecured Installment Loans, Secured Installment Loans, Open-End Loans and Single-Pay Loans. Revenue in the consolidated statements of income
F-6
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
includes: interest income, finance charges, CSO fees, late fees and non-sufficient funds fees as permitted by applicable laws and pursuant to the agreement with the customer. Product offerings differ by jurisdiction and are governed by the laws in each separate jurisdiction. Installment Loans include Secured Installment Loans and Unsecured Installment Loans. These loans are fully amortizing, with a fixed payment amount, which includes principal and accrued interest, due each period during the term of the loan. The loan terms for Installment Loans can range up to 48 months depending on state or provincial regulations. We record revenue from Installment Loans on a simple-interest basis. Accrued interest and fees are included in gross loans receivable in the Interim Consolidated Balance Sheets. CSO fees are recognized ratably over the term of the loan.
Open-End Loans function much like a revolving line-of-credit, whereby the periodic payment is a set percentage of the customers outstanding loan balance, and there is no defined loan term. We record revenue from Open-End Loans on a simple interest basis. Accrued interest and fees are included in gross loans receivable in the Interim Consolidated Balance Sheets.
Single-Pay Loans are primarily unsecured, short-term, small denomination loans, with a very small portion being auto title loans, which allow a customer to obtain a loan using their car as collateral. Revenues from Single-Pay Loan products are recognized each period on a constant-yield basis ratably over the term of each loan. We defer recognition of the unearned fees we expect to collect based on the remaining term of the loan at the end of each reporting period.
Check cashing fees, money order fees and other fees from ancillary products and services are generally recognized at the point-of-sale when the transaction is completed. We also earn revenue from the sale of credit protection insurance in the Canadian market. Insurance revenues are recognized ratably over the term of the loan.
Current and Past-Due Loans Receivable
We classify our loans receivable as either current or past-due. Single-Pay and Open-End Loans are considered past-due when a customer misses a scheduled payment and charged-off to the allowance for loan losses. The charge-off of Unsecured Installment and Secured Installment Loans was impacted by a change in accounting estimate in the first quarter of 2017.
Effective January 1, 2017, we modified the timeframe in which Installment Loans are charged-off and made related refinements to our loss provisioning methodology. Prior to January 1, 2017, we deemed all loans uncollectible and charged-off when a customer missed a scheduled payment and the loan was considered past-due. Because of the Companys continuing shift from Single-Pay to Installment Loan products and our analysis of payment patterns on early-stage versus late-stage delinquencies, we have revised our estimates and now consider Installment Loans uncollectible when the loan has been past-due for 90 consecutive days. Consequently, past-due Installment Loans remain in loans receivable, with disclosure of past-due balances, for 90 days before being charged-off against the allowance for loan losses. We evaluate the adequacy of the allowance for loan losses compared to the related gross receivables balances that include accrued interest.
In the income statement, the provision for losses for Installment Loans is based on an assessment of the cumulative net losses inherent in the underlying loan portfolios, by vintage, and several other quantitative and qualitative factors. The resulting loss provision rate is applied to loan originations to determine the provision for losses. In addition to improving estimated collectability and loss recognition for Installment Loans, we also believe these refinements are better aligned with industry comparisons and practices.
The aforementioned change is treated as a change in accounting estimate. In accordance with Accounting Standards Codification 250 which addresses a change in accounting estimate, the change is being applied
F-7
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
prospectively and is effective January 1, 2017. As a result, some credit quality metrics in 2017 may not be comparable to historical periods. Throughout the remainder of this report, the change in estimate is referred to as Q1 Loss Recognition Change.
Installment Loans generally are considered past-due when a customer misses a scheduled payment. Loans zero to 90 days past-due are disclosed and included in gross loans receivable. The Company accrues interest on past-due loans until charged off. The amount of the resulting charge-off includes unpaid principal, accrued interest and any uncollected fees, if applicable. Consequently, net loss rates that include accrued interest will be higher than under the methodology applied prior to January 1, 2017.
The result of this change in estimate resulted in an approximately $56.0 million of Installment Loans at September 30, 2017 that remained on our balance sheet that were between 1 and 90 days delinquent, as compared to none in the prior year period. Additionally, the installment allowance for loan losses as of September 30, 2017 of $71.3 million includes an estimated allowance of $36.4 million for the Installment Loans between 1 and 90 days delinquent, as compared to none in the prior year period.
For Single-Pay and Open-End Loans, past-due loans are charged-off upon payment default and do not return to current for any subsequent payment activity. For Installment Loans, customers with payment delinquency of 90 consecutive days are charged off. Charged-off loans are never returned to current or performing and all subsequent activity is accounted for within recoveries in the Allowance for loan losses. If a past-due Installment Loan customer makes payments sufficient to bring the account current for principal plus all accrued interest or fees pursuant to the original terms of the loan contract before becoming 90 consecutive days past due, the underlying loan balance returns to classification as current. Modifications to the original term of the loan agreement would not result in a loan returning to current classification and only loan customers that are current are eligible for refinancing.
Depending upon underlying state or provincial regulations, a borrower may be eligible for more than one outstanding loan.
Allowance for Loan Losses
The allowance for loan losses is primarily based on back-testing of subsequent collections history by product and cumulative aggregate net losses by product and by vintage. We do not specifically reserve for any individual loan but rather segregate loans into separate pools based upon loan portfolios containing similar risk characteristics. Additional quantitative factors, such as current default trends, past-due account roll rates and changes to underwriting and portfolio mix are also considered in evaluating the adequacy of the allowance and current provision rates. Qualitative factors such as the impact of new loan products, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions impact managements judgment on the overall adequacy of the allowance for loan losses.
In addition to the effect on Unsecured and Secured Installment provision rates and loan balances, the Q1 Loss Recognition Change affected comparability of activity in the related allowance for loan losses. Specifically, no Unsecured or Secured Installment Loans were charged-off to the allowance for loan losses in the first quarter of 2017 because charge-off effectively occurs on day 91 under the revised methodology and no affected loans originated during the first quarter reached day 91 until April 2017. Actual charge-offs and recoveries on defaulted/charged-off loans from the first quarter of 2017 affected the allowance for loan losses in prospective periods. But, as discussed previously, the related net losses were recognized in the Interim Consolidated Statement of Income during the three and nine months ended September 30, 2017 by applying expected net loss provision rates to the related loan originations.
F-8
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
Credit Services Organization
Through our CSO programs, we act as a credit services organization/credit access business on behalf of customers in accordance with applicable state laws. We currently offer loans through CSO programs in stores and online in the state of Texas and online in the state of Ohio. In Texas we offer Unsecured Installment Loans and Secured Installment Loans with a maximum term of 180 days. In Ohio we offer an Unsecured Installment Loan product with a maximum term of 18 months. As a CSO we earn revenue by charging the customer a fee (the CSO fee) for arranging an unrelated third-party to make a loan to that customer. When a customer executes an agreement with us under our CSO programs, we agree, for a CSO fee payable to us by the customer, to provide certain services to the customer, one of which is to guarantee the customers obligation to repay the loan the customer receives from the third-party lender. CSO fees are calculated based on the amount of the customers loan. For CSO loans, each lender is responsible for providing the criteria by which the customers application is underwritten and, if approved, determining the amount of the customer loan. We in turn are responsible for assessing whether or not we will guarantee the loan. This guarantee represents an obligation to purchase specific loans if they go into default.
As of September 30, 2017, the maximum amount payable under all such guarantees was $59.1 million, compared to $59.6 million at December 31, 2016. Should we be required to pay any portion of the total amount of the loans we have guaranteed, we will attempt to recover the amount we pay from the customers. We hold no collateral in respect of the guarantees.
These guarantees are performance guarantees as defined in ASC Topic 460. Performance guarantees are initially accounted for pursuant to ASC Topic 460 and recognized at fair value, and subsequently pursuant to ASC Topic 450 as contingent liabilities when we incur losses as the guarantor. The initial measurement of the guarantee liability is recorded at fair value and reported in the Credit services organization guarantee liability line in our Consolidated Balance Sheets. The initial fair value of the guarantee is the price we would pay to a third party market participant to assume the guarantee liability. There is no active market for transferring the guarantee liability. Accordingly, we determine the initial fair value of the guarantee by estimating the expected losses on the guaranteed loans. The expected losses on the guaranteed loans are estimated by assessing the nature of the loan products, the credit worthiness of the borrowers in the customer base, our historical loan default history for similar loans, industry loan default history, and historical collection rates on similar products, current default trends, past-due account roll rates, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. We review the factors that support estimates of expected losses and the guarantee liability monthly. In addition, because the majority of the underlying loan customers make bi-weekly payments, loan-pool payment performance is evaluated more frequently than monthly.
Our guarantee liability was $16.9 million and $17.1 million at September 30, 2017 and December 31, 2016, respectively. This liability represents the unamortized portion of the guarantee obligation required to be recognized at inception of the performance guarantee in accordance with ASC Topic 460 and a contingent liability for those performance guarantees where it is probable that we will be required to purchase the guaranteed loan from the lender in accordance with ASC Topic 450.
CSO fees are calculated based on the amount of the customers loan. We comply with the applicable jurisdictions Credit Services Organization Act or a similar statute. These laws generally define the services that we can provide to consumers and require us to provide a contract to the customer outlining our services and the cost of those services to the customer. For services we provide under our CSO programs, we receive payments from customers on their scheduled loan repayment due dates. The CSO fee is earned ratably over the term of the loan as the customers make payments. If a loan is paid off early, no additional CSO fees are due or collected. The
F-9
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
maximum CSO loan term is 180 days and 18 months in Texas and Ohio, respectively. During the year ended December 31, 2016 and the nine months ended September 30, 2017, approximately 53.2% and 52.9%, respectively, of Unsecured Installment Loans, and 62.5% and 52.7%, respectively, of Secured Installment Loans originated under CSO programs were paid off prior to the original maturity date.
Since CSO loans are made by a third party lender, we do not include them in our Consolidated Balance Sheets as loans receivable. CSO fees receivable are included in Prepaid expense and other in our Consolidated Balance Sheets. We receive payments from customers for these fees on their scheduled loan repayment due dates.
The impact of the Q1 Loss Recognition Change to the third-party loans we guarantee and the related CSO guarantee liability was approximately $11.1 million of Installment Loans guaranteed by the company at September 30, 2017 between 1 and 90 days delinquent, as compared to none in the prior year period. Additionally, the installment CSO guarantee liability as of September 30, 2017 of $16.9 million includes an estimated liability of $7.8 million for the Installment Loans guaranteed by the company between 1 and 90 days delinquent, as compared to none in the prior year period.
Recently Adopted Accounting Pronouncements
In September 2017, the FASB issued ASU 2017-13, Revenue Recognition (Topic 605), Revenue from Contracts with Customers (Topic 606), Leases (Topic 840), and Leases (Topic 842): Amendments to SEC Paragraphs Pursuant to the Staff Announcement at the July 20, 2017 EITF Meeting and Rescission of Prior SEC Staff Announcements and Observer Comments (ASU 2017-13. This ASU amends the early adoption date option for public business entities related to the adoption of ASU No. 2014-09 and ASU No. 2016-02. ASU 2017-13 will be effective for us beginning January 1, 2019. We are currently evaluating the impact this ASU will have on our Consolidated Financial Statements.
In October 2016, the FASB issued Accounting Standards Update ( ASU) 2016-17, Consolidation (Topic 810): Interests Held Through Related Parties that are Under Common Control (ASU 2016-17). The amendments affect the evaluation of whether to consolidate a Variable Interest Entity (VIE) in certain situations involving entities under common control. Specifically, the amendments change the evaluation of whether an entity is the primary beneficiary of a VIE for an entity that is a single decision maker of a variable interest by changing how an entity treats indirect interests in the VIE held through related parties that are under common control with the reporting entity. The guidance in ASU 2016-17 must be applied retrospectively to all relevant periods. ASU 2016-17 was effective for us beginning January 1, 2017. The adoption of this ASU did not have a material effect on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The amendments in ASU 2016-09 simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 was effective for us beginning January 1, 2017. The adoption of this ASU did not have a material effect on our Consolidated Financial Statements.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16), which requires an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined and eliminates the requirement to retrospectively account for those adjustments. The new standard became effective for us on January 1, 2017. The adoption of this ASU did not have a material effect on our Consolidated Financial Statements.
F-10
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial StatementsGoing Concern (Subtopic 205-40) (ASU 2014-15), which provides new guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements and is intended to enhance the timeliness, clarity and consistency of disclosure concerning such uncertainties. The new guidance requires management to perform assessments, on an interim and annual basis, of an entitys ability to continue as a going concern within one year of the date of issuance of the entitys interim or annual financial statements, as applicable. In addition, entities must provide certain disclosures if there is substantial doubt about the entitys ability to continue as a going concern. The guidance is effective for periods ending after December 15, 2016, and interim periods thereafter, with early adoption permitted. The adoption of ASU 2014-15 did not have a material effect on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In May 2017, the FASB issued ASU 2017-09, CompensationStock Compensation (Topic 718): Scope of Modification Accounting (ASU 2017-09). Under modification accounting, all entities are required to re-value its equity awards each time there is a modification to the terms of the awards. The provisions in ASU 2017-09 provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to account for the effects of a modification unless certain conditions are met. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for (1) public business entities for reporting periods for which financial statements have not yet been issued and (2) all other entities for reporting periods for which financial statements have not yet been made available for issuance. We are currently assessing the impact the adoption of ASU 2017-09 will have on our consolidated financial statements and footnote disclosures.
In January 2017, the FASB issued ASU 2017-04, IntangiblesGoodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). The amendments in ASU 2017-04 simplified the goodwill impairment test by eliminating Step 2 of the test which requires an entity to compute the implied fair value of goodwill. Instead, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value, and is limited to the amount of total goodwill allocated to that reporting unit. Under this ASU, an entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The provisions of ASU 2017-04 are effective for an entitys annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2020. We are currently assessing the impact the adoption of ASU 2017-04 will have on our consolidated financial statements and footnote disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of a Business (ASU 2017-01). The amendments in ASU 2017-01 narrow the definition of a business and provide a framework that gives an entity a basis for making reasonable judgments about whether a transaction involves an asset or a business and provide a screen to determine when a set (an integrated set of assets and activities) is not a business. The screen requires a determination that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the amendments in this Update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. ASU 2017-01 will be effective for us beginning January 1, 2019, and interim periods within annual periods beginning after January 1, 2020. Early adoption is permitted. We are currently assessing the impact the adoption of ASU 2017-01 will have on our consolidated financial statements and footnote disclosures.
F-11
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (ASU 2016-15). The amendments in ASU 2016-15 provide guidance on eight specific cash flow issues, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, distributions received from equity method investees and beneficial interests in securitization transactions. ASU 2016-15 will be effective for us beginning January 1, 2019. Early adoption is permitted, including adoption in an interim period. We are assessing the potential impact this ASU will have on our statement of cash flows.
In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13 will be effective for us beginning January 1, 2021. We are currently evaluating the impact this ASU will have on our Consolidated Financial Statements.
In February 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessees obligation to make lease payment arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessees right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged and lessees will no longer be provided with a source of off-balance sheet financing. This ASU is effective for us beginning on January 1, 2020. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are currently evaluating the impact this ASU will have on our Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial InstrumentsOverall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01) which requires (i) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, (ii) public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and (iii) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). This amendment eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. This amendment is effective for us beginning on January 1, 2019. We are currently evaluating the impact this ASU will have on our Consolidated Financial Statements.
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17). This amendment eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The new standard became effective for us on January 1, 2018. We do not expect that the adoption of this amendment will have a material impact on our Consolidated Financial Statements.
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) (ASU 2015-14), which deferred the effect date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), to annual reporting periods beginning after December 15, 2018 for entities other
F-12
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
than public business entities, certain not-for-profit entities, and certain employee benefit plans. In May 2014, the FASB issued ASU 2014-09 which amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. The guidance is effective for us beginning January 1, 2019. We have not yet determined the potential effects on the Consolidated Financial Statements, if any.
NOTE 2PREPAID EXPENSES AND OTHER
Prepaid expenses and other assets were are follows:
(in thousands) |
September 30,
2017 |
December 31,
2016 |
||||||
Settlements and collateral due from third-party lenders |
$ | 16,097 | $ | 18,576 | ||||
Fees receivable for third-party loans |
12,786 | 9,181 | ||||||
Prepaid expenses |
5,630 | 5,892 | ||||||
Other assets |
5,832 | 5,599 | ||||||
|
|
|
|
|||||
Total |
$ | 40,345 | $ | 39,248 | ||||
|
|
|
|
NOTE 3PROPERTY AND EQUIPMENT
The classification of property and equipment is as follows:
(in thousands) |
September 30,
2017 |
December 31,
2016 |
||||||
Leasehold improvements |
$ | 122,447 | $ | 122,419 | ||||
Furniture, fixtures and equipment |
38,802 | 35,060 | ||||||
|
|
|
|
|||||
Property and equipment, gross |
161,249 | 157,479 | ||||||
Accumulated depreciation |
(72,429 | ) | (61,583 | ) | ||||
|
|
|
|
|||||
Property and equipment, net |
$ | 88,820 | $ | 95,896 | ||||
|
|
|
|
Depreciation expense was $4.2 million and $3.4 million for the three months ended September 30, 2017 and September 30, 2016, respectively. Depreciation expense was $12.3 million and $11.5 million for the nine months ended September 30, 2017 and September 30, 2016, respectively.
NOTE 4GOODWILL AND INTANGIBLES
The change in the carrying amount of goodwill, by operating segment for the first nine months of 2017 was as follows:
(in thousands) |
U.S. | U.K. | Canada | Total | ||||||||||||
Balance as of December 31, 2016 |
$ | 91,131 | $ | 21,882 | $ | 28,541 | $ | 141,554 | ||||||||
Foreign currency translation |
| 1,890 | 2,233 | 4,123 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance as of September 30, 2017 |
$ | 91,131 | $ | 23,772 | $ | 30,774 | $ | 145,677 | ||||||||
|
|
|
|
|
|
|
|
F-13
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
Identifiable intangible assets consisted of the following:
September 30, 2017 | December 31, 2016 | |||||||||||||||
(in thousands) |
Gross
Carrying Amount |
Accumulated
Amortization |
Gross
Carrying Amount |
Accumulated
Amortization |
||||||||||||
Trade name |
$ | 27,035 | $ | (18 | ) | $ | 25,046 | $ | (12 | ) | ||||||
Customer relationships |
27,840 | (25,875 | ) | 26,411 | (23,603 | ) | ||||||||||
Computer software |
18,663 | (14,622 | ) | 16,429 | (13,370 | ) | ||||||||||
Provincial licenses |
401 | (401 | ) | 372 | (372 | ) | ||||||||||
Franchise agreements |
321 | (321 | ) | 298 | (298 | ) | ||||||||||
Positive leasehold interest |
16 | (17 | ) | 15 | (15 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance, end of year |
$ | 74,276 | $ | (41,254 | ) | $ | 68,571 | $ | (37,670 | ) | ||||||
|
|
|
|
|
|
|
|
Our identifiable intangible assets are amortized using the straight-line method over the estimated remaining useful lives, except for the Wage Day and Cash Money trade name intangible assets, which were determined to have indefinite lives and are not amortized. The estimated useful lives for our other intangible assets range from 1 to 8 years. Aggregate amortization expense related to identifiable intangible assets was $0.6 million and $0.5 million for the three months ended September 30, 2017 and 2016, respectively. Aggregate amortization expense related to identifiable intangible assets was $1.8 million and $2.7 million for the nine months ended September 30, 2017 and 2016, respectively.
The following table outlines the estimated future amortization expense related to intangible assets held at September 30, 2017:
(in thousands) |
Year Ending
December 31, |
|||
2017 (excluding 1st nine months of 2017) |
$ | 620 | ||
2018 |
2,517 | |||
2019 |
1,771 | |||
2020 |
434 | |||
2021 |
109 |
NOTE 5VARIABLE INTEREST ENTITIES
In 2016, we closed a facility whereby certain loan receivables were sold to wholly owned, bankruptcy-remote special purpose subsidiaries (VIEs) and additional debt was incurred through the ABL Facility and the Non-Recourse U.S. SPV Facility (See Note 11 Long-Term Debt for further discussion) that was collaterized by these underlying loan receivables.
We have evaluated the VIEs for consolidation and we determined that we are the primary beneficiary of the VIEs and are required to consolidate them. The assets and liabilities related to the VIEs are included in our consolidated financial statements and are accounted for as secured borrowings. We parenthetically disclose on our consolidated balance sheets the VIEs assets that can only be used to settle the VIEs obligations and the VIEs liabilities if the VIEs creditors have no recourse against our general credit.
F-14
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
The carrying amounts of consolidated VIEs assets and liabilities associated with our special purpose subsidiaries were as follows:
(in thousands) |
September 30,
2017 |
December 31,
2016 |
||||||
Assets |
||||||||
Restricted Cash |
$ | 6,258 | $ | 2,770 | ||||
Loans receivable less allowance for loan losses |
155,083 | 108,065 | ||||||
|
|
|
|
|||||
Total Assets |
$ | 161,341 | $ | 110,835 | ||||
|
|
|
|
|||||
Liabilities |
||||||||
Accounts payable and accrued liabilities |
$ | 16 | $ | | ||||
Accrued interest |
1,113 | 775 | ||||||
Long-term debt |
112,135 | 63,054 | ||||||
|
|
|
|
|||||
Total Liabilities |
$ | 113,264 | $ | 63,829 | ||||
|
|
|
|
NOTE 6RESTRICTED CASH
At September 30, 2017 and December 31, 2016 we had $21.8 million and $23.8 million, respectively, on deposit in collateral accounts with financial institutions and third-party lenders. At September 30, 2017, approximately $5.2 million and $16.6 million were included as a component of Restricted cash and Prepaid expenses and other, respectively, in our Interim Consolidated Balance Sheets. At December 31, 2016, approximately $5.1 million and $18.7 million were included as a component of Restricted cash and Prepaid expenses and other, respectively, in our Consolidated Balance Sheets.
As a result of the loan facilities that commenced in December 2016 and disclosed in Note 5Variable Interest Entities, $6.3 million and $2.8 million were included as Restricted cash of consolidated VIE in our Consolidated Balance Sheets at September 30, 2017 and December 31, 2016, respectively.
NOTE 7LOANS RECEIVABLE AND REVENUE
Unsecured and Secured Installment revenue includes interest income and non-sufficient-funds or returned-items fees on late or defaulted payments on past-due loans (to which we refer collectively in this report as late fees). Late fees comprise less than one-half of one percent of Installment revenues.
Open-End revenues include interest income on outstanding revolving balances and other usage or maintenance fees as permitted by underlying statutes.
Single-Pay revenues represent deferred presentment or other fees as defined by the underlying state, provincial or national regulations.
F-15
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
The following table summarizes revenue by product for the periods indicated:
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
(in thousands) |
2017 | 2016 | 2017 | 2016 | ||||||||||||
Unsecured Installment |
$ | 128,785 | $ | 85,377 | $ | 343,365 | $ | 236,399 | ||||||||
Secured Installment |
26,407 | 19,920 | 73,249 | 60,346 | ||||||||||||
Open-End |
18,630 | 16,652 | 52,342 | 49,865 | ||||||||||||
Single-Pay |
70,895 | 82,020 | 197,926 | 235,643 | ||||||||||||
Ancillary |
10,402 | 8,955 | 29,761 | 27,439 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total revenue |
$ | 255,119 | $ | 212,924 | $ | 696,643 | $ | 609,692 | ||||||||
|
|
|
|
|
|
|
|
Loans receivable consisted of the following:
September 30, 2017 | ||||||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Total | |||||||||||||||
Current loans receivable |
$ | 94,476 | $ | 140,478 | $ | 70,323 | $ | 32,133 | $ | 337,410 | ||||||||||
Delinquent loans receivable |
| 41,353 | 14,660 | | 56,013 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans receivable |
94,476 | 181,831 | 84,983 | 32,133 | 393,423 | |||||||||||||||
Less: allowance for losses |
(5,342 | ) | (46,938 | ) | (14,111 | ) | (4,880 | ) | (71,271 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans receivable, net |
$ | 89,134 | $ | 134,893 | $ | 70,872 | $ | 27,253 | $ | 322,152 | ||||||||||
|
|
|
|
|
|
|
|
|
|
The following table summarizes delinquent loans receivable by product for the periods indicated.
September 30, 2017 | ||||||||||||
(in thousands) |
Installment
Unsecured |
Installment
Secured |
Total | |||||||||
Delinquent loans receivable |
||||||||||||
0-30 days past due |
16,813 | 7,010 | 23,823 | |||||||||
31-60 days past due |
12,804 | 4,029 | 16,833 | |||||||||
61-90 days past due |
11,736 | 3,621 | 15,357 | |||||||||
|
|
|
|
|
|
|||||||
Total delinquent loans receivable |
$ | 41,353 | $ | 14,660 | $ | 56,013 | ||||||
|
|
|
|
|
|
December 31, 2016 | ||||||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Total | |||||||||||||||
Current loans receivable |
$ | 90,487 | $ | 102,090 | $ | 63,157 | $ | 30,462 | $ | 286,196 | ||||||||||
Delinquent loans receivable |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total consumer loans receivable |
90,487 | 102,090 | 63,157 | 30,462 | 286,196 | |||||||||||||||
Less: allowance for losses |
(5,501 | ) | (17,775 | ) | (10,737 | ) | (5,179 | ) | (39,192 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Consumer loans receivable, net |
$ | 84,986 | $ | 84,315 | $ | 52,420 | $ | 25,283 | $ | 247,004 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Prior to January 1, 2017, we deemed all loans uncollectible and charged-off when a customer missed a scheduled payment and the loan was considered past-due. See Note 1 for a discussion of the Q1 Loss Recognition Change. This change in estimate resulted in approximately $56.0 million of Installment Loans at September 30, 2017 that remained on our balance sheet that were between 1 and 90 days delinquent, as compared
F-16
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
to none in the prior year period. Additionally, the installment allowance for loan losses as of September 30, 2017 of $71.3 million includes an estimated allowance of $36.4 million for the Installment Loans between 1 and 90 days delinquent, as compared to none in the prior year period. Using current Unsecured and Secured loss provision rates as a percentage of gross combined loans receivable, this change added approximately $4.8 million to the provision for losses.
Loans guaranteed by us under our CSO programs:
September 30, 2017 | ||||||||||||
(in thousands) |
Installment
Unsecured |
Installment
Secured |
Total | |||||||||
Current loans receivable guaranteed by the Company |
$ | 56,976 | $ | 3,142 | $ | 60,118 | ||||||
Delinquent loans receivable guaranteed by the Company |
10,462 | 605 | 11,067 | |||||||||
|
|
|
|
|
|
|||||||
Total loans receivable guaranteed by the Company |
67,438 | 3,747 | 71,185 | |||||||||
Less: CSO guarantee liability |
(16,056 | ) | (834 | ) | (16,890 | ) | ||||||
|
|
|
|
|
|
|||||||
Loans receivable guaranteed by the Company, net |
$ | 51,382 | $ | 2,913 | $ | 54,295 | ||||||
|
|
|
|
|
|
The following table summarizes delinquent loans receivable by product that are guaranteed by us under our CSO programs for the periods indicated.
September 30, 2017 | ||||||||||||
(in thousands) |
Installment
Unsecured |
Installment
Secured |
Total | |||||||||
Delinquent loans receivable |
||||||||||||
0-30 days past due |
8,921 | 525 | 9,446 | |||||||||
31-60 days past due |
1,157 | 59 | 1,216 | |||||||||
61-90 days past due |
384 | 21 | 405 | |||||||||
|
|
|
|
|
|
|||||||
Total delinquent loans receivable |
$ | 10,462 | $ | 605 | $ | 11,067 | ||||||
|
|
|
|
|
|
December 31, 2016 | ||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Total | ||||||||||||
Current loans receivable guaranteed by the Company |
$ | 1,092 | $ | 62,360 | $ | 4,581 | $ | 68,033 | ||||||||
Delinquent loans receivable guaranteed by the Company |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Total loans receivable guaranteed by the Company |
1,092 | 62,360 | 4,581 | 68,033 | ||||||||||||
Less: CSO guarantee liability |
(274 | ) | (15,630 | ) | (1,148 | ) | (17,052 | ) | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Loans receivable guaranteed by the Company, net |
$ | 818 | $ | 46,730 | $ | 3,433 | $ | 50,981 | ||||||||
|
|
|
|
|
|
|
|
F-17
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
Summary of the activity in the allowance for loan losses during the three months ended September 30, 2017:
Three Months Ended September 30, 2017 | ||||||||||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Other | Total | ||||||||||||||||||
Balance, beginning of period |
$ | 5,313 | $ | 41,406 | $ | 19,196 | $ | 4,523 | $ | | $ | 70,438 | ||||||||||||
Charge-offs |
(51,707 | ) | (27,027 | ) | (10,985 | ) | (10,437 | ) | (1,479 | ) | (101,635 | ) | ||||||||||||
Recoveries |
31,194 | 3,169 | 1,911 | 4,446 | 921 | 41,641 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(20,513 | ) | (23,858 | ) | (9,074 | ) | (5,991 | ) | (558 | ) | (59,994 | ) | ||||||||||||
Provision for losses |
20,630 | 29,079 | 3,989 | 6,348 | 558 | 60,604 | ||||||||||||||||||
Effect of foreign currency translation |
(88 | ) | 311 | | | | 223 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, end of period |
$ | 5,342 | $ | 46,938 | $ | 14,111 | $ | 4,880 | $ | | $ | 71,271 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance for loan losses as a percentage of gross loan receivables |
5.7 | % | 25.8 | % | 16.6 | % | 15.2 | % | N/A | 18.1 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Summary of activity in the CSO guarantee liability during the three months ended September 30, 2017:
Three Months Ended September 30, 2017 | ||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Total | ||||||||||||
Balance, beginning of period |
$ | | $ | 14,748 | $ | 834 | $ | 15,582 | ||||||||
Charge-offs |
(235 | ) | (41,230 | ) | (3,381 | ) | (44,846 | ) | ||||||||
Recoveries |
233 | 6,326 | 858 | 7,417 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net charge-offs |
(2 | ) | (34,904 | ) | (2,523 | ) | (37,429 | ) | ||||||||
Provision for losses |
2 | 36,212 | 2,523 | 38,737 | ||||||||||||
Effect of foreign currency translation |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance, end of period |
$ | | $ | 16,056 | $ | 834 | $ | 16,890 | ||||||||
|
|
|
|
|
|
|
|
Summary of activity in the allowance for loan losses and the CSO guarantee liability, in total, during the three months ended September 30, 2017:
Three Months Ended September 30, 2017 | ||||||||||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Other | Total | ||||||||||||||||||
Balance, beginning of period |
$ | 5,313 | $ | 56,154 | $ | 20,030 | $ | 4,523 | $ | | $ | 86,020 | ||||||||||||
Charge-offs |
(51,942 | ) | (68,257 | ) | (14,366 | ) | (10,437 | ) | (1,479 | ) | (146,481 | ) | ||||||||||||
Recoveries |
31,427 | 9,495 | 2,769 | 4,446 | 921 | 49,058 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(20,515 | ) | (58,762 | ) | (11,597 | ) | (5,991 | ) | (558 | ) | (97,423 | ) | ||||||||||||
Provision for losses |
20,632 | 65,291 | 6,512 | 6,348 | 558 | 99,341 | ||||||||||||||||||
Effect of foreign currency translation |
(88 | ) | 311 | | | | 223 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, end of period |
$ | 5,342 | $ | 62,994 | $ | 14,945 | $ | 4,880 | $ | | $ | 88,161 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
F-18
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
Summary of the activity in the allowance for loan losses during the three months ended September 30, 2016:
Three Months Ended September 30, 2016 | ||||||||||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Other | Total | ||||||||||||||||||
Balance, beginning of period |
$ | 6,629 | $ | 10,294 | $ | 8,817 | $ | 4,819 | $ | | $ | 30,559 | ||||||||||||
Charge-offs |
(61,528 | ) | (40,622 | ) | (37,236 | ) | (22,710 | ) | (1,522 | ) | (163,618 | ) | ||||||||||||
Recoveries |
41,102 | 29,881 | 32,429 | 15,577 | 952 | 119,941 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(20,426 | ) | (10,741 | ) | (4,807 | ) | (7,133 | ) | (570 | ) | (43,677 | ) | ||||||||||||
Provision for losses |
20,542 | 12,523 | 6,125 | 7,295 | 570 | 47,055 | ||||||||||||||||||
Effect of foreign currency translation |
(681 | ) | 46 | | | | (635 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, end of period |
$ | 6,064 | $ | 12,122 | $ | 10,135 | $ | 4,981 | $ | | $ | 33,302 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance for loan losses as a percentage of gross loan receivables |
6.4 | % | 18.4 | % | 18.0 | % | 18.0 | % | N/A | 13.6 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Summary of activity in the CSO guarantee liability during the three months ended September 30, 2016:
Three Months Ended September 30, 2016 | ||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Total | ||||||||||||
Balance, beginning of period |
$ | 561 | $ | 12,887 | $ | 1,103 | $ | 14,551 | ||||||||
Charge-offs |
(3,462 | ) | (45,555 | ) | (3,870 | ) | (52,887 | ) | ||||||||
Recoveries |
974 | 20,452 | 3,174 | 24,600 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net charge-offs |
(2,488 | ) | (25,103 | ) | (696 | ) | (28,287 | ) | ||||||||
Provision for losses |
2,571 | 26,626 | 772 | 29,969 | ||||||||||||
Effect of foreign currency translation |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance, end of period |
$ | 644 | $ | 14,410 | $ | 1,179 | $ | 16,233 | ||||||||
|
|
|
|
|
|
|
|
Summary of activity in the allowance for loan losses and the CSO guarantee liability, in total, during the three months ended September 30, 2016:
Three Months Ended September 30, 2016 | ||||||||||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Other | Total | ||||||||||||||||||
Balance, beginning of period |
$ | 7,190 | $ | 23,181 | $ | 9,920 | $ | 4,819 | $ | | $ | 45,110 | ||||||||||||
Charge-offs |
(64,990 | ) | (86,177 | ) | (41,106 | ) | (22,710 | ) | (1,522 | ) | (216,505 | ) | ||||||||||||
Recoveries |
42,076 | 50,333 | 35,603 | 15,577 | 952 | 144,541 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(22,914 | ) | (35,844 | ) | (5,503 | ) | (7,133 | ) | (570 | ) | (71,964 | ) | ||||||||||||
Provision for losses |
23,113 | 39,149 | 6,897 | 7,295 | 570 | 77,024 | ||||||||||||||||||
Effect of foreign currency translation |
(681 | ) | 46 | | | | (635 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, end of period |
$ | 6,708 | $ | 26,532 | $ | 11,314 | $ | 4,981 | $ | | $ | 49,535 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
F-19
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
Summary of the activity in the allowance for loan losses during the nine months ended September 30, 2017:
Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Other | Total | ||||||||||||||||||
Balance, beginning of period |
$ | 5,501 | $ | 17,775 | $ | 10,737 | $ | 5,179 | $ | | $ | 39,192 | ||||||||||||
Charge-offs |
(140,612 | ) | (51,601 | ) | (17,926 | ) | (28,113 | ) | (3,879 | ) | (242,131 | ) | ||||||||||||
Recoveries |
94,535 | 13,803 | 6,726 | 13,903 | 2,450 | 131,417 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(46,077 | ) | (37,798 | ) | (11,200 | ) | (14,210 | ) | (1,429 | ) | (110,714 | ) | ||||||||||||
Provision for losses |
45,808 | 66,233 | 14,574 | 13,911 | 1,429 | 141,955 | ||||||||||||||||||
Effect of foreign currency translation |
110 | 728 | | | | 838 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, end of period |
$ | 5,342 | $ | 46,938 | $ | 14,111 | $ | 4,880 | $ | | $ | 71,271 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance for loan losses as a percentage of gross loan receivables |
5.7 | % | 25.8 | % | 16.6 | % | 15.2 | % | N/A | 18.1 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Summary of activity in the CSO guarantee liability during the nine months ended September 30, 2017:
Nine Months Ended September 30, 2017 | ||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Total | ||||||||||||
Balance, beginning of period |
$ | 274 | $ | 15,630 | $ | 1,148 | $ | 17,052 | ||||||||
Charge-offs |
(2,121 | ) | (102,352 | ) | (8,684 | ) | (113,157 | ) | ||||||||
Recoveries |
1,335 | 23,051 | 4,041 | 28,427 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net charge-offs |
(786 | ) | (79,301 | ) | (4,643 | ) | (84,730 | ) | ||||||||
Provision for losses |
512 | 79,727 | 4,329 | 84,568 | ||||||||||||
Effect of foreign currency translation |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance, end of period |
$ | | $ | 16,056 | $ | 834 | $ | 16,890 | ||||||||
|
|
|
|
|
|
|
|
Summary of activity in the allowance for loan losses and the CSO guarantee liability, in total, during the nine months ended September 30, 2017:
Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Other | Total | ||||||||||||||||||
Balance, beginning of period |
$ | 5,775 | $ | 33,405 | $ | 11,885 | $ | 5,179 | $ | | $ | 56,244 | ||||||||||||
Charge-offs |
(142,733 | ) | (153,953 | ) | (26,610 | ) | (28,113 | ) | (3,879 | ) | (355,288 | ) | ||||||||||||
Recoveries |
95,870 | 36,854 | 10,767 | 13,903 | 2,450 | 159,844 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(46,863 | ) | (117,099 | ) | (15,843 | ) | (14,210 | ) | (1,429 | ) | (195,444 | ) | ||||||||||||
Provision for losses |
46,320 | 145,960 | 18,903 | 13,911 | 1,429 | 226,523 | ||||||||||||||||||
Effect of foreign currency translation |
110 | 728 | | | | 838 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, end of period |
$ | 5,342 | $ | 62,994 | $ | 14,945 | $ | 4,880 | $ | | $ | 88,161 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
F-20
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
Summary of the activity in the allowance for loan losses during the nine months ended September 30, 2016:
Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Other | Total | ||||||||||||||||||
Balance, beginning of period |
$ | 8,313 | $ | 10,604 | $ | 9,209 | $ | 4,823 | $ | | $ | 32,949 | ||||||||||||
Charge-offs |
(171,797 | ) | (113,272 | ) | (103,818 | ) | (64,318 | ) | (4,310 | ) | (457,515 | ) | ||||||||||||
Recoveries |
117,471 | 86,711 | 93,098 | 46,676 | 2,710 | 346,666 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(54,326 | ) | (26,561 | ) | (10,720 | ) | (17,642 | ) | (1,600 | ) | (110,849 | ) | ||||||||||||
Provision for losses |
52,020 | 28,219 | 11,646 | 17,800 | 1,600 | 111,285 | ||||||||||||||||||
Effect of foreign currency translation |
57 | (140 | ) | | | | (83 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, end of period |
$ | 6,064 | $ | 12,122 | $ | 10,135 | $ | 4,981 | $ | | $ | 33,302 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance for loan losses as a percentage of gross loan receivables |
6.4 | % | 18.4 | % | 18.0 | % | 18.0 | % | N/A | 13.6 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Summary of activity in the CSO guarantee liability during the nine months ended September 30, 2016:
Nine Months Ended September 30, 2016 | ||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Total | ||||||||||||
Balance, beginning of period |
$ | 334 | $ | 15,910 | $ | 1,507 | $ | 17,751 | ||||||||
Charge-offs |
(7,398 | ) | (124,244 | ) | (11,869 | ) | (143,511 | ) | ||||||||
Recoveries |
1,952 | 63,647 | 9,923 | 75,522 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net charge-offs |
(5,446 | ) | (60,597 | ) | (1,946 | ) | (67,989 | ) | ||||||||
Provision for losses |
5,756 | 59,097 | 1,618 | 66,471 | ||||||||||||
Effect of foreign currency translation |
| | | | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance, end of period |
$ | 644 | $ | 14,410 | $ | 1,179 | $ | 16,233 | ||||||||
|
|
|
|
|
|
|
|
Summary of activity in the allowance for loan losses and the CSO guarantee liability, in total, during the nine months ended September 30, 2016:
Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Other | Total | ||||||||||||||||||
Balance, beginning of period |
$ | 8,647 | $ | 26,514 | $ | 10,716 | $ | 4,823 | $ | | $ | 50,700 | ||||||||||||
Charge-offs |
(179,195 | ) | (237,516 | ) | (115,687 | ) | (64,318 | ) | (4,310 | ) | (601,026 | ) | ||||||||||||
Recoveries |
119,423 | 150,358 | 103,021 | 46,676 | 2,710 | 422,188 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(59,772 | ) | (87,158 | ) | (12,666 | ) | (17,642 | ) | (1,600 | ) | (178,838 | ) | ||||||||||||
Provision for losses |
57,776 | 87,316 | 13,264 | 17,800 | 1,600 | 177,756 | ||||||||||||||||||
Effect of foreign currency translation |
57 | (140 | ) | | | | (83 | ) | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, end of period |
$ | 6,708 | $ | 26,532 | $ | 11,314 | $ | 4,981 | $ | | $ | 49,535 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 8CREDIT SERVICES ORGANIZATION
The CSO fee receivable amounts under our CSO programs were $12.8 million and $9.2 million at September 30, 2017 and December 31, 2016, respectively. As noted, we bear the risk of loss through our
F-21
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
guarantee to purchase any defaulted customer loans from the lenders. The terms of these loans range from six to eighteen months. This guarantee represents an obligation to purchase specific loans that go into default. (See Note 1 for a description of our accounting policies). As of September 30, 2017 and December 31, 2016, the maximum amount payable under all such guarantees was $59.1 million and $59.6 million, respectively. Should we be required to pay any portion of the total amount of the loans we have guaranteed, we will attempt to recover the amount we pay from the customers. We hold no collateral in respect of the guarantees. The initial measurement of this guarantee liability is recorded at fair value and reported in the Credit services organization guarantee liability line in our Consolidated Balance Sheets. The fair value of the guarantee is measured at origination when it is probably and estimable as to what likely collections are to be received over the expected life of the guarantee. The guarantee estimated by assessing the nature of the loan products, the credit worthiness of the borrowers in the customer base, the Companys historical loan default history for similar loans, industry loan default history, historical collection rates on similar products, current default trends, past-due account roll rates, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. Our guarantee liability was $16.9 million and $17.1 million at September 30, 2017 and December 31, 2016, respectively.
We have placed $16.6 million and $18.7 million in collateral accounts for the lenders at September 30, 2017 and December 31, 2016, respectively, which is reflected in Prepaid expenses and other in the Interim Consolidated Balance Sheets. The balances required to be maintained in these collateral accounts vary based upon lender, but are typically based on a percentage of the outstanding loan balances held by the lender. The percentage of outstanding loan balances required for collateral is defined within the terms agreed to between us and each such lender.
NOTE 9ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities were are follows:
(dollars in thousands) |
September 30, 2017 | December 31, 2016 | ||||||
Trade accounts payable |
$ | 21,680 | $ | 18,588 | ||||
Money orders payable |
8,182 | 7,356 | ||||||
Accrued taxes, other than income taxes |
407 | 447 | ||||||
Accrued payroll and fringe benefits |
19,694 | 14,621 | ||||||
Reserve for store closure costs |
5,096 | 1,258 | ||||||
Other accrued liabilities |
420 | 393 | ||||||
|
|
|
|
|||||
Total |
$ | 55,479 | $ | 42,663 | ||||
|
|
|
|
NOTE 10RESTRUCTURING COSTS
In the third quarter of 2017, the Boards of Directors of the Company and its U.K. subsidiaries approved a plan to close the remaining 13 Speedy Cash branch locations in the United Kingdom. The affected branches closed during the third quarter and our financial results include $7.4 million of related charges primarily for the remaining net cash obligations for store leases, employee redundancy and severance payments ($5.9 million) and the write-off of fixed assets and leasehold improvements ($1.5 million).
During the first quarter of 2016 we closed six stores in Texas. These stores were all underperforming stores that were acquired as part of the Money Box acquisition. Our results for the nine months ended September 30, 2016 include $1.1 million of charges related to these store closures primarily consisting of certain lease obligations and the write-down and loss on the disposal of fixed assets. We also determined that we were unable to reopen one store in Missouri that was damaged by a fire.
F-22
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
In December 2015, we closed ten branch locations in the United Kingdom as part of an overall plan to reduce operating losses in the wake of ongoing regulatory and market changes in the United Kingdom. We closed the remaining 13 branch locations during the third quarter of 2017. Our results for the nine months ended September 30, 2017 include $7.4 million of charges related to these store closures.
Impairments and store closure costs for the three and nine months ended September 30, 2017 were as follows:
(dollars in thousands) |
Nine Months Ended
September 30, 2017 |
|||
Lease obligations and related costs |
$ | 5,907 | ||
Write-down and loss on disposal of fixed assets |
1,519 | |||
|
|
|||
Total additions and adjustments |
$ | 7,426 | ||
|
|
Activity for the closed store reserve for the nine months ended September 30, 2017 was as follows:
(dollars in thousands) |
Nine Months Ended
September 30, 2017 |
|||
Beginning balanceJanuary 1, 2017 |
$ | 1,258 | ||
Additions and adjustments |
7,426 | |||
Payments and write-downs |
(3,588 | ) | ||
|
|
|||
Ending balanceSeptember 30, 2017 |
$ | 5,096 | ||
|
|
Closed store reserves of $5.1 million are included in the Accounts payable and accrued liabilities line item on the accompanying Interim Consolidated Balance Sheets at September 30, 2017.
NOTE 11LONG-TERM DEBT
Long-term debt consisted of the following:
(in thousands) |
September 30,
2017 |
December 31,
2016 |
||||||
February 2017 senior secured notes (due 2022) |
$ | 449,737 | $ | | ||||
May 2011 senior secured notes (due 2018) |
| 223,164 | ||||||
May 2012 senior secured notes (due 2018) |
| 89,734 | ||||||
February 2013 senior secured notes (due 2018) |
| 101,184 | ||||||
February 2013 cash pay notes (due 2017) |
| 124,365 | ||||||
Non-Recourse U.S. SPV Facility |
112,135 | 63,054 | ||||||
ABL Facility |
| 23,406 | ||||||
Senior Revolver |
| | ||||||
|
|
|
|
|||||
Total long-term debt, including current portion |
561,872 | 624,907 | ||||||
Less: current maturities of long-term debt |
| 147,771 | ||||||
|
|
|
|
|||||
Long-term debt |
$ | 561,872 | $ | 477,136 | ||||
|
|
|
|
Senior Secured Notes
On February 15, 2017 CURO Financial Technologies Corp. (CFTC), a subsidiary of CURO, issued $470.0 million 12.00% Senior Secured Notes due March 1, 2022. Interest on the notes is payable semiannually,
F-23
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
in arrears, on March 1 and September 1 of each year, beginning on September 1, 2017. The proceeds from the Notes were used, together with available cash, to (i) redeem the outstanding 10.75% Senior Secured Notes due 2018 of our wholly-owned subsidiary, CURO Intermediate, (ii) redeem the outstanding 12.00% Senior Cash Pay Notes due 2017, and (iii) pay fees, expenses, premiums and accrued interest in connection with the offering. Consequently, we received a $130.1 million dividend from CFTC in February 2017 to fund the redemption of the 12.00% Senior Cash Pay Notes. The extinguishment of the 10.75% Senior Secured Notes and the 12.00% Senior Cash Pay Notes resulted in a pretax loss of $12.5 million in the nine months ended September 30, 2017.
In connection with this debt issuance we capitalized financing costs of approximately $14.0 million, the balance of which are included in the Interim Consolidated Balance Sheets as a component of Long-term debt, and are being amortized over the term of the Senior Secured Notes and included as a component of interest expense.
Senior Revolver
On September 1, 2017, we entered into a $25.0 million Senior Secured Revolving Loan Facility with BayCoast Bank (the Senior Revolver). The terms of the Senior Revolver generally conform to the related provisions in the Indenture dated February 15, 2017 for our 12.00% Senior Secured Notes due 2022 and complements our other financing sources, while providing seasonal short-term liquidity. Under the Senior Revolver, there is $25.0 million maximum availability, including up to $5.0 million of standby letters of credit, for a one-year term, renewable for successive terms following annual review. The Senior Revolver accrues interest at the one-month LIBOR plus 5.00% (subject to a 5% overall rate minimum) and is repayable on demand. The terms of the Senior Revolver require that the outstanding balance be reduced to $0 for at least 30 consecutive days in each calendar year. The Senior Revolver is guaranteed by all subsidiaries of CURO that guarantee our 12% Senior Secured Notes due 2022 and is secured by a lien on substantially all assets of CURO and the guarantor subsidiaries that is senior to the lien securing our 12% Senior Secured Notes due 2022. The revolver was undrawn at September 30, 2017.
In connection with this facility we capitalized financing costs of approximately $0.1 million, the balance of which are included in the Interim Consolidated Balance Sheets as a component of Other Assets, and are being amortized over the term of the facility and included as a component of interest expense.
Non-Recourse U.S. SPV Facility
On November 17, 2016, CURO Receivables Finance I, LLC, a Delaware limited liability company (the SPV Borrower) and a wholly-owned subsidiary, entered into a five-year revolving credit facility with Victory Park Management, LLC and certain other lenders that provides for an $80.0 million term loan and $45.0 million of initial revolving borrowing capacity, with the ability to expand such revolving borrowing capacity over time and an automatic expansion to $70.0 million on the six month anniversary of the closing date, (our Non-Recourse U.S. SPV Facility). Our Non-Recourse U.S. SPV Facility is secured by a first lien against assets of the SPV Borrower, which is a special purpose vehicle holding certain receivables originated by the operating entities of Intermediate and CURO Receivables Holdings I, LLC, a Delaware limited liability company (Holdings) which is a holding company that owns the equity of the SPV Borrower. The lender advances to the SPV Borrower 80% of the principal balance of the eligible installment loans that we sell to the SPV Borrower, which serve as collateral for the lender. As customer loan payments come into the SPV Borrower, such payments are subjected to a conventional priority-of-payment waterfall provided the loan-to-value doesnt exceed 80%. The loans will bear interest at an annual rate of up to 12.0% plus the greater of (x) 1.0% per annum and (y) the three-month LIBOR. The SPV Borrower also pays a 0.50% per annum commitment fee on the unused portion of the commitments. Revolving commitment terminations and voluntary prepayments of term loans made prior to
F-24
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
the 30th month anniversary of the closing date are subject to a fee equal to 3.0% of the amount of revolving loans commitments terminated or term loans voluntarily prepaid. This facility matures in 2021.
ABL Facility
On November 17, 2016, CURO Intermediate entered into a six-month recourse credit facility with Victory Park Management, LLC and certain other lenders which provides for $25.0 million of borrowing capacity, (our ABL Facility). Our ABL Facility is secured by a first lien against our assets and the assets of CURO Intermediate and its domestic subsidiaries. The lender advances to CURO Intermediate 80% of the principal balance of the eligible installment loans held by CURO Intermediate and its guarantor subsidiaries. As customer loan payments come into CURO Intermediate and its guarantor subsidiaries, such payments are subjected to a conventional priority-of-payment waterfall provided the loan-to-value doesnt exceed 80%. The loans will bear interest at an annual rate of up to 8.0% plus the greater of (x) 1.0% per annum and (y) the three-month LIBOR. The ABL Facility provides that CURO Intermediate pays a 0.50% per annum commitment fee on the unused portion of the commitments and a 4.0% per annum monitoring fee on the loans outstanding. Commitment terminations and voluntary prepayments of loans made prior to the 30th month anniversary of the closing date of the Non-Recourse U.S. SPV Facility are subject to a fee equal to 3.0% of the amount of revolving loan commitments terminated or loans voluntarily prepaid. This facility matured in May 2017 and was fully converted to the Non-Recourse U.S. SPV Facility.
Cash Money Credit Facility
Cash Money entered into a C$7.5 million revolving credit facility (Cash Money Revolving Credit Facility) in November 2011 which is intended to afford us an additional element of liquidity to meet the short-term working capital needs of our Canadian operations. Aggregate draws on the Cash Money Revolving Credit Facility are limited to the lesser of: 1) the borrowing base, which is defined as a percentage of cash, deposits in transit and accounts receivable, and 2) C$7.5 million. Borrowings under the Cash Money Revolving Credit Facility bear interest (per annum) at Royal Bank of Canada Prime (RBC prime) plus 1.95%. In order to determine the amount available for borrowings under the Cash Money Revolving Credit Facility, the balance available is reduced by any amounts outstanding and C$0.3 million in outstanding letters of credit. There were no outstanding borrowings under this credit facility at September 30, 2017 and December 31, 2016.
Subordinated Shareholder Debt
As part of the acquisition of Cash Money in 2011, we issued an Escrow Note to the Seller which provided us indemnification for certain claims. This note bears interest at 10.0% per annum, and quarterly interest payments are due until the note matures in May 2019. The balance of this note at September 30, 2017 and December 31, 2016 was $2.4 million and $2.2 million, respectively.
Ranking and Guarantees
The 12.00% Senior Secured Notes due 2022 rank senior in right of payment to all of our and our guarantor entities existing and future subordinated indebtedness and equal in right of payment with all our and our guarantor entities existing and future senior indebtedness of the Company, including borrowings under our revolving credit facilities. Pursuant to our Intercreditor Agreement, the Notes and the guarantees will be effectively subordinated to our credit facilities and certain other indebtedness to the extent of the value of the assets securing such indebtedness and to liabilities of our subsidiaries that are not guarantors.
The Notes are secured by liens on substantially all of our and the guarantors assets, subject to certain exceptions. On or after March 1, 2019, we may redeem some or all of the Notes at a premium that will decrease
F-25
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
over time, plus accrued and unpaid interest, if any to the applicable date of redemption. Prior to March 1, 2019, we will be able to redeem up to 40% of the Notes at a redemption price of 112.000% of the principal amount of the Notes redeemed, plus accrued and unpaid interest to the redemption date with the net cash proceeds of certain equity offerings. Prior to March 1, 2019, subject to certain terms and conditions, we will also be able to redeem the Notes at a redemption price of 100% of the principal amount of the Notes redeemed, plus the applicable premium and any accrued and unpaid interest to the redemption date.
NOTE 12SHARE-BASED COMPENSATION
Share-based compensation expense for the three months ended September 30, 2017 and 2016 was $0.1 million and $0.3 million, respectively, and for the nine months ended September 30, 2017 and 2016 was $0.3 million and $0.8 million, respectively and is included in the Interim Consolidated Statements of Income as a component of Corporate and district expense.
The 2010 Equity Incentive Plan (the Plan) was originally approved by the Companys shareholders in November 2010, and amended in December 2013. The Plan provides for the issuance of up to 60,000 shares, subject to certain adjustment provisions described in the Plan. The Plan provides for the granting of stock options, restricted stock, and stock grants. Awards may be granted to employees, consultants and directors of the Company. The Plan provides that shares of Class B common stock subject to awards granted become available for issuance if such awards expire, terminate, are canceled for any reason, or are forfeited by the recipient. Pursuant to the formation of CURO, all of the rights and obligations under the stock option agreements were transferred from CFTC. Thus, the outstanding and unexercised options now represent an option to purchase the same number of shares of common stock of CURO at the same exercise price and on the same terms and conditions as provided in the original option agreement. No awards may be granted after November 30, 2020.
During the first quarter of 2017, we granted an incremental 1,511 stock options at an exercise price of $319.08 per share. The options vest ratably over a three year period and are subject to limitations on transferability. We also granted an incremental 1,250 stock options at an exercise price of $319.08 per share. The options vest ratably over a five year period and are subject to limitations on transferability. The fair value of the options granted was calculated at each grant date using a Black-Scholes option-pricing model which assumed the following weighted average assumptions: expected volatility of 45.3%, expected term of 6.1 years, risk-free interest rate of 2.2%, and expected dividend yield of 0%.
As of September 30, 2017, there was $0.9 million of unrecognized compensation cost, net of estimated forfeitures, related to share-based awards, which will be recognized over a weighted-average period of 3.2 years.
NOTE 13INCOME TAXES
Our effective tax rate was 50.4% and 39.0% for the three months ended September 30, 2017 and 2016, respectively. Our effective tax rate was 41.2% and 38.5% for the nine months ended September 30, 2017 and 2016, respectively. As of September 30, 2017, the Company had not provided U.S. tax on its cumulative undistributed foreign earnings of $137.2 million. The Company intends to reinvest its foreign earnings indefinitely in its non-U.S. operations. If the earnings were distributed to the United States, the Company would be subject to estimated U.S. taxes of approximately $61.7 million. In the event the earnings were distributed to the United States, the Company would adjust its income tax provision for the period and would determine the amount of credit for foreign tax credit that would be available to reduce the U.S. tax liability.
NOTE 14FINANCIAL INSTRUMENTS AND CONCENTRATIONS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We are required to use valuation techniques that are consistent
F-26
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
with the market approach, income approach, and/or cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability based on market data obtained from independent sources, or unobservable, meaning those that reflect our own estimate about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. Accounting standards establish a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs.
The three levels of inputs used to measure fair value are listed below.
Level 1Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have access to at the measurement date.
Level 2Inputs include quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3Unobservable inputs reflecting our own judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. We develop these inputs based on the best information available, including our own data.
Financial Assets and Liabilities Not Measured at Fair Value
The table below presents the assets and liabilities that were not measured at fair value at September 30, 2017.
Estimated Fair Value | ||||||||||||||||||||
(dollars in thousands) |
Carrying Value
September 30, 2017 |
Level 1 | Level 2 | Level 3 |
September 30,
2017 |
|||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash |
$ | 95,545 | $ | 95,545 | $ | | $ | | $ | 95,545 | ||||||||||
Restricted cash |
11,474 | 11,474 | | | 11,474 | |||||||||||||||
Loans receivable, net |
322,152 | | | 322,152 | 322,152 | |||||||||||||||
Investment |
4,975 | | | 4,975 | 4,975 | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Credit services organization guarantee liability |
$ | 16,890 | $ | | $ | | $ | 16,890 | $ | 16,890 | ||||||||||
February 2017 senior secured notes |
449,737 | | | 509,950 | 509,950 | |||||||||||||||
Non-Recourse U.S. SPV Facility |
112,135 | | | 116,590 | 116,590 |
F-27
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
The table below presents the assets and liabilities that were not measured at fair value at December 31, 2016.
Estimated Fair Value | ||||||||||||||||||||
(in thousands) |
Carrying Value
December 31, 2016 |
Carrying Value
Level 1 |
Carrying Value
Level 2 |
Carrying Value
Level 3 |
December 31,
2016 |
|||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash |
$ | 193,525 | $ | 193,525 | $ | | $ | | $ | 193,525 | ||||||||||
Restricted cash |
7,828 | 7,828 | | | 7,828 | |||||||||||||||
Loans receivable, net |
247,004 | | | 247,004 | 247,004 | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Credit services organization guarantee liability |
17,052 | 17,052 | 17,052 | |||||||||||||||||
May 2011 senior secured notes |
223,164 | 216,449 | | | 216,449 | |||||||||||||||
May 2012 senior secured notes |
89,734 | 86,625 | | | 86,625 | |||||||||||||||
February 2013 senior secured notes |
101,184 | 96,250 | | | 96,250 | |||||||||||||||
February 2013 cash pay notes |
124,365 | 118,301 | | | 118,301 | |||||||||||||||
Non-Recourse U.S. SPV Facility |
63,054 | | | 68,311 | 68,311 | |||||||||||||||
ABL Facility |
23,406 | | | 23,406 | 23,406 |
Loans receivable are carried on the Interim Consolidated Balance Sheets net of the allowance for estimated loan losses, which is calculated primarily based upon models that backtest subsequent collections history for each type of loan product. The unobservable inputs used to calculate the carrying value include additional quantitative factors, such as current default trends and changes to the portfolio mix are also considered in evaluating the accuracy of the models; as well as additional qualitative factors such as the impact of new loan products, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. Loans generally have terms ranging from 1 day to 42 months. The carrying value of loans receivable approximates the fair value.
In connection with our CSO programs, the accounting for which is discussed in detail in Note 1, we guarantee consumer loan payment obligations to unrelated third-party lenders for loans that we arrange for consumers on the third-party lenders behalf. The Company is required to purchase from the lender defaulted loans we have guaranteed. The estimated fair value of the guarantee liability related to CSO loans we have guaranteed was $16.9 million and $17.1 million as of September 30, 2017 and December 31, 2016, respectively. The initial measurement of this guarantee liability is recorded at fair value using Level 3 inputs with subsequent measurement of the liability measured as a contingent loss. The unobservable inputs used to calculate fair value include the nature of the loan products, the creditworthiness of the borrowers in the customer base, the Companys historical loan default history for similar loans, industry loan default history, historical collection rates on similar products, current default trends, past-due account roll rates, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions.
The fair value of our Senior Secured Notes was based on broker quotations. The fair values of the Non-Recourse U.S. SPV Facility and the ABL Facility were based on the cash needed for final settlement.
F-28
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
Derivative Financial Instrument
We had a cash flow hedge in which the hedging instrument was a forward extra to sell GBP 4,800,000 that expired in May 2017. We performed an assessment that determined that all critical terms of the hedging instrument and the hedged transaction match and as such qualitatively concluded that changes in the hedges intrinsic value would completely offset the change in the expected cash flows based on changes in the spot rate. Since the effectiveness of this hedge was assessed based on changes in the hedges intrinsic value, the change in the time value of the contract would be excluded from the assessment of hedge effectiveness.
Changes in the hedges intrinsic value, to the extent that they were effective as a hedge, were recorded in other comprehensive income. As of September 30, 2017 we have recorded a realized loss of $0.3 million in our consolidated statement of income associated with this hedge.
Concentration Risk
We are subject to regulation by federal, state and provincial governmental authorities that affect the products and services that we provide, particularly Single-Pay Loans. The level and type of regulation for payday advance loans varies greatly by jurisdiction, ranging from jurisdictions with moderate regulations or legislation, to other jurisdictions having very strict guidelines and requirements.
Revenues originated in Texas, Ontario, and California represented approximately 25.8%, 13.1%, and 17.4%, respectively, of our consolidated total revenues for the three months ended September 30, 2017. Revenues originated in Texas, Ontario, and California represented approximately 26.2%, 15.2%, and 14.8%, respectively, of our consolidated total revenues for the three months ended September 30, 2016.
Revenues originated in Texas, Ontario, and California represented approximately 25.7%, 13.1%, and 17.6%, respectively, of our consolidated total revenues for the nine months ended September 30, 2017. Revenues originated in Texas, Ontario, and California represented approximately 25.8%, 15.0%, and 15.0%, respectively, of our consolidated total revenues for the nine months ended September 30, 2016.
To the extent that laws and regulations are passed that affect the manner in which we conduct business in any one of those markets, our financial position, results of operations and cash flows could be adversely affected. Additionally, our ability to meet our financial obligations could be negatively impacted.
We hold cash at major financial institutions that often exceed FDIC insured limits. We manage our concentration risk by placing our cash deposits in high quality financial institutions and by periodically evaluating the credit quality of the financial institutions holding such deposits. Historically, we have not experienced any losses due to such cash concentration.
Financial instruments that potentially subject us to concentrations of credit risk primarily consist of our loans receivable. Concentrations of credit risk with respect to loans receivable are limited due to the large number of customers comprising our customer base.
Purchase of Cognical Holdings Inc. Preferred Shares
On April 20, 2017, we purchased 2,926,715 preferred shares of Cognical Holdings, Inc. (Cognical) for $5.0 million. Cognical operates as a business under an online website, www.zibby.com. Zibby is a leasing platform for online, brick and mortar and omnichannel retailers. Customers can apply in 30 seconds in-store or via the Zibby button on a retailers website and be approved for $300 to $3,500. Zibby increases retailer sales by
F-29
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
providing a fast and easy lease payment option for nonprime customers seeking to acquire furniture, appliances, electronics and other consumer durables. As a result of this transaction, we own 8.9% of the equity of Cognical. Cognical has also awarded the Company warrants to purchase the common stock of Cognical in partial consideration of services provided by Cognical. These warrants are subject to a certain vesting schedule. We have accounted for this investment and its related warrants using the fair value method of accounting.
NOTE 15STOCKHOLDERS EQUITY
In connection with the formation of CURO Group in 2013, the stockholders entered into an Investor Rights Agreement. Under the Investor Rights Agreement, one of CURO Groups investors, Freidman Fleisher & Lowe Capital Partners II, L.P. (and its affiliated funds, the FFL Partners), may request, any time after the sixth anniversary of their initial investment in the Company (which occurred in September 2008), that the Company repurchase their shares on terms to be negotiated by the parties in good faith. If no agreement can be reached on the repurchase terms, the FFL Partners can request that the Company be solicited for sale of all of its capital.
As discussed in Note 11 Long-Term Debt, we received a $130.1 million dividend to from our subsidiary in February 2017 to fund the redemption of the 12.00% Senior Cash Pay Notes. We also paid dividends of $28.0 million and $8.5 million to our stockholders, in May 2017 and August 2017, respectively.
NOTE 16SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows:
Nine Months Ended
September 30, |
||||||||
(dollars in thousands) |
2017 | 2016 | ||||||
Cash paid for: |
||||||||
Interest |
$ | 60,089 | $ | 31,112 | ||||
Income taxes |
16,650 | 34,003 | ||||||
Non-cash investing activities: |
||||||||
Payment for repurchase of May 2011 Senior Secured Notes accrued in accounts payable |
$ | | 18,939 | |||||
Property and equipment accrued in accounts payable |
$ | 208 | $ | 2,147 |
NOTE 17SEGMENT REPORTING
Segment information is prepared on the same basis that our chief operating decision maker reviews financial information for operational decision making purposes. We have three reportable operating segments: the United States, Canada and the United Kingdom.
The segment performance measure below is based on gross margin. In managements evaluation of performance, certain costs, such as corporate expenses, district expenses and interest expense, are not allocated by segment, and accordingly the following reporting segment results do not include such allocated costs. There are no intersegment revenues, and the amounts below were determined in accordance with the same accounting principles used in our consolidated financial statements.
F-30
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
The following table illustrates summarized financial information concerning our reportable segments.
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
(dollars in thousands) |
2017 | 2016 | 2017 | 2016 | ||||||||||||
Revenues by segment: |
||||||||||||||||
U.S. |
$ | 193,826 | $ | 154,680 | $ | 531,912 | $ | 443,107 | ||||||||
Canada |
50,658 | 49,631 | 135,819 | 140,852 | ||||||||||||
U.K. |
10,635 | 8,613 | 28,912 | 25,733 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Consolidated revenue |
$ | 255,119 | $ | 212,924 | $ | 696,643 | $ | 609,692 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Gross margin by segment: |
||||||||||||||||
U.S. |
$ | 61,103 | $ | 41,291 | $ | 201,354 | $ | 159,602 | ||||||||
Canada |
15,649 | 22,274 | 45,911 | 60,950 | ||||||||||||
U.K. |
3,414 | 3,470 | 9,808 | 9,053 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Consolidated gross margin |
$ | 80,166 | $ | 67,035 | $ | 257,073 | $ | 229,605 | ||||||||
|
|
|
|
|
|
|
|
|||||||||
Expenditures for long-lived assets by segment: |
||||||||||||||||
U.S. |
$ | 1,535 | $ | 4,163 | $ | 6,183 | $ | 6,068 | ||||||||
Canada |
180 | 710 | 656 | 3,629 | ||||||||||||
U.K. |
250 | | 1,078 | 42 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Consolidated expenditures for long-lived assets |
$ | 1,965 | $ | 4,873 | $ | 7,917 | $ | 9,739 | ||||||||
|
|
|
|
|
|
|
|
The proportion of gross loans receivable by segment is reflected in the table below.
(dollars in thousands) |
September 30,
2017 |
December 31,
2016 |
||||||
U.S. |
$ | 276,027 | $ | 206,215 | ||||
Canada |
99,325 | 66,988 | ||||||
U.K. |
18,071 | 12,993 | ||||||
|
|
|
|
|||||
Total gross loans receivable |
$ | 393,423 | $ | 286,196 | ||||
|
|
|
|
The following table illustrates our net long-lived assets, comprised of property and equipment by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the asset is physically located.
(dollars in thousands) |
September 30,
2017 |
December 31,
2016 |
||||||
U.S. |
$ | 53,845 | $ | 58,733 | ||||
Canada |
33,290 | 34,310 | ||||||
U.K. |
1,685 | 2,853 | ||||||
|
|
|
|
|||||
Total |
$ | 88,820 | $ | 95,896 | ||||
|
|
|
|
Our chief operating decision maker does not review assets by segment for purposes of allocating resources or decision-making purposes; therefore, total assets by segment are not disclosed.
F-31
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
NOTE 18LITIGATION
Harrison, et al v. Principal Investments, Inc. et al
During the period relevant to this class action litigation, the Company pursued in excess of 16,000 claims in the limited actions and jurisdiction court in Clark County, Nevada, seeking payment of loans on which customers had defaulted. The Company utilized outside counsel to file these debt collection lawsuits. On Scene Mediations, a process serving company, was employed to serve the summons and petitions in the majority of these cases. In an unrelated matter, the principal of On Scene Mediations was convicted of multiple accounts of perjury and filing false affidavits to obtain judgments on behalf of a Las Vegas collection agency. In September 2010, we were sued by four former customers in a proposed class action suit filed in the District Court in Clark County, Nevada. The plaintiffs in this case claimed that they, and others in the proposed class, were not properly served notice of the debt collection lawsuits by the Company.
On June 7, 2017, the parties reached a settlement in this matter. The Company has accrued approximately $2.0 million as a result of this settlement as of September 30, 2017. At a hearing before the District Court in Clark County, Nevada, on July 24, 2017 the Court granted preliminary approval of the settlement. On October 30, 2017, the court issued final approval of the class settlement.
Other Legal Matters
We are also a defendant in certain routine litigation matters encountered in the ordinary course of our business. Certain of these matters may be covered to an extent by insurance. In the opinion of management, based upon the advice of legal counsel, the likelihood is remote that the impact of any pending legal proceedings and claims, either individually or in the aggregate, would have a material adverse effect on our consolidated financial condition, results of operations or cash flows.
NOTE 19EARNINGS PER SHARE
The following presents the computation of basic earnings per share (in thousands, except per share amounts):
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Basic: |
||||||||||||||||
Net income |
$ | 9,762 | $ | 15,777 | 42,743 | 55,859 | ||||||||||
Weight average common shares |
1,053 | 1,053 | 1,053 | 1,053 | ||||||||||||
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|||||||||
Basic earnings per share |
$ | 9.27 | $ | 14.98 | $ | 40.59 | $ | 53.05 | ||||||||
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F-32
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
The following computation reconciles the differences between the basic and diluted earnings per share presentations (in thousands, except per share amounts):
Three Months Ended
September 30, |
Nine Months Ended
September 30, |
|||||||||||||||
2017 | 2016 | 2017 | 2016 | |||||||||||||
Diluted: |
||||||||||||||||
Net income |
$ | 9,762 | $ | 15,777 | $ | 42,743 | $ | 55,859 | ||||||||
Weight average common shares (basic) |
1,053 | 1,053 | 1,053 | 1,053 | ||||||||||||
Dilutive effect of stock options |
28 | 22 | 29 | 21 | ||||||||||||
Weighted average common sharesdiluted |
1,081 | 1,075 | 1,082 | 1,074 | ||||||||||||
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|||||||||
Diluted earnings per share |
$ | 9.03 | $ | 14.68 | $ | 39.50 | $ | 52.01 | ||||||||
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Potential common shares that would have the effect of increasing diluted earnings per share or decreasing diluted loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted earnings per share. For the three and nine months ended September 30, 2017, there were 4,632 potential common shares not included in the calculation of diluted earnings per share because their effect was anti-dilutive.
NOTE 20CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On February 15, 2017, CFTC issued $470.0 million aggregate principal amount 12.00% senior secured notes due March 1, 2022, the proceeds of which were used together with available cash, to (i) redeem the outstanding 10.75% Senior Secured Notes due 2018 of our wholly owned subsidiary, CURO Intermediate, (ii) redeem the outstanding 12.00% Senior Cash Pay Notes due 2017 of its parent, CURO, and (iii) pay fees, expenses, premiums and accrued interest in connection with the offering. The Senior Secured Notes were sold to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the Securities Act); or outside the United States to non-U.S. Persons in compliance with Regulation S of the Securities Act.
The following condensed consolidating financial information, which has been prepared in accordance with the requirements for presentation of Rule 3-10(d) of Regulation S-X promulgated under the Securities Act, presents the condensed consolidating financial information separately for:
(i) | CFTC as the issuer of the 12.00% senior secured notes; |
(ii) | CURO Intermediate as the issuer of the 10.75% senior secured notes that were redeemed in February 2017; |
(iii) | The Companys subsidiary guarantors, which are comprised of our domestic subsidiaries, excluding CFTC and CURO Intermediate (the Subsidiary Guarantors), on a combined basis, which are 100% owned by CURO, and which are guarantors of the 12.00% senior secured notes issued in February 2017 and the 10.75% senior secured notes redeemed in February 2017; |
(iv) | The Companys other subsidiaries on a combined basis, which are not guarantors of the 12.00% senior secured notes or the 10.75% senior secured notes (the Subsidiary Non-Guarantors) |
(v) | Consolidating and eliminating entries representing adjustments to: |
a. | eliminate intercompany transactions between or among the Company, the Subsidiary Guarantors and the Subsidiary Non-Guarantors; and |
b. | eliminate the investments in the Companys subsidiaries; |
(vi) | The Company and its subsidiaries on a consolidated basis. |
F-33
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
Condensed Consolidating Balance Sheets
September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
CFTC |
CURO
Intermediate |
Subsidiary
Guarantors |
Subsidiary
Non-Guarantors |
SPV
Subs |
Eliminations | Consolidated | CURO | Eliminations |
CURO
Consolidated |
||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||||||
Cash |
$ | | $ | | $ | 55,097 | $ | 40,368 | $ | | $ | | $ | 95,465 | $ | 80 | $ | | $ | 95,545 | ||||||||||||||||||||
Restricted cash |
| | 1,675 | 3,541 | 6,258 | | 11,474 | | | $ | 11,474 | |||||||||||||||||||||||||||||
Loans receivable, net |
| | 67,286 | 99,783 | 155,083 | | 322,152 | | | $ | 322,152 | |||||||||||||||||||||||||||||
Deferred income taxes |
2,901 | 9,620 | 1,096 | 3,362 | | (2,916 | ) | 14,063 | (31 | ) | | $ | 14,032 | |||||||||||||||||||||||||||
Income taxes receivable |
67,003 | | | 2,233 | | (67,003 | ) | 2,233 | | | $ | 2,233 | ||||||||||||||||||||||||||||
Prepaid expenses and other |
| | 34,325 | 3,421 | | | 37,746 | 2,599 | | $ | 40,345 | |||||||||||||||||||||||||||||
Property and equipment, net |
| | 53,844 | 34,976 | | | 88,820 | | | $ | 88,820 | |||||||||||||||||||||||||||||
Goodwill |
| | 91,130 | 54,547 | | | 145,677 | | | $ | 145,677 | |||||||||||||||||||||||||||||
Other intangibles, net |
17 | | 5,459 | 27,545 | | | 33,021 | | | $ | 33,021 | |||||||||||||||||||||||||||||
Intercompany receivable |
327,040 | 44,000 | 457,558 | | 58,567 | (887,165 | ) | | | | $ | | ||||||||||||||||||||||||||||
Investment in subsidiaries |
109,497 | 961,743 | | | | (1,071,240 | ) | | 54,869 | (54,869 | ) | $ | | |||||||||||||||||||||||||||
Other |
5,090 | | 2,758 | 992 | | | 8,840 | | | $ | 8,840 | |||||||||||||||||||||||||||||
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|
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Total assets |
$ | 511,548 | $ | 1,015,363 | $ | 770,228 | $ | 270,768 | $ | 219,908 | $ | (2,028,324 | ) | $ | 759,491 | $ | 57,517 | $ | (54,869 | ) | $ | 762,139 | ||||||||||||||||||
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Liabilities and Stockholders equity: |
||||||||||||||||||||||||||||||||||||||||
Accounts payable and accrued liabilities |
$ | 554 | $ | 7 | $ | 35,838 | $ | 16,996 | $ | 16 | $ | | $ | 53,411 | $ | 2,068 | $ | | $ | 55,479 | ||||||||||||||||||||
Deferred revenue |
| | 6,736 | 5,773 | | | 12,509 | | | 12,509 | ||||||||||||||||||||||||||||||
Income taxes payable |
| 74,787 | 4,974 | | | (67,003 | ) | 12,758 | (2,750 | ) | | 10,008 | ||||||||||||||||||||||||||||
Accrued interest |
4,387 | | | | 1,113 | | 5,500 | | | 5,500 | ||||||||||||||||||||||||||||||
Payable to CURO Holdings Corp. |
2,002 | | 5,689 | | | | 7,691 | | (7,691 | ) | | |||||||||||||||||||||||||||||
CSO guarantee liability |
| | 16,890 | | | | 16,890 | | | 16,890 | ||||||||||||||||||||||||||||||
Deferred rent |
| | 9,959 | 1,798 | | | 11,757 | | | 11,757 | ||||||||||||||||||||||||||||||
Long-term debt (excluding current maturities) |
449,737 | | | | 112,135 | | 561,872 | | | 561,872 | ||||||||||||||||||||||||||||||
Subordinated shareholder debt |
| | | 2,401 | | | 2,401 | | | 2,401 | ||||||||||||||||||||||||||||||
Intercompany payable |
| 820,499 | | 66,666 | | (887,165 | ) | | | | | |||||||||||||||||||||||||||||
Other long-term liabilities |
| | 2,701 | 1,927 | | | 4,628 | | | 4,628 | ||||||||||||||||||||||||||||||
Deferred tax liabilities |
| 10,573 | | 7,548 | | (2,916 | ) | 15,205 | | | 15,205 | |||||||||||||||||||||||||||||
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|
|||||||||||||||||||||
Total liabilities |
456,680 | 905,866 | 82,787 | 103,109 | 113,264 | (957,084 | ) | 704,622 | (682 | ) | (7,691 | ) | 696,249 | |||||||||||||||||||||||||||
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Stockholders equity |
54,868 | 109,497 | 687,441 | 167,659 | 106,644 | (1,071,240 | ) | 54,869 | 58,199 | (47,178 | ) | 65,890 | ||||||||||||||||||||||||||||
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|
|||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 511,548 | $ | 1,015,363 | $ | 770,228 | $ | 270,768 | $ | 219,908 | $ | (2,028,324 | ) | $ | 759,491 | $ | 57,517 | $ | (54,869 | ) | $ | 762,139 | ||||||||||||||||||
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F-34
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
December 31, 2016 | ||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
CFTC |
CURO
Intermediate |
Subsidiary
Guarantors |
Subsidiary
Non-Guarantors |
SPV
Subs |
Eliminations | Consolidated | CURO | Eliminations |
CURO
Consolidated |
||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||||||
Cash |
$ | | $ | 1,954 | $ | 127,712 | $ | 63,779 | $ | | $ | | $ | 193,445 | $ | 80 | $ | | $ | 193,525 | ||||||||||||||||||||
Restricted cash |
| 459 | 1,223 | 3,376 | 2,770 | | 7,828 | | | 7,828 | ||||||||||||||||||||||||||||||
Loans receivable, net |
| | 67,558 | 71,381 | 108,065 | | 247,004 | | | 247,004 | ||||||||||||||||||||||||||||||
Deferred income taxes |
2,833 | 8,802 | 2,925 | 2,768 | | (4,693 | ) | 12,635 | | | 12,635 | |||||||||||||||||||||||||||||
Income taxes receivable |
34,667 | | | 6,151 | | (37,710 | ) | 3,108 | 6,270 | | 9,378 | |||||||||||||||||||||||||||||
Prepaid expenses and other |
| | 32,964 | 4,205 | | | 37,169 | 4,735 | (2,656 | ) | 39,248 | |||||||||||||||||||||||||||||
Property and equipment, net |
| | 58,733 | 37,163 | | | 95,896 | | | 95,896 | ||||||||||||||||||||||||||||||
Goodwill |
| | 91,131 | 50,423 | | | 141,554 | | | 141,554 | ||||||||||||||||||||||||||||||
Other intangibles, net |
19 | | 5,616 | 25,266 | | | 30,901 | | | 30,901 | ||||||||||||||||||||||||||||||
Intercompany receivable |
| 55,444 | 383,887 | | | (439,331 | ) | | | | | |||||||||||||||||||||||||||||
Investment in subsidiaries |
187,473 | 830,443 | | | | (1,017,916 | ) | | 155,964 | (155,964 | ) | | ||||||||||||||||||||||||||||
Other |
| 1,745 | 1,084 | | | 2,829 | | 2,829 | ||||||||||||||||||||||||||||||||
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Total assets |
$ | 224,992 | $ | 897,102 | $ | 773,494 | $ | 265,596 | $ | 110,835 | $ | (1,499,650 | ) | $ | 772,369 | $ | 167,049 | $ | (158,620 | ) | $ | 780,798 | ||||||||||||||||||
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|
|||||||||||||||||||||
Liabilities and Stockholders equity: |
||||||||||||||||||||||||||||||||||||||||
Accounts payable and accrued liabilities |
$ | 253 | $ | 3 | $ | 32,528 | $ | 9,900 | $ | | $ | | $ | 42,684 | $ | (21 | ) | $ | | $ | 42,663 | |||||||||||||||||||
Deferred revenue |
| | 6,520 | 5,822 | | | 12,342 | | 12,342 | |||||||||||||||||||||||||||||||
Income taxes payable |
| 23,087 | 12,952 | 3,043 | | (37,710 | ) | 1,372 | | 1,372 | ||||||||||||||||||||||||||||||
Current maturities of long-term debt |
| 23,406 | | | | | 23,406 | 124,365 | | 147,771 | ||||||||||||||||||||||||||||||
Accrued interest |
| 5,575 | | | 775 | | 6,350 | 1,833 | | 8,183 | ||||||||||||||||||||||||||||||
Payable to CURO Holdings Corp. |
2,656 | | | | | | 2,656 | (2,656 | ) | | ||||||||||||||||||||||||||||||
CSO guarantee liability |
| | 17,052 | | | | 17,052 | | 17,052 | |||||||||||||||||||||||||||||||
Deferred rent |
| | 10,006 | 1,862 | | | 11,868 | | 11,868 | |||||||||||||||||||||||||||||||
Long-term debt (excluding current maturities) |
| 414,082 | | | 63,054 | | 477,136 | | 477,136 | |||||||||||||||||||||||||||||||
Subordinated shareholder debt |
| | | 2,227 | | | 2,227 | | 2,227 | |||||||||||||||||||||||||||||||
Intercompany payable |
65,822 | 233,537 | | 85,346 | 54,626 | (439,331 | ) | | | | ||||||||||||||||||||||||||||||
Other long-term liabilities |
299 | | 1,741 | 2,976 | | | 5,016 | | 5,016 | |||||||||||||||||||||||||||||||
Deferred tax liabilities |
(2 | ) | 9,914 | 2,495 | 6,582 | | (4,693 | ) | 14,296 | 17 | | 14,313 | ||||||||||||||||||||||||||||
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Total liabilities |
69,028 | 709,604 | 83,294 | 117,758 | 118,455 | (481,734 | ) | 616,405 | 126,194 | (2,656 | ) | 739,943 | ||||||||||||||||||||||||||||
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Stockholders equity |
155,964 | 187,498 | 690,200 | 147,838 | (7,620 | ) | (1,017,916 | ) | 155,964 | 40,855 | (155,964 | ) | 40,855 | |||||||||||||||||||||||||||
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Total liabilities and stockholders equity |
$ | 224,992 | $ | 897,102 | $ | 773,494 | $ | 265,596 | $ | 110,835 | $ | (1,499,650 | ) | $ | 772,369 | $ | 167,049 | $ | (158,620 | ) | $ | 780,798 | ||||||||||||||||||
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F-35
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
Condensed Consolidating Statements of Income
Three Months Ended September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
CFTC |
CURO
Intermediate |
Subsidiary
Guarantors |
Subsidiary
Non-Guarantors |
SPV
Subs |
Eliminations | Consolidated | CURO | Eliminations |
CURO
Consolidated |
||||||||||||||||||||||||||||||
Revenue |
$ | | $ | | $ | 123,608 | $ | 61,293 | $ | 70,218 | $ | | $ | 255,119 | $ | | $ | | $ | 255,119 | ||||||||||||||||||||
Provision for losses |
| | 53,906 | 19,835 | 25,600 | | 99,341 | | | 99,341 | ||||||||||||||||||||||||||||||
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Net revenue |
| | 69,702 | 41,458 | 44,618 | | 155,778 | | | 155,778 | ||||||||||||||||||||||||||||||
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Cost of providing services: |
| |||||||||||||||||||||||||||||||||||||||
Salaries and benefits |
| | 17,555 | 9,266 | | | 26,821 | | | 26,821 | ||||||||||||||||||||||||||||||
Occupancy |
| | 7,849 | 5,966 | | | 13,815 | | | 13,815 | ||||||||||||||||||||||||||||||
Office |
| | 4,682 | 1,123 | (90 | ) | | 5,715 | | | 5,715 | |||||||||||||||||||||||||||||
Other costs of providing services |
| | 10,990 | 1,773 | 228 | | 12,991 | | | 12,991 | ||||||||||||||||||||||||||||||
Advertising |
| | 12,004 | 4,266 | | | 16,270 | | | 16,270 | ||||||||||||||||||||||||||||||
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Total cost of providing services |
| | 53,080 | 22,394 | 138 | | 75,612 | | | 75,612 | ||||||||||||||||||||||||||||||
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Gross margin |
| | 16,622 | 19,064 | 44,480 | | 80,166 | | | 80,166 | ||||||||||||||||||||||||||||||
Operating (income) expense: |
| |||||||||||||||||||||||||||||||||||||||
Corporate and district |
327 | 15 | 28,155 | 8,987 | (3,861 | ) | | 33,623 | 631 | | 34,254 | |||||||||||||||||||||||||||||
Intercompany management fee |
| | (10,815 | ) | 4,200 | 6,615 | | | | | | |||||||||||||||||||||||||||||
Interest expense |
15,305 | | (98 | ) | 49 | 3,588 | | 18,844 | | | 18,844 | |||||||||||||||||||||||||||||
Restructuring costs |
| | | 7,393 | | | 7,393 | | | 7,393 | ||||||||||||||||||||||||||||||
Intercompany interest (income) expense |
| (1,054 | ) | (173 | ) | 1,227 | | | | | | | ||||||||||||||||||||||||||||
Other (income)/expense |
| | (13 | ) | 6 | | | (7 | ) | | | (7 | ) | |||||||||||||||||||||||||||
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Total operating expense |
15,632 | (1,039 | ) | 17,056 | 21,862 | 6,342 | | 59,853 | 631 | | 60,484 | |||||||||||||||||||||||||||||
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Net income (loss) before income taxes |
(15,632 | ) | 1,039 | (434 | ) | (2,798 | ) | 38,138 | | 20,313 | (631 | ) | | 19,682 | ||||||||||||||||||||||||||
Provision for income tax expense (benefit) |
(7,507 | ) | 17,793 | (1,832 | ) | 1,833 | | | 10,287 | (367 | ) | | 9,920 | |||||||||||||||||||||||||||
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|||||||||||||||||||||
Net income (loss) |
(8,125 | ) | (16,754 | ) | 1,398 | (4,631 | ) | 38,138 | | 10,026 | (264 | ) | | 9,762 | ||||||||||||||||||||||||||
Equity in net income (loss) of subsidiaries: |
| |||||||||||||||||||||||||||||||||||||||
CFTC |
10,026 | (10,026 | ) | | ||||||||||||||||||||||||||||||||||||
CURO Intermediate |
(16,754 | ) | | | | | 16,754 | | | | | |||||||||||||||||||||||||||||
Guarantor Subsidiaries |
1,398 | | | | | (1,398 | ) | | | | | |||||||||||||||||||||||||||||
Non-Guarantor Subsidiaries |
(4,631 | ) | | | | | 4,631 | | | | | |||||||||||||||||||||||||||||
SPV Subs |
38,138 | | | | | (38,138 | ) | | | | | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net income (loss) attributable to CURO |
$ | 10,026 | $ | (16,754 | ) | $ | 1,398 | $ | (4,631 | ) | $ | 38,138 | $ | (18,151 | ) | $ | 10,026 | $ | 9,762 | $ | (10,026 | ) | $ | 9,762 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-36
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
Three Months Ended September 30, 2016 | ||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
CFTC |
CURO
Intermediate |
Subsidiary
Guarantors |
Subsidiary
Non-Guarantors |
Eliminations |
CFTC
Consolidated |
CURO | Eliminations |
CURO
Consolidated |
|||||||||||||||||||||||||||
Revenue |
$ | | $ | | $ | 154,680 | $ | 58,244 | $ | | $ | 212,924 | $ | | $ | | $ | 212,924 | ||||||||||||||||||
Provision for losses |
| | 64,565 | 12,459 | | 77,024 | | | 77,024 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net revenue |
| | 90,115 | 45,785 | | 135,900 | | | 135,900 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Cost of providing services: |
| |||||||||||||||||||||||||||||||||||
Salaries and benefits |
| | 17,425 | 8,848 | | 26,273 | | | 26,273 | |||||||||||||||||||||||||||
Occupancy |
| | 7,520 | 5,825 | | 13,345 | | | 13,345 | |||||||||||||||||||||||||||
Office |
| | 3,966 | 850 | | 4,816 | | | 4,816 | |||||||||||||||||||||||||||
Other store operating expenses |
| | 11,302 | 1,298 | | 12,600 | | | 12,600 | |||||||||||||||||||||||||||
Advertising |
| | 8,611 | 3,220 | | 11,831 | | | 11,831 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total cost of providing services |
| | 48,824 | 20,041 | | 68,865 | | | 68,865 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Gross Margin |
| | 41,291 | 25,744 | | 67,035 | | | 67,035 | |||||||||||||||||||||||||||
Operating (income) expense: |
| |||||||||||||||||||||||||||||||||||
Corporate and district |
555 | 21 | 21,673 | 8,531 | | 30,780 | 27 | | 30,807 | |||||||||||||||||||||||||||
Intercompany management fee |
| | (3,303 | ) | 3,303 | | | | | |||||||||||||||||||||||||||
Interest expense |
| 12,057 | | (1 | ) | | 12,056 | 3,931 | | 15,987 | ||||||||||||||||||||||||||
Intercompany interest (income) expense |
| (1,195 | ) | (71 | ) | 1,266 | | | | | | |||||||||||||||||||||||||
Gain on extinguishment of debt |
| (6,991 | ) | | | (6,991 | ) | | | (6,991 | ) | |||||||||||||||||||||||||
Restructuring costs |
| | 426 | 1,060 | | 1,486 | | | 1,486 | |||||||||||||||||||||||||||
Other (income)/expense |
| | (164 | ) | 50 | | (114 | ) | | | (114 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total operating expense |
555 | 3,892 | 18,561 | 14,209 | | 37,217 | 3,958 | | 41,175 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net (loss) income before income taxes |
(555 | ) | (3,892 | ) | 22,730 | 11,535 | | 29,818 | (3,958 | ) | | 25,860 | ||||||||||||||||||||||||
Provision for income taxes |
(414 | ) | 6,550 | 1,645 | 3,819 | 11,600 | (1,517 | ) | | 10,083 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net income (loss) |
(141 | ) | (10,442 | ) | 21,085 | 7,716 | | 18,218 | (2,441 | ) | | 15,777 | ||||||||||||||||||||||||
Equity in net income (loss) of subsidiaries: |
| |||||||||||||||||||||||||||||||||||
CFTC |
18,218 | (18,218 | ) | | ||||||||||||||||||||||||||||||||
CURO Intermediate |
(10,442 | ) | | | | 10,442 | | | | | ||||||||||||||||||||||||||
Guarantor Subsidiaries |
21,085 | | | | (21,085 | ) | | | | | ||||||||||||||||||||||||||
Non-Guarantor Subsidiaries |
7,716 | | | | (7,716 | ) | | | | | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net income (loss) attributable to CURO |
$ | 18,218 | $ | (10,442 | ) | $ | 21,085 | $ | 7,716 | $ | (18,359 | ) | $ | 18,218 | $ | 15,777 | $ | (18,218 | ) | $ | 15,777 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-37
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
CFTC |
CURO
Intermediate |
Subsidiary
Guarantors |
Subsidiary
Non-Guarantors |
SPV
Subs |
Eliminations |
CFTC
Consolidated |
CURO | Eliminations |
CURO
Consolidated |
||||||||||||||||||||||||||||||
Revenue |
$ | | $ | | $ | 337,920 | $ | 164,731 | $ | 193,992 | $ | | $ | 696,643 | $ | | $ | | $ | 696,643 | ||||||||||||||||||||
Provision for losses |
| | 118,042 | 45,865 | 62,616 | | 226,523 | | | 226,523 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net revenue |
| | 219,878 | 118,866 | 131,376 | | 470,120 | | | 470,120 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Cost of providing services: |
| |||||||||||||||||||||||||||||||||||||||
Salaries and benefits |
| | 53,144 | 26,410 | | | 79,554 | | | 79,554 | ||||||||||||||||||||||||||||||
Occupancy |
| | 23,785 | 17,636 | | | 41,421 | | | 41,421 | ||||||||||||||||||||||||||||||
Office |
| | 12,168 | 3,441 | (90 | ) | | 15,519 | | | 15,519 | |||||||||||||||||||||||||||||
Other store operating expenses |
| | 36,005 | 4,657 | 292 | | 40,954 | | | 40,954 | ||||||||||||||||||||||||||||||
Advertising |
| | 24,596 | 11,003 | | | 35,599 | | | 35,599 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total cost of providing services |
| | 149,698 | 63,147 | 202 | | 213,047 | | | 213,047 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Gross Margin |
| | 70,180 | 55,719 | 131,174 | | 257,073 | | | 257,073 | ||||||||||||||||||||||||||||||
Operating (income) expense: |
| |||||||||||||||||||||||||||||||||||||||
Corporate and district |
3,304 | (55 | ) | 71,534 | 25,703 | 320 | | 100,806 | 2,799 | | 103,605 | |||||||||||||||||||||||||||||
Intercompany management fee |
| | (17,624 | ) | 11,009 | 6,615 | | | | | | |||||||||||||||||||||||||||||
Interest expense |
37,761 | 9,613 | (97 | ) | 131 | 9,976 | | 57,384 | 3,310 | | 60,694 | |||||||||||||||||||||||||||||
Loss on extinguishment of debt |
| 11,884 | | | | | 11,884 | 574 | | 12,458 | ||||||||||||||||||||||||||||||
Restructuring costs |
| | | 7,393 | | | 7,393 | | | 7,393 | ||||||||||||||||||||||||||||||
Intercompany interest (income) expense |
| (3,244 | ) | (503 | ) | 3,747 | | | | | | | ||||||||||||||||||||||||||||
Other (income)/expense |
| | 395 | (203 | ) | | | 192 | | | 192 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total operating expense |
41,065 | 18,198 | 53,705 | 47,780 | 16,911 | | 177,659 | 6,683 | | 184,342 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net income (loss) before income taxes |
(41,065 | ) | (18,198 | ) | 16,475 | 7,939 | 114,263 | | 79,414 | (6,683 | ) | | 72,731 | |||||||||||||||||||||||||||
Provision for income tax expense (benefit) |
(17,633 | ) | 51,964 | (7,879 | ) | 6,266 | | | 32,718 | (2,730 | ) | | 29,988 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net income (loss) |
(23,432 | ) | (70,162 | ) | 24,354 | 1,673 | 114,263 | | 46,696 | (3,953 | ) | | 42,743 | |||||||||||||||||||||||||||
Equity in net income (loss) of subsidiaries: |
| |||||||||||||||||||||||||||||||||||||||
CFTC |
46,696 | (46,696 | ) | | ||||||||||||||||||||||||||||||||||||
CURO Intermediate |
(70,162 | ) | | | | | 70,162 | | | | | |||||||||||||||||||||||||||||
Guarantor Subsidiaries |
24,354 | | | | | (24,354 | ) | | | | | |||||||||||||||||||||||||||||
Non-Guarantor Subsidiaries |
1,673 | | | | | (1,673 | ) | | | | | |||||||||||||||||||||||||||||
SPV Subs |
114,263 | | | | | (114,263 | ) | | | | | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net income (loss) attributable to CURO |
$ | 46,696 | $ | (70,162 | ) | $ | 24,354 | $ | 1,673 | $ | 114,263 | $ | (70,128 | ) | $ | 46,696 | $ | 42,743 | $ | (46,696 | ) | $ | 42,743 | |||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-38
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
CFTC |
CURO
Intermediate |
Subsidiary
Guarantors |
Subsidiary
Non-Guarantors |
Eliminations |
CFTC
Consolidated |
CURO | Eliminations |
CURO
Consolidated |
|||||||||||||||||||||||||||
Revenue |
| | 443,107 | 166,585 | | $ | 609,692 | | | $ | 609,692 | |||||||||||||||||||||||||
Provision for losses |
| | 142,598 | 35,158 | | 177,756 | | | 177,756 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net revenue |
| | 300,509 | 131,427 | | 431,936 | | | 431,936 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Cost of providing services: |
| |||||||||||||||||||||||||||||||||||
Salaries and benefits |
| | 52,626 | 26,733 | | 79,359 | | | 79,359 | |||||||||||||||||||||||||||
Occupancy |
| | 23,121 | 17,247 | | 40,368 | | | 40,368 | |||||||||||||||||||||||||||
Office |
| | 11,017 | 3,277 | | 14,294 | | | 14,294 | |||||||||||||||||||||||||||
Other store operating expenses |
| | 35,196 | 4,189 | | 39,385 | | | 39,385 | |||||||||||||||||||||||||||
Advertising |
| | 18,947 | 9,978 | | 28,925 | | | 28,925 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total cost of providing services |
| | 140,907 | 61,424 | | 202,331 | | | 202,331 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Gross Margin |
| | 159,602 | 70,003 | | 229,605 | | | 229,605 | |||||||||||||||||||||||||||
Operating (income) expense: |
| |||||||||||||||||||||||||||||||||||
Corporate and district |
1,432 | 168 | 64,312 | 28,901 | | 94,813 | 296 | | 95,109 | |||||||||||||||||||||||||||
Intercompany management fee |
(9,281 | ) | 9,281 | | | |||||||||||||||||||||||||||||||
Interest expense |
| 36,333 | | 52 | | 36,385 | 11,794 | | 48,179 | |||||||||||||||||||||||||||
Intercompany interest (income) expense |
| (3,659 | ) | (229 | ) | 3,888 | | | | | | |||||||||||||||||||||||||
Gain on extinguishment of debt |
| (6,991 | ) | | | | (6,991 | ) | | | (6,991 | ) | ||||||||||||||||||||||||
Restructuring costs |
| | 1,528 | 1,439 | | 2,967 | | | 2,967 | |||||||||||||||||||||||||||
Other (income)/expense |
| | (677 | ) | 118 | | (559 | ) | | | (559 | ) | ||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total operating expense |
1,432 | 25,851 | 55,653 | 43,679 | | 126,615 | 12,090 | | 138,705 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net income (loss) before income taxes |
(1,432 | ) | (25,851 | ) | 103,949 | 26,324 | | 102,990 | (12,090 | ) | 0 | 90,900 | ||||||||||||||||||||||||
Provision for income tax (benefit) expense |
(672 | ) | 20,083 | 10,595 | 9,791 | | 39,797 | (4,756 | ) | | 35,041 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net income (loss) |
(760 | ) | (45,934 | ) | 93,354 | 16,533 | | 63,193 | (7,334 | ) | 0 | 55,859 | ||||||||||||||||||||||||
Equity in net income (loss) of subsidiaries: |
| |||||||||||||||||||||||||||||||||||
CFTC |
63,193 | (63,193 | ) | | ||||||||||||||||||||||||||||||||
CURO Intermediate |
(45,934 | ) | | | | 45,934 | | | | | ||||||||||||||||||||||||||
Guarantor Subsidiaries |
93,354 | | | | (93,354 | ) | | | | | ||||||||||||||||||||||||||
Non-Guarantor Subsidiaries |
16,533 | | | | (16,533 | ) | | | | | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net income (loss) attributable to CURO |
$ | 63,193 | $ | (45,934 | ) | $ | 93,354 | $ | 16,533 | $ | (63,953 | ) | $ | 63,193 | $ | 55,859 | $ | (63,193 | ) | $ | 55,859 | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-39
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
Condensed Consolidating Statements of Cash Flows
Nine Months Ended September 30, 2017 | ||||||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
CFTC |
CURO
Intermediate |
Subsidiary
Guarantors |
Subsidiary
Non-Guarantors |
SPV
Subs |
Eliminations |
CFTC
Consolidated |
CURO | Eliminations |
CURO
Consolidated |
||||||||||||||||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||||||||||||||||||||||
Net cash provided (used) |
$ | (275,549 | ) | $ | 423,621 | $ | (65,982 | ) | $ | (25,579 | ) | $ | (21,384 | ) | $ | (632 | ) | 34,495 | (5,083 | ) | | 29,412 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Cash flows from investing activities: |
| |||||||||||||||||||||||||||||||||||||||
Purchase of property, equipment and software |
| | (6,183 | ) | (1,734 | ) | | | (7,917 | ) | | | (7,917 | ) | ||||||||||||||||||||||||||
Cash paid for Zibby Investment |
(4,975 | ) | | | | | | (4,975 | ) | | | (4,975 | ) | |||||||||||||||||||||||||||
Change in restricted cash |
| 459 | (3,939 | ) | 120 | | | (3,360 | ) | | | (3,360 | ) | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net cash provided (used) |
(4,975 | ) | 459 | (10,122 | ) | (1,614 | ) | | | (16,252 | ) | | | (16,252 | ) | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Cash flows from financing activities: |
| |||||||||||||||||||||||||||||||||||||||
Proceeds from Non-Recourse U.S. SPV Facility and ABL Facility |
| | | | 52,130 | | 52,130 | | | 52,130 | ||||||||||||||||||||||||||||||
Payments on Non-Recourse U.S. SPV Facility and ABL Facility |
| | | | (27,258 | ) | | (27,258 | ) | | | (27,258 | ) | |||||||||||||||||||||||||||
Proceeds from issuance of 12.00% Senior Secured Notes |
461,329 | | | | | | 461,329 | | | 461,329 | ||||||||||||||||||||||||||||||
Proceeds from revolving credit facilities |
25,000 | | | 8,028 | | | 33,028 | | | 33,028 | ||||||||||||||||||||||||||||||
Payments on revolving credit facilities |
(25,000 | ) | | | (8,028 | ) | | | (33,028 | ) | | | (33,028 | ) | ||||||||||||||||||||||||||
Payments on 10.75% Senior Secured Notes |
| (426,034 | ) | | | | | (426,034 | ) | | | (426,034 | ) | |||||||||||||||||||||||||||
Dividends (paid) received to/from CURO Group Holdings Corp. |
(166,583 | ) | | | | | | (166,583 | ) | 166,583 | | | ||||||||||||||||||||||||||||
Payments on Speedy Group Senior Secured Notes |
| | | | | | | (125,000 | ) | | (125,000 | ) | ||||||||||||||||||||||||||||
Dividends paid to stockholders |
| | | | | | | (36,500 | ) | | (36,500 | ) | ||||||||||||||||||||||||||||
Debt issuance costs paid |
(14,222 | ) | | | | | | (14,222 | ) | | | (14,222 | ) | |||||||||||||||||||||||||||
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Net cash provided (used) |
280,524 | (426,034 | ) | | | 24,872 | | (120,638 | ) | 5,083 | | (115,555 | ) | |||||||||||||||||||||||||||
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Effect of exchange rate changes on cash |
| | | 3,783 | | 632 | 4,415 | | | 4,415 | ||||||||||||||||||||||||||||||
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Net increase (decrease) in cash |
| (1,954 | ) | (76,104 | ) | (23,410 | ) | 3,488 | | (97,980 | ) | | | (97,980 | ) | |||||||||||||||||||||||||
Cash at beginning of period |
| 1,954 | 124,942 | 63,779 | 2,770 | | 193,445 | 80 | 193,525 | |||||||||||||||||||||||||||||||
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Cash at end of period |
$ | | $ | | $ | 48,838 | $ | 40,369 | $ | 6,258 | $ | | $ | 95,465 | $ | 80 | $ | | $ | 95,545 | ||||||||||||||||||||
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F-40
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
Nine Months Ended September 30, 2016 | ||||||||||||||||||||||||||||||||||||
(dollars in thousands) |
CFTC |
CURO
Intermediate |
Subsidiary
Guarantors |
Subsidiary
Non-Guarantors |
Eliminations |
CFTC
Consolidated |
CURO | Eliminations |
CURO
Consolidated |
|||||||||||||||||||||||||||
Cash flows from operating activities |
||||||||||||||||||||||||||||||||||||
Net cash provided (used) |
$ | 19 | $ | 8,509 | $ | 46,344 | $ | 33,231 | $ | (872 | ) | 87,231 | (1,402 | ) | | 85,829 | ||||||||||||||||||||
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Cash flows from investing activities: |
| |||||||||||||||||||||||||||||||||||
Purchase of property, equipment and software |
(19 | ) | | (6,057 | ) | (3,663 | ) | | (9,739 | ) | | | (9,739 | ) | ||||||||||||||||||||||
Change in restricted cash |
| (459 | ) | 4,477 | 1,910 | | 5,928 | | | 5,928 | ||||||||||||||||||||||||||
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Net cash provided (used) |
(19 | ) | (459 | ) | (1,580 | ) | (1,753 | ) | | (3,811 | ) | | | (3,811 | ) | |||||||||||||||||||||
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Cash flows from financing activities: |
| |||||||||||||||||||||||||||||||||||
Proceeds from credit facility |
| 30,000 | | | | 30,000 | | | 30,000 | |||||||||||||||||||||||||||
Payments on credit facility |
| (38,050 | ) | | | | (38,050 | ) | | | (38,050 | ) | ||||||||||||||||||||||||
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|||||||||||||||||||
Net cash provided (used) |
| (8,050 | ) | | | | (8,050 | ) | | | (8,050 | ) | ||||||||||||||||||||||||
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Effect of exchange rate changes on cash |
| | | 17 | 872 | 889 | | | 889 | |||||||||||||||||||||||||||
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Net increase in cash |
| | 44,764 | 31,495 | | 76,259 | (1,402 | ) | | 74,857 | ||||||||||||||||||||||||||
Cash at beginning of period |
| 2 | 57,149 | 41,928 | | 99,079 | 1,482 | | 100,561 | |||||||||||||||||||||||||||
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Cash at end of period |
$ | | $ | 2 | $ | 101,913 | $ | 73,423 | $ | | $ | 175,338 | $ | 80 | $ | | $ | 175,418 | ||||||||||||||||||
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NOTE 21SUBSEQUENT EVENTS
The Company has determined that a limited universe of borrowers may have incurred bank overdraft or non-sufficient funds fees because of possible confusion about certain electronic payments the Company initiated on their loans. As a result, the Company has decided to reimburse such fees upon demonstration by affected borrowers that the fees were incurred. Based on the terms as currently contemplated, the Company does not expect reimbursements to exceed $4.0 million and expects to recognize related charges in the fourth quarter of 2017.
Proposed Private Offering of Additional Notes and Consent Solicitation
On October 27, 2017, CFTC agreed to sell $135 million principal amount of additional 12.00% Senior Secured Notes due 2022 in a private offering exempt from the registration requirements of the Securities Act (the Additional Notes Offering). The proceeds from the Additional Notes Offering will be used, together with available cash, to (i) pay a cash dividend, in an amount not to exceed $140 million, to its sole stockholder (the Proposed Dividend) and (ii) pay fees, expenses, premiums and accrued interest in connection with the Additional Notes Offering. In addition to the Additional Notes Offering, CFTC sought the consent of the holders holding a majority in the outstanding principal amount outstanding of the current 12.00% Senior Secured Notes due 2022 to a one-time waiver with respect to the restrictions contained in Section 5.07(a) of the Indenture governing the Senior Secured Notes to permit the Proposed Dividend (the Proposed Waiver). As of the date of this report, holders holding a majority in aggregate principal amount of the outstanding previously issued notes have agreed to consent to the Proposed Waiver. The receipt of the Proposed Waiver is a condition to the consummation of this offering. The offering is expected to be completed on November 2, 2017, subject to the satisfaction or waiver of customary closing conditions.
Legal Proceedings
Harrison, et al v. Principal Investments, Inc. et al
During the period relevant to this matter, the Company pursued in excess of 16,000 claims in the limited actions and jurisdiction court in Clark County, Nevada, seeking repayment of loans on which customers had defaulted. The Company utilized outside counsel to file these debt collection lawsuits. On Scene Mediations, a process serving company, was employed to serve the summons and petitions in the majority of these cases. In an unrelated matter, the principal of On Scene Mediations was convicted of multiple accounts of perjury and filing false affidavits to obtain judgments on behalf of a Las Vegas collection agency. In September 2010, we were sued by four former customers in a proposed class action suit filed in the District Court in Clark County, Nevada. The plaintiffs in this case claimed that they, and others in the proposed class, were not properly served notice of the debt collection lawsuits by the Company.
F-41
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTSUNAUDITED (continued)
On June 7, 2017, the parties reached a settlement in this matter. The Company accrued approximately $2.0 million as a result of this settlement during the second quarter of 2017. At a hearing before the District Court in Clark County, Nevada, on July 24, 2017 the Court granted preliminary approval of the settlement. On October 30, 2017, the court issued final approval of the class settlement.
City of Austin
We were cited on July 5, 2016 by the City of Austin, Texas for alleged violations of the Austin, Texas ordinance addressing products offered by CSOs. The Texas ordinances regulate aspects of products offered under our CAB programs, including loan sizes and repayment terms. We believe that: (1) the Austin ordinance (like its counterparts elsewhere in the state) conflicts with Texas state law and (2) our product in any event complies with the ordinance, when it is properly construed. An Austin trial court agreed with our position that the ordinance conflicts with Texas law and, accordingly, did not address our second argument. In August 2017, an Austin appellate court reversed a trial courts decision and remanded the case to trial court for further proceedings. We appealed the appellate decision in October 2017, and the appeal is currently pending. We will not have a final determination of the lawfulness of our CAB program under the Austin ordinance (and similar ordinances in other Texas cities) for some time. A final adverse decision could potentially result in material monetary liability in Austin and elsewhere and would force us to restructure the loans we arrange in Texas.
These events were evaluated through the date the financial statements were available to be issued, November 1, 2017.
F-42
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM |
Board of Directors and Shareholders
CURO Group Holdings Corp.
We have audited the accompanying consolidated balance sheets of CURO Group Holdings Corp. and subsidiaries (the Company) as of December 31, 2016 and 2015, and the related consolidated statements of income, comprehensive income, changes in stockholders equity, and cash flows for each of the two years in the period ended December 31, 2016. These financial statements are the responsibility of the Companys management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States) and in accordance with auditing standards generally accepted in the United States of America. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. We were not engaged to perform an audit of the Companys internal control over financial reporting. Our audits included consideration of internal control over financial reporting as a basis for designing audit procedures that are appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Companys internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of CURO Group Holdings Corp. and subsidiaries as of December 31, 2016 and 2015, and the results of their operations and their cash flows for each of the two years in the period ended December 31, 2016 in conformity with accounting principles generally accepted in the United States of America.
As discussed in Note 1 to the consolidated financial statements, the Company adopted new accounting guidance in 2016 and 2015, related to the presentation of deferred financing costs.
/s/ GRANT THORNTON LLP
Kansas City, Missouri
July 12, 2017
F-43
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
See accompanying Notes to Consolidated Financial Statements.
F-44
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands)
Year Ended
December 31, |
||||||||
2016 | 2015 | |||||||
REVENUE |
||||||||
Revenues |
$ | 828,596 | $ | 813,131 | ||||
COST OF PROVIDING SERVICES |
||||||||
Provision for losses |
258,289 | 281,210 | ||||||
Salaries and benefits |
104,541 | 107,059 | ||||||
Occupancy |
54,509 | 53,288 | ||||||
Office |
20,463 | 19,929 | ||||||
Other store operating expenses |
53,617 | 47,380 | ||||||
Advertising |
43,921 | 65,664 | ||||||
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|
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|
|||||
Total cost of providing services |
535,340 | 574,530 | ||||||
|
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|
|||||
GROSS MARGIN |
293,256 | 238,601 | ||||||
OTHER (INCOME) EXPENSE |
||||||||
Corporate expenses |
114,269 | 117,109 | ||||||
District expenses |
10,850 | 11,937 | ||||||
Interest expense |
64,334 | 65,020 | ||||||
Gain on extinguishment of debt |
(6,991 | ) | | |||||
Goodwill and intangible asset impairment charges |
| 2,882 | ||||||
Restructuring costs |
3,618 | 4,291 | ||||||
Fair value adjustment to contingent consideration |
| | ||||||
Other, net |
(845 | ) | 1,488 | |||||
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|
|
|
|||||
Total other expense |
185,235 | 202,727 | ||||||
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|
|||||
NET INCOME BEFORE INCOME TAXES |
108,021 | 35,874 | ||||||
Provision for income taxes |
42,577 | 18,105 | ||||||
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|
|||||
NET INCOME |
$ | 65,444 | $ | 17,769 | ||||
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|
See accompanying Notes to Consolidated Financial Statements.
F-45
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)
(in thousands)
Year Ended
December 31, |
||||||||
2016 | 2015 | |||||||
NET INCOME |
$ | 65,444 | $ | 17,769 | ||||
Other comprehensive loss: |
||||||||
Cash flow hedges |
(333 | ) | | |||||
Foreign currency translation adjustment |
(6,022 | ) | (30,512 | ) | ||||
|
|
|
|
|||||
Other comprehensive loss |
(6,355 | ) | (30,512 | ) | ||||
|
|
|
|
|||||
COMPREHENSIVE INCOME (LOSS) |
$ | 59,089 | $ | (12,743 | ) | |||
|
|
|
|
See accompanying Notes to Consolidated Financial Statements.
F-46
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS EQUITY
(in thousands, except share data)
Stockholders Equity | ||||||||||||||||||||
Common
Stock |
Dividends in
excess of paid-in capital |
Retained
earnings |
AOCI(1) | Total | ||||||||||||||||
Balance, December 31, 2014 |
$ | 1 | $ | (38,044 | ) | $ | 53,622 | $ | (23,118 | ) | $ | (7,539 | ) | |||||||
Net income |
| | 17,769 | | 17,769 | |||||||||||||||
Foreign currency translation adjustment |
| | | (30,512 | ) | (30,512 | ) | |||||||||||||
Repurchase of equity award |
| (371 | ) | | | (371 | ) | |||||||||||||
Share-based compensation expense |
| 1,271 | | | 1,271 | |||||||||||||||
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Balance, December 31, 2015 |
1 | (37,144 | ) | 71,391 | (53,630 | ) | (19,382 | ) | ||||||||||||
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Net income |
| | 65,444 | | 65,444 | |||||||||||||||
Foreign currency translation adjustment |
| | | (6,022 | ) | (6,022 | ) | |||||||||||||
Cash flow hedge |
| | | (333 | ) | (333 | ) | |||||||||||||
Share-based compensation expense |
| 1,148 | | | 1,148 | |||||||||||||||
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Balance, December 31, 2016 |
$ | 1 | $ | (35,996 | ) | $ | 136,835 | $ | (59,985 | ) | $ | 40,855 | ||||||||
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(1) | Accumulated other comprehensive loss. |
See accompanying Notes to Consolidated Financial Statements.
F-47
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
Year Ended
December 31, |
||||||||
2016 | 2015 | |||||||
Cash flows from operating activities |
||||||||
Net income |
$ | 65,444 | $ | 17,769 | ||||
Adjustments to reconcile net income to net cash provided by operating activities: |
||||||||
Depreciation and amortization |
18,905 | 19,112 | ||||||
Provision for loan losses |
258,289 | 281,210 | ||||||
Goodwill and intangible asset impairment charges |
| 2,882 | ||||||
Restructuring costs |
523 | 2,249 | ||||||
Fair value adjustment to contingent consideration |
| | ||||||
Amortization of deferred financing costs |
3,289 | 3,221 | ||||||
Amortization of bond premium |
(1,541 | ) | (1,404 | ) | ||||
Benefit for deferred income taxes |
(680 | ) | (2,190 | ) | ||||
Loss on disposal of property and equipment |
217 | 628 | ||||||
Gain on extinguishment of debt |
(6,991 | ) | | |||||
Increase in cash surrender value of life insurance |
(918 | ) | | |||||
Share-based compensation expense |
1,148 | 1,271 | ||||||
Changes in operating assets and liabilities, net of effects from business acquisition: |
||||||||
Loans receivable |
(287,827 | ) | (301,581 | ) | ||||
Prepaid expenses and other assets |
(5,733 | ) | (3,152 | ) | ||||
Accounts payable and accrued liabilities |
2,010 | (2,168 | ) | |||||
Deferred revenue |
(2,080 | ) | 4,644 | |||||
Income taxes payable |
6,852 | (4,278 | ) | |||||
Income taxes receivable |
(7,154 | ) | (1,713 | ) | ||||
Deferred rent |
290 | 554 | ||||||
Other liabilities |
3,669 | 60 | ||||||
|
|
|
|
|||||
Net cash provided by operating activities |
47,712 | 17,114 | ||||||
|
|
|
|
|||||
Cash flows from investing activities |
||||||||
Purchase of property, equipment and software |
(16,026 | ) | (19,832 | ) | ||||
Changes in restricted cash |
3,104 | (6,423 | ) | |||||
Cash paid for business acquisition, net of cash acquired |
| | ||||||
|
|
|
|
|||||
Net cash used in investing activities |
(12,922 | ) | (26,255 | ) | ||||
|
|
|
|
|||||
Cash flows from financing activities |
||||||||
Proceeds from credit facilities |
30,000 | 57,050 | ||||||
Payments on credit facilities |
(38,050 | ) | (69,000 | ) | ||||
Deferred financing costs incurred |
(5,346 | ) | | |||||
Proceeds from Non-Recourse U.S. SPV facility and ABL facility |
91,717 | | ||||||
Purchase of May 2011 senior secured notes |
(18,939 | ) | | |||||
Payment for cash settlement of equity award |
| (371 | ) | |||||
Payments on contingent consideration |
| | ||||||
|
|
|
|
|||||
Net cash provided by (used in) financing activities |
59,382 | (12,321 | ) | |||||
|
|
|
|
|||||
Effect of exchange rate changes on cash |
(1,208 | ) | (8,064 | ) | ||||
|
|
|
|
|||||
Net increase (decrease) in cash |
92,964 | (29,526 | ) | |||||
Cash at beginning of period |
100,561 | 130,087 | ||||||
|
|
|
|
|||||
Cash at end of period |
$ | 193,525 | $ | 100,561 | ||||
|
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|
|
See accompanying Notes to Consolidated Financial Statements.
F-48
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
NOTE 1SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation
On May 11, 2016, we changed the name of Speedy Group Holdings Corp. to CURO Group Holdings Corp. (CURO); the name of Speedy Cash Holdings Corp. to CURO Financial Technologies Corp. (CFTC); and the name of Speedy Cash Intermediate Holdings Corp. to CURO Intermediate Holdings Corp (CURO Intermediate).
The terms we, our, us, and the Company refer to CURO and its directly and indirectly owned subsidiaries as a combined entity, except where otherwise stated.
We have prepared the accompanying audited Consolidated Financial Statements in accordance with accounting principles generally accepted in the United States of America (US GAAP).
The Company evaluated and disclosed subsequent events through September 27, 2017, which represents the date as of which the financial statements were available to be issued.
Principles of Consolidation
The Consolidated Financial Statements include the accounts of CURO and its wholly-owned subsidiaries. Intercompany transactions and balances have been eliminated in consolidation.
Use of Estimates
The preparation of consolidated financial statements in conformity with US GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and the disclosure of contingent assets and liabilities at the date of the financial statements. Estimates also affect the reported amounts of revenues and expenses during the periods reported. Some of the significant estimates that we have made in the accompanying consolidated financial statements include allowances for loan losses, certain assumptions related to goodwill and intangibles, contingent consideration, accruals related to self-insurance, Credit Services Organization (CSO) guarantee liability and estimated tax liabilities. Actual results may differ from those estimates.
Cash
We currently maintain cash balances in the United States, Canada and the United Kingdom. At December 31, 2016 we have $129.7 million, $53.1 million and $10.7 million in our cash accounts in the United States, Canada and the United Kingdom, respectively. Of the $129.7 million in the United States, approximately $128.4 million is not insured by the Federal Deposit Insurance Corporation.
Consumer Loans Receivable
Consumer loans receivable are net of the allowance for loan losses and are comprised of single-pay and Unsecured Installment and Secured Installment Loans. Our Single-Pay Loans are primarily comprised of payday loans and auto title loans. A payday loan transaction consists of providing a customer cash in exchange for the customers personal check or Automated Clearing House (ACH) authorization (in the aggregate amount of that cash plus a service fee), with an agreement to defer the presentment or deposit of that check or scheduled ACH withdrawal until the customers next payday, which is typically either two weeks or a month from the loans
F-49
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
origination date. An auto title loan allows a customer to obtain a loan using the customers car as collateral for the loan, with a typical loan term of 30 days. Because of the short-term nature of these receivables, we classify all single-pay payday and single-pay auto title loans as current receivables.
Unsecured Installment, Secured Installment and Open-End Loans require periodic payments of principal and interest. Installment Loans are fully amortized loans with a fixed payment amount due each period during the term of the loan. Open-End Loans function much like a revolving line-of-credit, whereby the periodic payment is a set percentage of the customers outstanding loan balance, and there is no defined loan term. The loan terms for Installment Loans can range from 3 to 42 months, depending on state regulations. Installment Loans with a maturity of twelve months or less are classified as current receivables. For Installment Loans with a maturity of greater than twelve months, payments due within twelve months are classified as current receivables, and the payments that are due past twelve months are classified as noncurrent receivables. Open-End Loans are classified as noncurrent receivables. Installment and Open-End Loans are offered as both Secured auto title loans and as Unsecured Loan products. The product offerings differ by jurisdiction and are governed by the laws in each separate jurisdiction.
Provision for Loan Losses and Allowance for Loan Losses
We maintain an allowance for loan losses at a level estimated to be adequate to absorb credit losses associated with our consumer loans receivable. The allowance is shown as a reduction of the consumer loans receivable balance on the accompanying Consolidated Balance Sheets. The allowance is established by loan type and is based upon an evaluation of our historical collection performance and loan losses for each type of loan product.
The allowance for loan losses is primarily based upon models that backtest subsequent collections history for each type of loan product. We do not specifically reserve for any individual loan but rather segregate loans into separate pools based upon loan portfolios containing similar risk characteristics. Additional quantitative factors, such as current default trends and changes to the portfolio mix are also considered in evaluating the accuracy of the models. Qualitative factors such as the impact of new loan products, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions impact managements judgment on the overall adequacy of the allowance for loan losses.
Management believes that the allowance for loan losses is adequate. Potential losses associated with returned checks or ACHs for consumer loans receivable are immediately charged to operations in the period such checks are returned or loan nonpayment occurs, since ultimate collection of these items is uncertain. Delinquent loans are removed from the balance sheet and are charged to the provision for losses. Recoveries are credited to the provision for losses in the period in which the recovery is received.
Credit Services Organization
Through our CSO programs, we act as a credit services organization/credit access business on behalf of customers in accordance with applicable state laws. We currently offer loans through CSO programs in stores and online in the state of Texas and online in the state of Ohio. In Texas we offer Unsecured Installment Loans and Secured Installment Loans with a maximum term of 180 days. In Ohio we offer an Unsecured Installment Loan product with a maximum term of 18 months. As a CSO we earn revenue by charging the customer a fee (the CSO fee) for arranging an unrelated third-party to make a loan to that customer. When a customer executes an agreement with us under our CSO programs, we agree, for a CSO fee payable to us by the customer, to provide certain services to the customer, one of which is to guarantee the customers obligation to repay the
F-50
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
loan the customer receives from the third-party lender. CSO fees are calculated based on the amount of the customers loan. For CSO loans, each lender is responsible for providing the criteria by which the customers application is underwritten and, if approved, determining the amount of the customer loan. We in turn are responsible for assessing whether or not we will guarantee the loan. This guarantee represents an obligation to purchase specific loans if they go into default.
As of December 31, 2016, the maximum amount payable under all such guarantees was $59.6 million, compared to $52.0 million at December 31, 2015. Should we be required to pay any portion of the total amount of the loans we have guaranteed, we will attempt to recover the amount we pay from the customers. We hold no collateral in respect of the guarantees.
These guarantees are performance guarantees as defined in ASC Topic 460. Performance guarantees are initially accounted for pursuant to ASC Topic 460 and recognized at fair value, and subsequently pursuant to ASC Topic 450 as contingent liabilities when we incur losses as the guarantor. The initial measurement of the guarantee liability is recorded at fair value and reported in the Credit services organization guarantee liability line in our Consolidated Balance Sheets. The initial fair value of the guarantee is the price we would pay to a third party market participant to assume the guarantee liability. There is no active market for transferring the guarantee liability. Accordingly, we determine the initial fair value of the guarantee by estimating the expected losses on the guaranteed loans. The expected losses on the guaranteed loans are estimated by assessing the nature of the loan products, the credit worthiness of the borrowers in the customer base, our historical loan default history for similar loans, industry loan default history, and historical collection rates on similar products, current default trends, past-due account roll rates, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. We review the factors that support estimates of expected losses and the guarantee liability monthly. In addition, because the majority of the underlying loan customers make bi-weekly payments, loan-pool payment performance is evaluated more frequently than monthly.
Our guarantee liability was $17.1 million and $17.8 million at December 31, 2016 and December 31, 2015, respectively. This liability represents the unamortized portion of the guarantee obligation required to be recognized at inception of the performance guarantee in accordance with ASC Topic 460 and a contingent liability for those performance guarantees where it is probable that we will be required to purchase the guaranteed loan from the lender in accordance with ASC Topic 450.
CSO fees are calculated based on the amount of the customers loan. We comply with the applicable jurisdictions Credit Services Organization Act or a similar statute. These laws generally define the services that we can provide to consumers and require us to provide a contract to the customer outlining our services and the cost of those services to the customer. For services we provide under our CSO programs, we receive payments from customers on their scheduled loan repayment due dates. The CSO fee is earned ratably over the term of the loan as the customers make payments. If a loan is paid off early, no additional CSO fees are due or collected. The maximum CSO loan term is 180 days and 18 months in Texas and Ohio, respectively. During the years ended December 31, 2016 and 2015, approximately 53.2% and 57.6%, respectively, of Unsecured Installment Loans, and 62.5% and 63.2%, respectively, of Secured Installment Loans originated under CSO programs were paid off prior to the original maturity date.
Since CSO loans are made by a third party lender, we do not include them in our Consolidated Balance Sheets as loans receivable. CSO fees receivable are included in Prepaid expense and other in our Consolidated Balance Sheets. We receive payments from customers for these fees on their scheduled loan repayment due dates.
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CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Variable Interest Entity
As part of our funding strategy and as part of our efforts to support our liquidity from sources other than our traditional capital market sources, we established a securitization program through a U.S. SPV Facility. We transferred certain consumer loan receivables to a wholly-owned, bankruptcy-remote special purpose subsidiary (VIE), that issues term notes backed by the underlying consumer loan receivables and are serviced by another wholly-owned subsidiary.
We are required to evaluate this VIE for consolidation. We have the ability to direct the activities of the VIE that most significantly impact the economic performance of the entities as the servicer of the securitized loan receivables. Additionally, we have the right to receive residual payments, which expose us to potentially significant losses and returns. Accordingly, we determined that we are the primary beneficiary of the VIE and are required to consolidate them. See Note 10Long-Term Debt for further discussion.
Cash Flow Hedge
As of December 31, 2016 we have an outstanding cash flow hedge in which the hedging instrument is a forward extra to sell GBP 4,800,000 with monthly expiration dates through May 2017. We have performed an assessment that determined that all critical terms of the hedging instrument and the hedged transaction match and as such have qualitatively concluded that changes in the hedges intrinsic value will completely offset the change in the expected cash flows based on changes in the spot rate. In making that determination, the guidance in ASC 815-20-25-84 was used. Future assessment will be performed utilizing the guidance in ASC 815-20-35-9 through 35-13, Relative Ease of Assessing Effectiveness. Additionally, in accordance with ASC 815-20-25-82, since the effectiveness of this hedge is assessed based on changes in the hedges intrinsic value, the change in the time value of the contract would be excluded from the assessment of hedge effectiveness.
We recorded the hedges fair value on the balance sheet in current liabilities. Changes in the hedges intrinsic value, to the extent that they are effective as a hedge, are recorded in other comprehensive income. As of December 31, 2016 we have recorded $0.3 million in other comprehensive income associated with this hedge.
Property and Equipment
Property and equipment is carried at cost less accumulated depreciation and amortization, except for property and equipment accounted for as part of a business combination, which is carried at fair value as of the acquisition date less accumulated depreciation and amortization. Expenditures for major additions and improvements are capitalized. Maintenance repairs and renewals, which neither materially add to the value, nor appreciably prolong its life, are charged to expense as incurred. Gains and losses on dispositions of property and equipment are included in operations.
The estimated useful lives for furniture, fixtures and equipment are seven to ten years. The estimated useful lives for leasehold improvements are the shorter of the estimated useful life of the asset, or the term of the lease, and vary from one year to fifteen years.
Goodwill and Other Intangible Assets
Our impairment testing for goodwill and indefinite-lived intangible assets is performed annually during the fourth quarter. However, we test for impairment between our annual tests if an event occurs or if circumstances change that indicate that the asset would be impaired, or, in the case of goodwill, that the fair value of a reporting unit is below its carrying value. These events or circumstances could include a significant change in the business
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
climate, a change in strategic direction, legal factors, operating performance indicators, a change in the competitive environment, the sale or disposition of a significant portion of a reporting unit, or future economic factors.
Goodwill
Goodwill is initially valued based on the excess of the purchase price of a business combination over the fair value of the acquired net assets recognized and represents the future economic benefits arising from other assets acquired that could not be individually identified and separately recognized. Intangible assets other than goodwill are initially valued at fair value. When appropriate, we utilize independent valuation experts to advise and assist us in determining the fair value of the identified intangible assets acquired in connection with a business acquisition and in determining appropriate amortization methods and periods for those intangible assets. Any contingent consideration included as part of the purchase is recognized at its fair value on the acquisition date.
Our annual impairment review for goodwill consists of performing a qualitative assessment to determine whether it is more likely than not that a reporting units fair value is less than its carrying amount as a basis for determining whether or not further testing is required. We may elect to bypass the qualitative assessment and proceed directly to the two-step process, for any reporting unit, in any period. We can resume the qualitative assessment for any reporting unit in any subsequent period. If we determine, on the basis of qualitative factors, that it is more likely than not that the fair value of the reporting unit is less than the carrying amount, we will then apply a two-step process of determining the fair value of the reporting unit and comparing it to the carrying value of the net assets allocated to the reporting unit. When performing the two-step process, if the fair value of the reporting unit exceeds it carrying value, no further analysis or write-down of goodwill is required. In the event the estimated fair value of a reporting unit is less than the carrying value, additional analysis is required. The additional analysis compares the carrying amount of the reporting units goodwill with the implied fair value of the goodwill. The use of external independent valuation experts may be required to assist management in determining the fair value of the reporting unit. The implied fair value of the goodwill is the excess of the fair value of the reporting unit over the fair value amounts assigned to all of the assets and liabilities of that unit as if the reporting unit was acquired in a business combination and the fair value of the reporting unit represented the purchase price. If the carrying value of goodwill exceeds its implied fair value, an impairment loss equal to such excess is recognized, which could significantly and adversely impact reported results of operations and shareholders equity. During the fourth quarter of 2016, we performed the first step of the two-step process and determined that the implied fair value of our reporting units exceed their carrying values, and therefore, the second step was not performed and no further analysis or write-down of goodwill is required.
During the third quarter of 2015, due to the declines in our overall financial performance in the United Kingdom, we determined that a triggering event had occurred requiring an impairment evaluation of our goodwill and other intangible assets in the United Kingdom. As a result, during the third quarter of 2015, we recorded non-cash impairment charges of $2.9 million which were comprised of a $1.8 million charge related to the Wage Day trade name, a $0.2 million charge related to the customer relationships acquired as part of the Wage Day acquisition, and a $0.9 million non-cash goodwill impairment charge in our U.K. reporting segment.
For the U.K. reporting unit, the estimated fair value as determined by the Discounted Cash Flow (DCF) model was lower than the associated carrying value. As a result, management performed the second step of the impairment analysis in order to determine the implied fair value of the U.K.s goodwill. The results of the second-step analysis indicated that the implied fair value of goodwill was £17.7 million. Therefore, in 2015, we recorded a non-cash goodwill impairment charge of £0.6 million ($0.9 million). The key assumptions used to determine the fair value of the U.K. reporting unit included the following: (a) the discount rate was 11%; (b) terminal period growth rate of 2.0%; and (c) effective combined tax rate of 20%.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During the 2015 annual review of goodwill, we performed the qualitative assessment for our United States and Canada reporting units. Management concluded that it was not more likely than not that the estimated fair values of these two reporting units were less than their carrying values. As such, no further analysis was required for these reporting units. As part of this annual impairment test in the fourth quarter, we reviewed our analysis done in the third quarter for the United Kingdom and updated projections as appropriate. Management concluded as a result of this analysis that it was not more likely than not that the estimated fair values of the reporting units were less than their carrying values.
The impairment of the goodwill on our U.K. reporting unit resulted primarily from changes to the regulatory environment in the United Kingdom that resulted in managements downward revision of its cash flow projections for the U.K. reporting unit. The primary driver of decreased volumes in the United Kingdom was the direct result of regulatory changes, primarily the new Financial Conduct Authority (FCA) rules that took effect on July 1, 2014, which reduced loan refinancing transactions from three to two and reduced the number of continuous payment authority attempts from three to two. Additionally, the FCA implemented a rate cap on high-cost short-term credit products that took effect on January 2, 2015. This price cap includes three components: 1) an initial cap of 0.8% of the outstanding principal per day; 2) a default fee fixed rate of £15; and 3) a total cost of credit cap of 100% of the total amount borrowed applying to all interest, fees and charges. With the imposition of the new rate cap, we ceased offering any new Installment Loan products in the United Kingdom in favor of a new rate capped Single-Pay Loan product. Additionally, the increase in compliance requirements has driven up the administrative costs necessary to operate in the United Kingdom. We modeled the impact of all of these regulatory changes in the projections used in our second-step analysis.
Other Intangible Assets
Our identifiable intangible assets, which resulted from business combinations, consist of trade names, customer relationships, computer software, provincial licenses, franchise agreements and positive leasehold interests.
The Wage Day and Cash Money trade names were determined to be intangible assets with indefinite lives. Intangible assets with indefinite lives are not amortized and are tested annually for impairment and are also reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of the asset might not be recoverable. Impairment of identifiable intangible assets with indefinite lives occurs when the fair value of the asset is less than its carrying amount. If impaired, the assets carrying amount is reduced to its fair value. In the fourth quarter of 2016, we tested these intangible assets with indefinite lives for impairment and concluded that no impairment exists as the fair value of these assets is greater than its carrying amounts.
In our interim analysis during the third quarter of 2015 mentioned above, we estimated the fair value of the Wage Day trade name using the relief-from-royalty method, which utilized several significant assumptions, including management projections of future revenue, a royalty rate, a long-term growth rate, and a discount rate. As these assumptions are largely unobservable, the estimate of fair value is considered to be unobservable within the fair value hierarchy. The significant unobservable inputs included projected revenues with annual growth rates, a royalty rate, a growth rate of 2.0% in the terminal period, and a discount rate of 15%. The carrying value of the Wage Day trade name exceeded its estimated fair value by £1.2 million. Accordingly, we recorded an impairment charge of £1.2 million ($1.8 million) during 2015, which was included in Goodwill and intangible asset impairment charges in our Consolidated Statements of Income.
As part of the annual impairment test in the fourth quarter of 2015, we relied on our analysis done in the third quarter for the Wage Day trade name intangible asset. Management concluded as a result of this analysis that the fair value of the asset was equal to its carrying amount.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Our finite lived intangible assets are amortized over their estimated economic benefit period, generally from three to seven years. These finite lived intangible assets are reviewed for impairment whenever events or changes in circumstances have indicated that the carrying amount of these assets might not be recoverable. If we were to determine that events and circumstances warrant a change to the estimate of an identifiable intangible assets remaining useful life, then the remaining carrying amount of the identifiable intangible asset would be amortized prospectively over that revised remaining useful life. Additionally, information resulting from our annual assessment, or other events and circumstances, may indicate that the carrying value of one or more identifiable intangible assets is not recoverable which would result in recognition of an impairment charge. There were no changes in events or circumstances that would cause us to review our finite lived intangible assets for impairment in 2016.
Business Combination Accounting
We have acquired businesses in the past, and we may acquire additional businesses in the future. Business combination accounting requires us to determine the fair value of all assets acquired, including identifiable intangible assets, liabilities assumed, and contingent consideration issued in a business combination. The cost of the acquisition is allocated to these assets and liabilities in amounts equal to the estimated fair value of each asset and liability, and any remaining acquisition cost is classified as goodwill. This allocation process requires extensive use of estimates and assumptions, including estimates of future cash flows to be generated by the acquired assets. We engage third-party appraisal firms to assist in fair value determination when appropriate. Our acquisitions may also include contingent consideration, or earn-out provisions, which provide for additional consideration to be paid to the seller if certain future conditions are met. These earn-out provisions are estimated and recognized at fair value at the acquisition date based on projected earnings or other financial metrics over specified periods after the acquisition date. These estimates are reviewed during each reporting period and adjusted based upon actual results. Acquisition-related costs for potential and completed acquisitions are expensed as incurred, and are included in corporate expense in the Consolidated Statements of Income.
Deferred Financing Costs
Deferred financing costs consist of debt issuance costs incurred in obtaining financing. These costs are presented in the balance sheet as a direct reduction from the carrying amount of associated debt, consistent with discounts or premiums. The effective interest rate method is used to amortize the deferred financing costs over the life of the notes and the straight-line method is used to amortize the deferred financing costs of the Non-Recourse U.S. SPV facility.
Financial Instruments
The carrying amounts reflected in the Consolidated Balance Sheets for cash, loans receivable, borrowings under credit facilities and accounts payable approximate fair value due to their short maturities and applicable interest rates. The outstanding borrowings under our credit facilities are variable interest rate debt instruments and their fair value approximates their carrying value due to the borrowing rates currently available to us for debt with similar terms.
Deferred Rent
We have entered into operating lease agreements for store locations and corporate offices, some of which contain provisions for future rent increases or periods in which rent payments are reduced (abated). In accordance with generally accepted accounting principles, we record monthly rent expense equal to the total of the payments due over the lease term, divided by the number of months of the lease term. The difference between
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
rent expense recorded and the amount paid is charged to Deferred rent which is reflected as a separate line item in the accompanying Consolidated Balance Sheets.
Advertising Costs
Advertising costs are expensed as incurred.
Revenue Recognition
Revenue in the consolidated statements of income includes: interest income, finance charges, CSO fees, late fees and non-sufficient funds fees as permitted by applicable laws and pursuant to the agreement with the customer. We offer a variety of consumer loan products, including payday loans, title loans and signature loans. These loans can be offered as either Single-Pay Loans or Installment Loans. Installment Loans require periodic payments of principal and interest. Installment Loans are fully amortized loans with a fixed payment amount due each period during the term of the loan. We also offer an Open-End Loan product in certain markets. Open-End Loans function much like a revolving line-of-credit, whereby the periodic payment is a set percentage of the customers outstanding loan balance, and there is no set maturity date. Lending laws in the jurisdictions in which we conduct business determine the repayment terms that can be offered for each of our loan products. Single-Pay Loans require full repayment of principal and interest on the loans due date, which typically ranges from 11 to 40 days from the loans origination date. The due date is set to coincide with the customers pay date.
Installment Loans are payable in periodic payments of principal and accrued interest. Open-End Loans are payable based on a periodic payment that is a set percentage of the customers outstanding loan balance. We record revenue from Installment and Open-End Loans on a simple interest basis. Unpaid and accrued interest and fees are included in Consumer loans receivable, less allowance for loan losses in the Consolidated Balance Sheets.
Revenues from Single-Pay Loan products are recognized each period on a constant yield basis ratably over the term of each loan. We defer recognition of the unearned fees we expect to collect based on the remaining term of the loan at the end of each reporting period.
Check cashing fees, money order fees and other fees from ancillary products and services are generally recognized at the point-of-sale when the transaction is completed.
Share-Based Compensation
We account for share-based compensation expense for awards to our employees and directors at the estimated fair value on the grant date. The fair value of stock option grants is determined using the Black-Scholes option pricing model, which requires us to make several assumptions including, but not limited to, risk-free interest rate, and the expected volatility of publicly traded stocks from our industry section, which we have determined to include the alternative financial sector. Our expected option term is calculated using the average of the vesting period and the original contractual term. The estimated fair value of share-based awards is recognized as compensation expense on a straight-line basis over the vesting period.
Income Taxes
A deferred tax asset or liability is recognized for the anticipated future tax consequences of temporary differences between the tax basis of assets or liabilities and their reported amounts in the financial statements and for operating loss and tax credit carryforwards. A valuation allowance is provided when, in the opinion of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
management, it is more likely than not that some portion or all of a deferred tax asset will not be realized. Realization of the deferred tax assets is dependent on our ability to generate sufficient future taxable income and, if necessary, execution of our tax planning strategies. In the event we determine that future taxable income, taking into consideration tax planning strategies, may not generate sufficient taxable income to fully realize net deferred tax assets, we may be required to establish or increase valuation allowances by a charge to income tax expense in the period such a determination is made. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date.
We follow accounting guidance which prescribes a comprehensive model for how companies should recognize, measure, present, and disclose in their financial statements uncertain tax positions taken or expected to be taken on a tax return. Under this guidance, tax positions are initially recognized in the financial statements when it is more likely than not the position will be sustained upon examination by the tax authorities. Such tax positions are initially and subsequently measured as the largest amount of tax benefit that is greater than 50% likely of being realized upon ultimate settlement with the tax authority assuming full knowledge of the position and all relevant facts. Application of this guidance requires numerous estimates based on available information. We consider many factors when evaluating and estimating our tax positions and tax benefits, and our recognized tax positions and tax benefits may not accurately anticipate actual outcomes. As we obtain additional information, we may need to periodically adjust our recognized tax positions and tax benefits. For additional information related to uncertain tax positions, see Note 13 Income Taxes.
Foreign Currency Translation
The local currencies are considered the functional currencies for our operations in the United Kingdom and Canada. All balance sheet accounts are translated into U.S. dollars at the current exchange rate at each period end. The income statement is translated at the average rates of exchange for the period. We have determined that certain of our intercompany balances are long-term in nature, and therefore, currency translation adjustments related to those accounts are recorded as a component of accumulated other comprehensive income (loss) in the Statements of Stockholders Equity. For intercompany balances that are settled on a regular basis, currency translation adjustments related to those accounts are recorded as a component of Other, net in the Consolidated Statements of Income.
Accumulated Other Comprehensive Loss
Accumulated other comprehensive loss at December 31, 2016 and 2015 were as follows:
(in thousands) |
December 31,
2016 |
December 31,
2015 |
||||||
Foreign currency translation adjustment |
$ | (59,652 | ) | $ | (53,630 | ) | ||
Cash flow hedge |
(333 | ) | | |||||
|
|
|
|
|||||
Total |
$ | (59,985 | ) | $ | (53,630 | ) | ||
|
|
|
|
Recently Adopted Accounting Pronouncements
In April 2015, the Financial Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) 2015-03, Simplifying the Presentation of Debt Issuance Costs (ASU 2015-03), which requires that debt issuance costs be presented in the balance sheet as a direct deduction from the carrying amount of associated
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
debt, consistent with discounts or premiums. We adopted the provisions of this ASU in the first quarter of 2016, and reclassified $8.5 million and $5.9 million to Long-term debt as of December 31, 2016 and December 31, 2015, respectively. Debt issuance costs had previously been reported as Deferred financing costs, a component of long-term assets, in our Consolidated Balance Sheets.
In August 2014, the FASB issued ASU 2014-15, Presentation of Financial StatementsGoing Concern (Subtopic 205-40) (ASU 2014-15) , which provides new guidance on determining when and how reporting entities must disclose going-concern uncertainties in their financial statements and is intended to enhance the timeliness, clarity and consistency of disclosure concerning such uncertainties. The new guidance requires management to perform assessments, on an interim and annual basis, of an entitys ability to continue as a going concern within one year of the date of issuance of the entitys interim or annual financial statements, as applicable. In addition, entities must provide certain disclosures if there is substantial doubt about the entitys ability to continue as a going concern. The guidance is effective for annual periods ending after December 15, 2016, and interim periods ending thereafter, with early adoption permitted. The adoption of ASU 2014-15 did not have a material effect on our consolidated financial statements.
Recently Issued Accounting Pronouncements Not Yet Adopted
In January 2017, the FASB issued ASU 2017-04, IntangiblesGoodwill and Other (Topic 350): Simplifying the Test for Goodwill Impairment (ASU 2017-04). The amendments in ASU 2017-04 simplified the goodwill impairment test by eliminating Step 2 of the test which requires an entity to compute the implied fair value of goodwill. Instead, an entity should recognize an impairment charge for the amount by which the carrying amount exceeds the reporting units fair value, and is limited to the amount of total goodwill allocated to that reporting unit. Under this ASU, an entity still has the option to perform the qualitative assessment for a reporting unit to determine if the quantitative impairment test is necessary. The provisions of ASU 2017-04 are effective for an entitys annual or interim goodwill impairment tests in fiscal years beginning after December 15, 2020. We are currently assessing the impact the adoption of ASU 2017-04 will have on our consolidated financial statements and footnote disclosures.
In January 2017, the FASB issued ASU 2017-01, Business Combinations (Topic 805): Clarifying the definition of a Business (ASU 2017-01). The amendments in ASU 2017-01 narrow the definition of a business and provide a framework that gives an entity a basis for making reasonable judgments about whether a transaction involves an asset or a business and provide a screen to determine when a set (an integrated set of assets and activities) is not a business. The screen requires a determination that when substantially all of the fair value of the gross assets acquired is concentrated in a single identifiable asset or a group of similar identifiable assets, the set is not a business. If the screen is not met, the amendments in this Update (1) require that to be considered a business, a set must include, at a minimum, an input and a substantive process that together significantly contribute to the ability to create output and (2) remove the evaluation of whether a market participant could replace missing elements. The amendments provide a framework to assist entities in evaluating whether both an input and a substantive process are present. We are currently assessing the impact the adoption of ASU 2017-01 will have on our consolidated financial statements and footnote disclosures.
In October 2016, the FASB issued ASU 2016-17, Consolidation (Topic 810): Interests Held Through Related Parties that are Under Common Control (ASU 2016-17). The amendments affect the evaluation of whether to consolidate a VIE in certain situations involving entities under common control. Specifically, the amendments change the evaluation of whether an entity is the primary beneficiary of a VIE for an entity that is a single decision maker of a variable interest by changing how an entity treats indirect interests in the VIE held through related parties that are under common control with the reporting entity. The guidance in ASU 2016-17 must be applied retrospectively to all relevant periods. ASU 2016-17 will be effective for us beginning January 1,
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
2017. We are currently assessing the impact the adoption of ASU 2016-17 will have on our consolidated financial statements and footnote disclosures.
In August 2016, the FASB issued ASU 2016-15, Statement of Cash Flows (Topic 230): Classification of Certain Cash Receipts and Cash Payments (a consensus of the Emerging Issues Task Force) (ASU 2016-15). The amendments in ASU 2016-15 provide guidance on eight specific cash flow issues, including debt prepayment or debt extinguishment costs, contingent consideration payments made after a business combination, distributions received from equity method investees and beneficial interests in securitization transactions. ASU 2016-15 will be effective for us beginning January 1, 2019. Early adoption is permitted, including adoption in an interim period. We are assessing the potential impact this ASU will have on our statement of cash flows.
In June 2016, the FASB issued ASU 2016-13, Financial InstrumentsCredit Losses (Topic 326): Measurement of Credit Losses on Financial Instruments (ASU 2016-13). This ASU modifies the impairment model to utilize an expected loss methodology in place of the currently used incurred loss methodology, which will result in the more timely recognition of losses. ASU 2016-13 will be effective for us beginning January 1, 2021. We are currently evaluating the impact this ASU will have on our Consolidated Financial Statements.
In March 2016, the FASB issued ASU 2016-09, Improvements to Employee Share-Based Payment Accounting (ASU 2016-09). The amendments in ASU 2016-09 simplify several aspects of the accounting for share-based payment transactions, including the income tax consequences, classification of awards as either equity or liabilities and classification on the statement of cash flows. ASU 2016-09 is effective for us beginning January 1, 2017, with early adoption permitted. We are currently evaluating the impact this ASU will have on our Consolidated Financial Statements.
In February 2016, the FASB issued its new lease accounting guidance in ASU No. 2016-02, Leases (Topic 842) (ASU 2016-02). Under the new guidance, lessees will be required to recognize the following for all leases (with the exception of short-term leases) at the commencement date: (i) a lease liability, which is a lessees obligation to make lease payment arising from a lease, measured on a discounted basis; and (ii) a right-of-use asset, which is an asset that represents the lessees right to use, or control the use of, a specified asset for the lease term. Under the new guidance, lessor accounting is largely unchanged and lessees will no longer be provided with a source of off-balance sheet financing. This ASU is effective for us beginning on January 1, 2020. Early adoption is permitted. Lessees (for capital and operating leases) and lessors (for sales-type, direct financing, and operating leases) must apply a modified retrospective transition approach for leases existing at, or entered into after, the beginning of the earliest comparative period presented in the financial statements. The modified retrospective approach would not require any transition accounting for leases that expired before the earliest comparative period presented. Lessees and lessors may not apply a full retrospective transition approach. We are currently evaluating the impact this ASU will have on our Consolidated Financial Statements.
In January 2016, the FASB issued ASU No. 2016-01, Financial Instruments-Overall (Subtopic 825-10): Recognition and Measurement of Financial Assets and Financial Liabilities (ASU 2016-01) which requires (i) equity investments (except those accounted for under the equity method of accounting, or those that result in consolidation of the investee) to be measured at fair value with changes in fair value recognized in net income, (ii) public business entities to use the exit price notion when measuring the fair value of financial instruments for disclosure purposes and (iii) separate presentation of financial assets and financial liabilities by measurement category and form of financial asset (i.e., securities or loans and receivables). This amendment eliminates the requirement for public business entities to disclose the method(s) and significant assumptions used to estimate the fair value that is required to be disclosed for financial instruments measured at amortized cost. This amendment is effective for us beginning on January 1, 2019. We are currently evaluating the impact this ASU will have on our Consolidated Financial Statements.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
In November 2015, the FASB issued ASU No. 2015-17, Income Taxes (Topic 740): Balance Sheet Classification of Deferred Taxes (ASU 2015-17). This amendment eliminates the current requirement for organizations to present deferred tax liabilities and assets as current and noncurrent in a classified balance sheet. Instead, organizations will be required to classify all deferred tax assets and liabilities as noncurrent. The new standard becomes effective for us on January 1, 2018. We do not expect that the adoption of this amendment will have a material impact on our Consolidated Financial Statements.
In September 2015, the FASB issued ASU 2015-16, Business Combinations (Topic 805): Simplifying the Accounting for Measurement-Period Adjustments (ASU 2015-16), which requires an acquirer recognize adjustments to provisional amounts that are identified during the measurement period in the reporting period in which the adjustment amounts are determined and eliminates the requirement to retrospectively account for those adjustments. The new standard becomes effective for us on January 1, 2017. Early adoption is permitted. The amendments in this update should be applied prospectively to adjustments to provisional amounts that occur after the effective date of this update. We do not expect that the adoption of this new guidance will have a material effect on our Consolidated Financial Statements.
In August 2015, the FASB issued ASU 2015-14, Revenue from Contracts with Customers (Topic 606) (ASU 2015-14), which deferred the effect date of ASU 2014-09, Revenue from Contracts with Customers (Topic 606) (ASU 2014-09), to annual reporting periods beginning after December 15, 2018 for entities other than public business entities, certain not-for-profit entities, and certain employee benefit plans. In May 2014, the FASB issued ASU 2014-09 which amended the existing accounting standards for revenue recognition. ASU 2014-09 establishes principles for recognizing revenue upon the transfer of promised goods or services to customers, in an amount that reflects the expected consideration received in exchange for those goods or services. The guidance is effective for us beginning January 1, 2019. We have not yet determined the potential effects on the Consolidated Financial Statements, if any.
NOTE 2PREPAID EXPENSES AND OTHER
Prepaid expenses and other current assets at December 31, 2016 and 2015 were are follows:
(in thousands) |
December 31,
2016 |
December 31,
2015 |
||||||
Settlements due from third-party lenders |
$ | 18,576 | $ | 16,876 | ||||
Fees receivable for third-party loans |
9,181 | 8,914 | ||||||
Prepaid expenses |
5,892 | 5,201 | ||||||
Other current assets |
5,599 | 2,485 | ||||||
|
|
|
|
|||||
Total |
$ | 39,248 | $ | 33,476 | ||||
|
|
|
|
NOTE 3PROPERTY AND EQUIPMENT
The classification of property and equipment is as follows:
(in thousands) |
December 31,
2016 |
December 31,
2015 |
||||||
Leasehold improvements |
$ | 122,419 | $ | 116,703 | ||||
Furniture, fixtures and equipment |
35,060 | 30,345 | ||||||
|
|
|
|
|||||
Property and equipment, gross |
157,479 | 147,048 | ||||||
Less accumulated depreciation |
(61,583 | ) | (47,341 | ) | ||||
|
|
|
|
|||||
Property and equipment, net |
$ | 95,896 | $ | 99,707 | ||||
|
|
|
|
F-60
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Depreciation expense for the years ended December 31, 2016 and 2015 was $15.4 million and $14.5 million, respectively.
NOTE 4GOODWILL AND INTANGIBLES
The change in the carrying amount of goodwill, by operating segment, for 2016 and 2015 was as follows:
(in thousands) |
U.S. | U.K. | Canada | Total | ||||||||||||
Balance as of January 1, 2015 |
$ | 91,131 | $ | 28,577 | $ | 33,102 | $ | 152,810 | ||||||||
Impairment |
| (905 | ) | | (905 | ) | ||||||||||
Foreign currency translation |
| (1,475 | ) | (5,395 | ) | (6,870 | ) | |||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance as of December 31, 2015 |
91,131 | 26,197 | 27,707 | 145,035 | ||||||||||||
Foreign currency translation |
| (4,315 | ) | 834 | (3,481 | ) | ||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance as of December 31, 2016 |
$ | 91,131 | $ | 21,882 | $ | 28,541 | $ | 141,554 | ||||||||
|
|
|
|
|
|
|
|
Identifiable intangible assets as of December 31, 2016 and 2015 consisted of the following:
2016 | 2015 | |||||||||||||||
(in thousands) |
Gross
Carrying Amount |
Accumulated
Amortization |
Gross
Carrying Amount |
Accumulated
Amortization |
||||||||||||
Trade name |
$ | 25,046 | $ | 12 | $ | 25,676 | $ | 634 | ||||||||
Customer relationships |
26,411 | 23,603 | 27,710 | 23,174 | ||||||||||||
Computer software |
16,429 | 13,370 | 15,440 | 12,322 | ||||||||||||
Provincial licenses |
372 | 372 | 361 | 361 | ||||||||||||
Franchise agreements |
298 | 298 | 289 | 289 | ||||||||||||
Positive leasehold interests |
15 | 15 | 11 | 11 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance, end of year |
$ | 68,571 | $ | 37,670 | $ | 69,487 | $ | 36,791 | ||||||||
|
|
|
|
|
|
|
|
As a result of our 2015 analysis of the Wage Day trade name intangible asset, we recorded an impairment charge of £1.2 million ($1.8 million). These amounts are included in Goodwill and intangible asset impairment charges in our Consolidated Statements of Income.
As a result of our 2015 analysis of the customer relationship intangible asset associated with the Wage Day acquisition, we recorded an impairment charge of £0.1 million ($0.2 million). These amounts are included in Goodwill and intangible asset impairment charges in our Consolidated Statements of Income.
Our identifiable intangible assets are amortized using the straight-line method over the estimated remaining useful lives, except for the Wage Day and Cash Money trade name intangible assets, which were determined to have indefinite lives and are not amortized. The estimated useful lives for our other intangible assets range from 1 to 8 years. Aggregate amortization expense related to identifiable intangible assets was $3.5 million and $4.6 million for the years ended December 31, 2016 and 2015, respectively.
F-61
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table outlines the estimated future amortization expense for the next five years related to intangible assets held at December 31, 2016:
(in thousands) |
||||
Year ending December 31, 2017 |
$ | 2,296 | ||
2018 |
1,987 | |||
2019 |
1,389 | |||
2020 |
161 | |||
2021 |
7 |
NOTE 5RESTRICTED CASH
At December 31, 2016 and 2015 we had $23.8 million and $28.3 million, respectively, on deposit in collateral accounts with financial institutions. At December 31, 2016, $5.1 million and $18.7 million were included as a component of Restricted cash and Prepaid expenses and other, respectively, in our Consolidated Balance Sheets. At December 31, 2015, approximately $11.8 million and $16.5 million were included as a component of Restricted cash and Prepaid expenses and other, respectively, in our Consolidated Balance Sheets.
As a result of the securitization program that commenced in 2016 and disclosed in Note 10Long-Term Debt , $2.8 million was included as Restricted cash of consolidated VIE in our Consolidated Balance Sheets at December 31, 2016.
NOTE 6LOANS RECEIVABLE AND REVENUE
Unsecured and Secured Installment revenue includes interest income and non-sufficient-funds or returned-items fees on late or defaulted payments on past-due loans (collectively, late fees). Late fees comprise less than one-half of one percent of Installment revenues.
Open-End revenues include interest income on outstanding revolving balances and other usage or maintenance fees as permitted by underlying statutes.
Single-Pay revenues represent deferred presentment or other fees as defined by the underlying state, provincial or national regulations.
The following table summarizes revenue by product for the periods indicated:
Year Ended
December 31, |
||||||||
(dollars in thousands) |
2016 | 2015 | ||||||
Unsecured Installment |
$ | 330,713 | $ | 314,383 | ||||
Secured Installment |
81,453 | 86,325 | ||||||
Open-End |
66,948 | 51,311 | ||||||
Single-Pay |
313,276 | 321,597 | ||||||
Ancillary |
36,206 | 39,515 | ||||||
|
|
|
|
|||||
Total revenue |
$ | 828,596 | $ | 813,131 | ||||
|
|
|
|
F-62
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Loans receivable consisted of the following:
December 31, 2016 | ||||||||||||||||||||
(dollars in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Total | |||||||||||||||
Current loans receivable |
$ | 90,487 | $ | 102,090 | $ | 63,157 | $ | 30,462 | $ | 286,196 | ||||||||||
Delinquent loans receivable |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans receivable |
90,487 | 102,090 | 63,157 | 30,462 | 286,196 | |||||||||||||||
Less: allowance for losses |
(5,501 | ) | (17,775 | ) | (10,737 | ) | (5,179 | ) | (39,192 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans receivable, net |
$ | 84,986 | $ | 84,315 | $ | 52,420 | $ | 25,283 | $ | 247,004 | ||||||||||
|
|
|
|
|
|
|
|
|
|
Loans receivable consisted of the following:
December 31, 2015 | ||||||||||||||||||||
(dollars in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Total | |||||||||||||||
Current loans receivable |
$ | 104,258 | $ | 67,647 | $ | 54,361 | $ | 25,914 | $ | 252,180 | ||||||||||
Delinquent loans receivable |
| | | | | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Total loans receivable |
104,258 | 67,647 | 54,361 | 25,914 | 252,180 | |||||||||||||||
Less: allowance for losses |
(8,313 | ) | (10,603 | ) | (9,209 | ) | (4,823 | ) | (32,948 | ) | ||||||||||
|
|
|
|
|
|
|
|
|
|
|||||||||||
Loans receivable, net |
$ | 95,945 | $ | 57,044 | $ | 45,152 | $ | 21,091 | $ | 219,232 | ||||||||||
|
|
|
|
|
|
|
|
|
|
In order to manage our portfolio of consumer loans effectively, we utilize a variety of proprietary underwriting criteria, monitor the performance of the portfolio, and maintain either an allowance or accrual for losses on consumer loans (including fees and interest) at a level estimated to be adequate to absorb credit losses inherent in the portfolio. We have defined our portfolio segment as consumer loans. We do not specifically reserve for any individual loan but rather segregate loans into separate pools based upon loan portfolios containing similar risk characteristics. The portfolios include balances outstanding from all consumer loans, including short-term single payment loans and installment loans. In addition, we maintain an accrual for losses related to loans guaranteed under our CSO programs. Because our revenue from consumer lending activities is generated through a high volume of small-dollar transactions, our exposure to loss from a single customer transaction is minimal. Increases in our allowance, net of charge-offs and recoveries, are recorded as a Provision for losses in our Consolidated Statements of Income. Recoveries on loans previously charged to the allowance are credited to the allowance when collected.
Our Unsecured Installment, Secured Installment and Open-End Loans are typically for larger amounts than the single pay loans. Unsecured Installment Loans are for a duration of up to 48 months, and Secured Installment Loans for a duration of up to 42 months; and Open-End Loans have an indefinite term. Unsecured Installment and Secured Installment Loans are considered delinquent and charged-off when a payment has not been made on the due date.
Our Single-Pay Loans are typically small dollar loans, and generally are for a term of up to 62 days. The entire amount of principal and interest is due at the end of the loan term. Single-Pay Loans are considered delinquent and charged-off when a payment has not been made on the due date.
When evaluating the adequacy of our allowance for loan losses we consider both quantitative and qualitative factors which include: the review of subsequent receipts; a review of current period charge offs, net of
F-63
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
recoveries, as a percentage of revenues; the impact of new loan products; changes to underwriting criteria or lending policies; new store development or entrance into new markets; changes in regulations or laws; recent credit trends; and general economic conditions. The accuracy of our allowance estimates is dependent upon several factors, including our ability to predict future default rates based on historical trends and expected future events.
Although the balance is not part of our allowance for loan losses, the process for evaluating and estimating credit risk for the loans guaranteed under our CSO programs is similar to that of our consumer loan portfolio because CSO loans are offered as single pay or installment products, and are therefore evaluated in a manner similar to our Single-Pay or Installment Loans. The liability for estimated losses related to loans guaranteed under our CSO programs is initially recorded at fair value and is included in Credit service organization guarantee liability in the consolidated balance sheets.
The following table summarizes the activity in the allowance for loan losses during the year ended December 31, 2016:
Year Ended December 31, 2016 | ||||||||||||||||||||||||
(dollars in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Other | Total | ||||||||||||||||||
Balance, beginning of period |
$ | 8,313 | $ | 10,603 | $ | 9,209 | $ | 4,823 | $ | | $ | 32,948 | ||||||||||||
Charge-offs |
(225,066 | ) | (165,843 | ) | (145,160 | ) | (86,586 | ) | (5,786 | ) | (628,441 | ) | ||||||||||||
Recoveries |
157,398 | 120,446 | 128,886 | 62,859 | 3,671 | 473,260 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(67,668 | ) | (45,397 | ) | (16,274 | ) | (23,727 | ) | (2,115 | ) | (155,181 | ) | ||||||||||||
Provision for losses |
64,919 | 52,776 | 17,802 | 24,083 | 2,115 | 161,695 | ||||||||||||||||||
Effect of foreign currency translation |
(63 | ) | (207 | ) | | | | (270 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, end of period |
$ | 5,501 | $ | 17,775 | $ | 10,737 | $ | 5,179 | $ | | $ | 39,192 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance for loan losses as a percentage of gross loan receivables |
6.1 | % | 17.4 | % | 17.0 | % | 17.0 | % | N/A | 13.7 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Summary of the activity in the CSO guarantee liability during the year ended December 31, 2016:
Year Ended December 31, 2016 | ||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Total | ||||||||||||
Balance, beginning of period |
$ | 334 | $ | 15,910 | $ | 1,507 | $ | 17,751 | ||||||||
Charge-offs |
(17,379 | ) | (164,853 | ) | (16,930 | ) | (199,162 | ) | ||||||||
Recoveries |
4,807 | 83,112 | 13,950 | 101,869 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net charge-offs |
(12,572 | ) | (81,741 | ) | (2,980 | ) | (97,293 | ) | ||||||||
Provision for losses |
12,512 | 81,461 | 2,621 | 96,594 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance, end of period |
$ | 274 | $ | 15,630 | $ | 1,148 | $ | 17,052 | ||||||||
|
|
|
|
|
|
|
|
F-64
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the activity in the allowance for loan losses and the CSO guarantee liability, in total, during the year ended December 31, 2016.
Year Ended December 31, 2016 | ||||||||||||||||||||||||
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Other | Total | |||||||||||||||||||
Balance, beginning of period |
$ | 8,647 | $ | 26,513 | $ | 10,716 | $ | 4,823 | $ | | $ | 50,699 | ||||||||||||
Charge-offs |
(242,445 | ) | (330,696 | ) | (162,090 | ) | (86,586 | ) | (5,786 | ) | (827,603 | ) | ||||||||||||
Recoveries |
162,205 | 203,558 | 142,836 | 62,859 | 3,671 | 575,129 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(80,240 | ) | (127,138 | ) | (19,254 | ) | (23,727 | ) | (2,115 | ) | (252,474 | ) | ||||||||||||
Provision for losses |
77,431 | 134,237 | 20,423 | 24,083 | 2,115 | 258,289 | ||||||||||||||||||
CTA |
(63 | ) | (207 | ) | | | | (270 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, end of period |
$ | 5,775 | $ | 33,405 | $ | 11,885 | $ | 5,179 | $ | | $ | 56,244 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
The following table summarizes the activity in the allowance for loan losses during the year ended December 31, 2015:
Year Ended December 31, 2015 | ||||||||||||||||||||||||
(dollars in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Other | Total | ||||||||||||||||||
Balance, beginning of period |
$ | 8,312 | $ | 8,680 | $ | 8,726 | $ | 3,969 | $ | | $ | 29,687 | ||||||||||||
Charge-offs |
(277,932 | ) | (119,704 | ) | (134,159 | ) | (57,960 | ) | (6,348 | ) | (596,103 | ) | ||||||||||||
Recoveries |
171,126 | 70,485 | 117,419 | 48,545 | 3,820 | 411,395 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(106,806 | ) | (49,219 | ) | (16,740 | ) | (9,415 | ) | (2,528 | ) | (184,708 | ) | ||||||||||||
Provision for losses |
107,458 | 51,170 | 17,223 | 10,269 | 2,528 | 188,648 | ||||||||||||||||||
Effect of foreign currency translation |
(651 | ) | (28 | ) | | | | (679 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, end of period |
$ | 8,313 | $ | 10,603 | $ | 9,209 | $ | 4,823 | $ | | $ | 32,948 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Allowance for loan losses as a percentage of gross loan receivables |
8.0 | % | 15.7 | % | 16.9 | % | 18.6 | % | N/A | 13.1 | % | |||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
Summary of the activity in the CSO guarantee liability during the year ended December 31, 2015.
Year Ended December 31, 2015 | ||||||||||||||||
(in thousands) |
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Total | ||||||||||||
Balance, beginning of period |
$ | | $ | 15,187 | $ | 1,439 | $ | 16,626 | ||||||||
Charge-offs |
(162 | ) | (163,960 | ) | (20,415 | ) | (184,537 | ) | ||||||||
Recoveries |
300 | 75,225 | 17,575 | 93,100 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Net charge-offs |
138 | (88,735 | ) | (2,840 | ) | (91,437 | ) | |||||||||
Provision for losses |
196 | 89,458 | 2,908 | 92,562 | ||||||||||||
|
|
|
|
|
|
|
|
|||||||||
Balance, end of period |
$ | 334 | $ | 15,910 | $ | 1,507 | $ | 17,751 | ||||||||
|
|
|
|
|
|
|
|
F-65
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table summarizes the activity in the allowance for loan losses and the CSO guarantee liability, in total, during the year ended December 31, 2015.
Year Ended December 31, 2015 | ||||||||||||||||||||||||
Single-Pay |
Installment
Unsecured |
Installment
Secured |
Open-End | Other | Total | |||||||||||||||||||
Balance, beginning of period |
$ | 8,312 | $ | 23,867 | $ | 10,165 | $ | 3,969 | $ | | $ | 46,313 | ||||||||||||
Charge-offs |
(278,094 | ) | (283,664 | ) | (154,574 | ) | (57,960 | ) | (6,348 | ) | (780,640 | ) | ||||||||||||
Recoveries |
171,426 | 145,710 | 134,994 | 48,545 | 3,820 | 504,495 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Net charge-offs |
(106,668 | ) | (137,954 | ) | (19,580 | ) | (9,415 | ) | (2,528 | ) | (276,145 | ) | ||||||||||||
Provision for losses |
107,654 | 140,628 | 20,131 | 10,269 | 2,528 | 281,210 | ||||||||||||||||||
CTA |
(651 | ) | (28 | ) | | | | (679 | ) | |||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||
Balance, end of period |
$ | 8,647 | $ | 26,513 | $ | 10,716 | $ | 4,823 | $ | | $ | 50,699 | ||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
NOTE 7CREDIT SERVICES ORGANIZATION
The CSO fee receivable amounts under our CSO programs were $9.2 million and $8.9 million at December 31, 2016 and 2015, respectively. As noted, we bear the risk of loss through our guarantee to purchase any defaulted customer loans from the lenders. The terms of these loans range from six to eighteen months. This guarantee represents an obligation to purchase specific loans that go into default. (See Note 1 for a description of our accounting policies.) As of December 31, 2016 and 2015, the maximum amount payable under all such guarantees was $59.6 million and $52.0 million, respectively. Should we be required to pay any portion of the total amount of the loans we have guaranteed, we will attempt to recover the amount we pay from the customers. We hold no collateral in respect of the guarantees. The initial measurement of this guarantee liability is recorded at fair value and reported in the Credit services organization guarantee liability line in our Consolidated Balance Sheets. The fair value of the guarantee is measured by assessing the nature of the loan products, the credit worthiness of the borrowers in the customer base, the Companys historical loan default history for similar loans, industry loan default history, and historical collection rates on similar products, current default trends, past-due account roll rates, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. Our guarantee liability was $17.1 million and $17.8 million at December 31, 2016 and 2015, respectively.
We have placed $18.7 million and $16.5 million in collateral accounts for the lenders at December 31, 2016 and 2015, respectively, which is reported in Prepaid expenses and other in the Interim Consolidated Balance Sheets. The balances required to be maintained in these collateral accounts vary based upon lender, but are typically based on a percentage of the outstanding loan balances held by the lender. The percentage of outstanding loan balances required for collateral is defined within the terms agreed to between us and each such lender.
F-66
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 8ACCOUNTS PAYABLE AND ACCRUED LIABILITIES
Accounts payable and accrued liabilities at December 31, 2016 and 2015 were as follows:
(in thousands) |
December 31,
2016 |
December 31,
2015 |
||||||
Trade accounts payable |
$ | 18,588 | $ | 17,107 | ||||
Money orders payable |
7,356 | 7,771 | ||||||
Accrued taxes, other than income taxes |
447 | 406 | ||||||
Accrued payroll and fringe benefits |
14,621 | 15,526 | ||||||
Reserve for store closure costs |
1,258 | 1,972 | ||||||
Other accrued liabilities |
393 | 368 | ||||||
|
|
|
|
|||||
Total |
$ | 42,663 | $ | 43,150 | ||||
|
|
|
|
NOTE 9RESTRUCTURING COSTS
Impairments, store closure and severance costs for the year ended December 31, 2016 were as follows:
(in thousands) |
Year Ended
December 31, 2016 |
Year Ended
December 31, 2015 |
||||||
Lease obligations and related costs |
$ | 1,620 | $ | 1,711 | ||||
Write-down and loss on disposal of fixed assets |
772 | 2,253 | ||||||
Severance costs |
1,226 | 327 | ||||||
|
|
|
|
|||||
Ending balance |
$ | 3,618 | $ | 4,291 | ||||
|
|
|
|
Activity for the closed store reserve for the year ended December 31, 2016 was as follows:
(in thousands) |
Year Ended
December 31, 2016 |
|||
Beginning balance |
$ | 1,972 | ||
Additions and adjustments |
2,812 | |||
Payments and write-downs |
(3,526 | ) | ||
|
|
|||
Ending balance |
$ | 1,258 | ||
|
|
Closed store reserves of $1.3 million are included in the Accounts payable and accrued liabilities line item on the accompanying Consolidated Balance Sheets at December 31, 2016.
In July 2016, we eliminated 35 Corporate positions in our Canadian headquarters. The eliminated positions, primarily Finance and IT, comprised 49% of total Corporate headcount in Canada and represented approximately $2.5 million in annualized salaries and benefits costs. The transition of the related duties to our U.S. headquarters was completed in the third quarter of 2016. Total related severance cost, the majority of which was statutory, was approximately $1.2 million, and is included in Restructuring costs in our Consolidated Statements of Income for the year ended December 31, 2016. At December 31, 2016 we have accrued $0.4 million of expense for estimated severance payments yet to be paid.
F-67
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
During 2016 we closed 7 underperforming acquired Money Box stores in Texas and determined that we were unable to reopen a Missouri store that was damaged by a fire. Our 2016 results include $1.4 million of charges related to these store closures primarily consisting of certain lease obligations and the write-down and loss on the disposal of fixed assets.
In December 2015, we closed ten store locations in the United Kingdom as part of an overall plan to reduce operating losses in the wake of ongoing regulatory and market changes in the United Kingdom. These stores were all closed in December. Our 2015 results include $4.3 million of charges relating to these store closures primarily consisting of certain lease obligations, write-down and loss on disposal of fixed assets, and severance costs associated with these locations. Our 2016 results include $1.0 million of charges related to these store closures primarily consisting of adjustments to lease obligations associated with these locations.
NOTE 10LONG-TERM DEBT
Long-term debt (net of deferred financing costs) consisted of the following:
(in thousands) |
December 31,
2016 |
December 31,
2015 |
||||||
May 2011 10.75% senior secured notes |
$ | 223,164 | $ | 246,692 | ||||
May 2012 10.75% senior secured notes |
89,734 | 89,406 | ||||||
February 2013 10.75% senior secured notes |
101,184 | 101,937 | ||||||
February 2013 cash pay notes |
124,365 | 123,640 | ||||||
Non-Recourse U.S. SPV facility |
63,054 | | ||||||
ABL facility |
23,406 | | ||||||
Revolving credit facility |
| 8,050 | ||||||
|
|
|
|
|||||
Total long-term debt, including current portion |
624,907 | 569,725 | ||||||
Current maturities of long-term debt |
147,771 | 8,050 | ||||||
|
|
|
|
|||||
Long-term debt |
$ | 477,136 | $ | 561,675 | ||||
|
|
|
|
Senior Secured Notes
On May 12, 2011, in connection with the acquisition of Cash Money, CURO Intermediate Holdings Corp. (Intermediate) issued and sold $250.0 million aggregate principal amount 10.75% senior secured notes due May 15, 2018 (the May 2011 Senior Secured Notes). The Senior Secured Notes were issued at par. Interest on the Notes is payable semi-annually, in arrears, on May 15 and November 15 of each year, beginning on November 15, 2011.
In accordance with the terms of the Notes, we used the net proceeds from the $250.0 million offering to finance our acquisition of Cash Money Group, Inc., to refinance our existing indebtedness, to fund the liquidation value of our Series A Participating Preferred Stock, to pay fees and expenses in connection with the transaction, and to fund an incremental $16.2 million to the balance sheet.
In connection with this debt offering and amendments to the Credit Agreement, in 2011 we capitalized financing costs of approximately $9.6 million, the balance of which are included in the Consolidated Balance Sheets as a direct reduction of Long-term debt, and are being amortized over the term of the May 2011 Senior Secured Notes and included as a component of interest expense.
On September 29, 2016, CURO Intermediate Holdings Corp. purchased $25.1 million of outstanding May 2011 10.75% Senior Secured Notes at 71.25% of the principal, plus accrued and unpaid interest of $1.0 million
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CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
via an open-market purchase. A gain on extinguishment of $7.0 million related to the discount on repurchase, net of the unamortized deferred financing costs and fees, was recognized in the year ended December 31, 2016.
On May 14, 2012, Intermediate issued and sold $90.0 million aggregate principal amount of 10.75% Senior Secured Notes due 2018 (the May 2012 Senior Secured Notes). The May 2012 Senior Secured Notes were issued under the same indenture, dated May 12, 2011, as the May 2011 Senior Secured Notes.
In accordance with the terms of the Notes, we used the net proceeds from the $90.0 million offering to finance our acquisition of The Money Store, L.P., a Texas limited partnership which operated as The Money Box ® Check Cashing for approximately $26.1 million in August 2012. The remaining cash was used to fund working capital growth and for other general corporate purposes.
The May 2012 Senior Secured Notes were issued at 101.75% of their face value for total proceeds of $91.6 million, with an effective interest rate of 10.35%. The original issue premium (OIP) was $1.6 million, which is the difference between the stated principal amount and the issue price. The OIP is included in the Consolidated Balance Sheets as a component of Long-term debt, and is being amortized over the term of the May 2012 Senior Secured Notes using the effective interest rate method and reported as an offset to non-cash interest expense. Interest on the May 2012 Senior Secured Notes is payable semi-annually, in arrears, on May 15 and November 15 of each year, beginning on November 15, 2012.
In connection with this debt offering and the increase to our U.S. Revolving Credit Facility, in 2012 we incurred $3.5 million of financing costs, the balance of which are included in the Consolidated Balance Sheets as a direct reduction of Long-term debt. The deferred financing costs are being amortized over the term of the May 2012 Senior Secured Notes and included as a component of interest expense.
On February 8, 2013, Intermediate issued and sold $100.0 million aggregate principal amount of 10.75% Senior Secured Notes due 2018 (the February 2013 Senior Secured Notes). The February 2013 Senior Secured Notes were issued under the same indenture, dated May 12, 2011, and the same terms as the May 2011 and May 2012 Senior Secured Notes.
In accordance with the terms of the Notes, we used the net proceeds from the $100.0 million offering to finance our acquisition of Wage Day Advance, Limited for approximately $80.9 million in February 2013. The remaining cash was used for general corporate purposes.
The February 2013 Senior Secured Notes were issued at 106.25% of their face value for total proceeds of $106.2 million, with an effective interest rate of 9.24%. The original issue premium (OIP) was $6.2 million, which is the difference between the stated principal amount and the issue price. The OIP is included in the Consolidated Balance Sheets as a component of Long-term debt, and is being amortized over the term of the February 2013 Senior Secured Notes using the effective interest rate method and reported as an offset to non-cash interest expense. Interest on the February 2013 Senior Secured Notes is payable semi-annually, in arrears, on May 15 and November 15 of each year, beginning on May 15, 2013.
In connection with this incremental borrowing in 2013, we incurred $2.9 million of financing costs, the balance of which are included in the Consolidated Balance Sheets as a direct reduction of Long-term debt. The deferred financing costs are being amortized over the term of the February 2013 Senior Secured Notes and included as a component within interest expense.
Cash Pay Notes
On February 14, 2013, Speedy Group issued $125.0 million 12.00% Senior Cash Pay Notes due November 15, 2017 (February 2013 Cash Pay Notes). The majority of the proceeds from this offering were
F-69
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
used to fund a $116.9 million dividend to the stockholders on February 14, 2013. In connection with this borrowing, we incurred $3.4 million of financing costs, the balance of which are included in the Consolidated Balance Sheets as a direct reduction of Long-term debt. The deferred financing costs are being amortized over the term of the February 2013 Cash Pay notes and included as a component of interest expense.
Ranking and Guarantees
The May 2011 Senior Secured Notes, May 2012 Senior Secured Notes, and the February 2013 Senior Secured Notes (collectively, the Notes) rank senior in right of payment to all of our and our guarantor entities existing and future subordinated indebtedness and equal in right of payment with all our and our guarantor entities existing and future senior indebtedness of the Company, including borrowings under our revolving credit facilities. Pursuant to our Intercreditor Agreement, the Notes and the guarantees will be effectively subordinated to our credit facilities and certain other indebtedness to the extent of the value of the assets securing such indebtedness and to liabilities of our subsidiaries that are not guarantors.
The Notes are secured by liens on substantially all of our and the guarantors assets, subject to certain exceptions. On or after May 15, 2015, we are able to redeem some or all of the Notes at a premium that will decrease over time, plus accrued and unpaid interest, if any to the applicable date of redemption. Prior to May 15, 2015, we were able to redeem the Notes, in whole or in part, by paying a make-whole premium.
The February 2013 Cash Pay Notes are unsecured obligations of Speedy Group. Interest on the Senior Cash Pay Notes is payable semiannually, in arrears, on May 15 and November 15 of each year, beginning on May 15, 2013. Interest payments are funded from dividend payments made to Speedy Group by Speedy Holdings and its subsidiaries. Dividend payments made by Speedy Holdings to Speedy Group are dependent upon Speedy Holdings ability to generate sufficient dividend paying capacity. Under the terms of Speedy Holdings indenture agreement, dividends and other restrictive payments are generally limited to 50% of consolidated net income, as defined in the agreement.
Non-Recourse U.S. SPV Facility
On November 17, 2016, CURO Receivables Finance I, LLC, a Delaware limited liability company (the SPV Borrower) and a wholly-owned subsidiary, entered into a five-year revolving credit facility with Victory Park Management, LLC and certain other lenders that provides for an $80.0 million term loan and $45.0 million of initial revolving borrowing capacity, with the ability to expand such revolving borrowing capacity over time and an automatic expansion to $70.0 million on the six month anniversary of the closing date, (our Non-Recourse U.S. SPV Facility). Our Non-Recourse U.S. SPV Facility is secured by a first lien against assets of the SPV Borrower, which is a special purpose vehicle holding certain receivables originated by the operating entities of Intermediate and CURO Receivables Holdings I, LLC, a Delaware limited liability company (Holdings) which is a holding company that owns the equity of the SPV Borrower. The lender advances to the SPV Borrower 80% of the principal balance of the eligible installment loans that we sell to the SPV Borrower, which serve as collateral for the lender. As customer loan payments come into the SPV Borrower, such payments are subjected to a conventional priority-of-payment waterfall provided the loan-to-value doesnt exceed 80%. The loans will bear interest at an annual rate of up to 12.0% plus the greater of (x) 1.0% per annum and (y) the three-month LIBOR. The SPV Borrower also pays a 0.50% per annum commitment fee on the unused portion of the commitments. Revolving commitment terminations and voluntary prepayments of term loans made prior to the 30th month anniversary of the closing date are subject to a fee equal to 3.0% of the amount of revolving loans commitments terminated or term loans voluntarily prepaid. This facility matures in 2021.
F-70
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
ABL Facility
On November 17, 2016, CURO Intermediate entered into a six-month recourse credit facility with Victory Park Management, LLC and certain other lenders which provides for $25.0 million of borrowing capacity, (our ABL Facility). Our ABL Facility is secured by a first lien against our assets and the assets of CURO Intermediate and its domestic subsidiaries. The lender advances to CURO Intermediate 80% of the principal balance of the eligible installment loans held by CURO Intermediate and its guarantor subsidiaries. As customer loan payments come into CURO Intermediate and its guarantor subsidiaries, such payments are subjected to a conventional priority-of-payment waterfall provided the loan-to-value doesnt exceed 80%. The loans will bear interest at an annual rate of up to 8.0% plus the greater of (x) 1.0% per annum and (y) the three-month LIBOR. The ABL Facility provides that CURO Intermediate pays a 0.50% per annum commitment fee on the unused portion of the commitments and a 4.0% per annum monitoring fee on the loans outstanding. Commitment terminations and voluntary prepayments of loans made prior to the 30th month anniversary of the closing date of the ABL Facility are subject to a fee equal to 3.0% of the amount of revolving loans commitments terminated or loans voluntarily prepaid. The ABL Facility matured and was fully converted to the SPV facility in 2017.
We are required to evaluate the SPV Borrower for consolidation as it is a variable interest entity (VIE). We have the ability to direct the activities of the VIE that most significantly impact the economic performance of the entity as the servicer of the securitized loan receivables. Additionally, we have the right to receive residual payments, which exposes the Company to potentially significant losses and returns. Accordingly, we determined that we are the primary beneficiary of the VIE and are required to consolidate this VIE.
Therefore, the financial results of the SPV Borrower are consolidated in this report and all inter-company transactions have been eliminated. See Note 22Condensed Consolidating Financial Information for detail.
As of December 31, 2016, the outstanding borrowings under the Non-Recourse U.S. SPV Facility were $68.9 million, consisting of $68.3 million of principal and $0.6 million of accrued interest. As of December 31, 2016, the outstanding borrowings under the ABL Facility were $23.6 million, consisting of $23.4 million of principal and $0.2 million of accrued interest. Unamortized issuance costs related to these borrowings at December 31, 2016 were $5.3 million. The total interest expense recognized for the year ended December 31, 2016 was $0.9 million, of which $0.1 million represented the non-cash amortization of the deferred financing costs.
The assets that are used to secure our Non-Recourse U.S. SPV Facility borrowings are classified as part of Consumer loans receivables and Restricted cash as noted in our Consolidated Balance Sheets.
Revolving Credit Facility
On May 10, 2016 we entered into a third amendment to our U.S. Revolving Credit facility. The amendment (a) extended the maturity of our U.S. Revolving Credit Facility to August 31, 2016; (b) reduced the commitment thereunder to $10.0 million; (c) eliminated the requirement that we pay an unused line fee for the unused portion of the commitment; and (d) provided that we would make no further requests for loans or letters of credit thereunder. On August 31, 2016 this facility expired.
The weighted average interest rate on the $8.1 million of variable debt outstanding at December 31, 2015 was approximately 7.0%. There was no variable rate debt outstanding at December 31, 2016.
We also maintain cash collateral of $0.5 million with Jefferies LLC, as issuing bank for our letters of credit, in respect of a letter of credit issued at our request.
F-71
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Cash Money Credit Facility
On November 4, 2011, Cash Money entered into a C$7.5 million revolving credit facility (Cash Money Revolving Credit Facility) which will afford us an additional element of liquidity to meet the short-term working capital needs of our Canadian operations. Aggregate draws on the Cash Money Revolving Credit Facility are limited to the lesser of: 1) the borrowing base, which is defined as a percentage of cash, deposits in transit and accounts receivable, and 2) C$7.5 million.
The Cash Money Revolving Credit Facility is collateralized by substantially all of Cash Moneys assets and contains various covenants that include, among other things, that the aggregate borrowings outstanding under the facility not exceed the borrowing base, restrictions on the encumbrance of assets and the creation of indebtedness. Borrowings under the Cash Money Revolving Credit Facility are subject to compliance with these covenants.
Borrowings under the Cash Money Revolving Credit Facility bear interest (per annum) at Royal Bank of Canada Prime (RBC prime) plus 1.95%. In order to determine the amount available for borrowings under the Cash Money Revolving Credit Facility, the balance available is reduced by any amounts outstanding and C$0.3 million in outstanding letters of credit. At December 31, 2016 and 2015, we had no outstanding borrowings under this facility.
Future Maturities of Long-Term Debt
Our Notes mature in May 2018. We may from time to time explore opportunities to (i) secure additional financing through a revolving credit facility; (ii) secure additional senior secured or other asset-backed financing; and (iii) refinance, redeem, repurchase or restructure outstanding Notes; and (iv) review strategic alternatives.
Annual maturities of outstanding long-term debt (before deferred financing costs and premiums) for each of the five years after December 31, 2016 are as follows:
(in thousands) |
Amount | |||
2017 |
$ | 148,406 | ||
2018 |
414,882 | |||
2019 |
| |||
2020 |
| |||
2021 |
68,311 | |||
|
|
|||
$ | 631,599 | |||
|
|
Subordinated Shareholder Debt
As part of the acquisition of Cash Money in 2011, we issued an Escrow Note to the Seller which provided us indemnification for certain claims. The balance of this note at December 31, 2016 and 2015 was $2.2 million. This note bears interest at 10.0% per annum, and quarterly interest payments are due until the note matures in May 2019.
Debt offeringSubsequent Event
On February 15, 2017, CFTC issued $470.0 million 12.00% Senior Secured Notes due March 1, 2022. Interest on the notes is payable semiannually, in arrears, on March 1 and September 1 of each year, beginning on September 1, 2017. The proceeds from the Notes were used, together with available cash, to (i) redeem the
F-72
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
outstanding 10.75% Senior Secured Notes due 2018 of our wholly-owned subsidiary, CURO Intermediate, (ii) redeem our outstanding 12.00% Senior Cash Pay Notes due 2017, and (iii) pay fees, expenses, premiums and accrued interest in connection with the offering.
NOTE 11STOCKHOLDERS EQUITY
Stockholders Equity
In connection with the formation of CURO in 2013, the stockholders entered into an Investor Rights Agreement. Under the Investor Rights Agreement, one of CURO investors, Freidman Fleisher & Lowe Capital Partners II, L.P. (and its affiliated funds, the FFL Holders), may request, any time after the sixth anniversary of their initial investment in the Company (which occurred in September 2008), that the Company repurchase their shares on terms to be negotiated by the parties in good faith. If no agreement can be reached on the repurchase terms, the FFL Holders can request that the Company be solicited for sale of all of its capital.
Common Stock
We have authorized 2 million shares of common stock. As of December 31, 2016 and 2015, we had issued 1,052,632 shares of common stock.
In connection with the 2011 acquisition of Cash Money, the Company issued 52,632 of its common stock to the J.P. Genova Family Trust as partial consideration to the Seller. The shares represented 5% of our outstanding common equity and $13.0 million of the purchase price.
In connection with the adoption of the 2010 Equity Incentive Plan (the Plan), we reserved for issuance under the Plan and for issuance upon exercise of the stock options under the Plan, 50,000 shares of common stock. In 2013, the Plan was amended to increase the number of shares available for issuance to 60,000 shares.
NOTE 12SHARE-BASED COMPENSATION
The 2010 Equity Incentive Plan (the Plan) was originally approved by the Companys shareholders in November 2010, and amended in December 2013. The Plan provides for the issuance of up to 60,000 shares, subject to certain adjustment provisions described in the Plan. The Plan provides for the granting of stock options, restricted stock, and stock grants. Awards may be granted to employees, consultants and directors of the Company. The Plan provides that shares of Class B common stock subject to awards granted become available for issuance if such awards expire, terminate, are canceled for any reason, or are forfeited by the recipient. Pursuant to the formation of CURO, all of the rights and obligations under the stock option agreements were transferred from CFTC. Thus, the outstanding and unexercised options now represent an option to purchase the same number of shares of common stock of CURO at the same exercise price and on the same terms and conditions as provided in the original option agreement. No awards may be granted after November 30, 2020.
Stock options are awards which allow the grantee to purchase shares of our common stock at prices equal to the fair value at the date of grant. The stock options that have been granted under the Plan thus far all vest at a rate of 20% per year over a 5-year period, have a term of 10 years and are subject to limitations on transferability.
We measure the cost of share-based compensation at fair value on the grant date and recognize such cost in the financial statements on a straight-line basis over the requisite service period of the awards. For the year ended December 31, 2016, the fair value of each stock option grant was estimated at the date of the grant using a Black-
F-73
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Scholes option pricing model based on the following assumptions: risk free interest rate of 1.9%, expected term of options of 6.0 years, expected volatility of 44.7% and no expected dividends. There were no awards granted in 2015.
Estimates of fair value are not intended to predict actual future events or the value ultimately realized by individuals who receive equity awards, and subsequent events are not indicative of the reasonableness of the original estimates of fair value made by the Company. We have estimated the expected term of our stock options using a formula considering the weighted average vesting term and the original contract term. The expected volatility is estimated based upon the historical volatility of publicly traded stocks from our industry sector (the alternative financial services sector). The expected risk-free interest rate is based on an average of various U.S. Treasury rates. The Company estimates forfeitures at the grant date based on its historical forfeiture rates.
Share-based compensation is measured at the grant date, based on the fair value of the award, and is recognized on a straight-line basis over the requisite service period. See Note1 for additional information.
The following table summarizes the Companys stock option activity for the year ended December 31, 2016:
Stock
Options |
Weighted
Average Exercise Price |
|||||||
Outstanding at beginning of year |
53,323 | $ | 84.18 | |||||
Granted |
12,828 | 131.61 | ||||||
Exercised |
| | ||||||
Forfeited |
(13,948 | ) | 75.05 | |||||
|
|
|
|
|||||
Outstanding at end of year |
52,203 | $ | 98.27 | |||||
|
|
|
|
|||||
Options vested at end of year |
34,402 | $ | 81.75 | |||||
|
|
|
|
Share-based compensation expense, which is included in the Consolidated Statements of Income as a component of Corporate expenses, was $1.1 million, ($0.7 million net of related taxes) and $1.3 million, ($0.8 million net of related taxes) for the years ended December 31, 2016 and 2015, respectively. Total unrecognized compensation expense related to stock options at December 31, 2016 was $0.8 million, which will be recognized over a weighted-average period of 3.8 years. At December 31, 2016, the intrinsic value of stock options outstanding was $2.1 million and the intrinsic value of vested stock options was $1.9 million.
F-74
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 13INCOME TAXES
Income tax expense (benefit) is comprised of the following for the years ended December 31, 2016 and 2015 as follows:
(in thousands) |
2016 | 2015 | ||||||
Current tax provision |
||||||||
Federal |
$ | 24,508 | $ | 8,716 | ||||
State |
5,495 | 486 | ||||||
Foreign |
13,254 | 11,146 | ||||||
|
|
|
|
|||||
Total current provision |
43,257 | 20,348 | ||||||
|
|
|
|
|||||
Deferred tax provision (benefit) |
||||||||
Federal |
186 | (1,167 | ) | |||||
State |
(134 | ) | (221 | ) | ||||
Foreign |
(732 | ) | (855 | ) | ||||
|
|
|
|
|||||
Total deferred tax benefit |
(680 | ) | (2,243 | ) | ||||
|
|
|
|
|||||
Total provision for income taxes |
$ | 42,577 | $ | 18,105 | ||||
|
|
|
|
As of December 31, 2016, the Company had not provided U.S. tax on its cumulative undistributed foreign earnings of $112.8 million. The Company intends to reinvest its foreign earnings indefinitely in its non-U.S. operations. If the earnings were distributed to the United States, the Company would be subject to estimated U.S. taxes of approximately $50.8 million. In the event the earnings were distributed to the United States, the Company would adjust its income tax provision for the period and would determine the amount of credit for foreign tax credit that would be available to reduce the U.S. tax liability.
The sources of deferred income tax assets (liabilities) are summarized as follows at December 31, 2016 and 2015:
(in thousands) |
2016 | 2015 | ||||||
Deferred tax assets related to: |
||||||||
Loans receivable |
$ | 8,142 | $ | 7,511 | ||||
Accrued expenses and other reserves |
8,630 | 9,013 | ||||||
Compensation accruals |
4,387 | 3,762 | ||||||
Deferred revenue |
247 | 365 | ||||||
State and provincial net operating loss carryforwards |
516 | 593 | ||||||
Foreign net operating loss and capital loss carryforwards |
12,953 | 12,449 | ||||||
Tax credit carryforwards |
284 | | ||||||
|
|
|
|
|||||
Gross deferred tax assets |
35,159 | 33,693 | ||||||
Less: valuation allowance |
(14,072 | ) | (13,097 | ) | ||||
|
|
|
|
|||||
Net deferred tax assets |
21,087 | 20,596 | ||||||
|
|
|
|
|||||
Deferred tax liabilities related to: |
||||||||
Property and equipment |
(5,564 | ) | (7,153 | ) | ||||
Goodwill and other intangible assets |
(17,015 | ) | (15,549 | ) | ||||
Prepaid expenses and other assets |
(186 | ) | (255 | ) | ||||
|
|
|
|
|||||
Gross deferred tax liabilities |
(22,765 | ) | (22,957 | ) | ||||
|
|
|
|
|||||
Net deferred tax liabilities |
$ | (1,678 | ) | $ | (2,361 | ) | ||
|
|
|
|
F-75
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Deferred tax assets and liabilities are included on the following line items in the Consolidated Balance Sheets at December 31, 2016 and 2015:
(in thousands) |
2016 | 2015 | ||||||
Net current deferred tax assets |
$ | 12,635 | $ | 13,399 | ||||
Net long-term deferred tax liabilities |
(14,313 | ) | (15,760 | ) | ||||
|
|
|
|
|||||
Net deferred tax assets (liabilities) |
$ | (1,678 | ) | $ | (2,361 | ) | ||
|
|
|
|
Differences between our effective tax rate computed on net earnings before income taxes and the statutory federal income tax rate are as follows for the years ended December 31, 2016 and 2015:
(dollars in thousands) |
2016 | 2015 | ||||||
Income tax expense using the statutory federal rate in effect |
$ | 37,807 | $ | 12,556 | ||||
Tax effect of: |
||||||||
State, local, and provincial income taxes, net of federal benefit |
9,045 | 4,373 | ||||||
Tax credits |
(713 | ) | | |||||
Nondeductible expenses |
521 | 263 | ||||||
Impact of goodwill impairment charges |
| 310 | ||||||
Nontaxable income |
| | ||||||
Foreign exchange gain/loss on intercompany loan |
| (1,423 | ) | |||||
Valuation allowance for foreign and state net operating loss and capital loss carryforwards |
3,129 | 5,827 | ||||||
Effects of foreign rates different than U.S. statutory rate |
(7,569 | ) | (3,350 | ) | ||||
Deferred remeasurement |
205 | 62 | ||||||
Other |
152 | (513 | ) | |||||
|
|
|
|
|||||
Total provision for income taxes |
$ | 42,577 | $ | 18,105 | ||||
|
|
|
|
|||||
Effective tax rate |
39.4 | % | 50.5 | % | ||||
|
|
|
|
|||||
Statutory federal tax rate |
35.0 | % | 35.0 | % | ||||
|
|
|
|
At December 31, 2016 and December 31, 2015 we had no reserves related to uncertain tax positions.
The tax years 2013 through 2015 remain open to examination by the taxing authorities in the United States. The tax years 2010 through 2015 remain open to examination by the taxing authorities in the U.K. The tax years 2011 through 2015 remain open to examination by the taxing authorities in Canada. We expect no material change related to our current positions in recorded unrecognized income tax benefit liability in the next twelve months.
We file income tax returns in U.S. federal jurisdictions, the United Kingdom, Canada (including provinces), and various state jurisdictions.
F-76
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
A summary of the valuation allowances for the years ended December 31, 2016 and 2015 are as follows:
(in thousands) |
2016 | 2015 | ||||||
Balance at beginning of year |
$ | 13,097 | $ | 5,447 | ||||
Revaluation of valuation allowance due to change in statutory rates |
(1,234 | ) | | |||||
Increase to balance charged as expense |
3,129 | 5,827 | ||||||
Increase to balance charged to Other Comprehensive Income |
1,627 | 2,099 | ||||||
Effect of foreign currency translation |
(2,547 | ) | (276 | ) | ||||
|
|
|
|
|||||
Balance at end of year |
$ | 14,072 | $ | 13,097 | ||||
|
|
|
|
As of December 31, 2016, we had as filed foreign operating loss carryforwards of $9.5 million and additional accrued foreign operating loss and capital loss carryforwards of $3.8 million. These carryforwards do not expire and can be used at any time. As of December 31, 2016, we have $0.3 million of deferred tax assets on foreign entities with foreign operating loss carryforwards. We are not expecting to have taxable income in the near future in this jurisdiction and have recorded a $13.3 million valuation allowance related to these foreign operating losses and a $0.3 million valuation allowance related to the deferred tax assets. As of December 31, 2016, we had as filed state operating loss carryforwards of $0.4 million and accrued utilization of state operating loss carryforwards and additional state operating losses of (net) $(0.2) million. These carryforwards expire in varying amounts in years 2017 through 2035 and are generated in states in which the Company may have taxable income in the near future. We have recorded a valuation allowance of $0.2 million related to these state operating losses. As of December 31, 2016 we have a state tax credit carryforward of $0.3 million. The utilization of this tax credit carryforward has various training expense requirements which we may or may not meet. Therefore, we have recorded a valuation allowance of $0.3 million related to this state tax credit carryforward. We have classified interest and penalties as a component of income tax expense. However, during 2016 and 2015 we did not record any estimated interest or penalties.
NOTE 14FINANCIAL INSTRUMENTS AND CONCENTRATIONS
Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants. We are required to use valuation techniques that are consistent with the market approach, income approach, and/or cost approach. Inputs to valuation techniques refer to the assumptions that market participants would use in pricing the asset or liability based on market data obtained from independent sources, or unobservable, meaning those that reflect our own estimate about the assumptions market participants would use in pricing the asset or liability based on the best information available in the circumstances. Accounting standards establish a three-level fair value hierarchy based upon the assumptions (inputs) used to price assets or liabilities. The hierarchy requires us to maximize the use of observable inputs and minimize the use of unobservable inputs. The three levels of inputs used to measure fair value are listed below.
Level 1Inputs are unadjusted quoted prices in active markets for identical assets or liabilities that we have access to at the measurement date.
Level 2Inputs include quoted market prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability and inputs that are derived principally from or corroborated by observable market data by correlation or other means (market corroborated inputs).
Level 3Unobservable inputs reflecting our own judgments about the assumptions market participants would use in pricing the asset or liability since limited market data exists. We develop these inputs based on the best information available, including our own data.
F-77
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Assets that are Measured at Fair Value on a Non-recurring Basis
The following table summarizes certain information for non-financial assets that were measured at fair value on a nonrecurring basis in periods subsequent to initial recognition into the most appropriate level within the fair value hierarchy based on the inputs used to determine the fair value at the measurement date.
In accordance with ASC 350-10 and ASC 350-20, during the third quarter of 2015, long-lived assets in the United Kingdom with a carrying amount of $6.1 million were written down to their fair value of $4.1 million, resulting in an impairment charge of $2.0 million. This impairment charge was included in earnings for the year ended December 31, 2015.
In accordance with ASC 350-20, during the third quarter of 2015, goodwill associated with our U.K. reporting unit with a carrying amount of $27.7 million was written down to its fair value of $26.8 million, resulting in an impairment charge of $0.9 million. This impairment charge was included in earnings for the year ended December 31, 2015.
Fair Value Measurements at the End
of the Reporting Period |
||||||||||||||||||||
(in thousands) |
December 31,
2015 |
Level 1 | Level 2 | Level 3 |
Total Gains
(Losses) |
|||||||||||||||
Non-recurring fair value measurements |
||||||||||||||||||||
Long-lived assets |
$ | 4,024 | $ | | $ | | $ | 4,024 | $ | (1,977 | ) | |||||||||
Goodwill |
26,197 | | | 26,197 | (905 | ) |
Financial Assets and Liabilities Not Measured at Fair Value
The table below presents the assets and liabilities that were not measured at fair value at December 31, 2016.
Estimated Fair Value | ||||||||||||||||||||
(in thousands) |
Carrying Value
December 31, 2016 |
Level 1 | Level 2 | Level 3 |
December 31,
2016 |
|||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash |
$ | 193,525 | $ | 193,525 | $ | | $ | | $ | 193,525 | ||||||||||
Restricted cash of consolidated VIE |
2,770 | 2,770 | | | 2,770 | |||||||||||||||
Consumer loans receivable, net |
247,004 | | | 247,004 | 247,004 | |||||||||||||||
Restricted cash |
5,058 | 5,058 | | | 5,058 | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
May 2011 senior secured notes |
$ | 223,164 | $ | 216,449 | $ | | $ | | $ | 216,449 | ||||||||||
May 2012 senior secured notes |
89,734 | 86,625 | | | 86,625 | |||||||||||||||
February 2013 senior secured notes |
101,184 | 96,250 | | | 96,250 | |||||||||||||||
February 2013 cash pay notes |
124,365 | 118,301 | | | 118.301 | |||||||||||||||
Non-Recourse U.S. SPV facility |
63,054 | | | 68,311 | 68,311 | |||||||||||||||
ABL facility |
23,406 | | | 23,406 | 23.406 |
F-78
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The table below presents the assets and liabilities that were not measured at fair value at December 31, 2015.
Estimated Fair Value | ||||||||||||||||||||
(in thousands) |
Carrying Value
December 31, 2015 |
Level 1 | Level 2 | Level 3 |
December 31,
2015 |
|||||||||||||||
Financial assets: |
||||||||||||||||||||
Cash |
$ | 100,561 | $ | 100,561 | $ | | $ | | $ | 100,561 | ||||||||||
Consumer loans receivable, net |
219,231 | | | 219,231 | 219,231 | |||||||||||||||
Financial liabilities: |
||||||||||||||||||||
Revolving credit facility |
$ | 8,050 | $ | | $ | 8,050 | $ | | $ | 8,050 | ||||||||||
May 2011 senior secured notes |
250,000 | 142,500 | | | 142,500 | |||||||||||||||
May 2012 senior secured notes |
90,739 | 51,300 | | | 51,300 | |||||||||||||||
February 2013 senior secured notes |
103,206 | 57,000 | | | 57,000 | |||||||||||||||
February 2013 cash pay notes |
125,000 | 61,250 | | | 61,250 |
Consumer loans receivable are carried on the Consolidated Balance Sheets net of the allowance for estimated loan losses, which is calculated primarily based upon models that backtest subsequent collections history for each type of loan product. The unobservable inputs used to calculate the carrying value include additional quantitative factors, such as current default trends and changes to the portfolio mix are also considered in evaluating the accuracy of the models; as well as additional qualitative factors such as the impact of new loan products, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions. Consumer loans generally have terms ranging from 1 day to 42 months. The carrying value of consumer loans receivable approximates the fair value.
In connection with our CSO programs, the accounting for which is discussed in detail in Note 1, we guarantee consumer loan payment obligations to unrelated third-party lenders for loans that we arrange for consumers on the third-party lenders behalf. The Company is required to purchase from the lender defaulted loans we have guaranteed. The estimated fair value of the guarantee liability related to CSO loans we have guaranteed was $17.1 million and $17.8 million as of December 31, 2016 and 2015, respectively. The initial measurement of this guarantee liability is recorded at fair value using Level 3 inputs with subsequent measurement of the liability measured as a contingent loss. The unobservable inputs used to calculate fair value include the nature of the loan products, the creditworthiness of the borrowers in the customer base, the Companys historical loan default history for similar loans, industry loan default history, historical collection rates on similar products, current default trends, past-due account roll rates, changes to underwriting criteria or lending policies, new store development or entrance into new markets, changes in jurisdictional regulations or laws, recent credit trends and general economic conditions.
The outstanding borrowing under our U.S. Revolving Credit Facility and our Cash Money Revolving Credit Facility are variable interest debt instruments and their fair value approximates their carrying value due to the borrowing rates currently available to us for debt with similar terms.
The fair value of our Senior Secured Notes and Cash Pay Notes was based on broker quotations. The fair values of the Non-Recourse U.S. SPV facility and the ABL facility were based on the cash needed for final settlement.
F-79
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Derivative Financial Instrument
As of December 31, 2016 we have an outstanding cash flow hedge in which the hedging instrument is a forward extra to sell GBP 4,800,000 with monthly expiry dates through May 2017. We have performed an assessment that determined that all critical terms of the hedging instrument and the hedged transaction match and as such have qualitatively concluded that changes in the hedges intrinsic value will completely offset the change in the expected cash flows based on changes in the spot rate. In making that determination, the guidance in ASC 815-20-25-84 was used. Future assessment will be performed utilizing the guidance in ASC 815-20-35-9 through 35-13, Relative Ease of Assessing Effectiveness. Additionally, in accordance with ASC 815-20-25-82, since the effectiveness of this hedge is assessed based on changes in the hedges intrinsic value, the change in the time value of the contract would be excluded from the assessment of hedge effectiveness.
The hedges fair value, which is recorded on a recurring basis based on broker quotations, is classified on the balance sheet in current liabilities. Changes in the hedges intrinsic value, to the extent that they are effective as a hedge, are recorded in other comprehensive income. As of December 31, 2016 we have recorded $0.3 million in other comprehensive income associated with this hedge.
Concentration Risk
We are subject to regulation by federal, state and provincial governmental authorities that affect the products and services that we provide, particularly payday advance loans. The level and type of regulation for payday advance loans varies greatly by jurisdiction, ranging from jurisdictions with moderate regulations or legislation, to other jurisdictions having very strict guidelines and requirements.
Revenues originated in Texas, Ontario, and California represented approximately 26.1%, 14.4%, and 15.1%, respectively, of our consolidated total revenues for the year ended December 31, 2016. Revenues originated in Texas, Ontario and California represented approximately 26.1%, 15.1% and 13.7%, respectively, of our consolidated total revenues for the year ended December 31, 2015.
To the extent that laws and regulations are passed that affect the manner in which we conduct business in any one of those markets, our financial position, results of operations and cash flows could be adversely affected. Additionally, our ability to meet our financial obligations could be negatively impacted.
We hold cash at major financial institutions that often exceed FDIC insured limits. We manage our concentration risk by placing our cash deposits in high quality financial institutions and by periodically evaluating the credit quality of the financial institutions holding such deposits. Historically, we have not experienced any losses due to such cash concentration.
Financial instruments that potentially subject us to concentrations of credit risk primarily consist of our consumer loans receivable. Concentrations of credit risk with respect to consumer loans receivable are limited due to the large number of customers comprising our customer base.
NOTE 15SUPPLEMENTAL CASH FLOW INFORMATION
Supplemental cash flow information is as follows for the years ended December 31, 2016 and 2015:
(in thousands) |
2016 | 2015 | ||||||
Cash paid for: |
||||||||
Interest |
$ | 61,019 | $ | 61,802 | ||||
Income taxes |
43,650 | 26,001 | ||||||
Non-cash investing and financing activities: |
||||||||
Property and equipment accrued in accounts payable |
3,338 | 4,758 |
F-80
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 16LEGAL PROCEEDINGS
On a quarterly basis, we review outstanding legal proceedings and claims to determine if an unfavorable outcome is considered remote, reasonably possible or probable, as defined by U.S. GAAP. If we determine that an unfavorable outcome is not probable or not reasonably estimable, we do not accrue for potential litigation losses. In contrast, if we determine that an unfavorable outcome is both probable and reasonably estimable, we accrue for potential litigation losses. The liability we may ultimately incur for such litigation matters, in the event of a negative outcome, may exceed the amounts for which we accrue.
Harrison, et al v. Principal Investments, Inc. et al
During the relevant period, the Company pursued in excess of 16,000 claims in the limited actions and jurisdiction court in Clark County, Nevada, seeking repayment of loans on which customer defaulted. The Company used outside counsel to file these debt collection lawsuits. On Scene Mediations, a process serving company, was employed to serve the summons and petitions in these cases. In an unrelated matter, the principals of On Scene Mediations were convicted of multiple accounts of perjury and filing false affidavits to obtain judgments on behalf of a Las Vegas collection agency. In September 2010, the Company was sued by four former customers in a proposed class action suit filed in District Court in Clark County, Nevada. The plaintiffs in this case claimed that they, and others in the proposed class, were not properly served notice of the debt collection lawsuits by the Company.
On June 7, 2017, the parties reached a settlement in this matter. At a hearing before the District Court in Clark County, Nevada, on July 10, 2017 the terms of the settlement were outlined before the Court and a fairness hearing was scheduled for July 24, 2017.
Other
We are also a defendant in certain routine litigation matters encountered in the ordinary course of our business. Certain of these matters may be covered to an extent by insurance. In the opinion of management, based upon the advice of legal counsel, the likelihood is remote that the impact of any such pending legal proceedings and claims, either individually or in the aggregate, would have a material adverse effect on our consolidated financial condition, results of operations or cash flows. However, because the ultimate outcome of legal proceedings and claims involves judgments, estimates and inherent uncertainties, actual outcomes of these proceedings and claims may materially differ from our current estimates. It is possible that resolution of one or more of the proceedings currently pending or threatened could result in losses material to our consolidated results of operations, liquidity or financial condition.
NOTE 17SEGMENT REPORTING
Segment information is prepared on the same basis that our chief operating decision maker reviews financial information for operational decision making purposes.
Our operations consist of three reportable segments as follows:
U.S. As of December 31, 2016, we operated a total of 216 U.S. retail locations. Our store count is comprised of stores in Texas (93), California (36), Nevada (18), Arizona (13), Tennessee (11), Kansas (10), Illinois (8), Alabama (7), Missouri (5), Louisiana (5), Colorado (3), Oregon (3), Washington (2) and Mississippi (2). We opened 1 store in the United States during 2016 and we have online presence in 24 states.
We provide Single-Pay Loans, Installment Loans and Open-End Loans, vehicle title loans, check cashing, gold buying, money transfer services, reloadable prepaid debit cards and a number of other ancillary financial products and services to our customers in the United States.
F-81
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Canada We operate under the Cash Money and LendDirect brands in Canada. As of December 31, 2016 we operated a total of 191 stores across seven Canadian provinces and territories, including stores in Ontario (121), Alberta (28), British Columbia (26), Saskatchewan (6), Nova Scotia (5), Manitoba (4) and New Brunswick (1). We opened a total of seven stores in Canada during 2016, and we have online presence in five provinces.
We provide Single-Pay Loans, Installment Loans, check cashing, money transfer services, foreign currency exchange, reloadable prepaid debit cards, and a number of other ancillary financial products and services to our customers in Canada.
U.K. We operate under the Speedy Cash ® and WageDayAdvance brands in the United Kingdom. As of December 31, 2016 we operated a total of 13 retail Speedy Cash locations in the United Kingdom, the majority of which are located in metropolitan London. We also offer loans online to U.K. customers as Wage Day Advance.
We provide Single-Pay Loans, Installment Loans, check cashing, gold buying, reloadable prepaid debit cards, foreign exchange services, and a number of other financial products and services to our customers in the United Kingdom.
The segment performance measure below is based on gross margin. In managements evaluation of performance, certain costs, such as corporate expenses, district expenses and interest expense, are not allocated by segment, and accordingly the following reporting segment results do not include such allocated costs. There are no intersegment revenues, and the amounts below were determined in accordance with the same accounting principles used in our consolidated financial statements.
The following table illustrates summarized financial information concerning our reportable segments.
Year Ended December 31, | ||||||||
(in thousands) |
2016 | 2015 | ||||||
Revenues by segment: |
||||||||
U.S. |
$ | 606,797 | $ | 573,664 | ||||
Canada |
188,079 | 184,859 | ||||||
U.K. |
33,720 | 54,608 | ||||||
|
|
|
|
|||||
Consolidated revenue |
$ | 828,596 | $ | 813,131 | ||||
|
|
|
|
|||||
Gross margin by segment: |
||||||||
U.S. |
$ | 204,328 | $ | 151,628 | ||||
Canada |
78,639 | 77,469 | ||||||
U.K. |
10,289 | 9,504 | ||||||
|
|
|
|
|||||
Consolidated gross margin |
$ | 293,256 | $ | 238,601 | ||||
|
|
|
|
|||||
Expenditures for long-lived assets by segment: |
||||||||
U.S. |
$ | 10,125 | $ | 8,642 | ||||
Canada |
5,872 | 11,062 | ||||||
U.K. |
29 | 128 | ||||||
|
|
|
|
|||||
Consolidated expenditures for long-lived assets |
$ | 16,026 | $ | 19,832 | ||||
|
|
|
|
F-82
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
The following table illustrates our net long-lived assets, comprised of property and equipment and construction in progress, by geographic region. These amounts are aggregated on a legal entity basis and do not necessarily reflect where the asset is physically located.
(in thousands) |
December 31,
2016 |
December 31,
2015 |
||||||
U.S. |
$ | 58,733 | $ | 62,895 | ||||
Canada |
34,310 | 32,487 | ||||||
U.K. |
2,853 | 4,325 | ||||||
|
|
|
|
|||||
Total |
$ | 95,896 | $ | 99,707 | ||||
|
|
|
|
Our chief operating decision maker does not review assets by segment for purposes of allocating resources or decision-making purposes; therefore, total assets by segment are not disclosed.
NOTE 18OPERATING LEASES
We have entered into operating lease agreements for the buildings in which we operate that expire at various times through 2030. The majority of the leases have an original term of five years with two 5-year renewal options. Most of the leases have escalation clauses and several also require payment of certain period costs including maintenance, insurance and property taxes.
Some of the leases are with related parties and have terms similar to the non-related party leases previously described. Rent expense on unrelated third-party leases for the years ended December 31, 2016 and 2015 was $23.1 million and $23.3 million, respectively; and for related party leases was $3.3 million and $3.2 million, respectively.
Future minimum lease payments that we are contractually obligated to make under operating leases are as follows at December 31, 2016.
(in thousands) |
Third Party | Related Party | Total | |||||||||
2017 |
$ | 22,933 | $ | 3,363 | $ | 26,296 | ||||||
2018 |
20,382 | 1,115 | 21,497 | |||||||||
2019 |
17,030 | 830 | 17,860 | |||||||||
2020 |
13,307 | 725 | 14,032 | |||||||||
2021 |
9,921 | 675 | 10,596 | |||||||||
Thereafter |
24,330 | 1,524 | 25,854 | |||||||||
|
|
|
|
|
|
|||||||
Total |
$ | 107,903 | $ | 8,232 | $ | 116,135 | ||||||
|
|
|
|
|
|
NOTE 19RELATED-PARTY TRANSACTIONS
We employ the services of Ad Astra Recovery Services, Inc. (Ad Astra), which is owned by our shareholders Doug Rippel, Chad Faulkner and Mike McKnight. Ad Astra provides third party collection activities for our U.S. operations. Generally, once loans are between 91 and 121 days delinquent we refer them to Ad Astra for collections. Ad Astra earns a commission fee equal to 30% of any amounts successfully recovered. Payments collected by Ad Astra on our behalf and commissions payable to Ad Astra are net settled on a one month lag. The net amount receivable from Ad Astra at December 31, 2016 and December 31, 2015 was $0.6 million, and $0.2 million, respectively. These amounts are included in Prepaid expenses and other in the Consolidated Balance Sheets. The commission expense paid to Ad Astra for the years ended December 31, 2016
F-83
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
and 2015 was $12.1 million and $10.6 million, respectively, and is included in Other store operating expenses in the Consolidated Statements of Income.
We have entered into several operating lease agreements for our corporate office, collection office, and stores in which we operate, with several real estate entities that are related through common ownership. These operating leases are discussed in Note 18 .
NOTE 20BENEFIT PLANS
In 2010 we instituted a 401(k) retirement savings plan which covers all U.S. employees. Employees may voluntarily contribute up to 90% of their compensation, as defined, to the plan. We match the employee contribution at a rate of 50% of the first 6% of compensation contributed to the plan. Employee contributions vest immediately. Employer contributions vest in full after three years of employment. Company contributions to the plan were $1.1 million and $1.0 million for the years ended December 31, 2016 and 2015, respectively.
In 2013 we instituted a Registered Retirement Savings Plan (RRSP) which covers all Canadian employees. We match the employee contribution at a rate of 50% of the first 6% of compensation contributed to the RRSP. Employee contributions vest immediately. Employer contributions vest 50% after one year and 100% after two years. Company contributions to the RRSP were $0.2 million for each of the two years ended December 31, 2016 and 2015.
In 2014, we instituted a pension plan which covers all U.K. employees. Employees are automatically enrolled at 1% of their compensation, and the Company will match the employees contribution up to 3% of the employees compensation. Company contributions to the plan were $0.2 million and $0.3 million for the years ended December 31, 2016 and 2015, respectively.
In 2015 we instituted a nonqualified deferred compensation plan that provides certain employees of the Company with the opportunity to elect to defer his or her base salary and performance-based compensation, which upon such election, will be credited to the applicable participants deferred compensation account. Participant contributions are fully vested at all times. Each deferred compensation account will be invested in one or more investment funds made available by the Company and selected by the participant. The Company may make discretionary contributions to the individual deferred compensation accounts, which the amount, if any, to be determined annually by the Company. Company contributions vest over a term of three years. Each vested deferred compensation account will be paid out in a lump sum upon a participants separation from service with the Company. The amount deferred under this plan totaled $1.4 million and $0.2 million as of December 31, 2016 and 2015, respectively, and was recorded in long-term liabilities.
The Company owns life insurance policies on plan beneficiaries as an informal funding vehicle to meet future benefit obligations. These policies are recorded at their cash surrender value and are included in other assets. Income generated from policies is recorded as other income.
F-84
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
NOTE 21EARNINGS PER SHARE
The following presents the computation of basic earnings per share (in thousands, except per share amounts):
Year Ended December 31, | ||||||||
2016 | 2015 | |||||||
Basic: |
||||||||
Net income |
$ | 65,444 | $ | 17,769 | ||||
Weighted average common shares |
1,053 | 1,053 | ||||||
Basic earnings per share |
$ | 62.15 | $ | 16.87 |
The following computation reconciles the differences between the basic and dilutes earnings per share presentations (in thousands, except per share amounts):
Year Ended December 31, | ||||||||
2016 | 2015 | |||||||
Diluted: |
||||||||
Net income |
$ | 65,444 | $ | 17,769 | ||||
Weighted average common shares (basic) |
1,053 | 1,053 | ||||||
Dilutive effect of stock options |
25 | 27 | ||||||
|
|
|
|
|||||
Weighted average common sharesdiluted |
1,078 | 1,080 | ||||||
|
|
|
|
|||||
Diluted earnings per share |
$ | 60.71 | $ | 16.45 |
Potential common shares that would have the effect of increasing diluted earnings per share or decreasing diluted loss per share are considered to be anti-dilutive and as such, these shares are not included in calculating diluted earnings per share. For the fiscal years ended December 31, 2016 there were 2,000 potential common shares not included in the calculation of diluted earnings per share because their effect was anti-dilutive.
NOTE 22CONDENSED CONSOLIDATING FINANCIAL INFORMATION
On May 12, 2011, in connection with the acquisition of Cash Money, CURO Intermediate issued and sold $250.0 million aggregate principal amount 10.75% senior secured notes due May 15, 2018. The Senior Secured Notes were sold to qualified institutional buyers under Rule 144A of the Securities Act of 1933, as amended (the Securities Act); or outside the United States to non-U.S. Persons in compliance with Regulation S of the Securities Act. Subsequent offerings of $90.0 million and $100.0 million aggregate principal amounts were sold on May 14, 2012 and February 5, 2013, respectively.
The following condensed consolidating financial information, which has been prepared in accordance with the requirements for presentation of Rule 3-10(d) of Regulation S-X promulgated under the Securities Act, presents the condensed consolidating financial information separately for:
(i) | CURO as the parent company of all entities listed below; |
(ii) | CFTC as the parent company of CURO Intermediate and the subsidiary guarantors and the other subsidiaries of the Company; |
(iii) | Intermediate as the issuer of the 10.75% senior secured notes; |
(iv) | The Companys subsidiary guarantors, which are comprised of our domestic subsidiaries, excluding: CFTC, CURO Intermediate, the Non-Recourse U.S. SPV Facility and the ABL Facility (the Subsidiary Guarantors), on a combined basis, which are 100% owned by CFTC, and which are guarantors of the 10.75% senior secured notes; |
F-85
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(v) | The Companys other subsidiaries, which are comprised of our foreign subsidiaries, which are not guarantors of the 10.75% senior secured notes (the Subsidiary Non-Guarantors); |
(vi) | The Non-Recourse U.S. SPV Facility and the ABL Facility (SPV Subs) which are not guarantors of the 10.75% senior secured notes; |
(vii) | Consolidating and eliminating entries representing adjustments to: |
1. | eliminate intercompany transactions between or among the Company, the Subsidiary Guarantors and the Subsidiary Non-Guarantors; and |
2. | eliminate the investments in the Companys subsidiaries; |
(viii) | The Company and its subsidiaries on a consolidated basis. |
F-86
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Balance Sheets
(in thousands) |
December 31, 2016 | |||||||||||||||||||||||||||||||||||||||
CFTC |
CURO
Intermediate |
Subsidiary
Guarantors |
Subsidiary
Non- Guarantors |
SPV
Subs |
Elimination |
CFTC
Consolidated |
CURO | Elimination |
CURO
Consolidated |
|||||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||||||
Cash |
$ | | $ | 1,954 | $ | 127,712 | $ | 63,779 | $ | | $ | | $ | 193,445 | $ | 80 | $ | | $ | 193,525 | ||||||||||||||||||||
Restricted cash of consolidated VIE |
| | | | 2,770 | | 2,770 | | | 2,770 | ||||||||||||||||||||||||||||||
Consumer loans receivable, net |
| | 47,869 | 63,156 | 49,973 | | 160,998 | | | 160,998 | ||||||||||||||||||||||||||||||
Deferred income taxes |
2,833 | 8,802 | 2,925 | 2,768 | | (4,693 | ) | 12,635 | | | 12,635 | |||||||||||||||||||||||||||||
Income taxes receivable |
34,667 | | | 6,151 | | (37,710 | ) | 3,108 | 6,270 | | 9,378 | |||||||||||||||||||||||||||||
Intercompany receivable |
| 444 | 366,314 | | | (366,758 | ) | | | | | |||||||||||||||||||||||||||||
Prepaid expenses and other |
| | 32,964 | 4,205 | | | 37,169 | 4,735 | (2,656 | ) | 39,248 | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total current assets |
37,500 | 11,200 | 577,784 | 140,059 | 52,743 | (409,161 | ) | 410,125 | 11,085 | (2,656 | ) | 418,554 | ||||||||||||||||||||||||||||
Property and equipment, net |
| | 58,733 | 37,163 | | | 95,896 | | | 95,896 | ||||||||||||||||||||||||||||||
Goodwill |
| | 91,131 | 50,423 | | | 141,554 | | | 141,554 | ||||||||||||||||||||||||||||||
Other intangibles, net |
19 | | 5,616 | 25,266 | | | 30,901 | | | 30,901 | ||||||||||||||||||||||||||||||
Consumer loans receivable, net |
| | 19,689 | 8,225 | 58,092 | | 86,006 | | | 86,006 | ||||||||||||||||||||||||||||||
Intercompany receivable |
| 55,000 | 17,573 | | | (72,573 | ) | | | | | |||||||||||||||||||||||||||||
Investment in subsidiaries |
187,473 | 830,443 | | | | (1,017,916 | ) | | 155,964 | (155,964 | ) | | ||||||||||||||||||||||||||||
Restricted cash |
| 459 | 1,223 | 3,376 | | | 5,058 | | | 5,058 | ||||||||||||||||||||||||||||||
Other |
| | 1,745 | 1,084 | | | 2,829 | | | 2,829 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total assets |
$ | 224,992 | $ | 897,102 | $ | 773,494 | $ | 265,596 | $ | 110,835 | $ | (1,499,650 | ) | $ | 772,369 | $ | 167,049 | $ | (158,620 | ) | $ | 780,798 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Liabilities and equity: |
||||||||||||||||||||||||||||||||||||||||
Accounts payable and accrued liabilities |
$ | 253 | $ | 3 | $ | 32,528 | $ | 9,900 | $ | | $ | | $ | 42,684 | $ | (21 | ) | $ | | $ | 42,663 | |||||||||||||||||||
Deferred revenue |
| | 6,520 | 5,822 | | | 12,342 | | | 12,342 | ||||||||||||||||||||||||||||||
Income taxes payable |
| 23,087 | 12,952 | 3,043 | | (37,710 | ) | 1,372 | | | 1,372 | |||||||||||||||||||||||||||||
Current maturities of long-term debt |
| 23,406 | | | | | 23,406 | 124,365 | | 147,771 | ||||||||||||||||||||||||||||||
Accrued interest |
| 5,575 | | | 775 | | 6,350 | 1,833 | | 8,183 | ||||||||||||||||||||||||||||||
Payable to CURO Group |
2,656 | | | | | | 2,656 | | (2,656 | ) | | |||||||||||||||||||||||||||||
Intercompany payable |
65,822 | 233,537 | | 12,773 | 54,626 | (366,758 | ) | | | | | |||||||||||||||||||||||||||||
CSO guarantee liability |
| | 17,052 | | | 17,052 | | | 17,052 | |||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total current liabilities |
68,731 | 285,608 | 69,052 | 31,538 | 55,401 | (404,468 | ) | 105,862 | 126,177 | (2,656 | ) | 229,383 | ||||||||||||||||||||||||||||
Deferred rent |
| | 10,006 | 1,862 | | | 11,868 | | | 11,868 | ||||||||||||||||||||||||||||||
Long-term debt (ex. current maturities) |
| 414,082 | | | 63,054 | | 477,136 | | | 477,136 | ||||||||||||||||||||||||||||||
Subordinated shareholder debt |
| | | 2,227 | | | 2,227 | | | 2,227 | ||||||||||||||||||||||||||||||
Intercompany payable |
| | | 72,573 | | (72,573 | ) | | | | | |||||||||||||||||||||||||||||
Other long-term liabilities |
299 | | 1,741 | 2,976 | | | 5,016 | | | 5,016 | ||||||||||||||||||||||||||||||
Deferred tax liabilities |
(2 | ) | 9,914 | 2,495 | 6,582 | | (4,693 | ) | 14,296 | 17 | | 14,313 | ||||||||||||||||||||||||||||
Stockholders equity (deficit) |
155,964 | 187,498 | 690,200 | 147,838 | (7,620 | ) | (1,017,916 | ) | 155,964 | 40,855 | (155,964 | ) | 40,855 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total liabilities and stockholders equity |
$ | 224,992 | $ | 897,102 | $ | 773,494 | $ | 265,596 | $ | 110,835 | $ | (1,499,650 | ) | $ | 772,369 | $ | 167,049 | $ | (158,620 | ) | $ | 780,798 | ||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-87
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands) |
December 31, 2015 | |||||||||||||||||||||||||||||||||||
CFTC |
CURO
Intermediate |
Subsidiary
Guarantors |
Subsidiary
Non- Guarantors |
Elimination |
CFTC
Consolidated |
CURO | Elimination |
CURO
Consolidated |
||||||||||||||||||||||||||||
Assets: |
||||||||||||||||||||||||||||||||||||
Cash |
$ | | $ | 2 | $ | 57,149 | $ | 41,928 | $ | | $ | 99,079 | $ | 1,482 | $ | | $ | 100,561 | ||||||||||||||||||
Consumer loans receivable, net |
| | 92,456 | 54,763 | | 147,219 | | | 147,219 | |||||||||||||||||||||||||||
Deferred income taxes |
2,735 | 8,577 | 2,660 | 2,189 | (2,735 | ) | 13,426 | | (27 | ) | 13,399 | |||||||||||||||||||||||||
Income taxes receivable |
15,138 | | | 2,176 | (15,138 | ) | 2,176 | 6,457 | (831 | ) | 7,802 | |||||||||||||||||||||||||
Prepaid expenses and other |
| | 30,616 | 2,572 | 218 | 33,406 | 12,003 | (11,933 | ) | 33,476 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total current assets |
$ | 17,873 | $ | 8,579 | $ | 182,881 | $ | 103,628 | $ | (17,655 | ) | $ | 295,306 | $ | 19,942 | $ | (12,791 | ) | $ | 302,457 | ||||||||||||||||
Property and equipment, net |
| | 62,895 | 36,812 | | 99,707 | | | 99,707 | |||||||||||||||||||||||||||
Goodwill |
| | 91,131 | 53,904 | | 145,035 | | | 145,035 | |||||||||||||||||||||||||||
Other intangibles, net |
| | 6,633 | 26,063 | | 32,696 | | | 32,696 | |||||||||||||||||||||||||||
Consumer loans receivable, net |
| | 71,621 | 392 | | 72,013 | | | 72,013 | |||||||||||||||||||||||||||
Intercompany receivable |
| 39,735 | 215,515 | | (255,250 | ) | | | | | ||||||||||||||||||||||||||
Investment in subsidiaries |
117,585 | 653,985 | | | (771,570 | ) | | 86,149 | (86,149 | ) | | |||||||||||||||||||||||||
Restricted cash |
| | 5,700 | 6,063 | | 11,763 | | | 11,763 | |||||||||||||||||||||||||||
Other |
| 55,000 | 961 | 1,385 | (55,000 | ) | 2,346 | | | 2,346 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total assets |
$ | 135,458 | $ | 757,299 | $ | 637,337 | $ | 228,247 | $ | (1,099,475 | ) | $ | 658,866 | $ | 106,091 | $ | (98,940 | ) | $ | 666,017 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Liabilities and equity: |
||||||||||||||||||||||||||||||||||||
Accounts payable and accrued liabilities |
$ | 50 | $ | 8 | $ | 31,905 | $ | 11,212 | $ | | $ | 43,175 | $ | | $ | (25 | ) | $ | 43,150 | |||||||||||||||||
Deferred revenue |
| | 7,017 | 8,702 | | 15,719 | | | 15,719 | |||||||||||||||||||||||||||
Income taxes payable |
| 10,033 | 5,936 | | (15,138 | ) | 831 | | (831 | ) | | |||||||||||||||||||||||||
Current maturities of long-term debt |
| 8,050 | | | | 8,050 | | | 8,050 | |||||||||||||||||||||||||||
Accrued interest |
| 5,959 | | | | 5,959 | 1,833 | | 7,792 | |||||||||||||||||||||||||||
Payable to CURO Group |
11,935 | | | | | 11,935 | | (11,935 | ) | | ||||||||||||||||||||||||||
Intercompany payable |
37,131 | 167,461 | | 50,440 | (255,032 | ) | | | | | ||||||||||||||||||||||||||
CSO guarantee liability |
| | 17,751 | | | 17,751 | | | 17,751 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total current liabilities |
$ | 49,116 | $ | 191,511 | $ | 62,609 | $ | 70,354 | $ | (270,170 | ) | $ | 103,420 | $ | 1,833 | $ | (12,791 | ) | $ | 92,462 | ||||||||||||||||
Deferred rent |
| | 9,745 | 1,872 | | 11,617 | | | 11,617 | |||||||||||||||||||||||||||
Long-term debt (ex. current maturities) |
| 438,035 | | 55,000 | (55,000 | ) | 438,035 | 123,640 | | 561,675 | ||||||||||||||||||||||||||
Subordinated shareholder debt |
| | | 2,162 | | 2,162 | | | 2,162 | |||||||||||||||||||||||||||
Other long-term liabilities |
193 | | 875 | 655 | | 1,723 | | | 1,723 | |||||||||||||||||||||||||||
Deferred tax liabilities |
| 10,168 | 1,590 | 6,737 | (2,735 | ) | 15,760 | | | 15,760 | ||||||||||||||||||||||||||
Stockholders equity (deficit) |
86,149 | 117,585 | 562,518 | 91,467 | (771,570 | ) | 86,149 | (19,382 | ) | (86,149 | ) | (19,382 | ) | |||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total Liabilities and Stockholders equity (deficit) |
$ | 135,458 | $ | 757,299 | $ | 637,337 | $ | 228,247 | $ | (1,099,475 | ) | $ | 658,866 | $ | 106,091 | $ | (98,940 | ) | $ | 666,017 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-88
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Statements of Income
(in thousands) |
Year ended December 31, 2016 | |||||||||||||||||||||||||||||||||||||||
CFTC |
CURO
Intermediate |
Subsidiary
Guarantors |
Subsidiary
Non- Guarantors |
SPV
Subs |
Eliminations |
CFTC
Consolidated |
CURO | Eliminations |
CURO
Consolidated |
|||||||||||||||||||||||||||||||
Revenue: |
||||||||||||||||||||||||||||||||||||||||
Total revenues |
$ | | $ | | $ | 581,820 | $ | 221,799 | $ | 24,977 | $ | | $ | 828,596 | $ | | $ | | $ | 828,596 | ||||||||||||||||||||
Cost of providing services: |
||||||||||||||||||||||||||||||||||||||||
Provision for losses |
| | 176,546 | 50,540 | 31,203 | | 258,289 | | | 258,289 | ||||||||||||||||||||||||||||||
Salaries and benefits |
| | 69,549 | 34,992 | | | 104,541 | | | 104,541 | ||||||||||||||||||||||||||||||
Occupancy |
| | 31,451 | 23,058 | | | 54,509 | | | 54,509 | ||||||||||||||||||||||||||||||
Office |
| | 15,883 | 4,580 | | | 20,463 | | | 20,463 | ||||||||||||||||||||||||||||||
Other store operating expenses |
| | 47,491 | 6,120 | 6 | | 53,617 | | | 53,617 | ||||||||||||||||||||||||||||||
Advertising |
| | 30,340 | 13,581 | | | 43,921 | | | 43,921 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total cost of providing services |
| | 371,260 | 132,871 | 31,209 | | 535,340 | | | 535,340 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Gross Margin |
| | 210,560 | 88,928 | (6,232 | ) | | 293,256 | | | 293,256 | |||||||||||||||||||||||||||||
Other (income) expense: |
||||||||||||||||||||||||||||||||||||||||
Corporate expenses |
1,898 | 338 | 78,873 | 32,713 | | | 113,822 | 447 | 114,269 | |||||||||||||||||||||||||||||||
Intercompany management fee (income) expense |
| | (12,632 | ) | 12,632 | | | | | | | |||||||||||||||||||||||||||||
District expenses |
| | 7,563 | 3,287 | | | 10,850 | | | 10,850 | ||||||||||||||||||||||||||||||
Interest expense |
| 47,684 | 2 | 58 | 864 | | 48,608 | 15,726 | | 64,334 | ||||||||||||||||||||||||||||||
Intercompany interest (income) expense |
| (4,961 | ) | (1,319 | ) | 5,741 | 539 | | | | | | ||||||||||||||||||||||||||||
Gain on extinguishment of debt |
| (6,991 | ) | | | | | (6,991 | ) | | | (6,991 | ) | |||||||||||||||||||||||||||
Restructuring costs |
| | 1,726 | 1,892 | | | 3,618 | | | 3,618 | ||||||||||||||||||||||||||||||
Other, net |
| | (984 | ) | 140 | | | (844 | ) | (1 | ) | | (845 | ) | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Total other expense |
1,898 | 36,070 | 73,229 | 56,463 | 1,403 | | 169,063 | 16,172 | | 185,235 | ||||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net earnings (loss) before income taxes |
(1,898 | ) | (36,070 | ) | 137,331 | 32,465 | (7,635 | ) | | 124,193 | (16,172 | ) | | 108,021 | ||||||||||||||||||||||||||
Provision for income tax expense (benefit) |
(682 | ) | 22,788 | 14,543 | 12,522 | | | 49,171 | (6,594 | ) | | 42,577 | ||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net earnings (loss) |
(1,216 | ) | (58,858 | ) | 122,788 | 19,943 | (7,635 | ) | | 75,022 | (9,578 | ) | | 65,444 | ||||||||||||||||||||||||||
Equity in net income (loss) of subsidiaries: |
||||||||||||||||||||||||||||||||||||||||
CFTC |
| | | | | | | 75,022 | (75,022 | ) | | |||||||||||||||||||||||||||||
Intermediate |
(58,858 | ) | | | | | 58,858 | | | | | |||||||||||||||||||||||||||||
Guarantor Subsidiaries |
122,788 | | | | | (122,788 | ) | | | | | |||||||||||||||||||||||||||||
Non-Guarantor Subsidiaries |
19,943 | | | | | (19,943 | ) | | | | | |||||||||||||||||||||||||||||
SPV Subs |
(7,635 | ) | | | | | 7,635 | | | | | |||||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||||
Net earnings (loss) attributable to CURO |
$ | 75,022 | $ | (58,858 | ) | $ | 122,788 | $ | 19,943 | $ | (7,635 | ) | $ | (76,238 | ) | $ | 75,022 | $ | 65,444 | $ | (75,022 | ) | $ | 65,444 | ||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
F-89
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands) |
Year ended December 31, 2015 | |||||||||||||||||||||||||||||||||||
CFTC |
CURO
Intermediate |
Subsidiary
Guarantors |
Subsidiary
Non- Guarantors |
Eliminations |
CFTC
Consolidated |
CURO | Eliminations |
CURO
Consolidated |
||||||||||||||||||||||||||||
Revenue: |
||||||||||||||||||||||||||||||||||||
Total revenues |
$ | | $ | | $ | 573,664 | $ | 239,467 | $ | | $ | 813,131 | $ | | $ | | $ | 813,131 | ||||||||||||||||||
Cost of providing services: |
||||||||||||||||||||||||||||||||||||
Provision for losses |
| | 222,868 | 58,342 | | 281,210 | | | 281,210 | |||||||||||||||||||||||||||
Salaries and benefits |
| | 68,928 | 38,131 | | 107,059 | | | 107,059 | |||||||||||||||||||||||||||
Occupancy |
| | 30,504 | 22,784 | | 53,288 | | | 53,288 | |||||||||||||||||||||||||||
Office |
| | 15,089 | 4,840 | | 19,929 | | | 19,929 | |||||||||||||||||||||||||||
Other store operating expenses |
| | 41,661 | 5,719 | | 47,380 | | | 47,380 | |||||||||||||||||||||||||||
Advertising |
| | 42,986 | 22,678 | | 65,664 | | | 65,664 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total cost of providing services |
| | 422,036 | 152,494 | | 574,530 | | | 574,530 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Gross Margin |
| | 151,628 | 86,973 | | 238,601 | | | 238,601 | |||||||||||||||||||||||||||
Other (income) expense: |
||||||||||||||||||||||||||||||||||||
Corporate expenses |
2,035 | 178 | 71,754 | 41,993 | | 115,960 | 1,149 | | 117,109 | |||||||||||||||||||||||||||
Intercompany management fee (income) expense |
| 1 | (13,064 | ) | 13,063 | | | | | | ||||||||||||||||||||||||||
District expenses |
| | 7,412 | 4,525 | | 11,937 | | | 11,937 | |||||||||||||||||||||||||||
Interest expense |
| 49,167 | 17 | 111 | | 49,295 | 15,725 | | 65,020 | |||||||||||||||||||||||||||
Intercompany interest (income) expense |
| (5,583 | ) | (265 | ) | 5,848 | | | | | | |||||||||||||||||||||||||
Goodwill and intangible asset impairment charges |
| | | 2,882 | | 2,882 | | | 2,882 | |||||||||||||||||||||||||||
Fair value adjustment to contingent consideration |
| | | 4,291 | | 4,291 | | | 4,291 | |||||||||||||||||||||||||||
Other, net |
| | (11 | ) | 1,499 | | 1,488 | | | 1,488 | ||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Total other expense |
2,035 | 43,763 | 65,843 | 74,212 | | 185,853 | 16,874 | | 202,727 | |||||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net earnings (loss) before income taxes |
(2,035 | ) | (43,763 | ) | 85,785 | 12,761 | | 52,748 | (16,874 | ) | | 35,874 | ||||||||||||||||||||||||
Provision for income tax expense (benefit) |
(673 | ) | 10,704 | 4,164 | 10,291 | | 24,486 | (6,381 | ) | | 18,105 | |||||||||||||||||||||||||
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|||||||||||||||||||
Net earnings (loss) |
(1,362 | ) | (54,467 | ) | 81,621 | 2,470 | | 28,262 | (10,493 | ) | | 17,769 | ||||||||||||||||||||||||
Equity in net income (loss) of subsidiaries: |
||||||||||||||||||||||||||||||||||||
CFTC |
| | | | | | 28,262 | (28,262 | ) | | ||||||||||||||||||||||||||
Intermediate |
(54,467 | ) | | | | 54,467 | | | | | ||||||||||||||||||||||||||
Guarantor Subsidiaries |
81,621 | | | | (81,621 | ) | | | | | ||||||||||||||||||||||||||
Non-Guarantor Subsidiaries |
2,470 | | | | (2,470 | ) | | | | | ||||||||||||||||||||||||||
|
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Net earnings (loss) attributable to CURO |
$ | 28,262 | $ | (54,467 | ) | $ | 81,621 | $ | 2,470 | $ | (29,624 | ) | $ | 28,262 | $ | 17,769 | $ | (28,262 | ) | $ | 17,769 | |||||||||||||||
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F-90
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Condensed Consolidating Statements of Cash Flows
(in thousands) |
Year ended December 31, 2016 | |||||||||||||||||||||||||||||||||||||||
CFTC |
CURO
Intermediate |
Subsidiary
Guarantors |
Subsidiary
Non- Guarantors |
SPV
Subs |
Eliminations |
CFTC
Consolidated |
CURO | Eliminations |
CURO
Consolidated |
|||||||||||||||||||||||||||||||
Cash flows from operating activities |
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Net cash provided (used) |
$ | 20 | $ | 29,400 | $ | 76,191 | $ | 27,731 | $ | (83,601 | ) | $ | (627 | ) | $ | 49,114 | $ | (1,402 | ) | $ | | $ | 47,712 | |||||||||||||||||
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Cash flows from investing activities: |
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Purchase of property, equipment and software |
(20 | ) | | (10,105 | ) | (5,901 | ) | | | (16,026 | ) | | | (16,026 | ) | |||||||||||||||||||||||||
Change in restricted cash |
| (459 | ) | 4,477 | 1,856 | (2,770 | ) | | 3,104 | | | 3,104 | ||||||||||||||||||||||||||||
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Net cash used |
(20 | ) | (459 | ) | (5,628 | ) | (4,045 | ) | (2,770 | ) | | (12,922 | ) | | | (12,922 | ) | |||||||||||||||||||||||
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|
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Cash flows from financing activities: |
||||||||||||||||||||||||||||||||||||||||
Proceeds from credit facility |
| 30,000 | | | | | 30,000 | | | 30,000 | ||||||||||||||||||||||||||||||
Payments on credit facility |
| (38,050 | ) | | | | | (38,050 | ) | | | (38,050 | ) | |||||||||||||||||||||||||||
Deferred financing costs incurred |
| | | | (5,346 | ) | | (5,346 | ) | | | (5,346 | ) | |||||||||||||||||||||||||||
Proceeds from Non-Recourse U.S. SPV facility and ABL facility |
| | | | 91,717 | | 91,717 | | | 91,717 | ||||||||||||||||||||||||||||||
Purchase of May 2011 senior secured notes |
| (18,939 | ) | | | | | (18,939 | ) | | | (18,939 | ) | |||||||||||||||||||||||||||
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Net cash provided (used) |
| (26,989 | ) | | | 86,371 | | 59,382 | | | 59,382 | |||||||||||||||||||||||||||||
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Effect of exchange rate changes on cash |
| | | (1,835 | ) | | 627 | (1,208 | ) | | | (1,208 | ) | |||||||||||||||||||||||||||
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Net increase in cash |
| 1,952 | 70,563 | 21,851 | | | 94,366 | (1,402 | ) | | 92,964 | |||||||||||||||||||||||||||||
Cash at beginning of period |
| 2 | 57,149 | 41,928 | | | 99,079 | 1,482 | | 100,561 | ||||||||||||||||||||||||||||||
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Cash at end of period |
$ | | $ | 1,954 | $ | 127,712 | $ | 63,779 | $ | | $ | | $ | 193,445 | $ | 80 | $ | | $ | 193,525 | ||||||||||||||||||||
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F-91
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
(in thousands) |
Year ended December 31, 2015 | |||||||||||||||||||||||||||||||||||
CFTC |
CURO
Intermediate |
Subsidiary
Guarantors |
Subsidiary
Non- Guarantors |
Eliminations |
CFTC
Consolidated |
CURO | Eliminations |
CURO
Consolidated |
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Cash flows from operating activities |
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Net cash provided (used) |
$ | | $ | 11,950 | $ | 27,698 | $ | (6,345 | ) | $ | 1,048 | $ | 34,351 | $ | (17,237 | ) | $ | | $ | 17,114 | ||||||||||||||||
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Cash flows from investing activities: |
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Purchase of property, equipment and software |
| | (8,642 | ) | (11,190 | ) | | (19,832 | ) | | | (19,832 | ) | |||||||||||||||||||||||
Intercompany dividends |
18,471 | | (18,471 | ) | | | | | | | ||||||||||||||||||||||||||
Change in restricted cash |
| | (300 | ) | (6,123 | ) | | (6,423 | ) | | | (6,423 | ) | |||||||||||||||||||||||
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|
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Net cash provided (used) |
18,471 | | (27,413 | ) | (17,313 | ) | | (26,255 | ) | | | (26,255 | ) | |||||||||||||||||||||||
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|
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Cash flows from financing activities: |
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Proceeds from credit facility |
| 57,050 | | | | 57,050 | | 57,050 | ||||||||||||||||||||||||||||
Payments on credit facility |
| (69,000 | ) | | | | (69,000 | ) | | (69,000 | ) | |||||||||||||||||||||||||
Dividend paid to CURO Group |
(18,100 | ) | | | | | (18,100 | ) | 18,100 | | | |||||||||||||||||||||||||
Payment for cash settlement of equity award |
(371 | ) | | | | | (371 | ) | | (371 | ) | |||||||||||||||||||||||||
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Net cash used |
(18,471 | ) | (11,950 | ) | | | | (30,421 | ) | 18,100 | | (12,321 | ) | |||||||||||||||||||||||
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Effect of exchange rate changes on cash |
| | | (7,016 | ) | (1,048 | ) | (8,064 | ) | | | (8,064 | ) | |||||||||||||||||||||||
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Net increase (decrease) in cash |
| | 285 | (30,674 | ) | | (30,389 | ) | 863 | | (29,526 | ) | ||||||||||||||||||||||||
Cash at beginning of period |
| 2 | 56,864 | 72,602 | | 129,468 | 619 | | 130,087 | |||||||||||||||||||||||||||
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Cash at end of period |
$ | | $ | 2 | $ | 57,149 | $ | 41,928 | $ | | $ | 99,079 | $ | 1,482 | $ | | $ | 100,561 | ||||||||||||||||||
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NOTE 23SUBSEQUENT EVENTS
Debt offering
On February 15, 2017 CFTC issued $470.0 million 12.00% Senior Secured Notes due March 1, 2022. Interest on the notes is payable semiannually, in arrears, on March 1 and September 1 of each year, beginning on September 1, 2017. The proceeds from the Notes were used, together with available cash, to (i) redeem the outstanding 10.75% Senior Secured Notes due 2018 of our wholly-owned subsidiary, CURO Intermediate Holdings, (ii) redeem our outstanding 12.00% Senior Cash Pay Notes due 2017 and (iii) pay fees, expenses, premiums and accrued interest in connection with the offering. Consequently, we received a $130.1 million dividend in February 2017 to fund the redemption of the 12.00% Senior Cash Pay Notes.
ABL Facility
On November 17, 2016, CURO Intermediate entered into a six-month recourse credit facility with Victory Park Management, LLC and certain other lenders, or the ABL Facility, which provided for $25.0 million of borrowing capacity. The ABL Facility matured in May 2017 and was fully converted to the SPV facility.
Dividends received
On May 12, 2017, CFTC declared a dividend of $28.0 million to CURO, which was paid to our stockholders on May 15, 2017.
Acquisition of preferred shares
On April 20, 2017, we purchased 2,926,715 preferred shares of Cognical Holdings, Inc. (Cognical) for $5.0 million. Cognical operates as a business under an online website, www.zibby.com. The online business facilitates the purchase of household items and serves the underbanked consumers. As a result of this transaction, we own 8.9% of the equity of Cognical.
F-92
CURO GROUP HOLDINGS CORP. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (continued)
Legal Proceedings: Harrison, et al v. Principal Investments, Inc. et al
On June 7, 2017, the parties in the Harrison, et al v. Principal Investments, Inc. et al class action lawsuit reached a settlement. At a hearing before the District Court in Clark County, Nevada, on July 10, 2017 the terms of the settlement were outlined before the Court and a fairness hearing was scheduled for July 24, 2017. In the opinion of management, the cost of such settlement should not have a material adverse effect on our financial position, results of operations or liquidity.
The Company evaluated and disclosed subsequent events through July 12, 2017, which represents the date as of which the financial statements were available to be issued.
F-93
PART IIINFORMATION NOT REQUIRED IN PROSPECTUS
Item 13. Other Expenses of Issuance and Distribution.
The following table sets forth all expenses to be paid by the registrant, other than estimated underwriting discounts and commissions, in connection with our initial public offering. All amounts shown are estimates except for the SEC registration fee and the FINRA filing fee:
(in thousands) |
||||
SEC registration fee |
$ | 12,450 | ||
FINRA filing fee |
$ | 15,500 | ||
NYSE listing fee |
$ | 25,000 | ||
Printing and engraving expenses |
$ | * | ||
Legal fees and expenses |
$ | * | ||
Accounting fees and expenses |
$ | * | ||
Transfer agent and registrar fees and expenses |
$ | * | ||
Miscellaneous |
$ | * | ||
|
|
|||
Total |
$ | * | ||
|
|
* | To be completed by amendment. |
Item 14. Indemnification of Directors and Officers.
Section 145 of the General Corporation Law of the State of Delaware authorizes a court to award, or a corporations board of directors to grant, indemnity to officers and directors under certain circumstances and subject to certain limitations. The terms of Section 145 of the General Corporation Law of the State of Delaware are sufficiently broad to permit indemnification under certain circumstances for liabilities, including reimbursement of expenses incurred, arising under the Securities Act of 1933, as amended.
As permitted by Section 102(b)(7) of the General Corporation Law of the State of Delaware, the registrants amended and restated certificate of incorporation, to be in effect upon the completion of this offering, includes provisions that eliminate the personal liability of its directors for monetary damages for any breach of fiduciary duties as a director, except liability for the following:
| any breach of the directors duty of loyalty to the registrant or its stockholders; |
| acts or omissions not in good faith or that involve intentional misconduct or a knowing violation of law; |
| under Section 174 of the General Corporation Law of the State of Delaware (regarding unlawful dividends and stock purchases); or |
| any transaction from which the director derived an improper personal benefit. |
To the extent Section 102(b)(7) is interpreted, or the General Corporation Law of the State of Delaware is amended, to allow similar protections for officers of a corporation, such provisions of the registrants amended and restated certificate of incorporation shall also extend to those persons.
In addition, as permitted by Section 145 of the General Corporation Law of the State of Delaware, the amended and restated bylaws of the registrant, to be in effect upon the completion of this offering, provide that:
| The registrant shall indemnify its directors and officers for serving the registrant in those capacities or for serving other business enterprises at the registrants request, to the fullest extent permitted by Delaware law. Delaware law provides that a corporation may indemnify such person if such person acted in good faith and in a manner such person reasonably believed to be in or not opposed to the best interests of the registrant and, with respect to any criminal proceeding, had no reasonable cause to believe such persons conduct was unlawful. |
II-1
| The registrant may, in its discretion, indemnify employees and agents as set forth in the General Corporation Law of the State of Delaware. |
| The registrant is required to advance expenses, as incurred, to its directors and officers in connection with defending a proceeding, except that such director or officer shall undertake to repay such advances if it is ultimately determined that such person is not entitled to indemnification. |
| The registrant will not be obligated pursuant to its amended and restated bylaws to indemnify a person with respect to proceedings initiated by that person, except with respect to proceedings authorized by the registrants board of directors or brought to enforce a right to indemnification. |
| The rights conferred in the amended and restated bylaws are not exclusive, and the registrant is authorized to enter into indemnification agreements with its directors, officers, employees and agents and to obtain insurance to indemnify such persons. |
The registrant has entered, and intends to continue to enter, into separate indemnification agreements with each of its directors and officers that provide the maximum indemnity allowed to directors and officers by Section 145 of the General Corporation Law of the State of Delaware and also provide for certain additional procedural protections. The registrant also maintains directors and officers insurance to insure such persons against certain liabilities.
The indemnification provisions in the registrants amended and restated certificate of incorporation, amended and restated bylaws and the indemnification agreements entered into between the registrant and its officers and directors may be sufficiently broad to permit indemnification of the registrants officers and directors for liabilities (including reimbursement of expenses incurred) arising under the Securities Act of 1933.
The underwriting agreement filed as Exhibit 1.1 to this registration statement provides for indemnification in limited circumstances by the underwriters of the registrant and its officers and directors for liabilities, including arising under the Securities Act of 1933 and otherwise.
Item 15. Recent Sales of Unregistered Securities.
| Since January 1, 2014, we granted stock options to employees and directors under our stock option plans covering an aggregate of 17,589 shares, with exercise prices ranging from $122.00 per share to $319.08 per share. |
| On February 15, 2017 CFTC issued $470,000,000 aggregate principal amount of 12.00% Senior Secured Notes due March 1, 2022 at an offering price of 98.155%. The initial purchasers were Jefferies LLC and Stephens Inc., and $6,000,000 of the 12.00% Senior Secured Notes were privately placed by the Company directly with certain members of the Companys board of directors. |
| On October 27, 2017 CFTC agreed to sell $135,000,000 aggregate principal amount of additional 12.00% Senior Secured Notes due March 1, 2022 at an offering price of 103.500%. The initial purchasers were Credit Suisse Securities (USA) LLC, Jefferies LLC and Stephens Inc. The offering is expected to be completed on November 2, 2017, subject to the satisfaction or waiver of customary closing conditions. |
Unless otherwise stated, the sales of the above securities were deemed to be exempt from registration under the Securities Act in reliance upon Section 4(a)(2) of the Securities Act (or Regulation D or Regulation S promulgated thereunder), or Rule 701 promulgated under Section 3(b) of the Securities Act as transactions by an issuer not involving any public offering or pursuant to benefit plans and contracts relating to compensation as provided under Rule 701 under the Securities Act. In connection with the issuance of the 12.00% Senior Secured Notes referenced above, the initial purchasers resold the 12.00% Senior Secured Notes to qualified institutional buyers within the meaning of Rule 144A under the Securities Act, in reliance on the exemption from registration requirements of the Securities Act provided by Rule 144A and outside the United States to non-U.S. persons in reliance on Regulation S under the Securities Act. The indenture governing the Notes permits transfers of such securities to accredited investors (as defined in Regulation D of the Securities Act of 1933), among others, subject to compliance with applicable law.
II-2
Item 16. Exhibits and Financial Statement Schedules.
(a) | Exhibits |
The list of exhibits is set forth under Exhibit Index at the end of this registration statement and is incorporated herein by reference.
(b) | Financial Statement Schedules |
All financial statement schedules have been omitted because the required information is included in the consolidated financial statements and the notes thereto or the information therein is not applicable.
Item 17. Undertakings.
The undersigned registrant hereby undertakes to provide to the underwriters, at the closing specified in the underwriting agreement, certificates in such denominations and registered in such names as required by the underwriters to permit prompt delivery to each purchaser.
Insofar as indemnification for liabilities arising under the Securities Act of 1933 may be permitted to directors, officers and controlling persons of the registrant pursuant to the foregoing provisions, or otherwise, the registrant has been advised that in the opinion of the Securities and Exchange Commission such indemnification is against public policy as expressed in the Securities Act of 1933, and is, therefore, unenforceable. In the event that a claim for indemnification against such liabilities (other than the payment by the registrant of expenses incurred or paid by a director, officer or controlling person of the registrant in the successful defense of any action, suit or proceeding) is asserted by such director, officer or controlling person in connection with the securities being registered, the registrant will, unless in the opinion of its counsel the matter has been settled by controlling precedent, submit to a court of appropriate jurisdiction the question whether such indemnification by it is against public policy as expressed in the Securities Act of 1933 and will be governed by the final adjudication of such issue.
The undersigned registrant hereby undertakes that:
(1) For purposes of determining any liability under the Securities Act of 1933, the information omitted from the form of prospectus filed as part of this registration statement in reliance upon Rule 430A and contained in a form of prospectus filed by the registrant pursuant to Rule 424(b)(1) or (4) or 497(h) under the Securities Act of 1933 shall be deemed to be part of this registration statement as of the time it was declared effective.
(2) For the purpose of determining any liability under the Securities Act of 1933, each post-effective amendment that contains a form of prospectus shall be deemed to be a new registration statement relating to the securities offered therein, and the offering of such securities at that time shall be deemed to be the initial bona fide offering thereof.
II-3
EXHIBIT INDEX
Exhibit
|
Description |
|
1.1 |
Form of Underwriting Agreement* |
|
3.1 | ||
3.2 | ||
4.1 |
Form of common stock certificate* |
|
4.2 |
Amended and Restated Investors Rights Agreement between the Registrant and the investors listed on the signature pages thereto* |
|
5.1 |
Opinion of Willkie Farr & Gallagher LLP* |
|
10.1 | ||
10.2 | ||
10.3 | ||
10.4 | ||
10.5 |
CURO Group Holdings Corp. 2017 Incentive Plan*+ |
|
10.6 |
CURO Group Holdings Corp. Employee Stock Purchase Plan*+ |
|
10.7 | ||
10.8 | ||
10.9 | ||
10.10 | ||
10.11 | ||
10.12 | ||
10.13 | ||
10.14 | ||
10.15 | ||
10.16 | ||
10.17 | ||
10.18 |
II-4
Exhibit
|
Description |
|
10.19 | ||
10.20 | ||
10.21 | ||
10.22 | ||
10.23 | ||
10.24 | ||
10.25 | ||
10.26 | ||
10.27 | ||
10.28 | ||
10.29 | ||
10.30 | ||
10.31 | ||
10.32 | ||
10.33 | ||
10.34 | ||
10.35 | ||
10.36 | ||
10.37 | ||
10.38 |
II-5
Exhibit
|
Description |
|
10.39 | ||
10.40 | ||
10.41 | ||
10.42 | ||
10.43 | ||
10.44 | ||
10.45 | ||
10.46 | ||
10.47 | ||
10.48 | ||
10.49 | ||
10.50 | ||
10.51 | ||
10.52 | ||
10.53 | ||
10.54 | ||
10.55 | ||
10.56 | ||
10.57
|
II-6
Exhibit
|
Description |
|
10.58 | ||
10.59 | ||
10.60 |
Amendment Number 1 to Donald F. Gayhardts Employment and Non-Competition Agreement*+ |
|
10.61 |
Form of Restricted Stock Unit Agreement*+ |
|
21.1 | ||
23.1 | ||
23.2 |
Consent of Willkie Farr & Gallagher LLP (included in Exhibit 5.1)* |
|
24.1 |
Power of Attorney (included in the signature page to registration statement)# |
|
99.1 | ||
99.2 |
# | Previously filed. |
* | To be filed by amendment. |
+ | Indicates management contract or compensatory plan, contract or arrangement. |
¥ | Confidential treatment pursuant to Rule 406 under the Securities Act has been requested as to certain portions of this exhibit, which portions have been omitted and submitted separately to the Securities and Exchange Commission. |
II-7
SIGNATURES
Pursuant to the requirements of the Securities Act of 1933, the registrant has duly caused this registration statement to be signed on its behalf by the undersigned, thereunto duly authorized, in the City of Wichita, State of Kansas, on this 1st day of November, 2017.
CURO GROUP HOLDINGS CORP. |
||
By: |
/s/ Don Gayhardt |
|
Name: Don Gayhardt |
||
Title: President and Chief Executive Officer |
II-8
Pursuant to the requirements of the Securities Act of 1933, as amended, this registration statement has been signed by the following persons in the capacities and on the dates indicated.
Signature |
Title |
Date |
||
/s/ Don Gayhardt Don Gayhardt |
President, Chief Executive Officer and Director (Principal Executive Officer) | November 1, 2017 | ||
/s/ Roger Dean Roger Dean |
Treasurer, Executive Vice President and Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer) | November 1, 2017 | ||
* Doug Rippel |
Executive Chairman | November 1, 2017 | ||
* Chad Faulkner |
Director | November 1, 2017 | ||
* Mike McKnight |
Director | November 1, 2017 | ||
* Christopher A. Masto |
Director | November 1, 2017 | ||
* Karen Winterhof |
Director | November 1, 2017 |
* | Pursuant to Power of Attorney. |
By: |
/s/ Roger Dean |
|||||
Roger Dean | ||||||
Attorney-in-Fact |
II-9
Exhibit 3.1
AMENDED AND RESTATED
CERTIFICATE OF INCORPORATION
OF
CURO GROUP HOLDINGS CORP.
CURO Group Holdings Corp. (the Corporation ), a corporation organized and existing under the General Corporation Law of the State of Delaware (the DGCL ), does hereby certify as follows:
(1) The Corporation was originally formed on February 7, 2013 by filing a Certificate of Incorporation (as amended, the Certificate of Incorporation ) with the Secretary of State of the State of Delaware under the name Speedy Group Holdings Corp. The Corporation filed a Certificate of Amendment to the Certificate of Incorporation with the Secretary of State of the State of Delaware on February 11, 2013. The Corporation changed its name to Curo Group Holdings Corp. by filing a second Certificate of Amendment to the Certificate of Incorporation with the Secretary of State of the State of Delaware on May 11, 2016. The Corporation effected a reverse stock split of its Class A common stock, par value $0.001 per share and Class B common stock, par value $0.001 per share, by filing a third Certificate of Amendment to the Certificate of Incorporation on [ ], 2017.
(2) This Amended and Restated Certificate of Incorporation (as amended or modified from time to time, this Amended and Restated Certificate of Incorporation ) was duly adopted in accordance with Sections 228, 242 and 245 of the DGCL.
(3) This Amended and Restated Certificate of Incorporation restates and integrates and further amends the Certificate of Incorporation of the Corporation in its entirety.
(4) The text of the current Certificate of Incorporation hereby is amended and restated in entirety as follows:
ARTICLE I
NAME
The name of the Corporation is CURO Group Holdings Corp.
ARTICLE II
REGISTERED OFFICE AND AGENT
The address of the registered office of the Corporation in the State of Delaware is 2711 Centerville Road, Suite 400, City of Wilmington, County of New Castle, Delaware 19808. The name of its registered agent at such address is Corporation Service Company.
ARTICLE III
PURPOSE
The purpose of the Corporation is to engage in any lawful act or activity for which corporations may be organized under the DGCL, as the same exists or may hereafter be amended.
ARTICLE IV
CAPITAL STOCK
I . | Authorized Capital |
The total number of shares of all classes of capital stock that the Corporation shall have authority to issue is [ · ], consisting of [ · ] shares of Common Stock, with a par value of $0.001 per share ( Common Stock ) and [ · ] shares of Preferred Stock, with a par value of $0.001 per share ( Preferred Stock ).
The number of authorized shares of Common Stock or Preferred Stock may be increased or decreased (but not below the number of shares thereof then-outstanding) by the affirmative vote of the holders of a majority of voting power of the outstanding shares of capital stock of the Corporation entitled to vote thereon, irrespective of the provisions of Section 242(b)(2) of the DGCL (or any successor provision thereto), and no vote of the holders of Common Stock or Preferred Stock voting separately as a class shall be required therefor, unless a vote of any such holder is required pursuant to this Amended and Restated Certificate of Incorporation (including any Certificate of Designation (as hereinafter defined) relating to any series of Preferred Stock).
II. | Common Stock |
A. Voting Rights . Except as otherwise expressly provided in this Amended and Restated Certificate of Incorporation or otherwise required by applicable law, each holder of record of Common Stock shall have one vote for each share of Common Stock held as of the applicable record date on any matter that is submitted to a vote or for the consent of the stockholders of the Corporation. The holders of shares of Common Stock shall not have cumulative voting rights. Except as otherwise required by law, holders of Common Stock shall not be entitled to vote on any amendment to this Amended and Restated Certificate of Incorporation (including any Certificate of Designation relating to any series of Preferred Stock) that relates solely to the terms of one or more outstanding series of Preferred Stock if the holders of such affected series are entitled, either separately or together with the holders of one or more other such series, to vote thereon pursuant to this Amended and Restated Certificate of Incorporation (including any Certificate of Designation relating to any series of Preferred Stock) or pursuant to the DGCL.
B. Dividends . Subject to the preferences applicable to any series of Preferred Stock, if any, outstanding at any time, the holders of shares of Common Stock shall be entitled to share equally, on a per share basis, in such dividends and other distributions of cash, property or shares of stock of the Corporation as may be declared by the Board of Directors of the Corporation (the Board of Directors ) from time to time with respect to the Common Stock out of assets or funds of the Corporation legally available therefor.
C. Liquidation . Subject to the payment or provision for payment of all debts and liabilities of the Corporation and to the preferences applicable to any series of Preferred Stock, if any, outstanding at any time, in the event of the voluntary or involuntary liquidation, dissolution, distribution of assets or winding up of the Corporation (a Liquidation Event ), all assets of the Corporation of whatever kind available for distribution to the holders of Common Stock shall be divided among and distributed ratably to the holders of Common Stock. The term Liquidation
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Event shall not be deemed to be occasioned by or to include any voluntary consolidation or merger of the Corporation with or into any other corporation or entity or other corporations or entities or a sale, lease or conveyance of all or a part of the Corporations assets.
D. Preemptive Rights . No holder of Common Stock is entitled to any preemptive, subscription, conversion or redemption rights and the Common Stock is not subject to redemption or sinking fund provisions.
III. | Preferred Stock |
Preferred Stock may be issued from time to time by the Corporation for such consideration as may be fixed by the Board of Directors. The Board of Directors is hereby expressly authorized, by resolution or resolutions, to provide, out of the unissued shares of Preferred Stock, for one or more series of Preferred Stock and, by filing a certificate pursuant to the applicable law of the State of Delaware (a Certificate of Designation ) with respect to each such series, to fix, without further stockholder approval, the designation of such series, the powers (including voting powers), privileges (including redemption privileges), preferences (including liquidation preferences) and relative, participating, optional and other special rights (including dividend rights and conversion rights), and the qualifications, limitations or restrictions thereof, of such series of Preferred Stock and the number of shares of such series, each as may be permitted by the DGCL. The privileges, preferences and relative, participating, optional and other special rights of, and the qualifications, limitations or restrictions thereof, of each series of Preferred Stock, if any, may differ from those of any and all other series at any time outstanding. Except as otherwise required by law, holders of any series of Preferred Stock shall be entitled to only such voting rights, if any, as shall expressly be granted thereto by this Amended and Restated Certificate of Incorporation (including any Certificate of Designation relating to such series of Preferred Stock).
ARTICLE V
AMENDMENT OF THE CERTIFICATE OF INCORPORATION AND BYLAWS
A. Amendment of Amended and Restate Certificate of Incorporation . Notwithstanding anything contained in this Amended and Restated Certificate of Incorporation or the bylaws of the Corporation and in addition to any affirmative vote of the holders of any particular class of capital stock of the Corporation required by applicable law, this Amended and Restated Certificate of Incorporation or the bylaws of the Corporation, the affirmative vote of the holders of at least a majority of the outstanding shares of capital stock of the Corporation entitled to vote thereon, voting together as a single class, shall be required to amend, repeal or adopt any provisions inconsistent with Article IV, this Article V, Article VI, Article VIII and Article IX of this Amended and Restated Certificate of Incorporation.
B. Amendment of Bylaws . In furtherance and not in limitation of the powers conferred by statute, the Board of Directors is expressly empowered to adopt, amend or repeal the bylaws of the Corporation in whole or in part, without the vote of the holders of any particular class of capital stock of the Corporation, in any manner not inconsistent with the laws of the State of Delaware or this Amended and Restated Certificate of Incorporation. Any adoption, amendment or repeal of the bylaws of the Corporation by the Board of Directors shall require the approval of
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a majority of the entire Board of Directors. The stockholders shall also have power to adopt, amend or repeal the bylaws of the Corporation; provided, however, that, in addition to any vote of any particular class of capital stock of the Corporation required by law or by this Amended and Restated Certificate of Incorporation, the affirmative vote of the holders of at least 66 2/3% of the outstanding shares of capital stock of the Corporation entitled to vote thereon, voting together as a single class, shall be required to adopt, amend or repeal any provision of the bylaws of the Corporation.
ARTICLE VI
BOARD OF DIRECTORS
A. Except as otherwise provided in this Amended and Restated Certificate of Incorporation or the DGCL, the business and affairs of the Corporation shall be managed by or under the direction of the Board of Directors. Except as otherwise provided for or fixed pursuant to the provisions of Article IV (including any Certificate of Designation with respect to any series of Preferred Stock) and this Article VI the total number of directors shall be determined from time to time exclusively by resolution adopted by the Board of Directors. The directors shall be divided into three classes designated Class I, Class II and Class III. Each class shall consist, as nearly as possible, of one-third of the total number of such directors. Class I directors shall initially serve for a term expiring at the first annual meeting of stockholders following the date the Common Stock is first publicly traded (the IPO Date ), Class II directors shall initially serve for a term expiring at the second annual meeting of stockholders following the IPO Date and Class III directors shall initially serve for a term expiring at the third annual meeting of stockholders following the IPO Date. At each succeeding annual meeting, successors to the class of directors whose term expires at that annual meeting shall be elected for a term expiring at the third succeeding annual meeting of stockholders. If the number of such directors is changed, any increase or decrease shall be apportioned among the classes so as to maintain the number of directors in each class as nearly equal as possible, and any such additional director of any class elected to fill a newly created directorship resulting from an increase in such class shall hold office for a term that shall coincide with the remaining term of that class, but in no case shall a decrease in the number of directors remove or shorten the term of any incumbent director. Any such director shall hold office until the annual meeting at which his or her term expires and until his or her successor shall be elected and qualified, or his or her death, resignation, retirement, disqualification or removal from office. The Board of Directors is authorized to assign members of the Board of Directors already in office to their respective class.
B. Subject to the rights granted to the holders of any one or more series of Preferred Stock then outstanding, any newly created directorship on the Board of Directors that results from an increase in the number of directors and any vacancy occurring in the Board of Directors (whether by death, resignation, retirement, disqualification, removal or other cause) shall be filled by the vote of a majority of the directors then in office, even if less than a quorum, or if no directors remain in office, by a vote of the stockholders at a special meeting called for such purpose. Any director elected to fill a vacancy or newly created directorship shall hold office until the next election of the class for which such director shall have been chosen and until his or her successor shall be elected and qualified, or until his or her earlier death, resignation, retirement, disqualification or removal.
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C. Any or all of the directors (other than the directors elected by the holders of any series of Preferred Stock of the Corporation, if applicable) may be removed only for cause and only by the holders of a majority of the voting power of all then outstanding shares of capital stock of the Corporation entitled to vote thereon, voting together as a single class.
D. Elections of directors need not be by written ballot unless the Bylaws shall so provide.
E. During any period when the holders of any series of Preferred Stock, voting separately as a series or together with one or more series, have the right to elect additional directors, then upon commencement and for the duration of the period during which such right continues: (i) the then otherwise total authorized number of directors of the Corporation shall automatically be increased by such specified number of directors, and the holders of such Preferred Stock shall be entitled to elect the additional directors so provided for or fixed pursuant to said provisions, and (ii) each such additional director shall serve until such directors successor shall have been duly elected and qualified, or until such directors right to hold such office terminates pursuant to said provisions, whichever occurs earlier, subject to his or her earlier death, resignation, retirement, disqualification or removal. Except as otherwise provided by the Board of Directors in the resolution or resolutions establishing such series, whenever the holders of any series of Preferred Stock having such right to elect additional directors are divested of such right pursuant to the provisions of such stock, the terms of office of all such additional directors elected by the holders of such stock, or elected to fill any vacancies resulting from the death, resignation, disqualification or removal of such additional directors, shall forthwith terminate and the total authorized number of directors of the Corporation shall be reduced accordingly.
ARTICLE VII
LIMITATION OF DIRECTOR LIABILITY AND INDEMNIFICATION
A. To the fullest extent permitted by the DGCL as it now exists or may hereafter be amended, a director of the Corporation shall not be personally liable to the Corporation or its stockholders for monetary damages for breach of fiduciary duty owed to the Corporation or its stockholders.
B. To the fullest extent permitted by the DGCL as it now exists or may hereafter be amended, the Corporation is expressly authorized, by approval of the Board of Directors, to provide indemnification of current and former directors, officers, employees and agents of the Corporation, and of any person who is or was serving at the request of the Corporation as a director, officer, employee or agent of another person, and to advance expenses (including attorneys fees) incurred by any such person. Any right to indemnification or advancement of expenses provided by or granted pursuant to this Amended and Restated Certificate of Incorporation and the DGCL shall not be deemed exclusive of any other rights to which those seeking indemnification or advancement of expenses may be entitled under the Bylaws, any agreement, a vote of stockholders or disinterested directors or otherwise.
C. Neither the amendment nor repeal of this Article VII, nor the adoption of any provision of this Amended and Restated Certificate of Incorporation, nor, to the fullest extent permitted by the DGCL, any modification of law shall eliminate, reduce or otherwise adversely affect any right or protection of a current or former director of the Corporation existing at the time of such amendment, repeal, adoption or modification.
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ARTICLE VIII
ANNUAL AND SPECIAL MEETINGS OF STOCKHOLDERS
A. Any action required or permitted to be taken by the stockholders of the Corporation must be effected at a duly called annual or special meeting of such holders and may not be effected by any consent in writing by such holders; provided , however , that any action required or permitted to be taken by the holders of Preferred Stock, voting separately as a series or separately as a class with one or more other such series, may be taken without a meeting, without prior notice and without a vote, to the extent expressly so provided by the applicable Certificate of Designation relating to such series of Preferred Stock.
B. Except as otherwise required by law and subject to the rights of the holders of any series of Preferred Stock, special meetings of the stockholders of the Corporation for any purpose or purposes may be called at any time only by or at the direction of the Board of Directors pursuant to a resolution adopted by a majority of the Board of Directors, the Chairman of the Board of Directors or the Chief Executive Officer of the Corporation.
C. An annual meeting of stockholders for the election of directors to succeed those whose terms expire and for the transaction of such other business as may properly come before the meeting, shall be held at such place, if any, on such date, and at such time as shall be fixed exclusively by resolution of the Board of Directors or a duly authorized committee thereof.
ARTICLE IX
COMPETITION AND CORPORATE OPPORTUNITIES
A. The Corporation renounces any interest or expectancy in, or in being offered an opportunity to participate in, any business opportunity that may from time to time be presented to Friedman Fleischer & Lowe Capital Partners II, L.P., FFL Executive Partners II, L.P. and FFL Parallel Fund II, L.P. (collectively, the FFL Holders ) or any of their respective officers, directors, agents, stockholders, members, managers, partners, Affiliates (as defined below) and subsidiaries (other than the Corporation and its subsidiaries) (collectively, Representatives ) and that may be a business opportunity for the FFL Holders, even if the opportunity is one that the Corporation might reasonably have pursued or had the ability to pursue if granted the opportunity to do so. For the purposes of this Article XI, (i) an Affiliate of, or a person affiliated with, a specified person, is a person that directly, or indirectly through one or more intermediaries, controls, or is controlled by, or is under common control with, the person specified. Notwithstanding the foregoing, no FFL Holder shall be deemed to be an Affiliate of the Corporation or any of its subsidiaries for purposes of this Article IX.
B. Neither the FFL Holders nor any of their respective Representatives shall, to the fullest extent permitted by law, have any duty to refrain from directly or indirectly (i) engaging in the same or similar business activities or lines of business in which the Corporation or any of its Affiliates now engages or proposes to engage or (ii) otherwise competing with the Corporation or any of its Affiliates, and, to the fullest extent permitted by law, none of the FFL Holders nor
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any of their respective Representatives shall be liable to the Corporation or its stockholders for breach of any fiduciary duty solely by reason of the fact that such person engages in any such activities. Subject to Section D of this Article IX, in the event that any of the FFL Holders or their respective Representatives acquires knowledge of a potential transaction or other matter or business opportunity which may be a corporate opportunity for itself, herself or himself and the Corporation or any of its Affiliates, neither the FFL Holders nor any of their respective Representatives shall, to the fullest extent permitted by law, have any fiduciary duty or other duty (contractual or otherwise) to communicate, present or offer such transaction or other business opportunity to the Corporation or any of its Affiliates and, to the fullest extent permitted by law, shall not be liable to the Corporation or its stockholders or to any Affiliate of the Corporation for breach of any fiduciary duty or other duty (contractual or otherwise) as a stockholder, director or officer of the Corporation solely by reason of the fact that such FFL Holder or its respective Representatives, pursues or acquires such corporate opportunity for itself, herself or himself, offers or directs such corporate opportunity to another person, or does not present such corporate opportunity to the Corporation or any of its Affiliates.
C. The Corporation and its Affiliates do not have any rights in or to the business ventures of the FFL Holders or any of their respective Representatives, or the income or profits derived therefrom, and the Corporation agrees that each of the FFL Holders and their respective Representatives may do business with any potential or actual customer or supplier of the Corporation or may employ or otherwise engage any officer or employee of the Corporation.
D. The Corporation does not renounce its interest in any corporate opportunity offered to the Corporation or any of its subsidiaries.
E. In addition to and notwithstanding the foregoing provisions of this Article IX, a corporate opportunity shall not be deemed to be a potential corporate opportunity for the Corporation if it is a business opportunity that (i) the Corporation is neither financially or legally able, nor contractually permitted to undertake, (ii) from its nature, is not in the line of the Corporations business or is of no practical advantage to the Corporation or (iii) is one in which the Corporation has no interest or reasonable expectancy.
F. To the fullest extent permitted by law, any person purchasing or otherwise acquiring any interest in any shares of capital stock of the Corporation shall be deemed to have notice of and to have consented to the provisions of this Article IX. Neither the alteration, amendment, addition to or repeal of this Article IX, nor the adoption of any provision of this Amended and Restated Certificate of Incorporation (including any Certificate of Designation relating to any series of Preferred Stock) inconsistent with this Article IX, shall eliminate or reduce the effect of this Article IX in respect of any business opportunity first identified or any other matter occurring, or any cause of action, suit or claim that, but for this Article IX, would accrue or arise, prior to such alteration, amendment, addition, repeal or adoption.
ARTICLE X
MISCELLANEOUS
A. If any provision or provisions of this Amended and Restated Certificate of Incorporation shall be held to be invalid, illegal or unenforceable as applied to any circumstance
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for any reason whatsoever: (1) the validity, legality and enforceability of such provisions in any other circumstance and of the remaining provisions of this Amended and Restated Certificate of Incorporation (including, without limitation, each portion of any paragraph of this Amended and Restated Certificate of Incorporation containing any such provision held to be invalid, illegal or unenforceable that is not itself held to be invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and (2) to the fullest extent possible, the provisions of this Amended and Restated Certificate of Incorporation (including, without limitation, each such portion of any paragraph of this Amended and Restated Certificate of Incorporation containing any such provision held to be invalid, illegal or unenforceable) shall be construed so as to permit the Corporation to protect its directors, officers, employees and agents from personal liability in respect of their good faith service or for the benefit of the Corporation to the fullest extent permitted by law.
B. Unless the Corporation consents in writing to the selection of an alternative forum, the Court of Chancery of the State of Delaware shall, to the fullest extent permitted by law, be the sole and exclusive forum for (1) any derivative action or proceeding brought on behalf of the Corporation, (2) any action asserting a claim of breach of a fiduciary duty owed by any director, officer, or other employee or stockholder of the Corporation to the Corporation or the Corporations stockholders, creditors or other constituents, (3) any action asserting a claim against the Corporation or any director or officer of the Corporation arising pursuant to any provision of the DGCL or this Amended and Restated Certificate of Incorporation or the Bylaws (as either may be amended and/or restated from time to time) or as to which the DGCL confers jurisdiction on the Court of Chancery of the State of Delaware, or (4) any action asserting a claim against the Corporation or any director or officer of the Corporation governed by the internal affairs doctrine. To the fullest extent permitted by law, any person or entity purchasing or otherwise acquiring or holding any interest in shares of capital stock of the Corporation shall be deemed to have notice of and consented to the provisions of this Section B of Article X.
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IN WITNESS WHEREOF , CURO Group Holdings Corp. has caused this Amended and Restated Certificate of Incorporation to be executed by its duly authorized officer on this th day of , 2017.
CURO GROUP HOLDINGS CORP. | ||||
By: | ||||
Name: | ||||
Title: |
Exhibit 3.2
AMENDED AND RESTATED
BYLAWS
OF
CURO Group Holdings Corp.
These Amended and Restated Bylaws (as amended, the Bylaws ) of CURO Group Holdings Corp., a Delaware corporation (the Corporation ), are effective as of [ ], 2017 and hereby amend and restate the previous bylaws of the Corporation, which are hereby deleted in their entirety and replaced with the following:
ARTICLE I.
OFFICES
The registered office of the Corporation in Delaware shall be at 2711 Centerville Road, Suite 400, City of Wilmington, County of New Castle, Delaware 19808, and the Corporation Service Company shall be the resident agent of the Corporation in charge thereof. The Corporation may also have such other offices at such other places, within or without the State of Delaware, as the board of directors of the Corporation (the Board of Directors ) may from time to time designate or the business of the Corporation may require. The books and records of the Corporation may be kept inside or outside the State of Delaware at such place or places as may from time to time be designated by the Board of Directors.
ARTICLE II.
STOCKHOLDERS
Section 2.1. Annual Meeting . The annual meeting of stockholders of the Corporation shall be held on such day in such month, in such city and state and at such time and place as may be designated by resolution of the Board of Directors and set forth in the notice of such meeting.
Section 2.2. Special Meetings . Special meetings of the stockholders may only be called in the manner provided for in the Amended and Restated Certificate of Incorporation of the Corporation (as amended, the Certificate of Incorporation ) and may be held either within or without the State of Delaware. The Board of Directors acting pursuant to a resolution adopted by a majority of the Whole Board may postpone, reschedule or cancel any special meeting of stockholders previously scheduled by the Board of Directors or the Executive Chairman. For purposes of these Bylaws, the term Whole Board shall mean the total number of authorized directors whether there exist any vacancies in previously authorized directorships. Such meetings shall be held on such day in such month, in such city and state and at such time and place as designated by resolution of the Board of Directors. Business transacted at all special meetings shall be confined to the purpose or purposes stated in the Corporations notice of meeting.
Section 2.3. Notice of Meetings . Written notice of the time and place of the meeting, the means of remote communications, if any, by which stockholders and proxy holders may be deemed to be present in person and vote at such meeting, and in the case of a special meeting, the purpose or purposes for which the meeting is called, shall be delivered by the Corporation at least 10 days but not more than 60 days before the day of the meeting, either personally, by electronic transmission in the manner provided in Section 232 of the General Corporation Law of
the State of Delaware (as amended, the DGCL ) (except to the extent prohibited by Section 232(e) of the DGCL) or by mail, to each stockholder of record entitled to vote at such meeting. If mailed, such notice shall be deemed to be delivered when deposited in the United States mail with postage thereon prepaid, addressed to the stockholder at such stockholders address as it appears on the records of the Corporation. If notice is given by electronic transmission, such notice shall be deemed to be given at the times provided in the DGCL. Notice of any adjourned meeting need not be given except by announcement at the meeting so adjourned, unless otherwise ordered in connection with such adjournment. Further notice, if any, shall be given as may be required by law. Any previously scheduled meeting of the stockholders may be postponed or rescheduled, and special meetings of the stockholders may be cancelled, upon public notice given prior to the date previously scheduled for such meeting of stockholders.
Section 2.4. Quorum . Except as otherwise provided by applicable law or by the Certificate of Incorporation, any number of stockholders, together holding at least a majority of the capital stock of the Corporation issued and outstanding and entitled to vote generally in the election of directors ( Voting Stock ), who shall be present in person or represented by proxy at any meeting duly called, shall constitute a quorum for the transaction of all business, except that when specified business is to be voted on by a class or series of stock voting as a class, the holders of a majority of the shares of such class or series shall constitute a quorum of such class or series for the transaction of such business.
Section 2.5. Adjournment of Meetings . The Executive Chairman of the Corporation (the Executive Chairman ) or the Chief Executive Officer of the Corporation (the Chief Executive Officer ) may adjourn any meeting of stockholders from time to time, whether or not there is a quorum. No notice of the time, date and place of adjourned meetings need be given except as required by applicable law. The stockholders present at a duly called meeting at which a quorum is present may continue to transact business until adjournment, notwithstanding the withdrawal of enough stockholders to leave less than a quorum.
Section 2.6. Conduct of Meetings . The Executive Chairman, or in his or her absence the Chief Executive Officer, or in his or her absence any person designated by the Board of Directors, shall preside at all regular or special meetings of stockholders. The Secretary of the Corporation (the Secretary ), or in the Secretarys absence, an Assistant Secretary of the Corporation, shall act as secretary of each meeting. In the absence of the Secretary and any Assistant Secretary at any such meeting, the presiding officer of the meeting may appoint any person to act as secretary of the meeting. The Board of Directors shall be entitled to make such rules or regulations for the conduct of meetings of stockholders as it shall deem necessary, appropriate or convenient. Subject to such rules and regulations of the Board of Directors, if any, the chairman of the meeting shall have the right and authority to prescribe such rules, regulations and procedures and to do all such acts as, in the judgment of such chairman, are necessary, appropriate or convenient for the proper conduct of the meeting.
Section 2.7. Order of Business .
(a) Annual Meetings of Stockholders . At any annual meeting of stockholders, only such nominations of individuals for election to the Board of Directors shall be made, and only such other business shall be conducted or considered, as shall have been properly brought before
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the meeting. For nominations to be properly made at an annual meeting, and proposals of other business to be properly brought before an annual meeting, nominations and proposals of other business must be: (a) specified in the Corporations notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors, (b) otherwise properly made at the annual meeting, by or at the direction of the Board of Directors or (c) otherwise properly requested to be brought before the annual meeting by a stockholder of the Corporation in accordance with these Bylaws. For nominations of individuals for election to the Board of Directors or proposals of other business to be properly requested by a stockholder to be made at an annual meeting, a stockholder must (i) be a stockholder of record at the time of giving of notice of such annual meeting by or at the direction of the Board of Directors and at the time of the annual meeting, (ii) be entitled to vote at such annual meeting and (iii) comply with the procedures set forth in these Bylaws as to such business or nomination. Subject to Article IX of these Bylaws, the immediately preceding sentence shall be the exclusive means for a stockholder to make nominations or other business proposals (other than matters properly brought under Rule 14a-8 under the Securities Exchange Act of 1934, as amended (the Exchange Act ) and included in the Corporations notice of meeting) before an annual meeting of stockholders.
(b) Special Meetings of Stockholders . At any special meeting of stockholders, only such business shall be conducted or considered as shall have been properly brought before the meeting pursuant to the Corporations notice of meeting. To be properly brought before a special meeting, proposals of business must be (i) specified in the Corporations notice of meeting (or any supplement thereto) given by or at the direction of the Board of Directors or (ii) otherwise properly brought before the special meeting, by or at the direction of the Board of Directors; provided, however, that nothing herein shall prohibit the Board of Directors from submitting additional matters to stockholders at any such special meeting. Nominations of individuals for election to the Board of Directors may be made at a special meeting of stockholders at which directors are to be elected pursuant to the Corporations notice of meeting (a) by or at the direction of the Board of Directors or (b) provided that the Board of Directors has determined that directors shall be elected at such meeting, by any stockholder of the Corporation who (1) is a stockholder of record at the time of giving of notice of such special meeting and at the time of the special meeting, (2) is entitled to vote at the meeting and (3) complies with the procedures set forth in these Bylaws as to such nomination. Subject to Article IX of these Bylaws, this Section 2.7(b) of Article II shall be the exclusive means for a stockholder to make nominations or other business proposals (other than matters properly brought under Rule 14a-8 under the Exchange Act and included in the Corporations notice of meeting) before a special meeting of stockholders.
(c) General . Except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, the chairman of any annual or special meeting shall have the power to determine whether a nomination or any other business proposed to be brought before the meeting was made or proposed, as the case may be, in accordance with these Bylaws and, if any proposed nomination or other business is not in compliance with these Bylaws, to declare that no action shall be taken on such nomination or other proposal and such nomination or other proposal shall be disregarded.
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Section 2.8. Advance Notice .
(a) Annual Meeting of Stockholders . Without qualification or limitation, subject to Section 2.8(c)(iv) of this Article II , for any nominations or any other business to be properly brought before an annual meeting by a stockholder pursuant to Section 2.7(a) of this Article II , the stockholder must have given timely notice thereof (including, in the case of nominations, the completed and signed questionnaire, representation and agreement required by Section 2.9 of this Article II ), and timely updates and supplements thereof, in each case in proper form, in writing to the Secretary, and such other business must otherwise be a proper matter for stockholder action.
To be timely, a stockholders notice shall be delivered to the Secretary at the principal offices of the Corporation not earlier than the close of business on the 120th day and not later than the close of business on the 90th day prior to the first anniversary of the preceding years annual meeting; provided, however, that in the event that the date of the annual meeting is more than 30 days before or more than 60 days after such anniversary date, notice by the stockholder must be so delivered not earlier than the close of business on the 120th day prior to the date of such annual meeting and not later than the close of business on the later of the 90th day prior to the date of such annual meeting or, if the first public announcement of the date of such annual meeting is less than 100 days prior to the date of such annual meeting, the 10th day following the day on which public announcement of the date of such meeting is first made by the Corporation. In no event shall any adjournment or postponement of an annual meeting, or the public announcement thereof, commence a new time period for the giving of a stockholders notice as described above. As used herein, the term public announcement means disclosure in a press release reported by a national news service or in a document publicly filed by the Corporation with the Securities and Exchange Commission (the SEC ) pursuant to Section 13, 14 or 15(d) of the Exchange Act and the rules and regulations promulgated thereunder.
Notwithstanding anything in the immediately preceding paragraph to the contrary, in the event that the number of directors to be elected to the Board of Directors is increased by the Board of Directors, and there is no public announcement by the Corporation naming all of the nominees for director or specifying the size of the increased Board of Directors at least 100 days prior to the first anniversary of the preceding years annual meeting, a stockholders notice required by this section shall also be considered timely, but only with respect to nominees for any new positions created by such increase, if it shall be delivered to the Secretary at the principal offices of the Corporation not later than the close of business on the 10th day following the day on which such public announcement is first made by the Corporation.
In addition, to be considered timely, a stockholders notice shall further be updated and supplemented, if necessary, so that the information provided or required to be provided in such notice shall be true and correct as of the record date for the meeting and as of the date that is 10 business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to the Secretary at the principal offices of the Corporation not later than 5 business days after the record date for the meeting in the case of the update and supplement required to be made as of the record date, and not later than 8 business days prior to the date for the meeting or any adjournment or postponement thereof in the case of the update
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and supplement required to be made as of 10 business days prior to the meeting or any adjournment or postponement thereof. The obligation to update and supplement as set forth in this paragraph or any other section of these Bylaws shall not limit the Corporations rights with respect to any deficiencies in any notice provided by a stockholder, extend any applicable deadlines hereunder or under any other provision of the Bylaws or enable or be deemed to permit a stockholder who has previously submitted notice hereunder or under any other provision of the Bylaws to amend or update any proposal or to submit any new proposal, including by changing or adding nominees, matters, business and or resolutions proposed to be brought before a meeting of the stockholders.
(b) Special Meetings of Stockholders . Only such business shall be conducted at a special meeting of stockholders as shall have been brought before the meeting pursuant to the Corporations notice of meeting, subject to the provisions of Section 2.7(b) of this Article II . Subject to Section 2.8(c)(iv) of this Article II , in the event the Corporation calls a special meeting of stockholders for the purpose of electing one or more directors to the Board of Directors, any stockholder may nominate an individual or individuals (as the case may be) for election to such position(s) as specified in the Corporations notice of meeting, provided that the stockholder gives timely notice thereof (including the completed and signed questionnaire, representation and agreement required by Section 2.9 of this Article II ), and timely updates and supplements thereof in each case in proper form, in writing, to the Secretary. To be timely, a stockholders notice pursuant to the preceding sentence shall be delivered to the Secretary at the principal offices of the Corporation not earlier than the close of business on the 120th day prior to the date of such special meeting and not later than the close of business on the later of the 90th day prior to the date of such special meeting or, if the first public announcement of the date of such special meeting is less than one hundred 100 days prior to the date of such special meeting, the 10th day following the day on which public announcement is first made of the date of the special meeting and of the nominees proposed by the Board of Directors to be elected at such meeting. In no event shall any adjournment or postponement of a special meeting of stockholders, or the public announcement thereof, commence a new time period for the giving of a stockholders notice as described above. In addition, to be considered timely, a stockholders notice shall further be updated and supplemented, if necessary, so that the information provided or required to be provided in such notice shall be true and correct as of the record date for the meeting and as of the date that is 10 business days prior to the meeting or any adjournment or postponement thereof, and such update and supplement shall be delivered to the Secretary at the principal executive offices of the Corporation not later than 5 business days after the record date for the meeting in the case of the update and supplement required to be made as of the record date, and not later than 8 business days prior to the date for the meeting, any adjournment or postponement thereof in the case of the update and supplement required to be made as of 10 business days prior to the meeting or any adjournment or postponement thereof.
(c) Disclosure Requirements . To be in proper form, a stockholders notice to the Secretary must include the following, as applicable:
(i) As to the stockholder giving the notice and the beneficial owner, if any, on whose behalf the nomination or proposal, as applicable, is made, a stockholders notice must set forth: (w) the name and address of such stockholder, as they appear on the Corporations books,
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of such beneficial owner, if any, and of their respective affiliates or associates or others acting in concert therewith, (x) (1) the class or series and number of shares of the Corporation that are, directly or indirectly, owned beneficially and of record by such stockholder, such beneficial owner and their respective affiliates or associates or others acting in concert therewith, (2) any option, warrant, convertible security, stock appreciation right, or similar right with an exercise or conversion privilege or a settlement payment or mechanism at a price related to any class or series of shares of the Corporation or with a value derived in whole or in part from the value of any class or series of shares of the Corporation, or any derivative or synthetic arrangement having the characteristics of a long position in any class or series of shares of the Corporation, or any contract, derivative, swap or other transaction or series of transactions designed to produce economic benefits and risks that correspond substantially to the ownership of any class or series of shares of the Corporation, including due to the fact that the value of such contract, derivative, swap or other transaction or series of transactions is determined by reference to the price, value or volatility of any class or series of shares of the Corporation, whether or not such instrument, contract or right shall be subject to settlement in the underlying class or series of shares of the Corporation, through the delivery of cash or other property, or otherwise, and without regard to whether the stockholder of record, the beneficial owner, if any, or any affiliates or associates or others acting in concert therewith, may have entered into transactions that hedge or mitigate the economic effect of such instrument, contract or right, or any other direct or indirect opportunity to profit or share in any profit derived from any increase or decrease in the value of shares of the Corporation (any of the foregoing, a Derivative Instrument ) directly or indirectly owned beneficially by such stockholder, the beneficial owner, if any, or any affiliates or associates or others acting in concert therewith, (3) any proxy, contract, arrangement, understanding, or relationship pursuant to which such stockholder, such beneficial owner and their respective affiliates or associates or others acting in concert therewith have any right to vote any class or series of shares of the Corporation, (4) any agreement, arrangement, understanding, relationship or otherwise, including any repurchase or similar stock borrowing agreement or arrangement, involving such stockholder, such beneficial owner and their respective affiliates or associates or others acting in concert therewith, directly or indirectly, the purpose or effect of which is to mitigate loss to, reduce the economic risk (of ownership or otherwise) of any class or series of the shares of the Corporation by, manage the risk of share price changes for, or increase or decrease the voting power of, such stockholder, such beneficial owner and their respective affiliates or associates or others acting in concert therewith with respect to any class or series of the shares of the Corporation, or which provides, directly or indirectly, the opportunity to profit or share in any profit derived from any decrease in the price or value of any class or series of the shares of the Corporation (any of the foregoing, a Short Interest ), (5) any rights to dividends on the shares of the Corporation owned beneficially by such stockholder, such beneficial owner and their respective affiliates or associates or others acting in concert therewith that are separated or separable from the underlying shares of the Corporation, (6) any proportionate interest in shares of the Corporation or Derivative Instruments held, directly or indirectly, by a general or limited partnership in which such stockholder, such beneficial owner and their respective affiliates or associates or others acting in concert therewith is a general partner or, directly or indirectly, beneficially owns an interest in a general partner of such general or limited partnership, (7) any performance-related fees (other than an asset-based fee) that such stockholder, such beneficial owner and their respective affiliates or associates or others acting in concert therewith are entitled to based on any increase or decrease in the value of shares of the Corporation or
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Derivative Instruments, if any, including without limitation any such interests held by members of the immediate family sharing the same household of such stockholder, such beneficial owner and their respective affiliates or associates or others acting in concert therewith, (8) any significant equity interests or any Derivative Instruments or Short Interests in any principal competitor of the Corporation held by such stockholder, such beneficial owner and their respective affiliates or associates or others acting in concert therewith and (9) any direct or indirect interest of such stockholder, such beneficial owner and their respective affiliates or associates or others acting in concert therewith in any contract with the Corporation, any affiliate of the Corporation or any principal competitor of the Corporation (including, in any such case, any employment agreement, collective bargaining agreement or consulting agreement), (y) all information that would be required to be set forth in a Schedule 13D filed pursuant to Rule 13d-1(a) or an amendment pursuant to Rule 13d-2(a) if such a statement were required to be filed under the Exchange Act and the rules and regulations promulgated thereunder by such stockholder, such beneficial owner and their respective affiliates or associates or others acting in concert therewith, if any, and (z) any other information relating to such stockholder, such beneficial owner and their respective affiliates or associates or others acting in concert therewith, if any, that would be required to be disclosed in a proxy statement and form of proxy or other filings required to be made in connection with solicitations of proxies for, as applicable, the proposal and/or for the election of directors in a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder;
(ii) As to the stockholder giving the notice, (x) a representation that the stockholder is a holder of record of the stock of the Corporation at the time of the giving of the notice, will be entitled to vote at such meeting and will appear in person or by proxy at the meeting to propose such business or nomination, (y) a representation whether the stockholder or the beneficial owner, if any, is part of a group that will (a) deliver a proxy statement and/or form of proxy to holders of at least the percentage of the voting power of the Corporations outstanding Voting Stock required under applicable law to approve or adopt the proposal or, in the case of nominations, reasonably believed by such stockholder or beneficial owner to elect the nominee and/or (b) otherwise solicit proxies or votes from stockholders in support of such proposal or nomination, and (z) a certification regarding whether such stockholder and beneficial owner, if any, have complied with all applicable federal, state and other legal requirements in connection with the stockholders and/or beneficial owners acquisition of shares of Voting Stock or other securities of the Corporation;
(iii) If the notice relates to any business other than a nomination of a director or directors that the stockholder proposes to bring before the meeting, a stockholders notice must, in addition to the matters set forth in paragraph (i) above, also set forth: (x) a brief description of the business desired to be brought before the meeting, the reasons for conducting such business at the meeting and any material interest of such stockholder, such beneficial owner and each of their respective affiliates or associates or others acting in concert therewith, if any, in such business, (y) the text of the proposal or business (including the text of any resolutions proposed for consideration and, in the event that such proposal or business includes a proposal to amend the Bylaws or the Certificate of Incorporation, the text of the proposed amendment) and (z) a description of all agreements, arrangements and understandings between such stockholder, such beneficial owner and any of their respective affiliates or associates or others acting in concert therewith, if any, and any other person or persons (including their names) in connection with the proposal of such business by such stockholder; and
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(iv) As to each individual, if any, whom the stockholder proposes to nominate for election or reelection to the Board of Directors, a stockholders notice must, in addition to the matters set forth in paragraph (i) above, also include: (x) all information relating to such individual that would be required to be disclosed in a proxy statement or other filings required to be made in connection with solicitations of proxies for election of directors in a contested election pursuant to Section 14 of the Exchange Act and the rules and regulations promulgated thereunder (including such individuals written consent to being named in the proxy statement as a nominee and to serving as a director if elected), (y) a description of all direct and indirect compensation and other material monetary agreements, arrangements and understandings during the past three (3) years, and any other material relationships, between or among such stockholder and beneficial owner, if any, and their respective affiliates and associates, or others acting in concert therewith, on the one hand, and each proposed nominee, and his or her respective affiliates and associates, or others acting in concert therewith, on the other hand, including, without limitation all information that would be required to be disclosed pursuant to Rule 404 or any successor provision promulgated under Regulation S-K if the stockholder making the nomination and any beneficial owner on whose behalf the nomination is made, if any, or any affiliate or associate thereof or person acting in concert therewith, were the registrant for purposes of such rule and the nominee were a director or executive officer of such registrant and a completed and signed questionnaire, representation and agreement required by Section 2.9 of this Article II . The Corporation may require any proposed nominee to furnish such other information as may reasonably be required by the Corporation to determine the eligibility of such proposed nominee to serve as an independent director of the Corporation or that could be material to a reasonable stockholders understanding of the independence, or lack thereof, of such nominee. Notwithstanding anything to the contrary, only persons who are nominated in accordance with the procedures set forth in these Bylaws shall be eligible for election as directors.
Notwithstanding the provisions of these Bylaws, a stockholder shall also comply with all applicable requirements of the Exchange Act and the rules and regulations thereunder with respect to the matters set forth above; provided, however, that any references in these Bylaws to the Exchange Act or the rules promulgated thereunder are not intended to and shall not limit the separate and additional requirements set forth in these Bylaws with respect to nominations or proposals as to any other business to be considered.
Nothing in this Section 2.8 of Article II shall be deemed to affect any rights (i) of stockholders to request inclusion of proposals in the Corporations proxy statement pursuant to Rule 14a-8 under the Exchange Act or (ii) of the holders of any series of preferred stock if and to the extent provided for under law, the Certificate of Incorporation or these Bylaws. Subject to Rule 14a-8 under the Exchange Act, nothing in this Section 2.8 of Article II shall be construed to permit any stockholder, or give any stockholder the right, to include or have disseminated or described in the Corporations proxy statement any nomination of director or directors or any other business proposal.
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Section 2.9. Submission of Questionnaire, Representation and Agreement . To be eligible to be a nominee for election or reelection as a director of the Corporation, a person nominated by a stockholder for election or reelection to the Board of Directors must deliver (in accordance with the time periods prescribed for delivery of notice under Section 2.8 of this Article II ) to the Secretary at the principal offices of the Corporation a written questionnaire with respect to the background and qualification of such individual and the background of any other person or entity on whose behalf, directly or indirectly, the nomination is being made (which questionnaire shall be provided by the Secretary upon written request), and a written representation and agreement (in the form provided by the Secretary upon written request) that such individual (A) is not and will not become a party to (1) any agreement, arrangement or understanding with, and has not given any commitment or assurance to, any person or entity as to how such person, if elected as a director of the Corporation, will act or vote on any issue or question (a Voting Commitment ) that has not been disclosed to the Corporation, or (2) any Voting Commitment that could limit or interfere with such individuals ability to comply, if elected as a director of the Corporation, with such individuals fiduciary duties under applicable law, (B) is not and will not become a party to any agreement, arrangement or understanding with any person or entity other than the Corporation with respect to any direct or indirect compensation, reimbursement or indemnification in connection with service or action as a director that has not been disclosed therein, (C) will comply with the Corporations corporate governance guidelines and other policies applicable to its directors, and has disclosed therein whether all or any portion of securities of the Corporation were purchased with any financial assistance provided by any other person and whether any other person has any interest in such securities, (D) in such individuals personal capacity and on behalf of any person or entity on whose behalf, directly or indirectly, the nomination is being made, would be in compliance, if elected as a director of the Corporation, and will comply, with all applicable corporate governance, conflict of interest, confidentiality and stock ownership and trading policies and guidelines of the Corporation publicly disclosed from time to time, (E) consents to being named as a nominee in the Corporations proxy statement pursuant to Rule 14a-4(d) under the Exchange Act and any associated proxy card of the Corporation and agrees to serve if elected as a director, and (F) will abide by the requirements of Section 2.10 of this Article II .
Section 2.10. Voting .
(a) Directors . Except as set forth below, the election of directors at all meetings of stockholders at which directors are to be elected shall be by ballot, and, subject to the rights of the holders of any series of preferred stock to elect directors, a majority of the votes cast at any meeting for the election of directors at which a quorum is present shall elect directors. For purposes herein, a majority of votes cast shall mean that the number of shares voted for a directors election exceeds 50% of the number of votes cast with respect to that directors election. Votes cast shall include direction to withhold authority in each case and exclude abstentions with respect to that directors election. Notwithstanding the foregoing, in the event of a contested election of directors, directors shall be elected by the vote of a plurality of the votes cast at any meeting for the election of directors at which a quorum is present. For purposes herein, a contested election shall mean any election of directors in which the number of candidates for election as directors exceeds the number of directors to be elected, with the determination thereof being made by the Secretary as of the later of (i) the close of the applicable notice of nomination period set forth in Section 2.8 of this Article II or under applicable law and
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(ii) the last day on which a Proxy Access Notice (as hereinafter defined) may be delivered in accordance with the procedures set forth in Article IX , based on whether one or more notice(s) of nomination or Proxy Access Notice(s) were timely filed. If, prior to the time the Corporation mails its initial proxy statement in connection with such election of directors, one or more notices of nomination are withdrawn such that the number of candidates for election as director no longer exceeds the number of directors to be elected, the election shall not be considered a contested election, but in all other cases, once an election is determined to be a contested election, directors shall be elected by the vote of a plurality of the votes cast.
(b) Incumbent Directors . If a nominee for director who is an incumbent director is not elected and no successor has been elected at such meeting, such incumbent director shall promptly tender his or her resignation to the Board of Directors. The Nominating and Corporate Governance Committee shall make a recommendation to the Board of Directors as to whether to accept or reject the tendered resignation, or whether other action should be taken. The Board of Directors shall act on the tendered resignation, taking into account the Nominating and Corporate Governance Committees recommendation, and publicly disclose (by a press release, a filing with the SEC or other broadly disseminated means of communication) its decision regarding the tendered resignation and the rationale behind the decision within 90 days from the date of the certification of the election results. The Nominating and Corporate Governance Committee in making its recommendation, and the Board of Directors in making its decision, may each consider any factors or other information that it considers appropriate and relevant. The director who tenders his or her resignation shall not participate in the recommendation of the Nominating and Corporate Governance Committee or the decision of the Board of Directors with respect to his or her resignation. If such directors resignation is not accepted by the Board of Directors, such director shall continue to serve until the next annual meeting and until his or her successor is duly elected, or his or her earlier resignation or removal. If a directors resignation is accepted by the Board of Directors, or if a nominee for director is not elected and the nominee is not an incumbent director, then the Board of Directors, in its sole discretion, may fill any resulting vacancy pursuant to the provisions of the Certificate of Incorporation.
(c) Other Matters . Except as otherwise provided by law, the Certificate of Incorporation, or these Bylaws, in all matters other than the election of directors, the affirmative vote of a majority of the shares present in person or represented by proxy at the meeting and entitled to vote on the matter shall be the act of the stockholders.
(d) Resignation . Any individual who is nominated for election to the Board of Directors and included in the Corporations proxy materials for an annual meeting shall tender an irrevocable resignation, effective immediately, upon a determination by the Board of Directors or any committee thereof that (1) the information provided to the Corporation by such individual or the person nominating such individual was untrue in any material respect or omitted to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading or (2) such individual or person nominating such individual shall have breached any representations or obligations owed to the Corporation under these Bylaws.
Section 2.11. Record Date of Stockholders . The Board of Directors is authorized to fix in advance a date not exceeding 60 days nor less than 10 days preceding the date of any meeting
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of stockholders, or the date for the payment of any dividend, or the date for the allotment of any rights, or the date when any change or conversion or exchange of Voting Stock shall go into effect, as a record date for the determination of the stockholders entitled to notice of, and to vote at, any meeting of stockholders, and any adjournment of a meeting of stockholders, or entitled to receive payment of any dividend, or to any allotment of rights, or to exercise the rights in respect of any change, conversion or exchange of Voting Stock. Only the stockholders that are stockholders of record on the date so fixed shall be entitled to notice of, and to vote at, such meeting of stockholders, and any adjournment of such meeting, or to receive payment of such dividend, or to receive such allotment of rights, or to exercise such rights, as the case may be, notwithstanding any transfer of any stock on the books of the Corporation, after such record date fixed in accordance with this Section 2.11 .
Section 2.12. Inspector of Elections . The Board of Directors by resolution shall appoint one or more inspectors, which inspector or inspectors may, but does not need to, include individuals who serve the Corporation in other capacities, including, without limitation, as officers, employees, agents or representatives, to act at the meetings of stockholders and make a written report thereof. One or more persons may be designated as alternate inspectors to replace any inspector who fails to act. If no inspector or alternate has been appointed to act or is able to act at a meeting of stockholders, the chairman of the meeting shall appoint one or more inspectors to act at the meeting. Each inspector, before discharging his or her duties, shall take and sign an oath faithfully to execute the duties of inspector with strict impartiality and according to the best of his or her ability. The inspectors shall have the duties prescribed by law.
Section 2.13. Voting List . The Secretary shall prepare, at least 10 days before every meeting of stockholders, a complete list of the stockholders entitled to vote generally in the election of directors; provided, however, if the record date for determining the stockholders entitled to vote is less than 10 days before such meeting date, the list shall reflect the stockholders entitled to vote as of the tenth day before such meeting date, arranged in alphabetical order and showing the address of each stockholder and the number of shares of each stockholder. The list shall be subject to the inspection of any stockholder.
ARTICLE III.
DIRECTORS
Section 3.1. Powers . The Board of Directors shall have full power to manage the business and affairs of the Corporation, and all powers of the Corporation, except those specifically reserved or granted to the stockholders by statute, the Certificate of Incorporation or these Bylaws, are hereby granted to and vested in the Board of Directors.
Section 3.2. Number and Term . Subject to the Certificate of Incorporation, the number of directors shall be fixed exclusively by resolution adopted by a majority of the Whole Board from time to time; provided that in no event shall the Board consist of less than seven (7) directors. Directors need not be stockholders of the Corporation. Candidates for election as directors at any annual meeting of shareholders shall be nominated and elected for terms to expire not later than the third annual meeting following their election.
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Section 3.3. Removal and Resignation . Directors of the Corporation may be removed in the manner provided in the Certificate of Incorporation and applicable law. Any director may resign at any time. Such resignation shall take effect at the time specified in the resignation, and if no time is specified, at the time of its receipt by the President of the Corporation (the President ) or the Secretary. Except as otherwise The acceptance of a resignation shall not be necessary to make it effective, unless so specified in the resignation.
Section 3.4. Filling of Vacancies . Vacancies in the Board of Directors for any reason and any newly created directorships resulting by reason of any increase in the number of directors shall be filled in the manner provided in the Certificate of Incorporation.
Section 3.5. Regular Meetings . The Board of Directors shall hold an annual meeting for the purpose of organization and the transaction of any business immediately after the annual meeting of the stockholders, provided a quorum of directors is present. Other regular meetings may be held at any time as may be determined from time to time by resolution of the Board of Directors.
Section 3.6. Special Meetings . Special meetings of the Board of Directors may be called by the Executive Chairman, by the Chief Executive Officer or by a majority of the Board of Directors then in office.
Section 3.7. Notice and Place of Meetings . Meetings of the Board of Directors may be held at the principal office of the Corporation, or at any other place as is stated in the notice of such meeting. Notice of any special meeting, and except as the Board of Directors may otherwise determine by resolution, notice of any regular meeting, shall be mailed to each director addressed to him or her at his residence or usual place of business at least 5 days before the day on which the meeting is to be held, or if sent to him or her at such place by telegraph, cable or facsimile, or delivered personally or by telephone, not later than the day before the day on which the meeting is to be held. No notice of the annual meeting of the Board of Directors shall be required if it is held immediately after the annual meeting of the stockholders and if a quorum is present.
Section 3.8. Business Transacted at Meetings, etc . Any business may be transacted and any corporate action may be taken at any regular or special meeting of the Board of Directors at which a quorum is present, whether the business or proposed action is stated in the notice of that meeting or not, unless special notice of such business or proposed action is required by law.
Section 3.9. Quorum . A majority of the Board of Directors at any time in office shall constitute a quorum. At any meeting at which a quorum is present, the vote of a majority of the members present shall be the act of the Board of Directors unless the act of a greater number is specifically required by applicable law or by the Certificate of Incorporation or these Bylaws. The members of the Board of Directors shall act only as the Board of Directors and the individual members of the Board of Directors shall not have any powers in their individual capacities.
Section 3.10. Compensation . Directors shall be entitled to such compensation and fees (including reimbursement of reasonable expenses) for their services as directors or as members
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of committees as shall be authorized by resolution of the Board of Directors. Nothing herein contained shall be construed to preclude any director from serving the Corporation in any other capacity as an officer, agent or otherwise, and receiving compensation therefor.
Section 3.11. Action Without a Meeting . Any action required or permitted to be taken at any meeting of the Board of Directors, or of any committee of the Board of Directors, may be taken without a meeting if all members of the Board of Directors or committee, as the case may be, consent to the action in writing, and the writing or writings are filed with the minutes of the proceedings of the Board of Directors or committee.
Section 3.12. Meetings Through Use of Communications Equipment . Members of the Board of Directors, or any committee designated by the Board of Directors, shall, except as otherwise provided by law, the Certificate of Incorporation or these Bylaws, have the power to participate in a meeting of the Board of Directors, or any committee, by means of a conference telephone or similar communications equipment by means of which all persons participating in the meeting can hear each other, and this participation shall constitute presence in person at the meeting.
Section 3.13. Committees . The Board of Directors may designate any such committee as the Board of Directors considers necessary or appropriate from time to time by resolution of a majority of the Whole Board, which committee shall consist of one or more directors of the Corporation. The Board of Directors may designate one or more directors as alternate members of any committee, who may replace any absent or disqualified member at any meeting of the committee. Any such committee may to the extent permitted by applicable law exercise such powers and shall have such responsibilities as shall be specified in the designating resolution. Each committee shall keep written minutes of its proceedings and shall report such proceedings to the Board of Directors as appropriate.
A majority of any committee may determine its action and fix the time and place of its meetings, unless the Board of Directors shall otherwise provide. Notice of such meetings shall be given to each member of the committee in the same manner as notice of meetings shall be given to each member of the Board of Directors. The Board of Directors shall have power at any time to fill vacancies in, to change the membership of, or to dissolve, any such committee. Nothing herein shall be deemed to prevent the Board of Directors from appointing one or more committees consisting in whole or in part of persons who are not directors of the Corporation; provided, however, that no such committee shall have or may exercise any authority of the Board of Directors.
ARTICLE IV.
OFFICERS
Section 4.1. Elected Officers . The elected officers of the Corporation shall be a Chief Executive Officer, a Chief Financial Officer, one or more Vice Presidents, a Treasurer, a Secretary and such other officers as the Board of Directors from time to time may deem proper. Any number of offices may be held by the same person. All officers elected by the Board of Directors shall each have such powers and duties as generally pertain to their respective offices, subject to the specific provisions of this Article IV . Such officers shall also have such powers
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and duties as from time to time may be conferred by the Board of Directors or by any committee thereof. The Board of Directors or any committee thereof may from time to time elect, or the Chief Executive Officer may appoint, such other officers (including one or more Assistant Vice Presidents, Assistant Secretaries, and Assistant Treasurers) and such agents, as may be necessary or desirable for the conduct of the business of the Corporation. Such other officers and agents shall have such duties and shall hold their offices for such terms as shall be provided in these Bylaws or as may be prescribed by the Board of Directors or such committee or by the Chief Executive Officer, as the case may be.
Section 4.2. Election and Term of Office . The elected officers of the Corporation shall be elected by the Board of Directors. Each officer shall hold office until such officers successor shall have been duly elected and shall have qualified or until such officers earlier death, resignation or removal. The Executive Chairman, if any, shall be a director of the Corporation, and should he or she cease to be a director, he or she shall ipso facto cease to be Executive Chairman.
Section 4.3. Removal of Officers . The Chief Executive Officer, the President, if any, and the Chief Financial Officer, if any, may be removed from office with or without cause by the affirmative vote of a majority of the Whole Board. Any other officer elected, or agent appointed, by the Board of Directors may be removed from office with or without cause by the affirmative vote of a majority of the Board of Directors then in office. Any officer or agent appointed by the Chief Executive Officer, the President or the Chief Financial Officer may be removed by the officer that appointed such officer or agent with or without cause. No elected officer shall have any contractual rights against the Corporation for compensation by virtue of such election beyond the date of the election of his or her successor, his or her death, or his or her resignation or removal, whichever event shall first occur, except as otherwise provided in an employment contract or under an employee deferred compensation plan
Section 4.4. Resignation . Any officer of the Corporation may resign at any time. This resignation shall be in writing and take effect at the time specified in the resignation, or if no time is specified, at the time of its receipt by the President or Secretary. The acceptance of a resignation shall not be necessary in order to make it effective, unless so specified in the resignation.
Section 4.5. Compensation . The compensation of the officers shall be fixed by the Board of Directors, or by any committee upon whom power in that regard may be conferred by the Board of Directors.
Section 4.6. Executive Chairman . The Executive Chairman, if any, shall be a director and shall preside at all meetings of the Board of Directors at which he or she is present, and shall have the powers and perform the duties as may from time to time be assigned to him or her by the Board of Directors.
Section 4.7. Chief Executive Officer . The Chief Executive Officer shall be responsible for the general management of the affairs of the Corporation and shall perform all duties incidental to the office which may be required by applicable law and all such other duties as are properly required of the Chief Executive Officer by the Board of Directors. The Chief Executive
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Officer shall make reports to the Board of Directors and the stockholders, and shall see that all orders and resolutions of the Board of Directors and of any committee thereof are carried into effect. The Chief Executive Officer of the Corporation may also serve as President, if so elected by the Board of Directors.
Section 4.8. President . If the Chief Executive Officer is not the President, the President, if any, shall act in a general executive capacity and shall assist the Chief Executive Officer in the administration and operation of the Corporations business and general supervision of its policies and affairs.
Section 4.9. Chief Financial Officer . The Chief Financial Officer shall act in an executive financial capacity. The Chief Financial Officer shall assist the Chief Executive Officer and the President in the general supervision of the Corporations financial policies and affairs.
Section 4.10. Vice Presidents . The Vice Presidents, or any of them, shall, subject to the direction of the Board of Directors, at the request of the President or in his absence, or in case of his inability to perform his duties from any cause, perform the duties of the President, and, when so acting, shall have all the powers of, and be subject to all restrictions upon, the President. The Vice Presidents shall also perform such other duties that may be assigned to them by the Board of Directors, and the Board of Directors may determine the order of priority among them.
Section 4.11. Treasurer . The Treasurer shall have custody of all the funds and securities of the Corporation which may be delivered into his possession. He or she may endorse on. behalf of the Corporation for collection, checks, notes and other obligations and shall deposit the same to the credit of the Corporation in a depository or depositories of the Corporation, and may sign all receipts and vouchers for payments made to the Corporation. He or she shall enter or cause to be entered regularly in the books of the Corporation kept for that purpose, full and accurate accounts of all monies received and paid on account of the Corporation and whenever required by the Board of Directors shall render statements of the accounts. The Treasurer shall perform the duties and have all other powers that are incident to the office of Treasurer or that are assigned to him or her by the Board of Directors.
Section 4.12. Secretary . The Secretary shall keep the minutes of all meetings of the stockholders and all meetings of the Board of Directors and any committee thereof in books provided for such purpose. He or she may affix the seal of the Corporation to all instruments to be executed on behalf of the Corporation under its seal. The Secretary shall perform the duties and have all other powers that are incident to the office of Secretary, or as may-from time to time be assigned to him or her by the Board of Directors, or as are prescribed by these Bylaws.
Section 4.13. Vacancies . A vacancy in any office shall be filled by the Board of Directors or by the authority appointing the predecessor in such office.
ARTICLE V.
CAPITAL STOCK
Section 5.1. Certificates of Stock . The stock of the Corporation shall be represented by certificates unless the Board of Directors shall by resolution in accordance with applicable law provide that some or all of any class or series of stock shall be uncertificated shares. Any such
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resolution shall not apply to shares represented by a certificate until such certificate is surrendered to the Corporation. Certificates of capital stock shall be in the form approved by the Board of Directors. The certificates shall be numbered in the order of their issue and shall be signed by the Chairman of the Board of Directors, or the President or one of the Vice Presidents, and the Secretary or the Treasurer. Any or all the signatures on the certificate may be a facsimile. In case any officer or officers who have signed, or whose facsimile signature or signatures have been placed on any certificate or certificates ceases to be an officer of the Corporation, whether because of death, resignation or otherwise, before that certificate or certificates are delivered or issued by the Corporation, that certificate or certificates may nevertheless be adopted by the Corporation and be issued and delivered as though the person or persons who signed that certificate or certificates, or whose facsimile signature or signatures is used thereon have not ceased to be an officer or officers of the Corporation.
Section 5.2. Registration and Transfer of Shares . The shares of the stock of the Corporation shall be transferred on the books of the Corporation, in the case of certificated shares of stock, by the holder thereof in person or by such persons attorney duly authorized in writing, upon surrender for cancellation of certificates for at least the same number of shares, with an assignment and power of transfer endorsed thereon or attached thereto, duly executed, with such proof of the authenticity of the signature as the Corporation or its agents may reasonably require; and, in the case of uncertificated shares of stock, upon receipt of proper transfer instructions from the registered holder of the shares or by such persons attorney duly authorized in writing, and upon compliance with appropriate procedures for transferring shares in uncertificated form. No transfer of stock shall be valid as against the Corporation for any purpose until it shall have been entered in the stock records of the Corporation by an entry showing from and to whom transferred.
The certificates of stock shall be signed, countersigned and registered in such manner as the Board of Directors may by resolution prescribe, which resolution may permit all or any of the signatures on such certificates to be in facsimile. In case any officer, transfer agent or registrar who has signed or whose facsimile signature has been placed upon a certificate has ceased to be such officer, transfer agent or registrar before such certificate is issued, it may be issued by the Corporation with the same effect as if such person were such officer, transfer agent or registrar at the date of issue.
Notwithstanding anything to the contrary in these Bylaws, at all times that the Corporations stock is listed on a stock exchange, the shares of the stock of the Corporation shall comply with all direct registration system eligibility requirements established by such exchange, including any requirement that shares of the Corporations stock be eligible for issue in book-entry form. All issuances and transfers of shares of the Corporations stock shall be entered on the books of the Corporation with all information necessary to comply with such direct registration system eligibility requirements, including the name and address of the person to whom the shares of stock are issued, the number of shares of stock issued and the date of issue
The Board of Directors may make other rules and regulations concerning the transfer and registration of certificates for stock and may appoint a transfer agent or registrar or both and may require all certificates of stock to bear the signature of either or both.
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Section 5.3. Lost, Destroyed and Mutilated Certificates . The holder of any stock of the Corporation shall immediately notify the Corporation of any loss, theft, destruction or mutilation of the certificates. The Corporation may issue a new certificate of stock in the place of any certificate previously issued by it and alleged to have been lost, stolen or destroyed, and the Board of Directors may, in its discretion, require the owner of the lost, stolen or destroyed certificate, or his legal representatives, to give the Corporation a bond, in such sum not exceeding double the value of the stock and with such surety or sureties as they may require, to indemnify it against any claim that may be made against it by reason of the issue of the new certificate and against all other liability in the premises, or may remit the owner to any remedy or remedies he or she may have under the laws of the State of Delaware.
ARTICLE VI.
DIVIDENDS, SURPLUS, ETC.
Section 6.1. General Discretion of Directors . The Board of Directors shall have power to fix and vary the amount to be set aside or reserved as working capital of the Corporation, or as reserves, or for other proper purposes of the Corporation, and, subject to the requirements of the Certificate of Incorporation, to determine whether any part of the surplus or net profits of the Corporation shall be declared as dividends and paid to the stockholders, and to fix the date or dates for, the terms and conditions of, and the manner of the payment of any dividends.
ARTICLE VII.
MISCELLANEOUS PROVISIONS
Section 7.1. Fiscal Year . The fiscal year of the Corporation shall commence on the first day of January and end on the last day of December; provided, that the Board of Directors shall have the power, from time to time, to fix a different fiscal year of the Corporation by a duly adopted resolution.
Section 7.2. Corporate Seal . The corporate seal shall be in such form as approved by the Board of Directors and may be altered at their pleasure. The corporate seal may be used by causing it or a facsimile thereof to be impressed or affixed or reproduced or otherwise.
Section 7.3. Notices . Except as otherwise expressly provided, any notice required to be given by these Bylaws shall be sufficient if given by depositing the same in a post office or letter box in a sealed postpaid wrapper addressed to the person entitled to notice at his address, as the same appears upon the books of the Corporation, or by telegraphing or cabling the same to that person at that address, or by facsimile transmission to a number designated upon the books of the Corporation, if any; and the notice shall be deemed to be given at the time it is mailed, telegraphed or cabled, or sent by facsimile.
Section 7.4. Waiver of Notice . Any stockholder or director may at any time, by writing or by telegraph, cable or facsimile transmission, waive any notice required to be given under these Bylaws, and if any stockholder or director is present at any meeting his presence shall constitute a waiver of notice.
Section 7.5. Checks, Drafts, etc . All checks, drafts or other orders for the payment of money, notes or other evidences of indebtedness issued in the name of the Corporation, shall be signed by an officer or officers, agent or agents of the Corporation, and in such manner, as shall from time to time be designated by resolution of the Board of Directors.
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Section 7.6. Deposits . All funds of the Corporation shall be deposited from time to time to the credit of the Corporation in a bank or banks, trust companies or other depositories as the Board of Directors may select, and, for the purpose of the deposit, checks, drafts, warrants and other orders for the payment of money which are payable to the order of the Corporation, may be endorsed for deposit, assigned and delivered by any officer of the Corporation, or by agents of the Corporation as the Board of Directors or the President may authorize for that purpose.
Section 7.7. Voting Stock of Other Corporations . Except as otherwise ordered by the Board of Directors, the President or the Treasurer shall have full power and authority on behalf of the Corporation to attend and to act and to vote at any such meeting of the stockholders of any corporation of which the Corporation is a stockholder, and to execute a proxy to any other person to represent the Corporation at any meeting, and at any meeting of the stockholders of any corporation of which the Corporation is a stockholder. The President or the Treasurer or the holder of any proxy, as the case may be, shall possess and may exercise any and all rights and powers incident to ownership of the stock which, as owner thereof, the Corporation might have possessed and exercised if present. The Board of Directors may from time to time confer like powers upon any other person or persons.
Section 7.8. Contracts . Except as otherwise required by applicable law, the Certificate of Incorporation or these Bylaws, any contracts or other instruments may be executed and delivered in the name and on behalf of the Corporation by such officer or officers of the Corporation as the Board of Directors may from time to time direct. Such authority may be general or confined to specific instances as the Board of Directors may determine. The Executive Chairman, the Chief Executive Officer, any President, and any Executive or Senior Vice President may execute bonds, contracts, deeds, leases and other instruments to be made or executed by or on behalf of the Corporation. Subject to any restrictions imposed by the Board of Directors or the Executive Chairman the Chief Executive Officer, the President or any Vice President of the Corporation may delegate contractual powers to others under his or her jurisdiction, it being understood, however, that any such delegation of power shall not relieve such officer of responsibility with respect to the exercise of such delegated power.
ARTICLE VIII.
PROXY ACCESS
Section 8.1. Inclusion of Stockholder Director Nominations in the Corporations Proxy Materials . Subject to the terms and conditions set forth in these Bylaws, the Corporation shall include in its proxy statement for an annual meeting of stockholders the name, together with the Required Information (as defined in Section 8.2 of this Article VIII ), of an eligible person nominated for election (the Stockholder Nominee ) to the Board of Directors by a stockholder or group of stockholders that satisfy the requirements of this Article VIII , including qualifying as an Eligible Stockholder (as defined in Section 8.3(d) of this Article VIII ) and that expressly elects at the time of providing the written notice required by this Article VIII (a Proxy Access Notice ) to have its nominee(s) included in the Corporations proxy statement pursuant to this Article VIII .
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Section 8.2. Definitions . For the purposes of this Article VIII :
Constituent Holder shall mean any stockholder, collective investment fund included within a Qualifying Fund (as defined in Section 8.3(d) of this Article VIII ) or beneficial holder whose stock ownership is counted for the purposes of qualifying as holding the Proxy Access Request Required Shares (as defined in Section 8.3(d) of this Article VIII ) or qualifying as an Eligible Stockholder (as defined in Section 8.3(d) of this Article VIII );
affiliate and associate shall have the meanings ascribed thereto in Rule 405 under the Securities Act of 1933, as amended; provided, however, that the term partner as used in the definition of associate shall not include any limited partner that is not involved in the management of the relevant partnership; and a stockholder (including any Constituent Holder) shall be deemed to own only those outstanding shares of Voting stock as to which the stockholder itself, such Constituent Holder itself, or any stockholder fund comprising a Qualifying Fund, possesses both (a) the full voting and investment rights pertaining to the shares and (b) the full economic interest in (including the opportunity for profit and risk of loss on) such shares; provided that the number of shares calculated in accordance with clauses (a) and (b) shall be deemed not to include (and to the extent any of the following arrangements have been entered into by affiliates of the stockholder, shall be reduced by) any shares (x) sold by such stockholder (or its affiliates) in any transaction that has not been settled or closed, including any short sale, (y) borrowed by such stockholder (or its affiliates) for any purposes or purchased by such stockholder (or its affiliates) pursuant to an agreement to resell, or (z) subject to any option, warrant, forward contract, swap, contract of sale, other derivative or similar agreement entered into by such stockholder (or its affiliates), whether any such instrument or agreement is to be settled with shares or with cash based on the notional amount or value of Voting stock, in any such case which instrument or agreement has, or is intended to have, or if exercised by either party thereto would have, the purpose or effect of (i) reducing in any manner, to any extent or at any time in the future, such stockholders (or its affiliates) full right to vote or direct the voting of any such shares, and/or (ii) hedging, offsetting or altering to any degree gain or loss arising from the full economic ownership of such shares by such stockholder (or its affiliate). A stockholder shall own shares held in the name of a nominee or other intermediary so long as the stockholder itself retains the right to instruct how the shares are voted with respect to the election of directors and the right to direct the disposition thereof and possesses the full economic interest in the shares. A stockholders ownership of shares shall be deemed to continue during any period in which such person has (1) loaned such shares (provided that such stockholder has the power to recall such shares on not more than five business days notice, has recalled such loaned shares as of the record date for the annual meeting of stockholders (and holds any voting power over such shares) and holds such shares (and voting power) through the date of the annual meeting of stockholders), or (2) or delegated any voting power over such shares by means of a proxy, power of attorney or other instrument or arrangement (provided that such stockholder has the power to revoke such delegation at any time without condition and has
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revoked such delegation as of the record date for the annual meeting of stockholders). The terms owned , ownership , owning and other variations of the word own shall have correlative meanings.
Section 8.3. Requirements .
(a) For purposes of this Article VIII , the Required Information that the Corporation shall include in its proxy statement is (i) the information concerning the Stockholder Nominee and the Eligible Stockholder that the Corporation determines is required to be disclosed in the Corporations proxy statement by the regulations promulgated under the Exchange Act; and (ii) if the Eligible Stockholder so elects, a Statement (as defined in Section 8.3(f) of this Article VIII ). The Corporation shall also include the name of the qualifying Stockholder Nominee in its proxy card. For the avoidance of doubt, and not withstanding any other provision of these Bylaws, the Corporation may in its sole discretion solicit against, and include in the proxy statement its own statements or other information relating to, any Eligible Stockholder and/or Stockholder Nominee, including any information provided to the Corporation with respect to the foregoing.
(b) To be timely, a stockholders Proxy Access Notice must be delivered to the principal offices of the Corporation no earlier than one hundred and fifty (150) days and no later than one hundred and twenty (120) days before the one-year anniversary of the date that the Corporation commenced mailing of its definitive proxy statement (as stated in such proxy statement) for the immediately preceding annual meeting with the SEC. In no event shall any adjournment or postponement of an annual meeting, the date of which has been announced by the Corporation, commence a new time period for the giving of a Proxy Access Notice.
(c) The number of Stockholder Nominees (including Stockholder Nominees that were submitted by an Eligible Stockholder for inclusion in the Corporations proxy materials pursuant to this Article VIII but either are subsequently withdrawn or that the Board of Directors decides to nominate as Board of Directors nominees or otherwise appoint to the Board of Directors) appearing in the Corporations proxy materials with respect to an annual meeting of stockholders shall not exceed the greater of (x) two (2) and (y) the largest whole number that does not exceed twenty percent (20%) of the number of directors in office as of the last day on which a Proxy Access Notice may be delivered in accordance with the procedures set forth in this Article VIII (such greater number, the Permitted Number ); provided , however , that the Permitted Number shall be reduced by the number of:
(i) directors in office with respect to whom a Proxy Access Notice was previously provided to the Corporation pursuant to this Article VIII , other than any such director whose term of office will expire at such annual meeting and who is not nominated by the Corporation at such annual meeting for another term of office and who is not seeking or agreeing to be nominated at such meeting for another term of office; and
(ii) directors in office or director candidates that, in either case, were elected or appointed to the Board of Directors or will be included in the Corporations proxy statement with respect to such annual meeting as an unopposed (by the Corporation) nominee pursuant to an agreement, arrangement or other understanding with a stockholder or group of stockholders
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(other than any such agreement, arrangement or understanding entered into in connection with an acquisition of shares of Voting Stock, by such stockholder or group of stockholders, from the Corporation), but only to the extent the Permitted Number after such reduction with respect to this clause (2) equals or exceeds one (1); provided , further , that in no circumstance shall the Permitted Number exceed the number of directors to be elected at the applicable annual meeting as noticed by the Corporation; provided , further , that in the event the Board of Directors resolves to reduce the size of the Board of Directors effective on or prior to the date of the annual meeting, the Permitted Number shall be calculated based on the number of directors in office as so reduced. Any Eligible Stockholder submitting more than one Stockholder Nominee for inclusion in the Corporations proxy statement pursuant to this Article VIII shall (i) rank such Stockholder Nominees based on the order that the Eligible Stockholder desires such Stockholder Nominees to be selected for inclusion in the Corporations proxy statement in the event that the number of Stockholder Nominees submitted by the Eligible Stockholder pursuant to this Article VIII exceeds the Permitted Number and (ii) explicitly specify and include the respective rankings referred to in the foregoing clause in the Proxy Access Notice delivered to the Corporation with respect to all Stockholder Nominees submitted pursuant thereto. In the event that the number of Stockholder Nominees submitted by Eligible Stockholders pursuant to this Article VIII exceeds the Permitted Number, each Eligible Stockholder will have its highest ranking Stockholder Nominee (as ranked pursuant to the preceding sentence) who meets the requirements of this Article VIII selected for inclusion in the Corporations proxy materials until the Permitted Number is reached, going in order of the amount (largest to smallest) of shares of Voting Stock each Eligible Stockholder disclosed as owned in its Proxy Access Notice submitted to the Corporation (with the understanding that an Eligible Stockholder may not ultimately have any of its Stockholder Nominees included if the Permitted Number has previously been reached). If the Permitted Number is not reached after each Eligible Stockholder has had one (1) Stockholder Nominee selected, this selection process shall continue as many times as necessary, following the same order each time, until the Permitted Number is reached. After reaching the Permitted Number of Stockholder Nominees, if any Stockholder Nominee who satisfies the eligibility requirements in this Article VIII thereafter withdraws, has his or her nomination withdrawn or is thereafter not submitted for director election, no other nominee or nominees shall be required to be substituted for such Stockholder Nominee and included in the Corporations proxy statement or otherwise submitted for director election pursuant to this Article VIII .
(d) An Eligible Stockholder is one or more stockholders of record who own and have owned, or are acting on behalf of one or more beneficial owners who own and have owned (in each case as defined above), in each case continuously for at least three (3) years as of both the date that the Proxy Access Notice is received by the Corporation pursuant to this Article VIII , and as of the record date for determining stockholders eligible to vote at the annual meeting, at least three percent (3%) of the aggregate voting power of the holders of Voting Stock entitled to vote generally in the election of directors (the Proxy Access Request Required Shares ), and who continue to own the Proxy Access Request Required Shares at all times between the date such Proxy Access Notice is received by the Corporation and the date of the applicable annual meeting, provided that the aggregate number of stockholders, and, if and to the extent that a stockholder is acting on behalf of one or more beneficial owners, of such beneficial owners, whose stock ownership is counted for the purpose of satisfying the foregoing ownership requirement may not exceed twenty (20). Two or more collective investment funds that are (I) under common management and investment control, (II) under common management and funded
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primarily by the same employers or (III) a group of investment companies as such term is defined in Section 12(d)(1)(G)(ii) of the Investment Company Act of 1940 (a Qualifying Fund ) will be treated as one stockholder for the purpose of determining the aggregate number of stockholders in this Section 8.3(d) , provided that each fund included within a Qualifying Fund otherwise meets the requirements set forth in this Article VIII . No shares may be attributed to more than one group constituting an Eligible Stockholder under this Article VIII (and, for the avoidance of doubt, no stockholder may be a member of more than one group constituting an Eligible Stockholder). A record holder acting on behalf of one or more beneficial owners will not be counted separately as a stockholder with respect to the shares owned by beneficial owners on whose behalf such record holder has been directed in writing to act, but each such beneficial owner will be counted separately, subject to the other provisions of this Section 8.3(d) , for purposes of determining the number of stockholders whose holdings may be considered as part of an Eligible Stockholders holdings. For the avoidance of doubt, Proxy Access Request Required Shares will qualify as such if and only if the beneficial owner of such shares as of the date of the Proxy Access Notice has itself individually beneficially owned such shares continuously for the three-year period ending on that date and through the other applicable dates referred to above (in addition to the other applicable requirements being met).
(e) No later than the final date when a Proxy Access Nomination pursuant to this Article VIII may be timely delivered to the Corporation, an Eligible Stockholder (including each Constituent Holder) must provide the following information in writing to the Secretary of the Corporation:
(i) with respect to each Constituent Holder, the information, representations and agreements that would be required to be provided in a stockholders notice of nomination pursuant to the requirements of Sections 2.8(c) and 2.9 of Article II of these Bylaws;
(ii) one or more written statements from the record holder of the shares (and from each intermediary through which the shares are or have been held during the requisite three-year holding period) verifying that, as of a date within seven (7) calendar days prior to the date the Proxy Access Notice is delivered to the Corporation, such person owns, and has owned continuously for the preceding three (3) years, the Proxy Access Request Required Shares, and such persons agreement to provide:
(1) within ten (10) days after the record date for the annual meeting, written statements from the record holder and intermediaries verifying such persons continuous ownership of the Proxy Access Request Required Shares through the record date, together with any additional information reasonably requested to verify such persons ownership of the Proxy Access Request Required Shares; and
(2) immediate notice if the Eligible Stockholder ceases to own any of the Proxy Access Request Required Shares prior to the date of the applicable annual meeting of stockholders;
(iii) a representation that such person:
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(1) acquired the Proxy Access Request Required Shares in the ordinary course of business and not with the intent to change or influence control of the Corporation, and does not presently have such intent;
(2) has not nominated and will not nominate for election to the Board of Directors at the annual meeting any person other than the Stockholder Nominee(s) being nominated pursuant to this Article VIII ;
(3) has not engaged and will not engage in, and has not and will not be a participant in another persons, solicitation within the meaning of Rule 14a -1(l) under the Exchange Act in support of the election of any individual as a director at the annual meeting other than its Stockholder Nominee(s) or a nominee of the Board of Directors;
(4) will not distribute to any stockholder any form of proxy for the annual meeting other than the form distributed by the Corporation; and
(5) will provide facts, statements and other information in all communications with the Corporation and its stockholders that are and will be true and correct in all material respects and do not and will not omit to state a material fact necessary in order to make the statements made, in light of the circumstances under which they were made, not misleading, and will otherwise comply with all applicable laws, rules and regulations in connection with any actions taken pursuant to this Article VIII ;
(iv) in the case of a nomination by a group of stockholders that together is such an Eligible Stockholder, the designation by all group members of one group member that is authorized to act on behalf of all members of the nominating stockholder group with respect to the nomination and matters related thereto, including withdrawal of the nomination; and
(v) an undertaking that such person agrees to:
(1) assume all liability stemming from, and indemnify and hold harmless (jointly with all other group members, in the case of a group member) the Corporation and its affiliates and each of its and their directors, officers, and employees individually against any liability, loss, damages expenses or other costs (including attorneys fees) incurred in in connection with any threatened or pending action, suit or proceeding, whether legal, administrative or investigative, against the Corporation or any of its affiliates, or any of its or their directors, officers or employees arising out of any legal or regulatory violation arising out of or relating to (i) the Eligible Stockholders nomination, solicitation, or other activity in connection with its efforts to elect a Stockholder Nominee pursuant to this Article VIII , (ii) communications with the stockholders of the Corporation (iii) the information that the Eligible Stockholder (including such person) provided to the Corporation or (iv) any failure of the Eligible Stockholder to comply with, or any breach of, its obligations, agreements or representations pursuant to these Bylaws;
(2) comply with all laws, rules, regulations and listing standards applicable to nominations or solicitations in connection with the annual meeting of stockholders, and promptly provide the Corporation with such other information as the Corporation may reasonably request; and
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(3) file with the SEC any solicitation by the Eligible Stockholder of stockholders of the Corporation relating to the annual meeting at which the Stockholder Nominee will be nominated. In addition, no later than the final date when a Proxy Access Notice pursuant to this Article VIII may be timely delivered to the Corporation, a Qualifying Fund whose stock ownership is counted for purposes of qualifying as an Eligible Stockholder must provide to the Secretary documentation reasonably satisfactory to the Board of Directors that demonstrates that the funds included within the Qualifying Fund satisfy the definition thereof. In order to be considered timely, any information required by this Article VIII to be provided to the Corporation must be supplemented (by delivery to the Secretary of the Corporation) (1) no later than ten (10) days following the record date for the applicable annual meeting, to disclose the foregoing information as of such record date, and (2) no later than the fifth day before the annual meeting, to disclose the foregoing information as of the date that is no earlier than ten (10) days prior to such annual meeting. For the avoidance of doubt, the requirement to update and supplement such information shall not permit any Eligible Stockholder or other person to change or add any proposed Stockholder Nominee or be deemed to cure any defects or limit the remedies (including without limitation under these Bylaws) available to the Corporation relating to any defect.
(f) If desired, the Eligible Stockholder may provide a statement for inclusion in the proxy statement in support of the Stockholder Nominees candidacy, provided that such statement (a) shall not exceed 500 words, (b) shall fully comply with Section 14 of the Exchange Act and the rules and regulations thereunder, including Rule 14a-9 (the Statement ), and (c) is provided at the same time as the relevant Proxy Access Notice. Notwithstanding anything to the contrary contained in this Article VIII , the Corporation may omit from its proxy materials any information or Statement that it, in good faith, believes is materially false or misleading, omits to state any material fact, or would violate any applicable law or regulation.
(g) No later than the final date when a Proxy Access Notice pursuant to this Article VIII may be timely delivered to the Corporation, each Stockholder Nominee must:
(i) provide an executed agreement, in a form deemed satisfactory by the Board of Directors or its designee (which form shall be provided by the Corporation reasonably promptly upon written request of a stockholder), that such Stockholder Nominee consents to being named in the Corporations proxy statement and form of proxy card (and will not agree to be named in any other persons proxy statement or form of proxy card with respect to the Corporation) as a nominee;
(ii) complete, sign and submit all questionnaires, representations and agreements required by these Bylaws, including Sections 2.8(c) and 2.9 of Article II , or of the Corporations directors generally; and
(iii) provide such additional information as necessary to permit the Board of Directors to determine if such Stockholder Nominee:
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(1) is independent under the listing standards of the principal U.S. exchange upon which the common stock of the Corporation is listed, any applicable rules of the SEC and any publicly disclosed standards used by the Board of Directors in determining and disclosing the independence of the Corporations directors;
(2) has any direct or indirect relationship with the Corporation other than those relationships that have been deemed categorically immaterial pursuant to the Corporations corporate governance guidelines;
(3) would, by serving on the Board of Directors, violate or cause the Corporation to be in violation of these Bylaws, the Certificate of Incorporation, the rules and listing standards of the principal U.S. exchange upon which the common stock of the Corporation is listed or any applicable law, rule or regulation; and
(4) is or has been subject to any event specified in Item 401(f) of Regulation S-K (or successor rule) of the SEC.
In the event that any information or communications provided by the Eligible Stockholder (or any Constituent Holder) or the Stockholder Nominee to the Corporation or its stockholders ceases to be true and correct in all material respects or omits a material fact necessary to make the statements made, in light of the circumstances under which they were made, not misleading, each Eligible Stockholder or Stockholder Nominee, as the case may be, shall promptly notify the Secretary of any defect in such previously provided information and of the information that is required to correct any such defect; it being understood for the avoidance of doubt that providing any such notification will not be deemed to cure any such defect or limit the remedies (including without limitation under these Bylaws) available to the Corporation relating to any such defect.
(h) Any Stockholder Nominee who is included in the Corporations proxy materials for a particular annual meeting of stockholders but withdraws from or becomes ineligible or unavailable for election at that annual meeting (other than by reason of such Stockholder Nominees disability or other health reason) shall be ineligible to be a Stockholder Nominee pursuant to this Article VIII for the next two (2) annual meetings. Any Stockholder Nominee who is included in the Corporations proxy statement for a particular annual meeting of stockholders, but subsequently is determined not to satisfy the eligibility requirements of this Article VIII or any other provision of these Bylaws, the Certificate of Incorporation or other applicable rules or regulation any time before the annual meeting of stockholders, shall not be eligible for election at the relevant annual meeting of stockholders.
(i) The Corporation will not be required to include, pursuant to this Article VIII , any Stockholder Nominee in its proxy materials for any annual meeting of stockholders, or, if the proxy statement already has been filed, to allow the nomination of a Stockholder Nominee, notwithstanding that proxies in respect of such vote may have been received by the Corporation:
(i) who is not independent under the listing standards of the principal U.S. exchange upon which the common stock of the Corporation is listed, any applicable rules of the SEC or any publicly disclosed standards used by the Board of Directors in determining and disclosing the independence of the Corporations directors, in each case as determined by the Board of Directors;
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(ii) whose service as a member of the Board of Directors would violate or cause the Corporation to be in violation of these Bylaws, the Certificate of Incorporation, the rules and listing standards of the principal U.S. exchange upon which the common stock of the Corporation is listed, or any applicable law, rule or regulation;
(iii) who is or has been, within the past three (3) years, an officer or director of a competitor, as defined in Section 8 of the Clayton Antitrust Act of 1914, 15 U.S.C. § 19;
(iv) who is a named subject of a pending criminal proceeding (excluding traffic violations and other minor offenses) or has been convicted in such a criminal proceeding within the past ten (10) years;
(v) who is subject to any order of the type specified in Rule 506(d) of Regulation D promulgated under the Securities Act of 1933;
(vi) if the Eligible Stockholder (or any Constituent Holder) or applicable Stockholder Nominee otherwise breaches or fails to comply in any material respect with its obligations pursuant to this Article VIII or any agreement, representation or undertaking required by this Section 8.3(i) ;
(vii) if the Eligible Stockholder ceases to be an Eligible Stockholder for any reason, including but not limited to not owning the Proxy Access Request Required Shares through the date of the applicable annual meeting; or
(viii) if the Secretary of the Corporation receives a notice that any stockholder has nominated or intends to nominate a person for election to the Board of Directors at such annual meeting pursuant to Section 2.8(c) of Article II of these Bylaws.
For the purposes of this Section 8.3(i) , subsections (i) , (ii) , (iii) , (iv) and (v) and, to the extent related to a breach or failure by the Stockholder Nominee, subsection ( vi ), will result in the exclusion from the proxy materials pursuant to this Article VIII of the specific Stockholder Nominee to whom the ineligibility applies, or, if the proxy statement already has been filed, the ineligibility of such Stockholder Nominee to be nominated; provided , however , that subsection ( vii ) and, to the extent related to a breach or failure by an Eligible Stockholder (or any Constituent Holder), subsection ( vi ), will result in the Voting Stock owned by such Eligible Stockholder (or Constituent Holder) being excluded from the Proxy Access Request Required Shares (and, if as a result the Proxy Access Notice will no longer have been filed by an Eligible Stockholder, the exclusion from the proxy materials pursuant to this Article VIII of all of the applicable stockholders Stockholder Nominees from the applicable annual meeting of stockholders or, if the proxy statement has already been filed, the ineligibility of all of such stockholders Stockholder Nominees to be nominated).
Notwithstanding anything to the contrary set forth herein, the Board of Directors or the person presiding at the annual meeting shall declare a nomination by an Eligible Stockholder to
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be invalid, and such nomination shall be disregarded and no vote on any such Stockholder Nominee shall occur, notwithstanding that proxies in respect of such vote may have been received by the Corporation, if (x) the Eligible Stockholder (or a qualified representative thereof) does not appear at the annual meeting to present any nomination pursuant to this Article VIII or (y) the Eligible Stockholder (or any Constituent Holder) becomes ineligible to nominate a director for inclusion in the Corporations proxy materials pursuant to this Article VIII or withdraws its nomination or a Stockholder Nominee becomes unwilling, unavailable or ineligible to serve on the Board of Directors, whether before or after the Corporations issuance of the definitive proxy statement.
ARTICLE IX.
INDEMNIFICATION OF DIRECTORS AND OFFICERS
Each person who was or is made a party or is threatened to be made a party to or is otherwise involved in any action, suit or proceeding, whether civil, criminal, administrative or investigative (hereinafter a proceeding ), by reason of the fact that he or she or a person of whom he or she is the legal representative is or was a director or an officer of the Corporation or, while a director or officer of the Corporation, is or was serving at the request of the Corporation as a director, officer, employee, agent or trustee of another corporation, or as its representative in a partnership, joint venture, trust or other enterprise, including service with respect to an employee benefit plan (hereinafter an indemnitee ), whether the basis of such proceeding is alleged action in an official capacity as a director, officer, employee, agent, trustee or representative or in any other capacity while serving as a director, officer, employee, agent, trustee or representative, shall be indemnified and held harmless by the Corporation to the fullest extent permitted by the DGCL (but, in the case of any amendment, only to the extent that such amendment permits the Corporation to provide broader indemnification rights than such law permitted the Corporation to provide prior to such amendment), against all expense, liability and loss (including attorneys fees, judgments, fines, the Employee Retirement Income Security Act of 1974, as amended, excise taxes or penalties and amounts paid or to be paid in settlement) reasonably incurred or suffered by such indemnitee in connection therewith; provided, however, that, except as provided in this Article IX with respect to proceedings to enforce rights to indemnification and advancement of expenses (as defined below) or with respect to any compulsory counterclaim brought by such indemnitee, the Corporation shall indemnify any such indemnitee in connection with a proceeding (or part thereof) initiated by such indemnitee only if such proceeding (or part thereof) was authorized by the Board of Directors.
In addition to the right to indemnification conferred in this Article IX , an indemnitee shall also have the right to be paid by the Corporation the expenses (including attorneys fees) incurred in appearing at, participating in or defending any such proceeding in advance of its final disposition or in connection with a proceeding brought to establish or enforce a right to indemnification or advancement of expenses under this Article IX (hereinafter an advancement of expenses ); provided, however, that, if the DGCL requires or in the case of an advance made in a proceeding brought to establish or enforce a right to indemnification or advancement, an advancement of expenses incurred by an indemnitee in his or her capacity as a director or officer
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(and not in any other capacity in which service was or is rendered by such indemnitee, including, without limitation, service to an employee benefit plan) shall be made only upon delivery to the Corporation of an undertaking, by or on behalf of such indemnitee, to repay all amounts so advanced if it shall ultimately be determined by final judicial decision from which there is no further right to appeal (hereinafter a final adjudication ) that such indemnitee is not entitled to be indemnified or entitled to advancement for such expenses under this Article IX or otherwise. If a claim under this Article IX is not paid in full by the Corporation within sixty (60) days after a written claim for indemnification has been received by the Corporation, and in the case of a claim for an advancement of expenses, within twenty (20) days, the indemnitee may at any time thereafter bring suit against the Corporation to recover the unpaid amount of the claim or to obtain advancement of expenses, as applicable. To the fullest extent permitted by law, if successful in whole or in part in any such suit, or in a suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the indemnitee shall be entitled to be paid also the expense of prosecuting or defending such suit. In (i) any suit brought by the indemnitee to enforce a right to indemnification hereunder (but not in a suit brought by the indemnitee to enforce a right to an advancement of expenses) it shall be a defense that, and (ii) in any suit brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the Corporation shall be entitled to recover such expenses upon a final adjudication that, the indemnitee has not met any applicable standard for indemnification set forth in the DGCL. Neither the failure of the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) to have made a determination prior to the commencement of such suit that indemnification of the indemnitee is proper in the circumstances because the indemnitee has met the applicable standard of conduct set forth in the DGCL, nor an actual determination by the Corporation (including its directors who are not parties to such action, a committee of such directors, independent legal counsel, or its stockholders) that the indemnitee has not met such applicable standard of conduct, shall create a presumption that the indemnitee has not met the applicable standard of conduct or, in the case of such a suit brought by the indemnitee, be a defense to such suit. In any suit brought by the indemnitee to enforce a right to indemnification or to an advancement of expenses hereunder, or brought by the Corporation to recover an advancement of expenses pursuant to the terms of an undertaking, the burden of proving that the indemnitee is not entitled to be indemnified, or to such advancement of expenses, under this Article IX or otherwise shall be on the Corporation.
The provision of indemnification to or the advancement of expenses and costs to any indemnitee under this Article IX , or the entitlement of any indemnitee to indemnification or advancement of expenses and costs under this Article IX , shall not limit or restrict in any way the power of the Corporation to indemnify or advance expenses and costs to such indemnitee in any other way permitted by applicable law or be deemed exclusive of, or invalidate, any right to which any indemnitee seeking indemnification or advancement of expenses and costs may be entitled under any law, agreement, vote of stockholders or disinterested directors or otherwise, both as to action in such indemnitees capacity as an officer, director, employee or agent of the Corporation and as to action in any other capacity.
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Given that certain jointly indemnifiable claims (as defined below) may arise due to the service of the indemnitee as a director of the Corporation at the request of the indemnitee-related entities (as defined below), the Corporation shall be fully and primarily responsible for the payment to the indemnitee in respect of indemnification or advancement of expenses in connection with any such jointly indemnifiable claims, pursuant to and in accordance with the terms of this Article IX , irrespective of any right of recovery the indemnitee may have from the indemnitee-related entities. Under no circumstance shall the Corporation be entitled to any right of subrogation or contribution by the indemnitee-related entities and no right of advancement or recovery the indemnitee may have from the indemnitee-related entities shall reduce or otherwise alter the rights of the indemnitee or the obligations of the Corporation hereunder. In the event that any of the indemnitee-related entities shall make any payment to the indemnitee in respect of indemnification or advancement of expenses with respect to any jointly indemnifiable claim, the indemnitee-related entity making such payment shall be subrogated to the extent of such payment to all of the rights of recovery of the indemnitee against the Corporation, and the indemnitee shall execute all papers reasonably required and shall do all things that may be reasonably necessary to secure such rights, including the execution of such documents as may be necessary to enable the indemnitee-related entities effectively to bring suit to enforce such rights. Each of the indemnitee-related entities shall be third-party beneficiaries with respect to this paragraph of this Article IX , entitled to enforce this paragraph of this Article IX .
For purposes of this Article IX , the following terms shall have the following meanings: The term indemnitee-related entities means any corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise (other than the Corporation or any other corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise for which the indemnitee has agreed, on behalf of the Corporation or at the Corporations request, to serve as a director, officer, employee or agent and which service is covered by the indemnity described herein) from whom an indemnitee may be entitled to indemnification or advancement of expenses with respect to which, in whole or in part, the Corporation may also have an indemnification or advancement obligation.
The term jointly indemnifiable claims shall be broadly construed and shall include, without limitation, any action, suit or proceeding for which the indemnitee shall be entitled to indemnification or advancement of expenses from both the indemnitee-related entities and the Corporation pursuant to the DGCL, any agreement or certificate of incorporation, bylaws, partnership agreement, operating agreement, certificate of formation, certificate of limited partnership or comparable organizational documents of the Corporation or the indemnitee-related entities, as applicable.
The Corporation may maintain insurance, at its expense, to protect itself and any director, officer, employee or agent of the Corporation or another corporation, partnership, joint venture, trust or other enterprise against any expense, liability or loss, whether or not the Corporation would have the power to indemnify such person against such expense, liability or loss under the DGCL.
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The Corporation may, to the extent authorized from time to time by the Board of Directors, grant rights to indemnification and to the advancement of expenses to any employee or agent of the Corporation to the fullest extent of the provisions of this Article IX with respect to the indemnification and advancement of expenses of directors and officers of the Corporation.
The rights conferred upon indemnitees in this Article IX shall be contract rights and such rights shall continue as to an indemnitee who has ceased to be a director, officer or trustee and shall inure to the benefit of the indemnitees heirs, executors and administrators. Any amendment, alteration or repeal of this Article IX that adversely affects any right of an indemnitee or its successors shall be prospective only and shall not limit or eliminate any such right with respect to any proceeding involving any occurrence or alleged occurrence of any action or omission to act that took place prior to such amendment or repeal.
ARTICLE X.
AMENDMENTS
The Board of Directors is authorized to make, repeal, alter, amend change, add to and rescind, in whole or in part, these Bylaws without the assent or vote of the stockholders in any manner not inconsistent with the DGCL or the Certificate of Incorporation. Notwithstanding any other provisions of these Bylaws or any provision of applicable law that might otherwise permit a lesser vote of the stockholders, any amendment, alteration, rescission or repeal of these Bylaws (including, without limitation, this Article X ) or adoption of any provision inconsistent herewith by our stockholders shall require the affirmative vote of the holders of at least a majority in voting power of all the then-outstanding shares of Voting Stock of the Corporation entitled to vote thereon, voting together as a single class.
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Exhibit 10.4
SPEEDY CASH HOLDINGS CORP.
2010 EQUITY INCENTIVE PLAN
TABLE OF CONTENTS
Page
1. PURPOSE |
1 | |||
2. DEFINITIONS |
1 | |||
3. TERM OF THE PLAN |
3 | |||
4. STOCK SUBJECT TO THE PLAN |
3 | |||
5. ADMINISTRATION |
3 | |||
6. AUTHORIZATION AND ELIGIBILITY |
4 | |||
7. SPECIFIC TERMS OF AWARDS |
4 | |||
8. ADJUSTMENT PROVISIONS |
8 | |||
9. SETTLEMENT OF AWARDS |
10 | |||
10. RESERVATION OF STOCK |
12 | |||
11. NO SPECIAL EMPLOYMENT OR OTHER RIGHTS |
12 | |||
12. NONEXCLUSIVITY OF THE PLAN |
12 | |||
13. TERMINATION AND AMENDMENT OF THE PLAN |
12 | |||
14. NOTICES AND OTHER COMMUNICATIONS |
13 | |||
15. GOVERNING LAW |
14 |
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SPEEDY CASH HOLDINGS CORP.
2010 EQUITY INCENTIVE PLAN
1. Purpose
This Plan is intended to encourage ownership of Common Stock by employees, consultants and directors of the Company and its Affiliates and to provide additional incentive for them to promote the success of the Companys business. The Plan is intended to be an incentive stock option plan within the meaning of Section 422 of the Code, but not all Awards are required to be Incentive Options.
2. Definitions
As used in this Plan, the following terms shall have the following meanings:
2.1. Affiliate means any corporation, partnership, limited liability company, business trust, or other entity controlling, controlled by or under common control with the Company.
2.2. Award means any grant or sale pursuant to the Plan of Options, Restricted Stock or Stock Grants.
2.3. Award Agreement means an agreement between the Company and the recipient of an Award, setting forth the terms and conditions of the Award.
2.4. Board means the Companys Board of Directors.
2.5. Code means the Internal Revenue Code of 1986, as amended from time to time, or any successor statute thereto, and any regulations issued from time to time thereunder.
2.6. Committee means the Audit Committee established by the Board.
2.7. Common Stock or Stock means (a) the Companys Class A Voting Common Stock, $0.001 par value per share and (b) the Companys Class B Non-Voting Common Stock, $0.001 par value per share.
2.8. Company means Speedy Cash Holdings Corp., a corporation organized under the laws of the State of Delaware.
2.9. Disposition Event has the meaning set forth in the Investor Rights Agreemeot.
2.10. Grant Date means the date as of which an Option is granted, as determined under Section 7.1(a).
2.11. Incentive Option means an Option which by its terms is to be treated as an incentive stock option within the meaning of Section 422 of the Code.
2.12. Investor Rights Agreement means the Investor Rights Agreement, dated as of September 10, 2008, by and among the Company and its stockholders, setting forth, among other things, conditions and restrictions upon the transfer of shares of Stock, as such agreements may be amended, restated, modified or replaced from time to time.
2.13. Market Value means the value of a share of Common Stock on any date as determined by the Committee.
2.14. Nonstatutory Option means any Option that is not an Incentive Option.
2.15. Option means an option to purchase shares of Common Stock.
2.16. Optionee means a Participant to whom an Option shall have been granted under the Plan.
2.17. Participant means any holder of an outstanding Award under the Plan.
2.18. Plan means this 2010 Equity Incentive Plan of the Company, as amended from time to time, and including any attachments or addenda hereto.
2.19. Restricted Stock means a grant of sale of shares of Common Stock to a Participant subject to a Risk of Forfeiture.
2.20. Restriction Period means the period of time, established by the Committee in connection with an Award of Restricted Stock, during which the shares of Restricted Stock are subject to a Risk of Forfeiture described in the applicable Award Agreemeot.
2.21. Risk of Forfeiture means a limitation on the right of the Participant to retain Restricted Stock, including a right of the Company to reacquire the Shares at less than their then Market Value, arising because of the occurrence or non-occurrence of specified events or conditions.
2.22. Stock Grant means the grant of shares of Common Stock not subject to restrictions or other forfeiture conditions.
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2.23. Ten Percent Owner means a person who owns, or is deemed within the meaning of Section 422(b)(6) of the Code to own, stock possessing more than 10% of the total combined voting power of all classes of stock of the Company (or any parent or subsidiary corporations of the Company, as defined in Sections 424(e) and (f), respectively, of the Code). Whether a person is a Ten Percent Owner shall be determined with respect to an Option based on the facts existing immediately prior to the Grant Date of the Option.
3. Term of the Plan
Unless the Plan shall have been earlier terminated by the Board, Awards may be granted under this Plan at any time in the period commencing on the date of approval of the Plan by the Board and ending immediately prior to the tenth anniversary of the earlier of the adoption of the Plan by the Board or approval of the Plan by the Companys stockholders. Awards granted pursuant to the Plan within that period shall not expire solely by reason of the termination of the Plan. Awards of Incentive Options granted prior to stockholder approval of the Plan are expressly conditioned upon such approval, but in the event of the failure of the stockholders to approve the Plan, such Awards shall thereafter and for all purposes be deemed to constitute Nonstatutory Options.
4. Stock Subject to the Plan
At no time shall the number of shares of Common Stock issued pursuant to or subject to outstanding Awards granted under the Plan (including, pursuant to Incentive Options), nor the number of shares of Stock issued pursuant to Incentive Options, exceed 50,000 shares of Common Stock; subject, however, to the provisions of Section 8 of the Plan. For purposes of applying the foregoing limitation, if any Option expires, terminates, or is cancelled for any reason without having been exercised in full, or if any Award of Restricted Stock is forfeited by the recipient or repurchased at less than its Market Value, the shares (i) not purchased by the Optionee or (ii) forfeited by the recipient shall again be available for Awards to be granted under the Plan and (b) if any Option is exercised by delivering previously owned shares in payment of the exercise price therefore, only the net number of shares, that is the number of shares issued minus the number received by the Company in payment of the exercise price, shall be considered to have been issued pursuant to an Award granted under the Plan. Shares of Common Stock issued pursuant to the Plan may be either authorized but unissued shares or shares held by the Company in its treasury.
5. Administration
The Plan shall be administered exclusively by the Committee. Subject to the provisions of the Plan, the Committee shall have complete authority, in its discretion, to make or to select the manner of making all determinations with respect to each Award to be granted by the Company under the Plan including the employee, consultant or director to receive the Award and the form, terms and conditions of the Award. In making such determinations, the Committee may take into account the nature of the services rendered by the respective employees, consultants, and directors, their present and potential
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contributions to the success of the Company and its Affiliates, and such other factors as the Committee in its discretion shall deem relevant. Subject to the provisions of the Plan, the Committee shall also have complete authority to interpret the Plan, to prescribe, amend and rescind rules and regulations relating to it, to determine the terms and provisions of the respective Award Agreements (which need not be identical), and to make all other determinations necessary or advisable for the administration of the Plan. The Committees determinations made in good faith on matters referred to in the Plan shall be final, binding and conclusive on all persons having or claiming any interest under the Plan or an Award made pursuant to hereto.
6. | Authorization and Eligibility |
The Committee may grant from time to time and at any time prior to the termination of the Plan one or more Awards, either alone or in combination with any other Awards, to any employee of or consultant to one or more of the Company and its Affiliates or to any non-employee member of the Board or of any board of directors (or similar governing authority) of any Affiliate. However, only employees of the Company, and of any parent or subsidiary corporations of the Company, as defined in Sections 424(e) and (f), respectively, of the Code, shall be eligible for the grant of an Incentive Option. Further, in no event shall the number of shares of Common Stock covered by Options or other Awards granted to any one person in any one calendar year exceed 66-2/3% of the aggregate number of shares of Common Stock subject to the Plan.
Each grant of an Award shall be subject to all applicable terms and conditions of the Plan (including but not limited to any specific terms and conditions applicable to that type of Award set out in the following Section), and such other terms and conditions, not inconsistent with the terms of the Plan, as the Committee may prescribe. No prospective Participant shall have any rights with respect to an Award, unless and until such Participant has executed an agreement evidencing the Award, delivered a fully executed copy thereof to the Company, and otherwise complied with the applicable terms and conditions of such Award.
7. | Specific Terms of Awards |
7.1. Options .
(a) Date of Grant . The granting of an Option shall take place at the time specified in the Award Agreement. Only if expressly so provided in the applicable Award Agreement shall the Grant Date be the date on which the Award Agreement shall have been duly executed and delivered by the Company and the Optionee.
(b) Exercise Price . The price at which shares of Common Stock may be acquired under each Incentive Option shall be not less than 100% of the Market Value of Common Stock on the Grant Date, or not less than 110% of the Market Value of Common Stock on the Grant Date if the Optionee is a Ten Percent Owner. The price at which shares may be acquired under each Nonstatutory Option shall not be so limited solely by reason of this Section.
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(c) Option Period . No Incentive Option may be exercised on or after the tenth anniversary of the Grant Date, or on or after the fifth anniversary of the Grant Date if the Optionee is a Ten Percent Owner. The Option period under each Nonstatutory Option shall not be so limited solely by reason of this Section.
(d) Exercisability . An Option may be immediately exercisable or become exercisable in such installments, cumulative or non-cumulative, as the Committee may determine. In the case of an Option not otherwise immediately exercisable in full, the Committee may accelerate the exercisability of such Option in whole or in part at any time; provided, that the acceleration of the exercisability of any Incentive Option would not cause the Option to fail to comply with the provisions of Section 422 of the Code.
(e) Termination of Association with the Company . Unless the Committee shall provide otherwise with respect to any Option, if the Optionees employment or other association with the Company and its Affiliates ends for any reason, including because of the Optionees employer ceasing to be an Affiliate, any outstanding Option of the Optionee shall cease to be exercisable in any respect not later than 90 days following that event and, for the period it remains exercisable following that event, shall be exercisable only to the extent exercisable at the date of that event. Military or sick leave or other bona fide leave shall not be deemed a termination of employment or other association, provided that it does not exceed the longer of ninety (90) days or the period during which the absent Optionees reemployment rights, if any, are guaranteed by statute or by contract.
(f) Transferability . Except as otherwise provided in this subsection (f), Options shall not be transferable, and no Option or interest therein may be sold, transferred, pledged, assigned, or otherwise alienated or hypothecated, other than by will or by the laws of descent and distribution. All of a Participants rights in any Option may be exercised during the life of the Participant only by the Participant or the Participants legal representative. However, the Committee may, at or after the grant of a Nonstatutory Option, provide that such Option may be transferred by the recipient to a family member; provided, however, that any such transfer is without payment of any consideration whatsoever and that no transfer of an Option shall be valid unless first approved by the Committee, acting in its sole discretion. For this purpose, family member means any child, stepchild, grandchild, parent, stepparent, spouse, former spouse, sibling, niece, nephew, mother-in-law, father-in-law, son-in-law, daughter-in-law, brother-in-law, or sister-in-law, including adoptive relationships, any person sharing the employees household (other than a tenant or employee), a trust in which the foregoing persons have more than fifty percent (50%) of the beneficial interests, a foundation in which the foregoing persons (or the Participant) control the management of assets, and any other entity in which these persons (or the Participant) own more than fifty percent (50%) of the voting interests.
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(g) Method of Exercise . An Option may be exercised by the Optionee giving written notice, in the manner provided in Section 14, specifying the number of shares with respect to which the Option is then being exercised. The notice shall be accompanied by payment in the form of cash or check payable to the order of the Company in an amount equal to the exercise price of the shares to be purchased or, if the Committee had so authorized on the grant of any particular Option hereunder {and subject to such conditions, if any, as the Committee may deem necessary to avoid adverse accounting effects to the Company) by delivery to the Company of that number of shares of Common Stock having a Market Value equal to the exercise price of the shares to be purchased. Receipt by the Company of such notice and payment shall constitute the exercise of the Option. Within thirty (30) days thereafter but subject to the remaining provisions of the Plan, the Company shall deliver or cause to be delivered to the Optionee or his agent a certificate or certificates for the number of shares then being purchased. Such shares shall be fully paid and nonassessable. Nothing herein shall be construed to preclude the Company from participating in a so-called cashless exercise, provided the Optionee or other person exercising the Option and each other party involved in any such exercise shall comply with such procedures, and enter into such agreements, of indemnity or otherwise, as the Company shall specify.
(h) Limit on Incentive Option Characterization . An Incentive Option shall be considered to be an Incentive Option only to the extent that the number of shares of Common Stock for which the Option first becomes exercisable in a calendar year do not have an aggregate Market Value (as of the date of the grant of the Option) in excess of the current limit. The current limit for any Optionee for any calendar year shall be $100,000 minus the aggregate Market Value at the date of grant of the number of shares of Common Stock available for purchase for the first time in the same year under each other Incentive Option previously granted to the Optionee under the Plan, and under each other incentive stock option previously granted to the Optionee under any other incentive stock option plan of the Company and its Affiliates, after December 31, 1986. Any shares of Common Stock which would cause the foregoing limit to be violated shall be deemed to have been granted under a separate Nonstatutory Option, otherwise identical in its terms to those of the Incentive Option.
(i) Notification of Disposition . Each person exercising any Incentive Option granted under the Plan shall be deemed to have covenanted with the Company to report to the Company any disposition of such shares prior to the expiration of the holding periods specified by Section 422(a)(l) of the Code and, if and to the extent that the realization of income in such a disposition imposes upon the Company federal, state, local or other withholding tax requirements, or any such withholding is required to secure for the Company an otherwise available tax deduction, to remit to the Company an amount in cash sufficient to satisfy those requirements.
(j) Rights Pending Exercise . No person holding an Option shall be deemed for any purpose to be a stockholder of the Company with respect to any of the shares of Stock issuable pursuant to his Option, except to the extent that the Option shall have been exercised with respect thereto and, in addition, a certificate shall have been issued therefor and delivered to such holder or his agent.
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7.2. Restricted Stock .
(a) Purchase Price . Shares of Restricted Stock shall be issued under the Plan for such consideration, in cash, other property or services, or any combination thereof, as is determined by the Committee.
(b) Issuance of Certificates . Each Participant receiving a Restricted Stock Award, subject to subsection (c) below, shall be issued a stock certificate in respect of such shares of Restricted Stock. Such certificate shall be registered in the name of such Participant, and, if applicable, shall bear an appropriate legend referring to the terms, conditions, and restrictions applicable to such Award substantially in the following form:
The transferability of this certificate and the shares represented by this certificate are subject to the terms and conditions of the Speedy Cash Holdings Corp. Equity Incentive Plan (as amended) and an Award Agreement entered into by the registered owner and Speedy Cash Holdings Corp. Copies of such Plan and Agreement are on file in the offices of Speedy Cash Holdings Corp.
(c) Escrow of Shares . The Committee may require that the stock certificates evidencing shares of Restricted Stock be held in custody by a designated escrow agent (which may but need not be the Company) until the restrictions thereon shall have lapsed, and that the Participant deliver a stock power, endorsed in blank, relating to the Stock covered by such Award.
(d) Restrictions and Restriction Period . During the Restriction Period applicable to shares of Restricted Stock, such shares shall be subject to limitations on transferability and a Risk of Forfeiture arising on the basis of such conditions related to the performance of services, Company or Affiliate performance or otherwise as the Committee may determine and provide for in the applicable Award Agreement. Any such Risk of Forfeiture may be waived or terminated, or the Restriction Period shortened, at any time by the Committee on such basis as it deems appropriate.
(e) Rights Pending Lapse of Risk of Forfeiture or Forfeiture of Award . Except as otherwise provided in the Plan or the applicable Award Agreement, at all times prior to lapse of any Risk of Forfeiture applicable to, or forfeiture of, an Award of Restricted Stock, the Participant shall have all of the rights of a stockholder of the Company, including the right to vote, and the right to receive any dividends with respect to, the shares of Restricted Stock. The Committee, as determined at the time of Award, may permit or require the payment of cash dividends to be deferred and, if the Committee so determines, reinvested in additional Restricted Stock to the extent shares are available under Section 4.
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(f) Termination of Association with the Company . Unless the Committee shall provide otherwise for any Award of Restricted Stock, upon termination of a Participants employment or other association with the Company and its Affiliates for any reason during the Restriction Period, including because of the Participants employer ceasing to be an Affiliate during the Restriction Period, all shares of Restricted Stock still subject to Risk of Forfeiture shall be forfeited or otherwise subject to return to or repurchase by the Company on the terms specified in the Award Agreement; provided, however, that military or sick leave or other bona fide leave shall not be deemed a termination of employment or other association, if it does not exceed the longer of ninety (90) days or the period during which the absent Participants reemployment rights, if any, are guaranteed by statute or by contract.
(g) Lapse of Restrictions . If and when the Restriction Period expires without a prior forfeiture of the Restricted Stock, the certificates for such shares shall be delivered to the Participant promptly if not theretofore so delivered.
7.3. Stock Grants . Stock Grants shall be awarded solely in recognition of significant contributions to the success of the Company or its Affiliates, in lieu of compensation otherwise already due and in such other limited circumstances as the Committee deems appropriate. Stock Grants shall be made without forfeiture conditions of any kind.
7.4. Awards to Participants Outside the United States . The Committee may modify the terms of any Award under the Plan granted to a Participant who is, at the time of grant or during the term of the Award, resident or primarily employed outside of the United States in any manner deemed by the Committee to be necessary or appropriate in order that the Award shall conform to laws, regulations, and customs of the country in which the Participant is then resident or primarily employed, or so that the value and other benefits of the Award to the Participant, as affected by foreign tax laws and other restrictions applicable as a result of the Participants residence or employment abroad, shall be comparable to the value of such an Award to a Participant who is resident or primarily employed in the United States. The Committee may establish supplements to, or amendments, restatements, or alternative versions of the Plan for the purpose of granting and administrating any such modified Award. No such modification, supplement, amendment, restatement or alternative version may increase the share limit of Section 4.
8. | Adjustment Provisions |
8.1. Adjustment for Corporate Actions . All of the share numbers set forth in the Plan reflect the capital structure of the Company as of November 30, 2010. Subject to Section 8.2, if subsequent to that date the outstanding shares of Common Stock (or any other securities covered by the Plan by reason of the prior application of this Section) are increased, decreased, or exchanged for a different number or kind of shares or other securities, or if additional shares or new or different shares or other securities are distributed with respect to shares of Common Stock or other securities, through merger, consolidation, sale of all or substantially all the property of the Company, reorganization, recapitalization, reclassification, stock dividend, stock split, reverse stock split, or other distribution with respect to such shares of Common Stock, or other securities, an appropriate and proportionate adjustment will be made in (i) the maximum numbers and
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kinds of shares provided in Section 4, (ii) the numbers and kinds of shares or other securities subject to the then outstanding Awards, (iii) the exercise price for each share or other unit of any other securities subject to then outstanding Options (without change in the aggregate purchase price as to which such Options remain exercisable), and (iv) the repurchase price of each share of Restricted Stock then subject to a Risk of Forfeiture in the form of a Company repurchase right.
8.2. Consolidation or Merger . Subject to the remainder of this Section 8.2 and the terms and provisions of any specific Award Agreement, in the event of any consolidation or merger of the Company with or into another company or in case of any sale or conveyance to another company or entity of the property of the Company as a whole or substantially as a whole, or in the case of any Disposition Event, regardless of how effected (including by sale of assets or sale of the Companys outstanding equity securities), shares of stock or other securities equivalent in kind and value to those shares and other securities an Optionee would have received if he or she had held the full number of shares of Stock remaining subject to the Option immediately prior to such consolidation, merger, sale or conveyance and had continued to hold those shares (together with all other shares, stock and securities thereafter issued in respect thereof) to the time of the exercise of the Option shall thereupon be subject to the Option. However, unless any Award Agreement shall provide different or additional terms, in any such transaction the Committee, in its discretion and as to one, some or all outstanding Options, may provide instead that any outstanding Option shall terminate, to the extent not exercised by the Optionee prior to termination, either (a) at the close of a period of not less than ten (10) days specified by the Committee and commencing on the Committees delivery of written notice to the Participant of its decision to terminate such Option without payment of consideration as provided in the following clause or (b) as of the date of the transaction, in consideration of the Companys payment to the Optionee of an amount of cash equal to the difference between the aggregate Market Value of the shares of Stock for which the Option is then exercisable and the aggregate exercise price for such shares under the Option.
8.3. Dissolution or Liquidation . Upon dissolution or liquidation of the Company, each outstanding Option shall terminate, but the Optionee (if at the time in the employ of or otherwise associated with the Company or any of its Affiliates) shall have the right, immediately prior to the dissolution or liquidation, to exercise the Option to the extent exercisable on the date of dissolution or liquidation.
8.4. Adjustment of Awards Upon the Occurrence of Certain Unusual or Nonrecurring Events . In the event of any corporate action not specifically covered by the preceding Sections, including but not limited to an extraordinary cash distribution on Common Stock, a corporate separation or other reorganization or liquidation, the Committee may make such adjustment of outstanding Awards and their terms, if any, as it, in its sole discretion, may deem equitable and appropriate in the circumstances.
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8.5. Related Matters . Any adjustment in Awards made pursuant to this Section 8 shall be determined and made, if at all, by the Committee and shall include any correlative modification of terms, including of Option exercise prices, rates of vesting or exercisability, Risks of Forfeiture and applicable repurchase prices for Restricted Stock, which the Committee may deem necessary or appropriate so as to ensure the rights of the Participants in their respective Awards are not substantially diminished nor enlarged as a result of the adjustment and corporate action other than as expressly contemplated in this Section 8. No fraction of a share shall be purchasable or deliverable upon exercise, but in the event any adjustment herennder of the number of shares covered by an Award shall cause such number to include a fraction of a share, such number of shares shall be adjusted to the nearest smaller whole number of shares. No adjustment of an Option exercise price per share pursuant to this Section 8 shall result in an exercise price which is less than the par value of the Stock.
9. | Settlement of Awards |
9.1. Violation of Law . Notwithstanding any other provision of the Plan or the relevant Award Agreement, if, at any time, in the reasonable opinion of the Company, the issuance of shares of Common Stock covered by an Award may constitute a violation of law, then the Company may delay such issuance and the delivery of a certificate for such shares until (i) approval shall have been obtained from such governmental agencies, other than the Securities and Exchange Commission, as may be required under any applicable law, rule, or regulation and (ii) in the case where such issuance would constitute a violation of a law administered by or a regulation of the Securities and Exchange Commission, one of the following conditions shall have been satisfied:
(a) the shares are at the time of the issue of such shares effectively registered under the Securities Act of 1933; or
(b) the Company shall have determined, on such basis as it deems appropriate (including an opinion of counsel in form and substance satisfactory to the Company) that the sale, transfer, assignment, pledge, encumbrance or other disposition of such shares or such beneficial interest, as the case may be, does not require registration under the Securities Act of 1933, as amended or any applicable State securities laws.
The Company shall make all reasonable efforts to bring about the occurrence of said events.
9.2. Corporate Restrictions on Rights in Stock . Any Stock to be issued pursuant to Awards granted under the Plan shall be subject to all restrictions upon the transfer thereof which may be now or hereafter imposed by the charter, certificate or articles, and by-laws, of the Company. Whenever Stock is to be issued pursuant to an Award, the Company shall be under no obligation to issue such shares until such time, if ever, as the recipient of the Award (and any person who exercises any Option, in whole or in part), shall have become a party to and bound by the Investor Rights Agreement, if any. In the event of any conflict between the provisions of this Plan and the provisions of the Investor Rights Agreement, the provisions of the Investor Rights Agreement shall control except as required to fulfill the intention that this Plan constitute an incentive stock option plan within the meaning of Section 422 of the Code, but insofar as possible the provisions of the Plan and such Agreement shall be construed so as to give full force and effect to all such provisions.
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9.3. Investment Representations . The Company shall be under no obligation to issue any shares covered by any Award unless the shares to be issued pursuant to Awards granted under the Plan have been effectively registered under the Securities Act of 1933, as amended, or the Participant shall have made such written representations to the Company (upon which the Company believes it may reasonably rely) as the Company may deem necessary or appropriate for purposes of confirming that the issuance of such shares will be exempt from the registration requirements of that Act and any applicable state securities laws and otherwise in compliance with all applicable laws, rules and regulations, including but not limited to that the Participant is acquiring the shares for his or her own account for the purpose of investment and not with a view to, or for sale in connection with, the distribution of any such shares.
9.4. Registration . If the Company shall deem it necessary or desirable to register under the Securities Act of 1933, as amended or other applicable statutes any shares of Stock issued or to be issued pursuant to Awards granted under the Plan, or to qualify any such shares of Stock for exemption from the Securities Act of 1933, as amended or other applicable statutes, then the Company shall take such action at its own expense. The Company may require from each recipient of an Award, or each holder of shares of Stock acquired pursuant to the Plan, such information in writing for use in any registration statement, prospectus, preliminary prospectus or offering circular as is reasonably necessary for that purpose and may require reasonable indemnity to the Company and its officers and directors from that holder against all losses, claims, damage and liabilities arising from use of the information so furnished and caused by any untrue statement of any material fact therein or caused by the omission to state a material fact required to be stated therein or necessary to make the statements therein not misleading in the light of the circumstances under which they were made. In addition, the Company may require of any such person that he or she agree that, without the prior written consent of the Company or the managing underwriter in any public offering of shares of Stock, he or she will not sell, make any short sale of, loan, grant any option for the purchase of, pledge or otherwise encumber, or otherwise dispose of, any shares of Common Stock during the 180 day period commencing on the effective date of the registration statement relating to the underwritten public offering of securities.
9.5. Placement of Legends; Stop Orders; etc . Each share of Common Stock to be issued pursuant to Awards granted under the Plan may bear a reference to the investment representation made in accordance with Section 9.3 in addition to any other applicable restriction under the Plan, the terms of the Award and if applicable under the Investor Rights Agreement and to the fact that no registration statement has been filed with the Securities and Exchange Commission in respect to such shares of Common Stock. All certificates for shares of Common Stock or other securities delivered under the Plan shall be subject to such stock transfer orders and other restrictions as the Committee may deem advisable under the rules, regulations, and other requirements of any stock exchange upon which the Common Stock is then listed, and any applicable federal or state securities law, and the Committee may cause a legend or legends to be put on any such certificates to make appropriate reference to such restrictions.
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9.6. Tax Withholding . Whenever shares of Stock are issued or to be issued pursuant to Awards granted under the Plan, the Company shall have the right to require the recipient to remit to the Company an amount sufficient to satisfy federal, state, local or other withholding tax requirements if, when, and to the extent required by law (whether so required to secure for the Company an otherwise available tax deduction or otherwise) prior to the delivery of any certificate or certificates for such shares. The obligations of the Company under the Plan shall be conditional on satisfaction of all such withholding obligations and the Company shall, to the extent permitted by law, have the right to deduct any such taxes from any payment of any kind otherwise due to the recipient of an Award.
10. | Reservation of Stock |
The Company shall at all times during the term of the Plan and any outstanding Options granted hereunder reserve or otherwise keep available such number of shares of Stock as will be sufficient to satisfy the requirements of the Plan (if then in effect) and the Options and shall pay all fees and expenses necessarily incurred by the Company in connection therewith.
11. | No Special Employment or Other Rights |
Nothing contained in the Plan or in any Award Agreement shall confer upon any recipient of an Award any right with respect to the continuation of his or her employment or other association with the Company (or any Affiliate), or interfere in any way with the right of the Company (or any Affiliate), subject to the terms of any separate employment or consulting agreement or provision of law or corporate charter, certificate or articles, or by-laws, to the contrary, at any time to terminate such employment or consulting agreement or to increase or decrease, or otherwise adjust, the other terms and conditions of the recipients employment or other association with the Company and its Affiliates.
12. | Nonexclusivity of the Plan |
Neither the adoption of the Plan by the Board nor the submission of the Plan to the stockholders of the Company shall be construed as creating any limitations on the power of the Board to adopt such other incentive arrangements as it may deem desirable, including without limitation, the granting of stock options and restricted stock other than under the Plan, and such arrangements may be either applicable generally or only in specific cases.
13. | Termination and Amendment of the Plan |
Subject to the Certificate of Incorporation of the Company, the Board may at any time terminate the Plan or make such modifications of the Plan as it shall deem advisable. Unless the Board otherwise expressly provides, no amendment of the Plan shall affect the terms of any Award outstanding on the date of such amendment.
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The Committee may amend the terms of any Award theretofore granted, prospectively or retroactively, provided that the Award as amended is consistent with the terms of the Plan. Also within the limitations of the Plan, the Committee may modify, extend or assume outstanding Awards or may accept the cancellation of outstanding Awards or of outstanding stock options or other equity-based compensation awards granted by another issuer in return for the grant of new Awards for the same or a different number of shares and on the same or different terms and conditions (including but not limited to the exercise price of any Option). Furthermore, the Committee may at any time (a) offer to buy out for a payment in cash or cash equivalents an Award previously granted or (b) authorize the recipient of an Award to elect to cash out an Award previously granted, in either case at such time and based upon such terms and conditions as the Committee shall establish.
No amendment or modification of the Plan by the Board, or of an outstanding Award by the Committee, shall impair the rights of the recipient of any Award outstanding on the date of such amendment or modification or such Award, as the case may be, without the Participants consent; provided, however, that no such consent shall be required if (i) the Board or Committee, as the case may be, determines in its sole discretion and prior to the date of any Disposition Event that such amendment or alteration either is required or advisable in order for the Company, the Plan or the Award to satisfy any law or regulation, including without limitation the provisions of Section 409A of the Code or to meet the requirements of or avoid adverse financial accounting consequences under any accounting standard, or (ii) the Board or Committee, as the case may be, determines in its sole discretion that such amendment or alteration is not reasonably likely to significantly diminish the benefits provided under the Award, or that any such diminution has been adequately compensated.
14. Notices and Other Communications
Any notice, demand, request or other communication hereunder to any party shall be deemed to be sufficient if contained in a written instrument delivered in person or duly sent by first class registered, certified or overnight mail, postage prepaid, or telecopied with a confirmation copy by regular, certified or overnight mail, addressed or telecopied, as the case may be, (i) if to the recipient of an Award, at his or her residence address last filed with the Company and (ii) if to the Company, to Speedy Cash Holdings Corp, 3527 North Ridge Road, Wichita, Kansas 67205 Attention: Chief Executive Officer, with copies to Friedman Flesischer & Lowe LLC, One Maritime Plaza, Suite 1000, San Francisco, California 94111, Fax No. (415) 402-2111, Attention: Chris Masto and Aaron Money, and to Bingham McCutchen LLP, 399 Park Avenue, New York, New York 10022, Attention: Neil W. Townsend, Esq., Fax No. (212) 752-5378, or to such other address or telecopier number, as the case may be, as the addressee may have designated by notice to the addressor. All such notices, requests, demands and other communications shall be deemed to have been received: (i) in the case of personal delivery, on the date of such delivery; (ii) in the case of mailing, when received by the addressee; and (iii) in the case of facsimile transmission, when confirmed by facsimile machine report.
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15. Governing Law
The Plan and all Award Agreements and actions taken thereunder shall be governed, interpreted and enforced in accordance with the laws of the State of New York, without regard to the conflict of laws principles thereof.
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STOCK OPTION AGREEMENT
This STOCK OPTION AGREEMENT dated as of [DATE] (this Agreement ) is between CURO GROUP HOLDINGS CORP (f/k/a Speedy Group Holdings Corp.), a Delaware corporation (the Company ) and [NAME] ( Optionee ).
WHEREAS , the Optionee has been retained as an employee of the Company or one of its Subsidiaries (as defined below); and
WHEREAS , the Optionee is eligible to receive an additional incentive compensation in the form of an option to purchase shares of the Companys Class B Common Stock (as defined below) upon certain terms and conditions.
NOW THEREFORE , the Optionee and the Company agree as follows:
1. Definitions . As used herein, the following terms have the meanings set forth below:
Affiliate has the meaning specified in the Investor Rights Agreement.
Agreement has the meaning specified in the preamble hereto.
Board means the Board of Directors of the Company.
Cause means any of the following:
(i) the Optionees commission of an act of fraud, embezzlement, misappropriation or breach of fiduciary duty against the Company or any of its subsidiaries (collectively, the Companies ), including, but not limited to, the offer, payment, solicitation or acceptance of any unlawful bribe or kickback with respect to the business of any of the Companies;
(ii) the Optionees conviction by a court of competent jurisdiction of, or pleading guilty or nolo contendere to, any felony or any other crime that could reasonably be expected to have a material adverse effect on the business or reputation of any of the Companies;
(iii) a material breach by the Optionee of any of the covenants, terms and provisions applicable to him or her in connection with his or her employment with the Companies, including, without limitation, any failure to comply with the rules and regulations that have been or may hereafter be established by the Board for the conduct of the employees of the Companies or for the position or positions held by the Optionee, and such breach continuing for a period of ten (10) days after written notice to the Optionee specifying such breach in reasonable detail;
(iv) the Optionees refusal, after written notice, to obey any lawful resolution of or direction by the Board which is consistent with his or her duties hereunder;
(v) chronic absence by the Optionee from work (excluding vacation, illnesses or leaves of absence approved by the Board) and such absence continuing following written notice to the Optionee;
(vi) the Optionees failure to devote his or her full time and best efforts to the performance of his or her duties to the Companies and such failure continuing for more than ten (10) days after written notice of such failure specified in reasonable detail has been given to the Optionee; or
(vii) the Optionees engaging in the unlawful use (including being under the influence) or possession of illegal drugs or possession of illegal, unpermitted or unregistered weapons, in each case on the premises of the Company or any of its direct or indirect subsidiaries.
Charter means the Companys Certificate of Incorporation and all amendments thereto.
Class A Common Stock means the Companys Class A Voting Common Stock, $0.001 par value per share.
Class B Common Stock means the Companys Class B Non-Voting Common Stock, $0.001 par value per share.
Code means the Internal Revenue Code of 1986, as amended, and the Treasury Regulations promulgated thereunder.
Common Equity Value means, as of any date, the fair market value (as determined in good faith by the Board) of the entire common stock equity of the Company (without premium for control or discounts for minority interests, restrictions on transfer or lack of voting rights or other premiums or discounts that would be applicable if less than all of the common stock equity is sold in a single transaction), calculated as of such date, plus the aggregate consideration to be paid to the Company upon the exercise of all then outstanding and exercisable warrants, options or convertible securities pursuant to which the Company is then obligated to issue shares of Common Stock (excluding any options or warrants for which the exercise price per share exceeds the Market Value Per Share of a share of Common Stock as of such date).
Common Stock means the Class A Common Stock and the Class B Common Stock, and any capital stock of the Company which is (a) not preferred as to dividends or assets over any class of stock of the Company, (b) not subject to redemption, and (c) issued to the holders of Common Stock upon any reclassification thereof.
Company has the meaning specified in the preamble hereto.
Delayed Closing Date has the meaning specified in Section 3(e) hereof.
Disposition Event means (a) (i) the sale of all or substantially all of the assets of the Company and its Subsidiaries in a single transaction or series of related transactions whether by liquidation, dissolution, merger, consolidation or sale or (ii) the sale or other transfer of at least a majority of the outstanding shares of Common Stock in a single transaction or a series of related transactions, in either case to any Person who is not an Affiliate of the Company, or of a
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stockholder thereof, immediately prior to such transaction or transactions, or (b) the effective time of any merger, share exchange, consolidation, or other business combination of the Company if immediately after such transaction Persons who hold a majority of the outstanding voting securities entitled to vote generally in the election of directors of the surviving entity (or the entity owning 100% of such surviving entity) are not Persons who, immediately prior to such transaction, held the securities of the Company entitled to vote generally in the election of directors; provided , however , that such sale, transfer or other event described in (a) and (b) herein results in a change in the ownership or effective control, or a change in the ownership of a substantial portion of the assets, of the Company within the meaning of Section 409A of the Code.
Imputed Rate means the lowest per annum rate necessary to avoid the imputation of interest under the Code.
Initial Date means [ ].
Investor Rights Agreement means the Investor Rights Agreement, dated as of February 11, 2013, among the Company and its stockholders, as amended and in effect from time to time.
Market Value Per Share means, with respect to any date, for any share of Common Stock, (i) the Common Equity Value as of such date, divided by (ii) the sum of (x) the total number of shares of Common Stock then outstanding plus (y) the total number of shares of Common Stock issuable upon exercise or conversion of any then outstanding and exercisable warrants, options or convertible securities pursuant to which the Company is then obligated to issues shares of Common Stock (excluding any options or warrants for which the exercise price per share exceeds the Market Value Per Share of a share of Common Stock as of such date), as determined in good faith by the Board.
Net Repurchase Price means, with respect to any Repurchase Share being repurchased by the Company pursuant to Section 3, the Market Value Per Share of such Repurchase Share as of the Termination Date less the Exercise Price for such share.
Option has the meaning set forth in Section 2 hereof.
Option Price has the meaning set forth in Section 2 hereof.
Optioned Shares has the meaning specified in Section 2 hereof.
Optionee has the meaning specified in the preamble hereto.
Person means an individual, partnership, limited liability company, corporation, association, trust, joint venture, unincorporated organization, or any government, governmental department or agency or political subdivision thereof.
Plan means the Companys 2010 Equity Incentive Plan attached hereto as Exhibit A .
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Policies means the rules and regulations that are established by the Board from time to time for the conduct of its employees or for the position or positions held by the Optionee with the Company or any of its Subsidiaries.
Public Sale means the Companys initial public offering of Common Stock.
Repurchase Closing has the meaning set forth in Section 3(c) hereof.
Repurchase Notice has the meaning set forth in Section 3(b) hereof.
Repurchase Price means, with respect to any Repurchase Shares being repurchased by the Company pursuant to Section 3, the Market Value Per Share.
Repurchase Shares has the meaning set forth in Section 3(b) hereof.
Subsidiary means, with respect to the Company, any corporation, a majority (by number of votes) of the outstanding shares of any class or classes of which shall at the time be owned by the Company or by a Subsidiary of the Company, if the holders of the shares of such class or classes (a) are ordinarily, in the absence of contingencies, entitled to vote for the election of a majority of the directors (or persons performing similar functions) of the issuer thereof, even though the right so to vote has been suspended by the happening of such a contingency, or (b) are at the time entitled, as such holders, to vote for the election of a majority of the directors (or persons performing similar functions) of the issuer thereof, whether or not the right so to vote exists by reason of the happening of a contingency.
Termination Date means the date of any Termination of Employment.
Termination of Employment means the termination of the Optionees employment with the Company or its Subsidiaries for any reason, including, without limitation, for resignation, death or disability and whether or not for Cause.
Unvested Optioned Shares means, at any given time, all Optioned Shares that are not then Vested Optioned Shares.
Vested Optioned Shares has the meaning set forth in Section 4(b) hereof.
2. Optioned Shares . Subject to the terms and conditions set forth herein and pursuant to the Plan, the Company grants to the Optionee an option (the Option ) to purchase from the Company [ · ] shares of Class B Common Stock pursuant to Section 4(b) hereof (the Optioned Shares ), at a price of $ per Optioned Share (the Option Price ). The Option is not intended to qualify as an incentive stock option under Section 422 of the Code.
3. Duration of Option .
(a) The Option shall terminate in its entirety on the earliest of (i) the day after the completion of the first Disposition Event to occur after the date hereof, (ii) the tenth (10th) anniversary of the Initial Date, (iii) the date of the Optionees Termination of Employment for Cause or (iv) the thirtieth (30th) day following the Optionees Termination of Employment for
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any reason other than by the Employer for Cause. In the event that the Optionees Termination of Employment for any reason (other than by the Employer for Cause), the Option, with respect to any Optioned Shares which have not become Vested Optioned Shares as of the date of such termination of employment, shall irrevocably expire and the Optionee shall not have any right to purchase such Optioned Shares.
(b) If the Optionee desires to exercise this Option under the circumstances set forth in Section 4(a)(ii)(B) or (C) below, the Optionee shall deliver written notice to the Company (the Exercise Notice ), together with payment in the form of cash or check payable to the order of the Company in an amount equal to the exercise price of the Vested Optioned Shares to be purchased as contemplated by Section 7.1(g) of the Plan. The Company shall have the right, but not the obligation, within fifteen (15) business days following its receipt of the Exercise Notice to elect by written notice to the Optionee (the Repurchase Notice ) to repurchase some or all of the shares to be issued in connection with such exercise (the Repurchase Shares ) for a repurchase price per Repurchase Share equal to the Repurchase Price as of the Termination Date (such Repurchase Price to be paid to the Optionee in the manner set forth in Section 3(c), (d) or (e) below, as applicable).
(c) Any repurchase pursuant to paragraph (b) above shall occur at a closing (the Repurchase Closing ) to be held within 75 days following delivery of the Repurchase Notice at a time and place specified by the Company in the Repurchase Notice not less than five (5) days after delivery of the Repurchase Notice. Subject to the provisions of paragraphs (d) and (e) below, at the Repurchase Closing, the Company shall (i) be deemed to have issued the Repurchase Shares to the Optionee pursuant to Section 7.1(g) of the Plan and to have repurchased such shares from the Optionee immediately thereafter and (ii) return the Exercise Price (in cash or by returning the check that the Company received with the Exercise Notice) paid by the Optionee with respect to the Repurchase Shares and pay to the Optionee the Net Repurchase Price for the Repurchase Shares in cash (except as provided in paragraph (d) or (e) below), less any applicable withholding taxes in accordance with the Companys standard practice. Upon the return of the Exercise Price and the payment of the Net Repurchase Price by the Company, none of the Repurchase Shares shall be deemed to be outstanding, all of the Optionees rights with respect to such Repurchase Shares shall terminate with the exception of the right of the Optionee to receive the return of the Exercise Price and the Net Repurchase Price in exchange therefor pursuant to this Section 3, and the Optionee hereby appoints the Company as the Optionees attorney-in-fact to take all actions necessary and sign all documents required to cancel such Repurchase Shares on its books and records.
(d) In the event that any cash payment by the Company of any portion of the Net Repurchase Price is, at the time such payment would otherwise be due hereunder, prohibited by the terms of any of the Companys (or its affiliates) financing agreements with its lenders (or such financing agreements prohibit the Companys Subsidiaries from distributing cash to the Company to pay the Net Repurchase Price), the Company shall be entitled to complete the repurchase of the Repurchase Shares by delivering to the Optionee (or any transferee pursuant to Section 3(f) or 5 hereof) (i) a check in an amount equal to that portion of the Net Repurchase Price the payment of which is not so prohibited (or may be distributed to the Company for payment) and (ii) a promissory note for the balance of the Net Repurchase Price. Such promissory note shall (w) bear interest at the greater of the Imputed Rate and four percent (4%)
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per annum, (x) provide for the payment of the principal evidenced thereby, and all accrued unpaid interest thereon, in such installments and at such times as are permitted under the terms of the Companys financing agreements with its lenders or its subsidiaries lenders, (y) be subordinated to the Companys indebtedness to its lenders or its subsidiaries lenders on terms satisfactory to such lenders, and (z) provide for the payment in full of the principal evidenced thereby upon the closing of a Disposition Event.
(e) If the Company is prohibited by the terms of any of the financing agreements of the Company with its lenders from issuing a promissory note for the balance of the Net Repurchase Price as contemplated by paragraph (d) above, or is prohibited by law from repurchasing all of the Repurchase Shares which it is obligated to repurchase hereunder due to any existing or prospective impairment of its capital, the closing of such repurchase shall be delayed until the first date on which the Company is permitted by the terms of any such financing agreements to repurchase such Repurchase Shares and has sufficient capital to lawfully repurchase such Repurchase Shares (the Delayed Closing Date ). In the event of any such delay, (i) the Company will be obligated to pay, on the Delayed Closing Date, interest on the Repurchase Price for such Repurchase Shares, at the rate equal to the greater of the Imputed Rate and four percent (4%) per annum from the date on which the closing of the repurchase of such Repurchase Shares was originally scheduled to occur to the Delayed Closing Date, and (ii) the Optionee shall be bound by the restrictions on Transfer of the Repurchase Shares contained in Section 3(f) below during such delay.
(f) Except as otherwise expressly provided in the Investor Rights Agreement, the Optionee may not sell, assign, transfer, pledge or otherwise dispose of ( Transfer ) any of the Optioned Shares, either voluntarily or involuntarily or by operation of law, except to the Company or any of its Subsidiaries. On and after the time the Company completes a Public Sale, all of the restrictions on Transfer and the repurchase rights of the Company contained herein, shall cease to apply to any Optioned Shares. On and after the completion of a Disposition Event or a Public Sale, all of the repurchase rights of the Company contained herein shall cease to apply to any Optioned Shares. Upon any permitted Transfer of the Optioned Shares, the transferee of the Optioned Shares shall execute and deliver to the Company an agreement containing repurchase provisions substantially the same as those contained herein.
(g) Upon any stock split, reverse stock split, recombination of shares or other similar reorganization of the capital structure of the Company, the Repurchase Price otherwise payable to the Optionee upon the repurchase of any Repurchase Shares pursuant to Section 3 hereof shall be proportionally adjusted to reflect such reorganization.
4. Exercise of Option .
(a) Exercise . Subject to the provisions of Sections 4(b) and 4(c) below, the Option (i) may not be exercised if the Option has terminated or expired pursuant to Section 3(a) above and (ii) may only be exercised at the following times:
(A) | upon or immediately following the first Disposition Event to occur after the date hereof; |
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(B) | at any time after a Public Sale; |
(C) | on the Optionees Termination of Employment for any reason other than Cause; or |
(D) | on the thirtieth day (30th) day prior to the tenth (10th) anniversary of the Initial Date. |
If this Option becomes exercisable by reason of paragraph (C) or (D) above, then it must be exercised, if ever, within the thirty (30)-day period commencing on and immediately following the date specified.
(b) Vesting of Optioned Shares . At any time when the Option is exercisable in accordance with paragraph 4(a) above, the Optionee shall have the right to exercise the Option for all or a portion of the Optioned Shares which have become Vested Optioned Shares in accordance with this paragraph (b). On the date hereof, all of the Optioned Shares shall be Unvested Optioned Shares. On [ ] of each [ ], so long as no Termination of Employment has occurred, a one-third (1/3) of the Optioned Shares shall become Vested Optioned Shares , such that all of the Optioned Shares shall be Vested Optioned Shares as of and after [ ] if no Termination of Employment has occurred prior to such date. Upon the occurrence of a Disposition Event prior to a Termination of Employment for any reason, all of the then Unvested Optioned Shares shall become Vested Optioned Shares. No Optioned Shares which have not already become Vested Optioned Shares shall become Vested Optioned Shares upon or after a Termination of Employment for any reason.
(c) Manner of Exercise . Exercise of the Option may be effected in the manner specified in Section 7.1(g) of the Plan.
5. Restriction Against Transfer of Option . During the Optionees lifetime, the Option may be exercised only by the Optionee. Except for a transfer of the Option by will or operation of law after the Optionees death, the Option and all rights granted hereunder may not be transferred, assigned, pledged, or hypothecated (whether by operation of law or otherwise) and shall not be subject to execution, attachment, or similar process. Any Transfer of the Option in violation of this Section 5 shall be void and will result in the immediate termination of the Option.
6. Incorporation of Plan Terms . This Option is granted subject to all of the applicable terms and provisions of the Plan, including, but not limited to, the limitations on the Companys obligation to deliver Optioned Shares upon exercise set forth in Section 9 ( Settlement of Awards ) of the Plan.
7. Limitation of Rights in Optioned Shares . The Optionee shall not be deemed for any purpose to be a stockholder of the Company with respect to any of the Optioned Shares except to the extent that the Option shall have been exercised with respect thereto and, in addition, a stock certificate shall have been issued therefor and delivered to the Optionee. All Class B Common Stock issued pursuant to the Option shall be subject to the Investor Rights Agreement. All Class B Common Stock issued pursuant to the Option shall be subject to all restrictions upon the transfer thereof which may be now or hereafter imposed by the Charter or
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the Bylaws of the Company or the Investor Rights Agreement. In connection with the exercise of the Option prior to a Disposition Event or a Public Sale, the Optionee agrees that the Optionee will execute and deliver to the Company as a condition to the exercise of the Option an Instrument of Accession making the Optionee a party to the Investor Rights Agreement (to the extent that the Optionee is not already a party thereto).
8. Notices . All notices, demands and other communications hereunder shall be in writing or by written telecommunication, and shall be deemed to have been duly given if delivered personally or if mailed by certified mail, return receipt requested, postage prepaid, or if sent by overnight courier, or sent by written telecommunication, as follows:
If to the Company, to:
CURO Group Holdings Corp.
(f/k/a Speedy Group Holdings Corp)
3527 North Ridge Road
Wichita, Kansas 67205
Attention: Chief Executive Officer
With copies sent simultaneously to:
Friedman Fleischer & Lowe, LLC
One Maritime Plaza
Suite 2200
San Francisco, California 94111
Fax No.: (415) 402-2111
Attention: Christopher Masto and Aaron Money
Willkie Farr & Gallagher LLP
787 Seventh Ave
New York, NY 10019
Attention: Neil W. Townsend, Esq.
If to the Optionee, to the address set forth on the signature page hereto or the most current address of the Optionee in the books and records of the Company.
9. Governing Law . This Agreement is being delivered and is intended to be performed in the State of New York and shall be construed and enforced in accordance with the laws of such state.
10. Successors and Assigns . This Agreement shall be binding upon any successor or assign of either the Company or the Optionee, and upon any executor, administrator, trustee, guardian, or other legal representative of the Optionee.
[Remainder of Page Intentionally Left Blank]
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IN WITNESS WHEREOF , the parties have executed this Agreement as of the date first above written.
CURO GROUP HOLDINGS CORP. (f/k/a Speedy Group Holdings Corp.) |
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By: |
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Title: |
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Name: |
Address: |
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EXHIBIT A
2010 Equity Incentive Plan
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Exhibit 10.31
CURO GROUP HOLDINGS CORP.
INDEMNIFICATION AGREEMENT
This Indemnification Agreement (this Agreement ) is made as of , 20 , by and between CURO Group Holdings Corp., a Delaware corporation (the Company ), and ( Indemnitee ). This Agreement supersedes and replaces any and all previous Agreements between the Company and Indemnitee covering the subject matter of this Agreement. Certain capitalized terms used herein are defined in Section 2 hereof.
RECITALS
WHEREAS, individuals are reluctant to serve publicly-held corporations as directors, officers or in other capacities unless they are provided with adequate protection through insurance or adequate indemnification against inordinate risks of claims and actions against them arising out of their service to and activities on behalf of the corporation;
WHEREAS, the Board of Directors of the Company (the Board ) has determined that, in order to attract and retain qualified individuals, the Company will attempt to maintain on an ongoing basis, at its sole expense, liability insurance to protect persons serving the Company and its subsidiaries from certain liabilities. Although the furnishing of such insurance has been a customary and widespread practice among United States-based corporations and other business enterprises, the Company believes that, given current market conditions and trends, such insurance may be available to it in the future only at higher premiums and with more exclusions. At the same time, directors, officers and other persons in service to corporations or business enterprises are being increasingly subjected to expensive and time-consuming litigation relating to, among other things, matters that traditionally would have been brought only against the corporation or business enterprise itself;
WHEREAS, the Amended and Restated Bylaws (the Bylaws ) and Amended and Restated Certificate of Incorporation (the Certificate of Incorporation ) of the Company require indemnification of the officers and directors of the Company. Indemnitee may also be entitled to indemnification pursuant to the General Corporation Law of the State of Delaware (the DGCL ). The Bylaws, Certificate of Incorporation and the DGCL expressly provide that the indemnification provisions set forth therein are not exclusive, and thereby contemplate that contracts may be entered into between the Company and members of the Board, officers and other persons with respect to indemnification;
WHEREAS, the uncertainties relating to such insurance and to indemnification have increased the difficulty of attracting and retaining such persons;
WHEREAS, the Board has determined that the increased difficulty in attracting and retaining such persons is detrimental to the best interests of the Company and its stockholders and that the Company should act to assure such persons that there will be increased certainty of such protection in the future;
WHEREAS, it is reasonable, prudent and necessary for the Company to contractually obligate itself to indemnify, and to advance expenses on behalf of, such persons to the fullest extent permitted by applicable law so that they will serve or continue to serve the Company free from undue concern that they will not be so indemnified;
WHEREAS, this Agreement is a supplement to and in furtherance of the indemnification provided in the Companys Bylaws, the Certificate of Incorporation and any resolutions adopted pursuant thereto, as well as any rights of Indemnitee under any directors and officers liability insurance policy, and this Agreement shall not be deemed a substitute therefor, nor to limit, diminish or abrogate any rights of Indemnitee thereunder; and
WHEREAS, Indemnitee does not regard the protection available under the Bylaws, Certificate of Incorporation and insurance as adequate in the present circumstances, and may not be willing to serve as an officer or director without adequate protection, and the Company desires Indemnitee to serve in such capacity. Indemnitee is willing to serve, continue to serve and to take on additional service for or on behalf of the Company on the condition that he be so indemnified.
NOW, THEREFORE, in consideration of the premises and the covenants contained herein, the Company and Indemnitee do hereby covenant and agree as follows:
Section 1. Services to the Company . Indemnitee agrees to serve as a director, officer, employee or agent of the Company, as applicable, or at the request of the Company, as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, as applicable. Indemnitee may at any time and for any reason resign from such position (subject to any other contractual obligation or any obligation imposed by operation of law), in which event the Company shall have no obligation under this Agreement to continue Indemnitee in such position. This Agreement shall not be deemed an employment contract between the Company (or any of its subsidiaries or any Enterprise (as defined below)) and Indemnitee. Indemnitee specifically acknowledges that Indemnitees employment with the Company (or any of its subsidiaries or any Enterprise), if any, is at will, and Indemnitee may be discharged at any time for any reason, with or without cause, except as may be otherwise provided in any written employment contract between Indemnitee and the Company (or any of its subsidiaries or any Enterprise), other applicable formal severance policies duly adopted by the Board or, with respect to service as a director, officer or agent of the Company, by the Certificate of Incorporation, the Bylaws and the DGCL. The foregoing notwithstanding, this Agreement shall continue in force after Indemnitee has ceased to serve as a director or, officer, employee or agent of the Company, as applicable, or, at the request of the Company, as a director, officer, employee, agent or fiduciary of another corporation, partnership, joint venture, trust or other enterprise, as applicable, as provided in Section 16 hereof.
Section 2. Definitions . As used in this Agreement:
(a) References to agent shall mean any person who is or was a director, officer or employee of the Company or a subsidiary of the Company or other person authorized by the Company to act for the Company or serve as a director, officer, employee, fiduciary or other official of another corporation, partnership, limited liability company, joint venture, trust or other enterprise at the request of, for the convenience of or to represent the interests of the Company or a subsidiary of the Company.
(b) A Change in Control shall be deemed to occur upon the earliest to occur after the date of this Agreement of any of the following events:
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i. Acquisition of Stock by Third Party . Any Person (as defined below) is or becomes the Beneficial Owner (as defined below), directly or indirectly, of securities of the Company representing fifteen percent (15%) or more of the combined voting power of the Companys then outstanding securities unless the change in relative Beneficial Ownership of the Companys securities by any Person results solely from a reduction in the aggregate number of outstanding shares of securities entitled to vote generally in the election of directors;
ii. Change in Board of Directors . During any period of two (2) consecutive years (not including any period prior to the execution of this Agreement), individuals who at the beginning of such period constitute the Board, and any new director (other than a director designated by a person who has entered into an agreement with the Company to effect a transaction described in Sections 2(b)(i), 2(b)(iii) or 2(b)(iv)) whose election by the Board or nomination for election by the Companys stockholders was approved by a vote of at least two-thirds (2/3) of the directors then still in office who either were directors at the beginning of the period or whose election or nomination for election was previously so approved, cease for any reason to constitute at least a majority of the members of the Board;
iii. Corporate Transactions . The effective date of a merger or consolidation of the Company with any other entity, other than a merger or consolidation that would result in the voting securities of the Company outstanding immediately prior to such merger or consolidation continuing to represent (either by remaining outstanding or by being converted into voting securities of the surviving entity) more than a majority of the combined voting power of the voting securities of the surviving entity outstanding immediately after such merger or consolidation and with the power to elect at least a majority of the board of directors or other governing body of such surviving entity;
iv. Liquidation . The approval by the stockholders of the Company of a complete liquidation of the Company or an agreement for the sale or disposition by the Company of all or substantially all of the Companys assets; and
v. Other Events . There occurs any other event of a nature that would be required to be reported in response to Item 6(e) of Schedule 14A of Regulation 14A (or a response to any similar item on any similar schedule or form) promulgated under the Exchange Act, whether or not the Company is then subject to such reporting requirement.
For purposes of this Section 2(b), the following terms shall have the following meanings:
(A) Exchange Act shall mean the Securities Exchange Act of 1934, as amended from time to time.
(B) Person shall have the meaning as set forth in Sections 13(d) and 14(d) of the Exchange Act; provided , however , that Person shall exclude (i) the Company, (ii) any trustee or other fiduciary holding securities under an employee benefit plan of the Company and (iii) any corporation owned, directly or indirectly, by the stockholders of the Company in substantially the same proportions as their ownership of stock of the Company.
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(C) Beneficial Owner shall have the meaning given to such term in Rule 13d-3 under the Exchange Act; provided , however , that Beneficial Owner shall exclude any Person otherwise becoming a Beneficial Owner by reason of the stockholders of the Company approving a merger of the Company with another entity.
(c) Corporate Status describes the status of a person who is or was a director, trustee, partner, managing member, officer, employee, agent or fiduciary of the Company or of any other corporation, limited liability company, partnership or joint venture, trust or other enterprise which such person is or was serving at the request of the Company.
(d) Disinterested Director shall mean a director of the Company who is not and was not a party to the Proceeding (as defined below) in respect of which indemnification is sought by Indemnitee.
(e) Enterprise shall mean the Company and any other corporation, limited liability company, partnership, joint venture, trust or other enterprise of which Indemnitee is or was serving at the request of the Company as a director, officer, trustee, partner, managing member, employee, agent or fiduciary.
(f) Expenses shall include all reasonable attorneys fees, retainers, court costs, transcript costs, fees and costs of experts and other professionals, witness fees, travel expenses, duplicating costs, printing and binding costs, telephone charges, postage, delivery service fees, fax transmission charges, secretarial services, any federal, state, local or foreign taxes imposed on Indemnitee as a result of the actual or deemed receipt of any payments under this Agreement, ERISA excise taxes and penalties, and all other disbursements, obligations or expenses of the types customarily incurred in connection with, or as a result of, prosecuting, defending, preparing to prosecute or defend, investigating, being or preparing to be a deponent or witness in or otherwise participating in a Proceeding. Expenses also shall include (i) Expenses incurred in connection with any appeal resulting from any Proceeding, including, without limitation, the premium, security for and other costs relating to any cost bond, supersedeas bond or other appeal bond or its equivalent, (ii) expenses incurred in connection with recovery under any directors and officers liability insurance policies maintained by the Company, regardless of whether Indemnitee is ultimately determined to be entitled to such indemnification, advancement or Expenses or insurance recovery, as the case may be, and (iii) for purposes of Section 14(d) only, Expenses incurred by or on behalf of Indemnitee in connection with the interpretation, enforcement or defense of Indemnitees rights under this Agreement, the Certificate of Incorporation, the Bylaws or under any officers liability insurance policies maintained by the Company, by litigation or otherwise. The parties agree that for the purposes of any advancement of Expenses for which Indemnitee has made written demand to the Company in accordance with this Agreement, all Expenses included in such demand that are certified by affidavit of Indemnitees counsel as being reasonable shall be presumed conclusively to be reasonable. Expenses, however, shall not include amounts paid in settlement by Indemnitee or the amount of judgments or fines against Indemnitee.
(g) Indemnity Obligations shall mean all obligations of the Company to Indemnitee under this Agreement, including the Companys obligations to provide indemnification to Indemnitee and advance Expenses to Indemnitee under this Agreement.
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(h) Independent Counsel shall mean a law firm, or a member of a law firm, that is experienced in matters of corporation law and neither presently is, nor in the past five years has been, retained to represent: (i) the Company or Indemnitee in any matter material to either such party (other than with respect to matters concerning Indemnitee under this Agreement, or of other indemnitees under similar indemnification agreements), or (ii) any other party to the Proceeding giving rise to a claim for indemnification hereunder. Notwithstanding the foregoing, the term Independent Counsel shall not include any person who, under the applicable standards of professional conduct then prevailing, would have a conflict of interest in representing either the Company or Indemnitee in an action to determine Indemnitees rights under this Agreement. The Company agrees to pay the reasonable fees and expenses of the Independent Counsel referred to above and to fully indemnify such counsel against any and all Expenses, claims, liabilities and damages arising out of or relating to this Agreement or its engagement pursuant hereto.
(i) The term Proceeding shall include any threatened, pending or completed action, suit, claim, counterclaim, cross claim, arbitration, mediation, alternate dispute resolution mechanism, investigation, inquiry, administrative hearing or any other actual, threatened or completed proceeding, whether brought in the right of the Company or otherwise and whether of a civil, criminal, administrative, regulatory, legislative or investigative (formal or informal) nature, including any appeal therefrom and including without limitation any such Proceeding pending as of the date of this Agreement, in which Indemnitee was, is or will be involved as a party, potential party, non-party witness or otherwise by reason of the fact that Indemnitee is or was a director or officer of the Company, by reason of any action taken by him (or a failure to take action by him) or of any action (or failure to act) on his part while acting pursuant to his Corporate Status, in each case whether or not serving in such capacity at the time any liability or Expense is incurred for which indemnification, reimbursement or advancement of Expenses can be provided under this Agreement. If Indemnitee believes in good faith that a given situation may lead to or culminate in the institution of a Proceeding, this shall be considered a Proceeding under this paragraph.
(j) Reference to other enterprise shall include employee benefit plans; references to fines shall include any excise tax assessed with respect to any employee benefit plan; references to serving at the request of the Company shall include any service as a director, officer, employee or agent of the Company that imposes duties on, or involves services by, such director, officer, employee or agent with respect to an employee benefit plan, its participants or beneficiaries; and a person who acted in good faith and in a manner he reasonably believed to be in the best interests of the participants and beneficiaries of an employee benefit plan shall be deemed to have acted in a manner not opposed to the best interests of the Company as referred to in this Agreement.
Section 3. Indemnity in Third-Party Proceedings . The Company shall indemnify Indemnitee in accordance with the provisions of this Section 3 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding, other than a Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 3, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses, judgments, liabilities, fines, penalties and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, liabilities, fines, penalties and amounts paid in settlement) actually and reasonably incurred by Indemnitee or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a
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manner he reasonably believed to be in or not opposed to the best interests of the Company and, in the case of a criminal Proceeding, had no reasonable cause to believe that his conduct was unlawful. The parties hereto intend that this Agreement, to the fullest extent permitted by applicable law, shall provide for indemnification in excess of that expressly permitted by statute, including, without limitation, any indemnification provided by the Certificate of Incorporation, the Bylaws, vote of its stockholders or disinterested directors or applicable law.
Section 4. Indemnity in Proceedings by or in the Right of the Company . The Company shall indemnify Indemnitee in accordance with the provisions of this Section 4 if Indemnitee is, or is threatened to be made, a party to or a participant in any Proceeding by or in the right of the Company to procure a judgment in its favor. Pursuant to this Section 4, Indemnitee shall be indemnified to the fullest extent permitted by applicable law against all Expenses actually and reasonably incurred by him or on his behalf in connection with such Proceeding or any claim, issue or matter therein, if Indemnitee acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company. If applicable law so provides, no indemnification for Expenses shall be made under this Section 4 in respect of any claim, issue or matter in such Proceeding as to which Indemnitee shall have been finally adjudged by a court of competent jurisdiction to be liable to the Company, unless and only to the extent that the Chancery Court of the State of Delaware (the Delaware Court ) or any court in which the Proceeding was brought shall determine upon application that, despite the adjudication of liability but in view of all the circumstances of the case, Indemnitee is fairly and reasonably entitled to indemnification for such Expenses as the Delaware Court or such other court shall deem proper.
Section 5. Indemnification for Expenses of a Party who is wholly or partly successful . Notwithstanding any other provisions of this Agreement, to the fullest extent permitted by applicable law and to the extent that Indemnitee is a party to (or a participant in) and is successful, on the merits or otherwise, in any Proceeding or in defense of any claim, issue or matter therein, in whole or in part, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith. If Indemnitee is not wholly successful in such Proceeding but is successful, on the merits or otherwise, as to one or more but less than all claims, issues or matters in such Proceeding, the Company shall indemnify Indemnitee against all Expenses actually and reasonably incurred by him or on his behalf in connection with or related to each successfully resolved claim, issue or matter to the fullest extent permitted by applicable law. For purposes of this Section and without limitation, the termination of any claim, issue or matter in such a Proceeding by dismissal, with or without prejudice, shall be deemed to be a successful result as to such claim, issue or matter.
Section 6. Indemnification for Expenses of a Witness . Notwithstanding any other provision of this Agreement, to the fullest extent permitted by applicable law and to the extent that Indemnitee is, by reason of his Corporate Status, a witness, is or was made (or asked) to respond to discovery requests in any Proceeding or otherwise asked to participate in any aspect of a Proceeding to which Indemnitee is not a party, he shall be indemnified against all Expenses actually and reasonably incurred by him or on his behalf in connection therewith.
Section 7. Partial Indemnification . If Indemnitee is entitled under any provision of this Agreement to indemnification by the Company for some or a portion of Expenses, but not, however, for the total amount thereof, the Company shall nevertheless indemnify Indemnitee for the portion thereof to which Indemnitee is entitled.
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Section 8. Additional Indemnification .
(a) Notwithstanding any limitation in Sections 3, 4 or 5, the Company shall indemnify Indemnitee to the fullest extent permitted by applicable law if Indemnitee, by reason of his or her Corporate Status is, or is a party to or threatened to be made a party to or a participant in any Proceeding (including a Proceeding by or in the right of the Company to procure a judgment in its favor) against all Expenses, judgments, fines and amounts paid in settlement (including all interest, assessments and other charges paid or payable in connection with or in respect of such Expenses, judgments, fines and amounts paid in settlement) actually and reasonably incurred by Indemnitee or on his behalf in connection with the Proceeding or any claim, issue or matter therein.
(b) For purposes of Section 8(a), the meaning of the phrase to the fullest extent permitted by applicable law shall include, but not be limited to:
i. to the fullest extent permitted by the provision of the DGCL that authorizes or contemplates additional indemnification by agreement, or the corresponding provision of any amendment to or replacement of the DGCL, and
ii. to the fullest extent authorized or permitted by any amendments to or replacements of the DGCL adopted after the date of this Agreement that increase the extent to which a corporation may indemnify its officers and directors.
Section 9. Exclusions . Notwithstanding any provision in this Agreement, the Company shall not be obligated under this Agreement to make any indemnification payment in connection with any claim made against Indemnitee:
(a) for which payment has actually been made to or on behalf of Indemnitee under any insurance policy or other indemnity provision, except with respect to any excess beyond the amount paid under any insurance policy or other indemnity provision; or
(b) for (i) an accounting or disgorgement of profits made from the purchase and sale (or sale and purchase) by Indemnitee of securities of the Company within the meaning of Section 16(b) of the Exchange Act or similar provisions of federal, state or local statutory law or common law; provided that the Company shall advance Expenses in connection with Indemnitees defense of a claim under Section 16(b), which advances shall be repaid to the Company if it is ultimately determined that Indemnitee is not entitled to indemnification of such Expenses; or (ii) any reimbursement of the Company by Indemnitee of any bonus or other incentive-based or equity-based compensation or of any profits realized by Indemnitee from the sale of securities of the Company, as required in each case under the Exchange Act (including any such reimbursements that arise from an accounting restatement of the Company pursuant to Section 304 of the Sarbanes-Oxley Act of 2002 (the Sarbanes-Oxley Act ), or the payment to the Company of profits arising from the purchase and sale by Indemnitee of securities in violation of Section 306 of the Sarbanes-Oxley Act), if Indemnitee is held liable therefor (including pursuant to any settlement arrangements);
(c) except as provided in Section 14(d) of this Agreement, in connection with any Proceeding (or any part of any Proceeding) initiated by Indemnitee, including any Proceeding (or any part
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of any Proceeding) initiated by Indemnitee against the Company or its directors, officers, employees or other indemnitees, unless (i) the Board authorized the Proceeding (or any part of any Proceeding) prior to its initiation, (ii) such payment arises in connection with any mandatory counterclaim or cross-claim or affirmative defense brought or raised by Indemnitee in any Proceeding (or any part of any Proceeding), or (iii) the Company provides the indemnification, in its sole discretion, pursuant to the powers vested in the Company under applicable law; or
(d) if a court having jurisdiction in the matter shall determine by final non-appealable judgment or other final non-appealable adjudication that such indemnification is not lawful.
Section 10. Advances of Expenses . Notwithstanding any provision of this Agreement to the contrary (other than Section 14(d)), the Company shall advance, to the extent not prohibited by applicable law, the Expenses incurred by or on behalf of Indemnitee in connection with any Proceeding (or any part of any Proceeding) not initiated by Indemnitee, and such advancement shall be made as soon as reasonably practicable, but in any event no later than within thirty (30) days after the receipt by the Company of a written statement or statements requesting such advances from time to time (which shall include invoices received by Indemnitee in connection with such Expenses or otherwise reasonably evidence the Expenses incurred by Indemnitee, but, in the case of invoices in connection with legal services, any references to legal work performed or to expenditures made that would cause Indemnitee to waive any privilege accorded by applicable law shall not be so included), whether prior to or after final disposition of any Proceeding. Advances shall be unsecured and interest-free. Advances shall be made without regard to Indemnitees ability to repay the Expenses and without regard to Indemnitees ultimate entitlement to indemnification under the other provisions of this Agreement. In accordance with Section 14(d), advances shall include any and all reasonable Expenses incurred pursuing an action to enforce this right of advancement, including Expenses incurred preparing and forwarding statements to the Company to support the advances claimed. Indemnitee shall qualify for advances upon the execution and delivery to the Company of this Agreement which shall constitute an undertaking providing that Indemnitee shall reimburse the Company for all Expenses advanced (without interest) by the Company pursuant to this Section 10, in the event and only to the extent that it shall be determined by final non-appealable judgment or other final non-appealable adjudication under the provisions of any applicable law (as to which all rights of appeal therefrom have been exhausted or lapsed) that Indemnitee is not entitled to be indemnified by the Company for such Expenses. This Section 10 shall not apply to any claim made by Indemnitee for which indemnity is excluded pursuant to Section 9.
Section 11. Procedure for Notification and Defense of Claim .
(a) Indemnitee shall notify the Company in writing of any matter with respect to which Indemnitee intends to seek indemnification or advancement of Expenses hereunder as soon as reasonably practicable following the receipt by Indemnitee of written notice thereof or Indemnitees becoming aware thereof. The written notification to the Company shall include, in reasonable detail, a description of the nature of the Proceeding and the facts underlying the Proceeding, in each case, to the extent known to Indemnitee. To obtain indemnification under this Agreement, Indemnitee shall submit to the Company a written request, including therein or therewith such documentation and information as is reasonably available to Indemnitee and is reasonably necessary to determine whether and to what extent Indemnitee is entitled to indemnification following the final disposition of such Proceeding. The failure
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by Indemnitee to notify the Company hereunder will not relieve the Company from any liability that it may have to Indemnitee hereunder or otherwise than under this Agreement, and any delay in so notifying the Company shall not constitute a waiver by Indemnitee of any rights under this Agreement, except to the extent (solely with respect to the indemnity hereunder) that such failure or delay materially prejudices the Company. The Secretary of the Company shall, promptly upon receipt of such a request for indemnification, advise the Board in writing that Indemnitee has requested indemnification. Any delay in providing the request will not relieve the Company from its obligations under this Agreement, except to the extent such delay is prejudicial.
(b) The Company will be entitled to participate in the Proceeding at its own expense.
(c) The Company shall not settle any Proceeding (in whole or in part) if such settlement would impose any Expense, judgment, liability, fine, penalty or limitation on Indemnitee which Indemnitee is not entitled to be indemnified hereunder without Indemnitees prior written consent, which shall not be unreasonably withheld.
Section 12. Procedure Upon Application for Indemnification .
(a) Upon written request by Indemnitee for indemnification pursuant to Section 11(a), a determination, if required by applicable law, with respect to Indemnitees entitlement thereto shall be made in the specific case: (i) if a Change in Control shall have occurred, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee; or (ii) if a Change in Control shall not have occurred, (A) by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, (B) by a committee of Disinterested Directors designated by a majority vote of the Disinterested Directors, even though less than a quorum of the Board, (C) if there are no such Disinterested Directors or, if such Disinterested Directors so direct, by Independent Counsel in a written opinion to the Board, a copy of which shall be delivered to Indemnitee or (D) if so directed by the Board, by the stockholders of the Company; and, if it is so determined that Indemnitee is entitled to indemnification, payment to Indemnitee shall be made within ten (10) days after such determination. Indemnitee shall cooperate with the person, persons or entity making such determination with respect to Indemnitees entitlement to indemnification, including providing to such person, persons or entity upon reasonable advance request any documentation or information that is not privileged or otherwise protected from disclosure and that is reasonably available to Indemnitee and reasonably necessary to such determination. Any costs or Expenses (including attorneys fees and disbursements) reasonably incurred by or on behalf of Indemnitee in so cooperating with the person, persons or entity making such determination shall be borne by the Company (irrespective of the determination as to Indemnitees entitlement to indemnification) and the Company hereby indemnifies and agrees to hold Indemnitee harmless therefrom. The Company promptly will advise Indemnitee in writing with respect to any determination that Indemnitee is or is not entitled to indemnification, including a description of any reason or basis for which indemnification has been denied.
(b) In the event the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 12(a) hereof, the Independent Counsel shall be selected as provided in this Section 12(b). If a Change in Control shall not have occurred, the Independent Counsel shall be selected by the Board, and the Company shall give written notice to Indemnitee advising him of the identity of the Independent Counsel so selected. If a Change in Control shall have occurred, the
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Independent Counsel shall be selected by Indemnitee (unless Indemnitee shall request that such selection be made by the Board, in which event the preceding sentence shall apply), and Indemnitee shall give written notice to the Company advising it of the identity of the Independent Counsel so selected. In either event, Indemnitee or the Company, as the case may be, may, within ten (10) days after such written notice of selection shall have been given, deliver to the Company or to Indemnitee, as the case may be, a written objection to such selection; provided , however , that such objection may be asserted only on the ground that the Independent Counsel so selected does not meet the requirements of Independent Counsel as defined in Section 2 of this Agreement, and the objection shall set forth with particularity the factual basis of such assertion. Absent a proper and timely objection, the person so selected shall act as Independent Counsel. If such written objection is so made and substantiated, the Independent Counsel so selected may not serve as Independent Counsel unless and until such objection is withdrawn or the Delaware Court has determined that such objection is without merit. If, within twenty (20) days after the later of submission by Indemnitee of a written request for indemnification pursuant to Section 11(a) hereof and the final disposition of the Proceeding, no Independent Counsel shall have been selected and not objected to, either the Company or Indemnitee may petition the Delaware Court for resolution of any objection that shall have been made by the Company or Indemnitee to the others selection of Independent Counsel and/or for the appointment as Independent Counsel of a person selected by such court or by such other person as such court shall designate, and the person with respect to whom all objections are so resolved or the person so appointed shall act as Independent Counsel under Section 12(a) hereof. Upon the due commencement of any judicial proceeding or arbitration pursuant to Section 14(a) of this Agreement, Independent Counsel shall be discharged and relieved of any further responsibility in such capacity (subject to the applicable standards of professional conduct then prevailing).
(c) If the Company disputes a portion of the amounts for which indemnification is requested, the undisputed portion shall be paid and only the disputed portion withheld pending resolution of any such dispute.
Section 13. Presumptions and Effect of Certain Proceedings .
(a) In making a determination with respect to entitlement to indemnification hereunder, the person or persons or entity making such determination shall, to the fullest extent not prohibited by applicable law, presume that Indemnitee is entitled to indemnification under this Agreement if Indemnitee has submitted a request for indemnification in accordance with Section 11(a) of this Agreement, and the Company shall, to the fullest extent not prohibited by applicable law, have the burden of proof to overcome that presumption in connection with the making by any person, persons or entity of any determination contrary to that presumption. Neither the failure of the Company (including by its directors or Independent Counsel) to have made a determination prior to the commencement of any action pursuant to this Agreement that indemnification is proper in the circumstances because Indemnitee has met the applicable standard of conduct, nor an actual determination by the Company (including by its directors or Independent Counsel) that Indemnitee has not met such applicable standard of conduct, shall be a defense to the action or create a presumption that Indemnitee has not met the applicable standard of conduct.
(b) Subject to Section 14(e), if the person, persons or entity empowered or selected under Section 12 of this Agreement to determine whether Indemnitee is entitled to indemnification shall not have made a determination within sixty (60) days after receipt by the Company of the request
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therefor, the requisite determination of entitlement to indemnification shall, to the fullest extent not prohibited by law, be deemed to have been made and Indemnitee shall be entitled to such indemnification, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitees statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law; provided , however , that such 60-day period may be extended for a reasonable time, not to exceed an additional thirty (30) days, if the person, persons or entity making the determination with respect to entitlement to indemnification in good faith requires such additional time for the obtaining or evaluating of documentation and/or information relating thereto; and provided , further , that the foregoing provisions of this Section 13(b) shall not apply (i) if the determination of entitlement to indemnification is to be made by the stockholders pursuant to Section 12(a) of this Agreement and if (A) within fifteen (15) days after receipt by the Company of the request for such determination the Board has resolved to submit such determination to the stockholders for their consideration at an annual meeting thereof to be held within seventy five (75) days after such receipt and such determination is made thereat, or (B) a special meeting of stockholders is called within fifteen (15) days after such receipt for the purpose of making such determination, such meeting is held for such purpose within sixty (60) days after having been so called and such determination is made thereat, or (ii) if the determination of entitlement to indemnification is to be made by Independent Counsel pursuant to Section 12(a) of this Agreement.
(c) The termination of any Proceeding or of any claim, issue or matter therein, by judgment, order, settlement or conviction, or upon a plea of nolo contendere or its equivalent, shall not (except as otherwise expressly provided in this Agreement) of itself adversely affect the right of Indemnitee to indemnification or create a presumption that Indemnitee did not act in good faith and in a manner which he reasonably believed to be in or not opposed to the best interests of the Company or, with respect to any criminal Proceeding, that Indemnitee had reasonable cause to believe that his conduct was unlawful.
(d) For purposes of any determination of good faith, Indemnitee shall be deemed to have acted in good faith if Indemnitees action is based on the records or books of account of the Enterprise, including financial statements, or on information supplied to Indemnitee by the directors or officers of the Enterprise in the course of their duties, or on the advice of legal counsel for the Enterprise or on information or records given or reports made to the Enterprise by an independent certified public accountant or by an appraiser, investment banker, or other expert selected with reasonable care by the Enterprise. The provisions of this Section 13(d) shall not be deemed to be exclusive or to limit in any way the other circumstances in which Indemnitee may be deemed to have met the applicable standard of conduct set forth in this Agreement. Whether or not the foregoing provisions of this Section 13(d) are satisfied, it shall in any event be presumed that Indemnitee has at all times acted in good faith and in a manner he reasonably believed to be in or not opposed to the best interests of the Company.
(e) The knowledge and/or actions, or failure to act, of any director, officer, trustee, partner, managing member, fiduciary, agent or employee of the Enterprise shall not be imputed to Indemnitee for purposes of determining the right to indemnification under this Agreement.
Section 14. Remedies of Indemnitee .
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(a) Subject to Section 14(e), in the event that (i) a determination is made pursuant to Section 12 of this Agreement that Indemnitee is not entitled to indemnification under this Agreement, (ii) advancement of Expenses is not timely made pursuant to Section 10 of this Agreement, (iii) no determination of entitlement to indemnification shall have been made pursuant to Section 12(a) of this Agreement within ninety (90) days after receipt by the Company of the request for indemnification, (iv) payment of indemnification is not made pursuant to Section 5, 6 or 7 or the last sentence of Section 12(a) of this Agreement within ten (10) days after receipt by the Company of a written request therefor, (v) payment of indemnification pursuant to Section 3, 4 or 8 of this Agreement is not made within ten (10) days after a determination has been made that Indemnitee is entitled to indemnification, or (vi) the Company or any other person takes or threatens to take any action to declare this Agreement void or unenforceable, or institutes any litigation or other action or Proceeding designed to deny, or to recover from, Indemnitee the benefits provided or intended to be provided to Indemnitee hereunder, Indemnitee shall be entitled to an adjudication by a court of his entitlement to such indemnification or advancement of Expenses. Alternatively, Indemnitee, at his option, may seek an award in arbitration to be conducted by a single arbitrator pursuant to the Commercial Arbitration Rules of the American Arbitration Association. Indemnitee shall commence such proceeding seeking an adjudication or an award in arbitration within one-hundred eighty (180) days following the date on which Indemnitee first has the right to commence such proceeding pursuant to this Section 14(a); provided , however , that the foregoing clause shall not apply in respect of a proceeding brought by Indemnitee to enforce his rights under Section 5 of this Agreement. The Company shall not oppose Indemnitees right to seek any such adjudication or award in arbitration.
(b) In the event that a determination shall have been made pursuant to Section 12(a) of this Agreement that Indemnitee is not entitled to indemnification, any judicial proceeding or arbitration commenced pursuant to this Section 14 shall be conducted in all respects as a de novo trial, or arbitration, on the merits and Indemnitee shall not be prejudiced by reason of that adverse determination. In any judicial proceeding or arbitration commenced pursuant to this Section 14 the Company shall have the burden of proving Indemnitee is not entitled to indemnification or advancement of Expenses, as the case may be.
(c) If a determination shall have been made pursuant to Section 12(a) of this Agreement that Indemnitee is entitled to indemnification, the Company shall be bound by such determination in any judicial proceeding or arbitration commenced pursuant to this Section 14, absent (i) a misstatement by Indemnitee of a material fact, or an omission of a material fact necessary to make Indemnitees statement not materially misleading, in connection with the request for indemnification, or (ii) a prohibition of such indemnification under applicable law.
(d) The Company shall, to the fullest extent not prohibited by law, be precluded from asserting in any judicial proceeding or arbitration commenced pursuant to this Section 14 that the procedures and presumptions of this Agreement are not valid, binding and enforceable and shall stipulate in any such court or before any such arbitrator that the Company is bound by all the provisions of this Agreement. It is the intent of the Company that, to the fullest extent permitted by applicable law, Indemnitee not be required to incur legal fees or other Expenses associated with the interpretation, enforcement or defense of Indemnitees rights under this Agreement by litigation or otherwise because the cost and expense thereof would substantially detract from the benefits intended to be extended to Indemnitee hereunder. The Company shall, to the fullest extent permitted by applicable law, indemnify
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Indemnitee against any and all Expenses and, if requested by Indemnitee, shall (within ten (10) days after receipt by the Company of a written request therefor) advance, to the extent not prohibited by law, such Expenses to Indemnitee, which are incurred by or on behalf of Indemnitee in connection with any action brought by Indemnitee for indemnification or advancement of Expenses from the Company under this Agreement or under any directors and officers liability insurance policies maintained by the Company if, in the case of indemnification, Indemnitee is wholly successful on the underlying claims; if Indemnitee is not wholly successful on the underlying claims, then such indemnification shall be only to the extent Indemnitee is successful on such underlying claims or otherwise as permitted by applicable law, whichever is greater.
(e) Notwithstanding anything in this Agreement to the contrary, no determination as to entitlement of Indemnitee to indemnification under this Agreement shall be required to be made prior to the final disposition of the Proceeding.
Section 15. Non-exclusivity; Survival of Rights; Insurance; Subrogation .
(a) The rights of indemnification and to receive advancement of Expenses as provided by this Agreement (i) shall not be deemed exclusive of any other rights to which Indemnitee may at any time be entitled under applicable law, the Certificate of Incorporation, the Bylaws, any agreement, a vote of stockholders or a resolution of directors, or otherwise and (ii) shall be interpreted independently of, and without reference to, any other such rights to which Indemnitee may at any time be entitled. No amendment, alteration or repeal of this Agreement or of any provision hereof shall limit or restrict any right of Indemnitee under this Agreement in respect of any action taken or omitted by such Indemnitee in his Corporate Status prior to such amendment, alteration or repeal. The Company shall not adopt any amendment or alteration to, or repeal of, the Certificate of Incorporation or the Bylaws, the effect of which would be to deny, diminish or encumber the Indemnitees rights to indemnification pursuant to this Agreement, the Certificate of Incorporation, the Bylaws or applicable law relative to such rights prior to such amendment, alteration or repeal. To the extent that a change in Delaware law, whether by statute or judicial decision, permits greater indemnification or advancement of Expenses than would be afforded currently under the Bylaws, Certificate of Incorporation and this Agreement, it is the intent of the parties hereto that Indemnitee shall enjoy by this Agreement the greater benefits so afforded by such change. No right or remedy herein conferred is intended to be exclusive of any other right or remedy, and every other right and remedy shall be cumulative and in addition to every other right and remedy given hereunder or now or hereafter existing at law or in equity or otherwise. The assertion or employment of any right or remedy hereunder, or otherwise, shall not prevent the concurrent assertion or employment of any other right or remedy.
(b) To the extent that the Company maintains an insurance policy or policies providing liability insurance for directors, officers, employees, or agents of the Enterprise, Indemnitee shall be covered by such policy or policies in accordance with its or their terms to the maximum extent of the coverage available for any such director, officer, employee or agent under such policy or policies. If, at the time of the receipt of a notice of a claim pursuant to the terms hereof, the Company has director and officer liability insurance in effect, the Company shall give prompt notice of such claim or of the commencement of a Proceeding, as the case may be, to the insurers in accordance with the procedures set forth in the respective policies. The Company shall thereafter take all necessary or desirable action to cause such insurers to pay, on behalf of Indemnitee, all amounts payable as a result of such Proceeding in accordance with the terms of such policies.
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(c) In the event of any payment under this Agreement, the Company shall be subrogated to the extent of such payment to all of the rights of recovery of Indemnitee, who shall execute all papers required and take all action necessary to secure such rights, including execution of such documents as are necessary to enable the Company to effectively bring suit to enforce such rights.
(d) The Company shall not be liable under this Agreement to make any payment of amounts otherwise indemnifiable hereunder (or for which advancement is provided hereunder) if and to the extent that Indemnitee has otherwise actually received such payment under any insurance policy, contract, agreement or otherwise.
(e) The Companys obligation to indemnify or advance Expenses hereunder to Indemnitee who is or was serving at the request of the Company as a director, officer, trustee, partner, managing member, fiduciary, employee or agent of any other corporation, limited liability company, partnership, joint venture, trust, employee benefit plan or other enterprise shall be reduced by any amount Indemnitee has actually received as indemnification or advancement of Expenses from such other corporation, limited liability company, partnership, joint venture, trust or other enterprise.
(f) The Company hereby acknowledges that Indemnitee may have certain rights to indemnification, advancement and insurance provided by one or more Persons with whom or which Indemnitee may be associated. The Company hereby acknowledges and agrees that (i) the Company shall be the indemnitor of first resort with respect to any Proceeding, Expense, liability or matter that is the subject of the Indemnity Obligations, (ii) the Company shall be primarily liable for all Indemnity Obligations and any indemnification afforded to Indemnitee in respect of any Proceeding, Expense, liability or matter that is the subject of Indemnity Obligations, whether created by applicable law, organizational or constituent documents, contract (including this Agreement) or otherwise, (iii) any obligation of any other Persons with whom or which Indemnitee may be associated to indemnify Indemnitee or advance Expenses or liabilities to Indemnitee in respect of any Proceeding shall be secondary to the obligations of the Company hereunder, (iv) the Company shall be required to indemnify Indemnitee and advance Expenses or liabilities to Indemnitee hereunder to the fullest extent provided herein without regard to any rights Indemnitee may have against any other Person with whom or which Indemnitee may be associated or insurer of any such Person and (v) the Company irrevocably waives, relinquishes and releases any other Person with whom or which Indemnitee may be associated from any claim of contribution, subrogation or any other recovery of any kind in respect of amounts paid by the Company hereunder. In the event any other Person with whom or which Indemnitee may be associated or their insurers advances or extinguishes any liability or loss which is the subject of any Indemnity Obligation owed by the Company or payable under any Company insurance policy, the payor shall have a right of subrogation against the Company or its insurer or insurers for all amounts so paid which would otherwise be payable by the Company or its insurer or insurers under this Agreement. In no event will payment of an Indemnity Obligation by any other Person with whom or which Indemnitee may be associated or their insurers affect the obligations of the Company hereunder or shift primary liability for any Indemnity Obligation to any other Person with whom or which Indemnitee may be associated. Any indemnification, insurance or advancement provided by any other Person with whom or which Indemnitee may be associated with respect to any liability arising as a result of Indemnitees status as
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director, officer, employee or agent of the Company or capacity as an officer or director of any Person is specifically in excess over any Indemnity Obligation of the Company or valid and any collectible insurance (including but not limited to any malpractice insurance or professional errors and omissions insurance) provided by the Company under this Agreement.
Section 16. Duration of Agreement . This Agreement shall continue until and terminate upon the later of (a) ten (10) years after the date that Indemnitee shall have ceased to serve as a director, officer, employee or agent of the Company or (b) one year after the final termination of any Proceeding then pending in respect of which Indemnitee is granted rights of indemnification or advancement of Expenses hereunder and of any proceeding (including any appeal thereof) commenced by Indemnitee pursuant to Section 14 of this Agreement relating thereto. The indemnification and advancement of expenses rights provided by or granted pursuant to this Agreement shall be binding upon and be enforceable by the parties hereto and their respective successors and assigns (including any direct or indirect successor by purchase, merger, consolidation or otherwise to all or substantially all of the business or assets of the Company), shall continue as to an Indemnitee who has ceased to be a director, officer, employee or agent of the Company or of any other Enterprise, and shall inure to the benefit of Indemnitee and his spouse, assigns, heirs, devisees, executors and administrators and other legal representatives. The Company shall require and shall cause any successor (whether direct or indirect by purchase, merger, consolidation or otherwise) to all or substantially all of the business or assets of the Company to, by written agreement, expressly assume and agree to perform this Agreement in the same manner and to the same extent that the Company would be required to perform if no such succession had taken place.
Section 17. Severability . Nothing in this Agreement is intended to require or shall be construed as requiring the Company to do or fail to do any act in violation of applicable law. The Companys inability, pursuant to court order or other applicable law, to perform its obligations hereunder shall not constitute a breach of this Agreement. If any provision or provisions of this Agreement shall be held to be invalid, illegal or unenforceable for any reason whatsoever, then (a) the validity, legality and enforceability of the remaining provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall not in any way be affected or impaired thereby and shall remain enforceable to the fullest extent permitted by applicable law; (b) such provision or provisions shall be deemed reformed to the extent necessary to conform to applicable law and to give the maximum effect to the intent of the parties hereto; and (c) to the fullest extent possible, the provisions of this Agreement (including, without limitation, each portion of any Section of this Agreement containing any such provision held to be invalid, illegal or unenforceable, that is not itself invalid, illegal or unenforceable) shall be construed so as to give effect to the intent manifested thereby.
Section 18. Enforcement. The Company expressly confirms and agrees that it has entered into this Agreement and assumed the obligations imposed on it hereby in order to induce Indemnitee to serve or continue to serve as a director or officer of the Company, and the Company acknowledges that Indemnitee is relying upon this Agreement in serving as a director or officer of the Company.
Section 19. Entire Agreement . This Agreement constitutes the entire agreement between the parties hereto with respect to the subject matter hereof and supersedes all prior agreements and understandings, oral, written and implied, between the parties hereto with respect to the subject matter hereof; provided , however , that this Agreement is a supplement to and in furtherance of the Certificate of Incorporation, the Bylaws, any directors and officers insurance maintained by the Company and applicable law, and shall not be deemed a substitute therefor, nor to diminish or abrogate any rights of Indemnitee thereunder.
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Section 20. Modification and Waiver . No supplement, modification or amendment of this Agreement shall be binding unless executed in writing by the parties hereto. No waiver of any of the provisions of this Agreement shall be deemed or shall constitute a waiver of any other provisions of this Agreement nor shall any waiver constitute a continuing waiver.
Section 21. Notice by Indemnitee . Indemnitee agrees promptly to notify the Company in writing upon being served with any summons, citation, subpoena, complaint, indictment, information or other document relating to any Proceeding or matter which may be subject to indemnification or advancement of Expenses covered hereunder. The failure of Indemnitee to so notify the Company shall not relieve the Company of any obligation which it may have to Indemnitee under this Agreement or otherwise.
Section 22. Notices . All notices, requests, demands and other communications under this Agreement shall be in writing and shall be deemed to have been duly given if (a) delivered by hand and receipted for by the party to whom said notice or other communication shall have been directed, (b) mailed by certified or registered mail with postage prepaid, on the third business day after the date on which it is so mailed, (c) mailed by reputable overnight courier and receipted for by the party to whom said notice or other communication shall have been directed or (d) sent by facsimile transmission, with receipt of oral confirmation that such transmission has been received:
(a) If to Indemnitee, at the address indicated on the signature page of this Agreement, or such other address as Indemnitee shall provide to the Company.
(b) | If to the Company to: |
CURO Group Holdings Corp.
3527 North Ridge Road
Wichita, Kansas 67205
Attention: General Counsel
Facsimile: [ ]
with a copy to (which shall not constitute notice):
Willkie Farr & Gallagher LLP
787 Seventh Avenue
New York, New York 10019
Attention: Cristopher Greer, Esq.
Facsimile: [ ]
or to any other address as may have been furnished to Indemnitee by the Company.
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Section 23. Contribution . To the fullest extent permissible under applicable law, if the indemnification provided for in this Agreement is unavailable to Indemnitee for any reason whatsoever, the Company, in lieu of indemnifying Indemnitee, shall contribute to the amount incurred by or on behalf of Indemnitee, whether for judgments, fines, penalties, excise taxes, amounts paid or payable in settlement and/or for Expenses, in connection with any claim relating to an indemnifiable event under this Agreement, in such proportion as is deemed fair and reasonable in light of all of the circumstances of such Proceeding in order to reflect (i) the relative benefits received by the Company and Indemnitee as a result of the event(s) and/or transaction(s) giving cause to such Proceeding; and/or (ii) the relative fault of the Company (and its directors, officers, employees and agents) and Indemnitee in connection with such event(s) and/or transaction(s).
Section 24. Applicable Law and Consent to Jurisdiction . This Agreement and the legal relations among the parties shall be governed by, and construed and enforced in accordance with, the laws of the State of Delaware, without regard to its conflict of laws rules. Except with respect to any arbitration commenced by Indemnitee pursuant to Section 14(a) of this Agreement, the Company and Indemnitee hereby irrevocably and unconditionally (i) agree that any action or proceeding arising out of or in connection with this Agreement shall be brought only in the Delaware Court, and not in any other state or federal court in the United States of America or any court in any other country, (ii) consent to submit to the exclusive jurisdiction of the Delaware Court for purposes of any action or proceeding arising out of or in connection with this Agreement, (iii) waive any objection to the laying of venue of any such action or proceeding in the Delaware Court and (iv) waive, and agree not to plead or to make, any claim that any such action or proceeding brought in the Delaware Court has been brought in an improper or inconvenient forum.
Section 25. Counterparts . This Agreement may be executed in one or more counterparts, each of which shall for all purposes be deemed to be an original but all of which together shall constitute one and the same Agreement. Only one such counterpart signed by the party against whom enforceability is sought needs to be produced to evidence the existence of this Agreement.
Section 26. Miscellaneous . Use of the masculine pronoun shall be deemed to include usage of the feminine pronoun where appropriate. The headings of the paragraphs of this Agreement are inserted for convenience only and shall not be deemed to constitute part of this Agreement or to affect the construction thereof.
[ Signature Page Follows ]
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IN WITNESS WHEREOF, the parties have caused this Agreement to be signed as of the day and year first above written.
CURO GROUP HOLDINGS CORP. | INDEMNITEE | |||||||
By: |
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Name: |
Name: |
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Title: |
Address: |
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Exhibit 10.59
October 16, 2017
CURO FINANCIAL TECHNOLOGIES CORP. (the Company)
SPECIAL BONUS NOTICE
On or about October 16, 2017, our parent company CURO Group Holdings Corp. ( Holdings ) paid a dividend in the amount of $5.22 per share to its holders of common stock. While there is no requirement to pay a dividend in respect of the stock options issued to you by Holdings (as the options have not been exercised) and you are not otherwise entitled to receive the bonuses set forth herein pursuant to such stock options, subject to the terms and conditions set forth herein, we have determined to pay to you the bonuses set forth herein as discretionary compensation in recognition of your dedication and commitment to the Company. Capitalized terms used but not otherwise defined herein shall have the meanings ascribed thereto in that certain Stock Option Agreement(s), between you and Holdings, entered into as of the date hereof (the Stock Option Agreement(s) ).
BONUSES
Initial Bonus . Following the date upon which you return an executed copy of this Special Bonus Notice, the Company will pay or cause to be paid to you a bonus (the Initial Bonus ) equal to (a) the number of Vested Optioned Shares under the Stock Option Agreement(s) on the date hereof (as set forth in the chart below) multiplied by (b) $5.22 per share (the Per Share Amount ).
Quarterly Bonuses for 2017-2022 Calendar Years . If you have any Unvested Optioned Shares as of the date hereof and remain employed with the Company or any of its subsidiaries on the last day of each calendar quarter during each of 2017, 2018, 2019, 2020, 2021, and 2022 commencing with the first calendar quarter ending after the date hereof (each, a Quarterly Payment Date ), the Company will cause its subsidiary to pay to you a bonus for each such calendar quarter (each, a Quarterly Bonus ) equal to the Quarterly Payment Amount. The term Quarterly Payment Amount means, for each applicable calendar quarter, (i) the number of Unvested Optioned Shares under the Stock Option Agreement(s) that become Vested Option Shares pursuant to the Stock Option Agreement(s) during the calendar quarter, in each case, other than due to a Disposition Event, multiplied by (ii) the Per Share Amount (as may be equitably adjusted by the Company for any recapitalization, reclassification, stock dividend, stock split, reverse stock split or other similar event affecting the outstanding shares of Common Stock of the Company). Quarterly Bonuses will be paid to you upon or within ten (10) business days following the applicable Quarterly Payment Date.
Disposition Event Bonus . If you have any Unvested Optioned Shares as of the date hereof and remain employed with the Company or any of its subsidiaries on the date on which the first Disposition Event is consummated after the date hereof (such date, the Disposition Event Payment Date ), the Company will pay or cause to be paid to you a bonus (the DE Bonus ) equal to the DE Payment Amount. The term DE Payment Amount means (i) the number of Unvested Optioned Shares under the Stock Option Agreement(s) which become Vested Option Shares solely as a result of the Disposition Event multiplied by (ii) the Per Share Amount (as may be equitably adjusted by the Company for any recapitalization, reclassification, stock
dividend, stock split, reverse stock split or other similar event affecting the outstanding shares of Common Stock of the Company). Subject to the terms hereof, the DE Bonus will be paid to you upon or within ten (10) business days following the Disposition Event whereupon the Companys undertakings hereunder shall be terminated and discharged in full.
OTHER TERMS
In all cases, each bonus shall be subject to reduction for applicable federal, state and local tax or other withholdings made by the Company or its subsidiary in the ordinary course. As a condition to the payment of any DE Bonus in connection with a Disposition Event, the Company or its subsidiary may require you to provide reasonable cooperation and assistance in connection with a Disposition Event and/or to satisfy other reasonable requirements in respect of the payment of the DE Bonus (including, without limitation, the execution and delivery by you (prior to a specified date) of a release of claims against the Company and its affiliates in a form to be determined by the Company).
Notwithstanding the payment dates specified above for the bonuses payable pursuant to this Special Bonus Notice in respect of the 2017 calendar year, such bonuses shall be deferred pursuant to the Companys Nonqualified Deferred Compensation Plan if and to the extent you have validly elected to defer your Bonus Compensation in respect of the 2017 calendar year thereunder.
All determinations related to the calculation of, conditions to the payment of, and your eligibility to receive any bonus in accordance herewith, or any adjustments contemplated hereby, will be made by the Company in its discretion, in good faith, and all such determinations shall be final, binding and conclusive. The terms of this notice shall not be deemed to amend, supplement or modify in any way the terms and conditions of your Stock Option Agreement(s) with the Company. The Companys undertakings hereunder shall terminate in full upon any termination of your employment for any reason. This Special Bonus Notice embodies the complete agreement and understanding among you, the Company with respect to the subject matter hereof and supersedes any prior understandings, agreements, communications or representations by or among the parties, written or oral, relating in any way to the subject matter hereof.
[Remainder of page intentionally left blank.]
Please acknowledge your agreement to the terms and conditions set forth in this Special Bonus Notice by returning a copy executed by you where indicated below to Vin Thomas NO LATER THAN 5:00 p.m. CST ON October 27, 2017 . The Company and its subsidiaries shall have no obligations to pay bonuses hereunder if you have not returned your executed copy of this notice prior to such time.
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Name: Date: |
NAME
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VESTED OPTIONED SHARES AS OF DATE HEREOF
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UNVESTED OPTIONED SHARES AS OF DATE HEREOF
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INITIAL BONUS
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[ ]
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[ ]
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[ ]
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$[ ]
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Exhibit 23.1
Consent of Independent Registered Public Accounting Firm
We have issued our report dated July 12, 2017, with respect to the consolidated financial statements of Curo Group Holdings Corp. and Subsidiaries contained in the Registration Statement and Prospectus. We consent to the use of the aforementioned report in the Registration Statement and Prospectus, and to the use of our name as it appears under the caption Experts.
/s/ GRANT THORNTON LLP
Kansas City, Missouri
November 1, 2017