- Quarterly Report (10-Q)

Table of Contents

 

 

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

WASHINGTON, D.C. 20549

 

 

FORM 10-Q

 

 

 

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

For the quarterly period ended June 30, 2009

OR

 

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

for the transition period from              to             

Commission File Number 000-50840

 

 

QC H OLDINGS , Inc.

(Exact name of registrant as specified in its charter)

 

 

 

Kansas		48-1209939
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification No.)

 

9401 Indian Creek Parkway, Suite 1500 Overland Park, Kansas		66210
(Address of principal executive offices)		(Zip Code)

[phone]

(Registrant’s telephone number, including area code)

Not applicable

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

 

 

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

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

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

 

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

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

The number of shares outstanding of the registrant’s common stock, as of July 31, 2009:

Common Stock $0.01 per share par value – 17,411,654 Shares

 

 

 

---

Table of Contents

QC H OLDINGS , I NC .

Form 10-Q

June 30, 2009

Index

 

				Page
PART I - FINANCIAL INFORMATION
Item 1.		Financial Statements
Introductory Comments				1
Consolidated Balance Sheets - December 31, 2008 and June 30, 2009				2
Consolidated Statements of Income - Three and Six Months Ended June 30, 2008 and 2009				3
Consolidated Statements of Cash Flows - Six Months Ended June 30, 2008 and 2009				4
Consolidated Statements of Changes in Stockholders’ Equity - Year Ended December 31, 2008 and Six Months Ended June 30, 2009				5
Notes to Consolidated Financial Statements				6
Computation of Basic and Diluted Earnings per Share				10
Item 2.		Management’s Discussion and Analysis of Financial Condition and Results of Operations		22
Item 3.		Quantitative and Qualitative Disclosures About Market Risk		38
Item 4.		Controls and Procedures		38
PART II - OTHER INFORMATION
Item 1.		Legal Proceedings		39
Item 2.		Unregistered Sales of Equity Securities and Use of Proceeds		39
Item 4.		Submission of Matters to a Vote of Security Holders		39
Item 6.		Exhibits		40
SIGNATURES				41

---

Table of Contents

QC H OLDINGS , I NC .

F ORM 10-Q

J UNE  30, 2009

PART I - FINANCIAL INFORMATION

 

Item 1.

Financial Statements

INTRODUCTORY COMMENTS

The consolidated financial statements included in this report have been prepared by QC Holdings, Inc. (the Company or QC), without audit, under the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles have been condensed or omitted under those rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. These consolidated financial statements should be read in conjunction with the audited financial statements and the notes thereto, as well as Management’s Discussion and Analysis of Financial Condition and Results of Operations, included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008. Results for the six months ended June 30, 2009 are not necessarily indicative of the results expected for the full year 2009.

---

Table of Contents

QC H OLDINGS , I NC . AND S UBSIDIARIES

Consolidated Balance Sheets

(in thousands, except share and per share amounts)

 

		December 31, 2008				June 30, 2009
						Unaudited
ASSETS
Current assets:
Cash and cash equivalents		$	17,314			$	13,481
Loans receivable, less allowance for losses of $6,648 at December 31, 2008 and $9,470 at June 30, 2009			73,711				69,637
Deferred income taxes			2,128				4,251
Prepaid expenses and other current assets			4,357				4,928
Total current assets			97,510				92,297
Property and equipment, net			23,664				20,751
Goodwill			16,144				16,491
Deferred income taxes			85				353
Other assets, net			5,639				5,924
Total assets		$	143,042			$	135,816
LIABILITIES AND STOCKHOLDERS’ EQUITY
Current liabilities:
Accounts payable		$	298			$	323
Accrued expenses and other liabilities			5,017				4,473
Accrued compensation and benefits			7,258				6,201
Deferred revenue			4,802				4,004
Income taxes payable			1,112				1,106
Debt due within one year			33,143				22,500
Total current liabilities			51,630				38,607
Long-term debt			37,607				34,607
Other non-current liabilities			4,386				4,501
Total liabilities			93,623				77,715
Commitments and contingencies
Stockholders’ equity:
Common stock, $0.01 par value: 75,000,000 shares authorized; 20,700,250 shares issued and 17,451,721 outstanding at December 31, 2008; 20,700,250 shares issued and 17,411,654 outstanding at June 30, 2009			207				207
Additional paid-in capital			67,347				66,805
Retained earnings			17,737				25,951
Treasury stock, at cost			(34,782	)			(34,050	)
Accumulated other comprehensive income (loss)			(1,090	)			(812	)
Total stockholders’ equity			49,419				58,101
Total liabilities and stockholders’ equity		$	143,042			$	135,816

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

 

Page 2

---

Table of Contents

QC H OLDINGS , I NC . AND S UBSIDIARIES

Consolidated Statements of Income

(in thousands, except per share amounts)

(Unaudited)

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2009				2008				2009
Revenues
Payday loan fees		$	43,112			$	38,474			$	85,600			$	77,749
Other			9,182				13,541				19,426				29,323
Total revenues			52,294				52,015				105,026				107,072
Branch expenses
Salaries and benefits			11,820				11,321				23,326				22,981
Provision for losses			14,084				11,746				22,458				20,353
Occupancy			6,470				6,030				12,754				12,273
Depreciation and amortization			1,077				1,035				2,162				2,066
Other			3,741				4,420				7,820				9,953
Total branch expenses			37,192				34,552				68,520				67,626
Branch gross profit			15,102				17,463				36,506				39,446
Regional expenses			3,309				3,382				6,752				6,846
Corporate expenses			6,126				5,225				13,031				11,176
Depreciation and amortization			688				827				1,364				1,560
Interest expense, net			1,010				811				2,208				1,858
Other expense, net			241				18				319				153
Income from continuing operations before taxes			3,728				7,200				12,832				17,853
Provision for income taxes			1,433				2,726				5,012				6,886
Income from continuing operations			2,295				4,474				7,820				10,967
Loss from discontinued operations, net of income tax			(800	)			(217	)			(931	)			(953	)
Net income		$	1,495			$	4,257			$	6,889			$	10,014
Weighted average number of common shares outstanding:
Basic			17,739				17,459				18,232				17,465
Diluted			17,939				17,634				18,406				17,581
Earnings (loss) per share:
Basic
Continuing operations		$	0.13			$	0.25			$	0.42			$	0.61
Discontinued operations			(0.05	)			(0.01	)			(0.05	)			(0.05	)
Net income		$	0.08			$	0.24			$	0.37			$	0.56
Diluted
Continuing operations		$	0.13			$	0.25			$	0.42			$	0.61
Discontinued operations			(0.05	)			(0.01	)			(0.05	)			(0.05	)
Net income		$	0.08			$	0.24			$	0.37			$	0.56

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

 

Page 3

---

Table of Contents

QC H OLDINGS , I NC . AND S UBSIDIARIES

Consolidated Statements of Cash Flows

(in thousands)

(Unaudited)

 

		Six Months Ended June 30,
		2008				2009
Cash flows from operating activities
Net income		$	6,889			$	10,014
Adjustments to reconcile net income to net cash provided by operating activities:
Depreciation and amortization			3,651				3,657
Provision for losses			24,181				20,832
Deferred income taxes			(1,512	)			(2,561	)
Loss on disposal of property and equipment			873				846
Stock-based compensation			1,189				1,445
Changes in operating assets and liabilities:
Loans receivable, net			(16,666	)			(14,016	)
Prepaid expenses and other assets			(211	)			72
Other assets			(57	)			(517	)
Accounts payable			(324	)			25
Accrued expenses, other liabilities, accrued compensation and benefits and deferred revenue			(2,044	)			(1,951	)
Income taxes			(1,553	)			(157	)
Other non-current liabilities			1,021				117
Net operating			15,437				17,806
Cash flows from investing activities
Purchase of property and equipment			(1,407	)			(938	)
Proceeds from sale of property and equipment			5				10
Acquisition costs, net			(206	)			(4,163	)
Net investing			(1,608	)			(5,091	)
Cash flows from financing activities
Borrowings under credit facility			19,050				16,750
Repayments under credit facility			(25,300	)			(24,500	)
Repayments on long-term debt			(2,000	)			(5,893	)
Dividends to stockholders			(901	)			(1,800	)
Repurchase of common stock			(11,144	)			(1,251	)
Exercise of stock options			50				146
Net financing			(20,245	)			(16,548	)
Cash and cash equivalents
Net decrease			(6,416	)			(3,833	)
At beginning of year			24,145				17,314
At end of period		$	17,729			$	13,481
Supplementary schedule of cash flow information
Cash paid during the period for
Interest		$	2,382			$	1,889
Income taxes			7,569				8,984

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

 

Page 4

---

Table of Contents

QC H OLDINGS , I NC . AND S UBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity

(in thousands)

 

		Outstanding shares			Common stock			Additional paid-in capital				Retained earnings				Treasury stock				Accumulated other comprehensive income (loss)				Total stockholders’ equity
Balance, December 31, 2007		18,787			$	207		$	67,446			$	9,502			$	(24,929	)		$	—			$	52,226
Comprehensive income:
Net income													13,579
Unrealized loss on derivative instrument, net of deferred taxes of $666																					(1,090	)
Total comprehensive income																									12,489
Common stock repurchases		(1,563	)														(12,547	)							(12,547	)
Dividends to stockholders													(5,344	)											(5,344	)
Issuance of restricted stock awards		105							(1,339	)							1,339								—
Stock-based compensation expense									2,227																2,227
Stock option exercises		123							(1,126	)							1,355								229
Tax impact of stock-based compensation									139																139
Balance, December 31, 2008		17,452				207			67,347				17,737				(34,782	)			(1,090	)			49,419
Comprehensive income:
Net income													10,014
Unrealized gain on derivative instrument, net of deferred taxes of $170																					278
Total comprehensive income																									10,292
Common stock repurchases		(228	)														(1,251	)							(1,251	)
Dividends to stockholders													(1,800	)											(1,800	)
Issuance of restricted stock awards		113							(1,197	)							1,197								—
Stock-based compensation expense									1,445																1,445
Stock option exercises		75							(640	)							786								146
Tax impact of stock-based compensation									(150	)															(150	)
Balance, June 30, 2009 (Unaudited)		17,412			$	207		$	66,805			$	25,951			$	(34,050	)		$	(812	)		$	58,101

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

 

Page 5

---

Table of Contents

QC H OLDINGS , I NC . AND S UBSIDIARIES

N OTES TO C ONSOLIDATED F INANCIAL S TATEMENTS

(Unaudited)

Note 1 – The Company and Basis of Presentation

Business. The accompanying consolidated financial statements include the accounts of QC Holdings, Inc. and its wholly-owned subsidiaries, QC Financial Services, Inc., QC Auto Services, Inc., QC Loan Services, Inc. and QC E-Services, Inc. (collectively the Company). QC Financial Services, Inc. is the 100% owner of QC Financial Services of California, Inc., Financial Services of North Carolina, Inc., QC Financial Services of Texas, Inc., Express Check Advance of South Carolina, LLC, QC Advance, Inc., Cash Title Loans, Inc. and QC Properties, LLC. QC Holdings, Inc., incorporated in 1998 under the laws of the State of Kansas, was founded in 1984, and has provided various retail consumer financial products and services throughout its 25-year history. The Company’s common stock trades on the NASDAQ Global Market exchange under the symbol “QCCO.”

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

The Company also provides other consumer financial products and services, such as installment loans, credit services, check cashing services, title loans, open-end credit, money transfers and money orders. All of the Company’s loans and other services are subject to state regulation, which vary from state to state, as well as to federal and local regulation, where applicable. As of June 30, 2009, the Company operated 557 short-term lending branches with locations in Alabama, Arizona, California, Colorado, Idaho, Illinois, Indiana, Kansas, Kentucky, Louisiana, Mississippi, Missouri, Montana, Nebraska, Nevada, New Mexico, Ohio, Oklahoma, South Carolina, Texas, Utah, Virginia, Washington and Wisconsin.

In September 2007, the Company entered into the buy here, pay here segment of the used automotive market in connection with ongoing efforts to evaluate alternative products that serve the Company’s customer base. In January 2009, the Company purchased two buy here, pay here locations in Missouri for approximately $4.1 million. As of June 30, 2009, the Company operated five buy here, pay here lots, which are located in Missouri and Kansas. These locations sell used vehicles and earn finance charges from the related vehicle financing contracts. The average principal amount for buy here, pay here loans originated during the first six months of 2009 was approximately $8,700 and the average term of the loan was 31 months.

Basis of Presentation. The consolidated financial statements of QC Holdings, Inc. included herein have been prepared by the Company, without audit, pursuant to the rules and regulations of the United States Securities and Exchange Commission. Certain information and footnote disclosures normally included in financial statements prepared in accordance with generally accepted accounting principles (GAAP) have been condensed or omitted pursuant to such rules and regulations, although the Company believes that the disclosures are adequate to enable a reasonable understanding of the information presented. The Consolidated Balance Sheet as of December 31, 2008 was derived from the audited financial statements of the Company, but does not include all disclosures required by GAAP. These consolidated financial statements should be read in conjunction with the Company’s audited financial statements and the notes thereto included in the Company’s Annual Report on Form 10-K for the year ended December 31, 2008.

In the opinion of the Company’s management, the accompanying unaudited consolidated financial statements contain all adjustments (consisting of normal closing procedures) necessary to present fairly the financial position of the Company and its subsidiary companies as of December 31, 2008 and June 30, 2009, and the results of operations and cash flows for the three and six months ended June 30, 2008 and 2009, in conformity with GAAP.

 

Page 6

---

Table of Contents

In preparing these financial statements, we have evaluated events and transactions for potential recognition or disclosure through August 7, 2009.

The results of operations for the three and six months ended June 30, 2009 are not necessarily indicative of the results to be expected for the full year 2009.

Note 2 – Accounting Developments

In April 2009, the Financial Accounting Standards Board (FASB) issued three Staff Positions (FSPs) that are intended to provide additional application guidance and enhance disclosures about fair value measurements and impairments of securities. FSP FAS 157-4 clarifies the objective and method of fair value measurement even when there has been a significant decrease in market activity for the asset being measured. FSP FAS 115-2 and FAS 124-2 establish a new model for measuring other-than-temporary impairments for debt securities, including establishing criteria for when to recognize a write-down through earnings versus other comprehensive income. FSP FAS 107-1 and APB 28-1 expand the fair value disclosures required for all financial instruments within the scope of SFAS No. 107, Disclosures about Fair Value of Financial Instruments, to interim periods. All of these FSPs are effective for the Company beginning April 1, 2009. The adoption of these standards did not have a material impact on the Company’s consolidated financial statements.

In May 2009, the FASB issued SFAS No. 165, Subsequent Events (SFAS 165). SFAS 165 establishes principles and standards related to the accounting for and disclosure of events that occur after the balance sheet date but before the financial statements are issued. SFAS 165 requires an entity to recognize, in the financial statements, subsequent events that provide additional information regarding conditions that existed at the balance sheet date. Subsequent events that provide information about conditions that did not exist at the balance sheet date shall not be recognized in the financial statements under SFAS 165. SFAS 165 is effective for interim and annual reporting periods ending after June 15, 2009. The Company adopted this standard on June 30, 2009. The adoption of SFAS 165 did not have a material effect on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS 166, Accounting for Transfers of Financial Assets — an amendment of FASB Statement No. 140 (SFAS 166). SFAS 166 removes the concept of a qualifying special-purpose entity from Statement 140 and removes the exception from applying FASB Interpretation No 46, Consolidation of Variable Interest Entities , to qualifying special purpose entities. This standard is effective for annual reporting periods beginning after November 15, 2009. The Company does not believe that the adoption of SFAS 166 will have a material impact on the Company’s consolidated financial statements.

In June 2009, the FASB issued SFAS 168, The FASB Accounting Standards Codification ^TM and the Hierarchy of Generally Accepted Accounting Principles—a replacement of FASB Statement No. 162, (SFAS 168) . Under SFAS 168, the FASB Accounting Standards Codification will become the source of GAAP recognized by the FASB to be applied by nongovernmental entities. On the effective date of this statement, the Codification will supersede all existing non-SEC accounting and reporting standards. This standard is effective for financial statements issued for interim and annual periods ending after September 15, 2009. The Company does not believe that the adoption of SFAS 168 will have a material impact on the Company’s consolidated financial statements.

In June 2008, FASB issued FSP EITF 03-6-1, Determining Whether Instruments Granted in Share-Based Payment Transactions Are Participating Securities (FSP EITF 03-6-1). FSP EITF 03-6-1 provides that unvested share-based payment awards that contain non-forfeitable rights to dividends are considered to be participating securities and must be included in the computation of earnings per share pursuant to the two-class method. The Company adopted FSP EITF 03-6-1 on January 1, 2009. In the last few years, the Company has issued restricted stock to employees and independent directors that contain non-forfeitable rights to dividends. As required upon adoption, we retrospectively adjusted prior period earnings per share data to conform to provisions of this standard. See Note 6 for additional information.

 

Page 7

---

Table of Contents

In March 2008, the FASB issued Statement of Financial Accounting Standard No. 161, Disclosures about Derivative Instruments and Hedging Activities, an amendment of FASB Statement No. 133 (SFAS 161), which requires enhanced disclosures about an entity’s derivative and hedging activities. The Company adopted SFAS 161 on January 1, 2009. For additional information regarding derivative instruments and hedging activities, see Note 12.

In February 2008, the FASB issued Staff Position 157-2, Effective Date of FASB 157 , (FSP 157-2) which deferred the provisions of SFAS 157 to annual periods beginning after November 15, 2008 for non-financial assets and liabilities. Non-financial assets include fair value measurements associated with business acquisitions and impairment testing of tangible and intangible assets. In accordance with FSP 157-2, the Company adopted the provisions of FAS No. 157 to non-financial assets and non-financial liabilities in the first quarter of 2009. The adoption of FSP 157-2 did not have a material impact on the Company’s consolidated financial statements.

In December 2007, the FASB issued Statement of Financial Accounting Standards No. 141 (revised 2007), Business Combinations (SFAS 141R). SFAS 141R broadens the guidance of SFAS 141, extending its applicability to all transactions and other events in which one entity obtains control over one or more other businesses. It broadens the fair value measurement and recognition of assets acquired, liabilities assumed, and interests transferred as a result of business combinations. SFAS 141R expands on required disclosures to improve the statement users’ abilities to evaluate the nature and financial effects of business combinations. The Company adopted SFAS 141R on January 1, 2009 with no material effect on its consolidated financial statements.

Note 3 – Fair Value Measurements

On January 1, 2008, the company adopted Statement of Financial Accounting Standards No. 159, The Fair Value Option for Financial Assets and Financial Liabilities (SFAS 159). The Company did not elect the fair value measurement option under SFAS 159 for any of its financial assets or liabilities and, as a result, there was no impact on the Company’s consolidated financial statements.

On January 1, 2008 the Company adopted Statement of Financial Accounting Standards No. 157, Fair Value Measurement (SFAS 157). SFAS 157 establishes a common definition for fair value to be applied to generally accepted accounting principles guidance requiring use of fair value, establishes a framework for measuring fair value, and expands disclosure about such fair value measurements. SFAS 157 does not require any new fair value measurements, but provides guidance on how to measure fair value by providing a fair value hierarchy based on the source of the information. In accordance with FSP FAS No. 157-2, the Company adopted in the first quarter of 2009 the provisions of SFAS No. 157 with respect to non-financial assets and non-financial liabilities. The adoption did not have a material impact on the Company’s consolidated financial statements.

Fair Value Hierarchy Tables. SFAS 157 specifies a hierarchy of valuation techniques based on whether the inputs to those valuation techniques are observable or unobservable. In general, fair values determined by Level 1 inputs utilize quoted prices (unadjusted) in active markets for identical assets or liabilities that the Company has the ability to access. Level 2 inputs include quoted prices for similar assets and liabilities in active markets, and inputs other than quoted prices that are observable for the asset or liability. Level 3 inputs are unobservable inputs for the asset or liability, and include situations where there is little, if any, market activity for the asset or liability. In certain cases, the inputs used to measure fair value may fall into different levels of the fair value hierarchy. In such cases, the level in the fair value hierarchy within which the fair value measurement in its entirety falls has been determined based on the lowest level input that is significant to the fair value measurement in its entirety. The Company’s assessment of the significance of a particular input to the fair value in its entirety requires judgment and considers factors specific to the asset or liability.

 

Page 8

---

Table of Contents

The following table presents fair value measurements as of June 30, 2009 (in thousands) :

 

		Fair Value Measurements
		Level 1			Level 2			Level 3			Liability at fair value
Interest rate swap agreement		$	—		$	1,308		$	—		$	1,308
Total		$	—		$	1,308		$	—		$	1,308

As of December 31, 2008, the fair value of the interest rate swap agreement was $1.8 million. For the six months ended June 30, 2009, the Company recorded unrealized gain of $448,000 on the interest rate swap agreement in other comprehensive income. For additional information on the interest rate swap agreement, see Note 12.

Note 4 – Significant Business Transactions

Closure of Branches. During the first six months of 2009, the Company closed 29 of its lower performing branches in various states (which included five branches that were consolidated into nearby branches). The Company recorded approximately $1.4 million in pre-tax charges during the six months ended June 30, 2009 associated with these closings. The charges included an $810,000 loss for the disposition of fixed assets, $597,000 for lease terminations and other related occupancy costs, $15,000 in severance and benefit costs and $10,000 for other costs.

During third quarter 2008, the Company closed 13 of its 32 branches in Ohio, primarily due to a new law that went into effect on September 1, 2008 that effectively precludes payday loans. The Company recorded approximately $943,000 in pre-tax charges during 2008 associated with these closings. The charges included a $554,000 loss for the disposition of fixed assets, $342,000 for lease terminations and other related occupancy costs, $40,000 in severance and benefit costs and $7,000 for other costs.

The following table summarizes the accrued costs associated with the closure of branches and the activity related to those charges as of June 30, 2009 (in thousands) :

 

		Balance at December 31, 2008			Additions			Reductions				Balance at June 30, 2009
Lease and related occupancy costs (a)		$	318		$	733		$	(546	)		$	505
Severance						15			(15	)
Other						10			(10	)
Total		$	318		$	758		$	(571	)		$	505

 

(a)

The additions include charges of $136,000 during the six months ended June 30, 2009 to increase the lease liabilities for branches that were closed prior to January 1, 2009 and not included in discontinued operations. The increase was primarily due to changes in estimates based on the Company’s ability to sub-lease space in branch locations.

As of June 30, 2009, the balance of $505,000 for accrued costs associated with the closure of branches is included as a current liability on the Consolidated Balance Sheet as the Company expects that the liabilities for these costs will be settled within one year.

 

Page 9

---

Table of Contents

Note 5 – Discontinued Operations

As noted above, the closure of branches during first six months of 2009 included 24 branches that were not consolidated into nearby branches. These branches and the Ohio branches that closed during third quarter 2008 are reported as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144 – Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). In accordance with SFAS 144, the Consolidated Statements of Income and related disclosures in the accompanying notes present the results of these branches as discontinued operations for all periods presented. With respect to the Consolidated Balance Sheets, the Consolidated Statements of Cash Flows and related disclosures in the accompanying notes, the items associated with the discontinued operations are included with the continuing operations for all periods presented.

Summarized financial information for discontinued operations during the three and six months ended June 30, 2008 and 2009 is presented below (in thousands) :

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2009				2008				2009
Total revenues		$	1,596			$	67			$	3,308			$	865
Provision for losses			954				(23	)			1,723				479
Other branch expenses (income)			1,404				316				2,553				1,264
Branch gross loss			(762	)			(226	)			(968	)			(878	)
Other, net			(561	)			(132	)			(571	)			(697	)
Loss before income taxes			(1,323	)			(358	)			(1,539	)			(1,575	)
Benefit for income taxes			523				141				608				622
Loss from discontinued operations		$	(800	)		$	(217	)		$	(931	)		$	(953	)

Note 6 – Earnings Per Share

Basic and diluted earnings per share are computed by dividing income available to common stockholders by the weighted average number of common shares outstanding during the period. The computation of diluted earnings per share gives effect to all dilutive potential common shares that were outstanding during the period. The effect of stock options and unvested restricted stock represent the only differences between the weighted average shares used for the basic earnings per share computation compared to the diluted earnings per share computation for each period presented.

As noted above, the Company adopted FSP EITF 03-6-1 on January 1, 2009. Under FSP EITF 03-6-1, certain share-based payment awards that allow holders to receive dividends before they vest are treated as participating securities. Prior to the adoption of FSP EITF 03-6-1, unvested share-based payment awards with non-forfeitable rights to dividends were included in the calculation of diluted earning per share using the treasury stock method. The FSP EITF 03-6-1 requires these unvested share-based payment awards to be included in the calculation of basic earnings per share using the two-class method. For the three months ended June 30, 2008, there was no impact of adopting the FSP on previously reported basic and diluted earnings per share. For the six months ended June 30, 2008, the impact of adopting the FSP decreased previously reported basic earnings per share by $0.01 and had no impact on previously reported diluted earnings per share.

 

Page 10

---

Table of Contents

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

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2009				2008				2009
Income available to common stockholders:
Income from continuing operations		$	2,295			$	4,474			$	7,820			$	10,967
Discontinued operations, net of income tax			(800	)			(217	)			(931	)			(953	)
Net income		$	1,495			$	4,257			$	6,889			$	10,014
Weighted average shares outstanding:
Weighted average basic common shares outstanding			17,739				17,459				18,232				17,465
Dilutive effect of stock options and unvested restricted stock			200				175				174				116
Weighted average diluted common shares outstanding			17,939				17,634				18,406				17,581
Basic earnings (loss) per share:
Continuing operations		$	0.13			$	0.25			$	0.42			$	0.61
Discontinued operations			(0.05	)			(0.01	)			(0.05	)			(0.05	)
Net income		$	0.08			$	0.24			$	0.37			$	0.56
Diluted earnings (loss) per share:
Continuing operations		$	0.13			$	0.25			$	0.42			$	0.61
Discontinued operations			(0.05	)			(0.01	)			(0.05	)			(0.05	)
Net income		$	0.08			$	0.24			$	0.37			$	0.56

Anti-dilutive securities. Options to purchase 2.3 million shares of common stock were excluded from the diluted earnings per share calculation for the three and six months ended June 30, 2009, because they were anti-dilutive. Options to purchase 2.3 million shares of common stock were excluded from the diluted earnings per share calculation for the three and six months ended June 30, 2008, because they were anti-dilutive.

Note 7 – Allowance for Doubtful Accounts and Provision for Losses

When the Company enters into a payday loan with a customer, the Company records a loan receivable for the amount loaned to the customer plus the fee charged by the Company, which varies from state to state based on applicable regulations.

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2008			2009			2008			2009
Average loan to customer (principal plus fee)		$	369.13		$	367.67		$	369.77		$	368.53
Average fee received by the Company		$	53.37		$	53.34		$	53.51		$	53.32
Average term of the loan (days)			16			16			16			16

When checks are presented to the bank for payment and returned as uncollected, all accrued fees, interest and outstanding principal are charged-off as uncollectible, generally within 14 days after the due date. Accordingly, payday loans included in the receivable balance at any given point in time are typically not older than 30 days. During the three months and six months ended June 30, 2009, the Company received approximately $258,000 and $552,000, respectively from the sale of certain payday loan receivables that the Company had previously charged off. The sales were recorded as a recovery within the allowance for loan losses.

 

Page 11

---

Table of Contents

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

The methodology for estimating the allowance for payday and title loan losses utilizes a four-step approach, which reflects the short-term nature of the loan portfolio at each period-end, the historical collection experience in the month following each reporting period-end and any fluctuations in recent general economic conditions. There were no qualitative adjustments made to the allowance as of December 31, 2008 and June 30, 2009.

The Company maintains an allowance for installment loans at a level it considers sufficient to cover estimated losses in the collection of its installment loans. The allowance calculation for installment loans is based upon historical charge-off experience (primarily a six-month trailing average of charge-offs to total volume) and qualitative factors, with consideration given to recent credit loss trends and economic factors. As of December 31, 2008, the Company recorded a qualitative adjustment to increase the allowance for installment loans by $356,000, as a result of its review of these factors. As of June 30, 2009, the Company reviewed the qualitative factors and determined that no qualitative adjustment was needed.

The allowance calculation for auto loans is based upon the Company’s review of industry loss experience and qualitative factors with consideration given to changes in loan characteristics, delinquency levels, collateral values and other general economic conditions. Industry loss rates typically range between 24% and 28% of revenues, with higher ratios during more difficult macroeconomic periods. In 2008, the automotive sales industry experienced an increase in delinquencies and, as a result, an increase in losses. The Company’s level of allowance with respect to automotive loans at June 30, 2009 is higher than levels expected in future years due to the Company’s relative inexperience in the buy here, pay here business, as well as the age of the new locations and the generally negative industry and macroeconomic environment. As of December 31, 2008, the Company recorded a qualitative adjustment to increase the allowance for auto loans by $300,000, as a result of its review of these factors. As of June 30, 2009, the Company reviewed the qualitative factors and determined that no qualitative adjustment was needed.

The following tables summarize the activity in the allowance for loan losses during the three and six months ended June 30, 2008 and 2009 (in thousands) :

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2009				2008				2009
Allowance for loan losses
Balance, beginning of period		$	2,767			$	7,821			$	4,442			$	6,648
Charge-offs			(23,739	)			(18,725	)			(47,036	)			(39,136	)
Recoveries			10,897				9,069				23,995				22,230
Provision for losses			14,141				11,305				22,665				19,728
Balance, end of period		$	4,066			$	9,470			$	4,066			$	9,470

The provision for losses in the Consolidated Statements of Income includes losses associated with the credit service organization (see note 14 for additional information) and excludes loss activity related to discontinued operations (see note 5 for additional information).

 

Page 12

---

Table of Contents

Note 8 – Other Revenues

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2008			2009			2008			2009
Installment loan interest		$	4,285		$	4,221		$	8,890		$	8,698
Buy here, pay here sales and interest			578			3,247			1,179			7,626
Credit service fees			1,414			1,490			2,817			3,083
Check cashing fees			1,339			1,254			3,296			3,191
Title loan fees			905			757			1,838			1,556
Open-end credit fees						1,760						3,429
Other fees			661			812			1,406			1,740
Total		$	9,182		$	13,541		$	19,426		$	29,323

Note 9 – Property and Equipment

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

 

		December 31, 2008				June 30, 2009
Buildings		$	4,336			$	4,336
Leasehold improvements			20,923				20,273
Furniture and equipment			23,801				23,493
Vehicles			939				954
			49,999				49,056
Less: Accumulated depreciation and amortization			(26,335	)			(28,305	)
Total		$	23,664			$	20,751

In February 2005, the Company entered into a seven-year lease to relocate its corporate headquarters to office space in Overland Park, Kansas. As part of the lease agreement, the Company received a tenant allowance from the landlord for leasehold improvements totaling $976,000. The tenant allowance was recorded by the Company as a deferred rent liability and is being amortized as a reduction of rent expense over the life of the lease. As of December 31, 2008, the balance of the deferred rent liability was approximately $464,000, of which $325,000 is classified as a non-current liability. As of June 30, 2009, the balance of the deferred rent liability was approximately $395,000 of which $256,000 is classified as a non-current liability.

Note 10 –Acquisitions, Goodwill and Intangible Assets

Acquisitions. In January 2009, the Company purchased two buy here, pay here locations in Missouri for approximately $4.2 million, which included loans receivable of approximately $2.7 million and inventory of $642,000. The Company used the purchase method of accounting. The excess of the total acquisition cost over the fair value of the net tangible assets acquired totaled $765,000. Of this amount, the Company recorded $347,000 to goodwill, $141,000 to customer relationships, $183,000 to non-compete agreements and $94,000 to trade name. The pro forma results of operations have not been presented because the results of operations for the Company would not have been materially different from those reported for the year ended December 31, 2008.

 

Page 13

---

Table of Contents

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

 

		December 31, 2008			June 30, 2009
Balance at beginning of period		$	16,081		$	16,144
Acquisitions			63			347
Balance at end of period		$	16,144		$	16,491

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

 

		December 31, 2008				June 30, 2009
Amortized intangible assets:
Customer relationships		$	2,327			$	2,478
Non-compete agreements			918				1,104
Debt issue costs			1,591				1,591
Other			15				15
			4,851				5,188
Non-amortized intangible assets:
Trade names			600				694
Gross carrying amount			5,451				5,882
Less: Accumulated amortization			(1,934	)			(2,598	)
Net intangible assets		$	3,517			$	3,284

Intangible assets at December 31, 2008 and June 30, 2009 include customer relationships, non-compete agreements, trade names and debt financing costs. Customer relationships are amortized using the straight-line method over the weighted average useful lives ranging from 4 to 15 years. Non-compete agreements are currently amortized using the straight-line method over the term of the agreements, ranging from three to five years. The amount recorded for trade names are generally considered an indefinite life intangible and not subject to amortization. Costs paid to obtain debt financing are amortized over the term of each related debt agreement using the straight-line method, which approximates the effective interest method.

Note 11– Indebtedness

The following table summarizes long-term debt at December 31, 2008 and June 30, 2009 (in thousands) :

 

		December 31, 2008				June 30, 2009
Term loan		$	46,000			$	40,107
Revolving credit facility			24,750				17,000
Total debt			70,750				57,107
Less: debt due within one year			(33,143	)			(22,500	)
Long-term debt		$	37,607			$	34,607

On December 7, 2007, the Company entered into an Amended and Restated Credit Agreement with a syndicate of banks to replace its existing line of credit facility. The previous line of credit facility had a total commitment of $45.0 million. The amended credit agreement provides for a five-year term loan of $50.0 million and a revolving line of credit (including provisions permitting the issuance of letters of credit and swingline loans) of up to $45.0 million. The maximum borrowings under the credit facility, as amended on March 7, 2008, may be increased to $120.0 million pursuant to bank approval and subject to terms and conditions set forth therein.

 

Page 14

---

Table of Contents

The credit facility is guaranteed by each subsidiary and is secured by all the capital stock of each subsidiary of the Company and all personal property (including all present and future accounts receivable, inventory, property and equipment, general intangibles (including intellectual property), instruments, deposit accounts, investment property and the proceeds thereof). Borrowings under the term loan and the facility are available based on two types of loans, Base Rate loans or LIBOR Rate loans. Base Rate loans bear interest at the higher of the Prime Rate or the Federal Funds Rate plus 0.50%. LIBOR Rate loans bear interest at rates based on the LIBOR rate for the applicable loan period with a maximum margin over LIBOR of 3.50%. The loan period for a LIBOR Rate loan may be one month, two months, three months or six months and the loan may be renewed upon notice to the agent provided that no default has occurred. As a result, the revolving credit facility is classified as debt due within one year, although the revolving credit facility, by its terms, does not mature until December 6, 2012. The credit facility has a grid that adjusts the borrowing rates for both Base Rate loans and LIBOR Rate loans based upon the Company’s leverage ratio. Leverage ratio is defined as the ratio of total debt to earnings before interest, taxes, depreciation and amortization (EBITDA). The credit facility also includes a non-use fee ranging from 0.25% to 0.375%, which is based upon the Company’s leverage ratio. Among other provisions, the amended credit agreement contains certain financial covenants related to EBITDA, fixed charges, leverage ratio, working capital ratio, total indebtedness, and maximum loss ratio. As of June 30, 2009, the Company was in compliance with all of its debt covenants.

In accordance with GAAP, amounts drawn on the revolving credit facility are shown as debt due within one year. Under the terms of the credit agreement, however, the revolving credit facility does not mature until December 2012, and no amounts are due thereon prior to the maturity of the credit facility. Accordingly, so long as the Company is in compliance with our financial and other covenants in the credit facility, the Company does not face a refinancing risk until the term loan and the revolving credit facility mature in December 2012.

In addition to scheduled repayments, the term loan contains mandatory prepayment provisions beginning in 2009 whereby the Company is required to reduce the outstanding principal amounts of the term loan based on the Company’s excess cash flow (as defined in the agreement) and the Company’s leverage ratio as of the most recent completed fiscal year. For the six months ended June 30, 2009, the Company paid $5.9 million on the term loan, which included $2.7 million required under the mandatory prepayment provisions, $2.5 million scheduled payment and an additional voluntary prepayment of $725,000 to reduce the balance of the term loan.

Note 12 – Derivative Instruments

Derivative instruments are accounted for at fair value in accordance with Statement of Financial Accounting Standards No. 133, Accounting for Derivative Instruments and Hedging Activities (SFAS 133). The accounting for changes in the fair value of a derivative depends on the intended use and designation of the derivative instrument. For a derivative instrument designated as a fair value hedge, the gain or loss on the derivative is recognized in earnings in the period of change in fair value together with the offsetting gain or loss on the hedged item. For a derivative instrument designated as a cash flow hedge, the effective portion of the derivative’s gain or loss is initially reported as a component of Other Comprehensive Income (OCI) and is subsequently recognized in earnings when the hedged exposure affects earnings. The ineffective portion of the gain or loss is recognized in earnings. Gains or losses from changes in fair values of derivatives that are not designated as hedges for accounting purposes are recognized currently in earnings.

The Company is exposed to certain risks relating to adverse changes in interest rates on its long-term debt and manages this risk through the use of a derivative. The Company does not enter into derivative instruments for trading or speculative purposes.

 

Page 15

---

Table of Contents

Cash Flow Hedge. The Company entered into an interest rate swap agreement during first quarter 2008 for $49 million of its outstanding debt as a cash flow hedge to interest rate fluctuations under its credit facility. The swap agreement is designated as a cash flow hedge, and effectively changes the floating rate interest obligation associated with the $50 million term loan into a fixed rate. The swap agreement has a maturity date of December 6, 2012. Under the swap, the Company pays a fixed interest rate of 3.43% and receives interest at a rate of LIBOR. As of June 30, 2009, approximately $39.5 million (representing the majority of the unpaid principal of the term loan) is subject to the interest rate swap agreement. The hedge is highly effective and, therefore, the Company reported no net gain or loss during the three and six months ended June 30, 2009. The Company expects approximately $1.1 million of losses in other comprehensive income to be reclassified into earnings within the next 12 months.

The following table summarizes the fair value and location in the Consolidated Balance Sheet of all derivatives held by the Company as of June 30, 2009 (in thousands ).

 

Derivatives Designated as Hedging Instruments under SFAS 133		Balance Sheet Classification		Fair Value
Liabilities:
Interest rate swaps		Accrued expenses and other liabilities		$	1,308

The following table summarizes the gains (losses) recognized in Other Comprehensive Income (in thousands) related to the interest rate swap agreement.

 

Derivatives Designated as Hedging Instruments under SFAS 133		Gain (Loss) Recognized in OCI
Cash flow hedges:
Loss recognized in other comprehensive income		$	(6	)
Amount reclassified from accumulated other comprehensive income to interest expense			454
Total		$	448

Note 13 – Income taxes

The Company had unrecognized tax benefits of approximately $50,000 as of December 31, 2008 and June 30, 2009. The unrecognized tax benefits of $50,000 at June 30, 2009, which if ultimately recognized, would impact the Company’s annual effective tax rate.

The Company records accruals for interest and penalties related to unrecognized tax benefits in interest expense and operating expense, respectively. Interest and penalties and associated accruals were not material as of June 30, 2009.

The Company is subject to U.S federal income tax and various state income taxes. Tax regulations within each jurisdiction are subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. In the ordinary course of business, transactions occur for which the ultimate tax outcome is uncertain. In addition, respective tax authorities periodically audit our income tax returns. These audits examine our significant tax filing positions, including the timing and amounts of deductions and the allocation of income among tax jurisdictions. During 2006, the Company settled two open tax years, 2003 and 2004, which were undergoing audit by the United States Internal Revenue Service. The 2005, 2006, 2007 and 2008 federal income tax returns are the only tax years for which the statute of limitations is still open. Generally, state income tax returns for all years after 2004 are subject to potential future audit by tax authorities in the Company’s state tax jurisdictions.

 

Page 16

---

Table of Contents

Note 14 – Credit Services Organization

Payday loans are originated by the Company at all of its branches, except branches in Texas. For its locations in Texas, the Company began operating as a credit service organization (CSO), through one of its subsidiaries, in September 2005. As a CSO, the Company acts as a credit services organization on behalf of consumers in accordance with Texas laws. The Company charges the consumer a fee for arranging for an unrelated third-party to make a loan to the consumer and for providing related services to the consumer, including a guarantee of the consumer’s obligation to the third-party lender. The Company also services the loan for the lender. The CSO fee is recognized ratably over the term of the loan. The Company is not involved in the loan approval process or in determining the loan approval procedures or criteria. As a result, loans made by the lender are not included in the Company’s loans receivable balance and are not reflected in the Consolidated Balance Sheets. As noted above, however, the Company absorbs all risk of loss through its guarantee of the consumer’s loan from the lender. As of December 31, 2008 and June 30, 2009, the consumers had total loans outstanding with the lender of approximately $3.6 million and $2.2 million, respectively. The decline in loans outstanding was due to the closure of 11 branches in Texas during first quarter 2009. Because of the economic exposure for potential losses related to the guarantee of these loans, the Company records a payable to reflect the anticipated losses related to uncollected loans. The payable is recognized at its fair value pursuant to FASB Interpretation No. 45, Guarantor’s Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others. The balance of the liability for estimated losses reported in accrued liabilities was approximately $180,000 as of December 31, 2008 and $100,000 as of June 30, 2009. With respect to the CSO, the Company recorded a provision for losses for the six months ended June 30, 2008 and 2009 totaling $1.5 million and $1.1 million, respectively. For the six months ended June 30, 2009, charge-offs and recoveries associated with the CSO were $1.7 million and $481,000, respectively.

Note 15 – Stockholders Equity

Comprehensive income (loss) . Components of comprehensive income (loss) consist of the following (in thousands) :

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2009				2008				2009
Net income		$	1,495			$	4,257			$	6,889			$	10,014
Other comprehensive income (loss):
Unrealized gain (loss) on interest rate swap			352				112				352				(6	)
Amount reclassed to interest expense related to interest rate swap			91				227				91				454
Deferred income taxes			(167	)			(129	)			(167	)			(170	)
Other comprehensive income (loss):			276				210				276				278
Comprehensive income		$	1,771			$	4,467			$	7,165			$	10,292

Stock Repurchases. The board of directors has authorized the Company to repurchase up to $60 million of its common stock in the open market and through private purchases. The acquired shares may be used for corporate purposes, including shares issued to employees in stock-based compensation programs. As of June 30, 2009, the Company has repurchased 4.7 million shares at a total cost of approximately $51.8 million, which leaves approximately $8.2 million that may yet be purchased under the current program.

Dividends. On May 5, 2009, the Company’s board of directors declared a cash dividend of $0.05 per common share. The dividend was paid on June 2, 2009 to stockholders of record as of May 19, 2009. The total amount of the dividend paid was approximately $900,000.

 

Page 17

---

Table of Contents

Note 16 – Stock-Based Compensation

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

 

		Three Months Ended June 30,						Six Months Ended June 30,
		2008			2009			2008			2009
Employee stock-based compensation:
Stock options		$	288		$	338		$	558		$	648
Restricted stock awards			220			300			415			567
			508			638			973			1,215
Non-employee director stock-based compensation
Restricted stock awards									216			230
Total		$	508		$	638		$	1,189		$	1,445

Stock option grants. The Company granted 530,492 stock options during first quarter 2009 to certain employees under the 2004 Equity Incentive Plan. These stock options vest equally over four years. The Company estimated that the fair value of these option grants was approximately $811,000. The fair value of the options was calculated at the grant date using a Black-Scholes option-pricing model assuming 53.53% expected volatility, a risk-free interest rate of 2.37%, a 4.56% expected dividend yield and an expected life of 6.25 years.

A summary of stock option activity for the six months ended June 30, 2009 is as follows:

 

		Options			Weighted Average Exercise Price
Outstanding, January 1, 2009		2,551,534			$	10.53
Granted		530,492				4.39
Exercised		(75,000	)			1.95
Terminated/Cancelled		(52,794	)			11.10
Outstanding, June 30, 2009		2,954,232			$	9.63
Exercisable, June 30, 2009		2,001,608			$	10.98

Restricted stock grants. During first quarter 2009, the Company granted 411,744 shares of restricted stock to various employees and non-employee directors under the 2004 Equity Incentive Plan pursuant to restricted stock agreements. The grants consisted of 359,464 shares granted to employees that vest equally over four years and 52,280 shares granted to non-employee directors that vested immediately upon grant subject to an agreed-upon six-month holding period. The Company estimated that the fair market value of these restricted stock grants was approximately $1.8 million. For the three and six months ended June 30, 2009, the Company recognized $94,000 and $385,000, respectively in stock-based compensation expense related to these restricted stock grants. As of June 30, 2009, there was $1.4 million of total unrecognized compensation costs related to these restricted stock grants. The Company expects that these costs will be amortized over a weighted average period of 3.6 years.

 

Page 18

---

Table of Contents

A summary of all restricted stock activity under the equity compensation plans for the six months ended June 30, 2009 is as follows:

 

		Restricted Stock			Weighted Average Grant Date Fair Value
Non-vested balance, January 1, 2009		223,292			$	11.92
Granted		411,744				4.39
Vested		(112,623	)			6.70
Forfeited		(7,242	)			7.48
Non-vested balance, June 30, 2009		515,171			$	6.73

Note 17 – Commitments and Contingencies

Litigation.  The Company is subject to various legal proceedings arising from normal business operations. Although there can be no assurances, based on the information currently available, management believes that it is probable that the ultimate outcome of each of the actions will not have a material adverse effect on the consolidated financial statements. However, an adverse outcome in any of the actions could have a material adverse effect on the financial results of the Company in the period in which it is recorded.

Missouri. On October 13, 2006, one of the Company’s Missouri customers sued the Company in the Circuit Court of St. Louis County, Missouri in a purported class action. The lawsuit alleges violations of the Missouri statute pertaining to unsecured loans under $500 and the Missouri Merchandising Practices Act. The lawsuit seeks monetary damages and a declaratory judgment that the arbitration agreement with the plaintiff is not enforceable on a variety of theories. The Company moved to compel arbitration of this matter. In December 2007, the court entered an order striking the class action waiver provision in the Company’s customer arbitration agreement, ordered the case to arbitration and dismissed the lawsuit filed in Circuit Court. In July 2008, the Company filed its appeal of the court’s order with the Missouri Court of Appeals. In December 2008, the Court of Appeals affirmed the decision of the trial court and ordered the case to arbitration, but struck the class action waiver provision. In June 2009, plaintiff filed her action in arbitration. After the Company files its answer, the case will move to the class discovery stage.

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

 

Page 19

---

Table of Contents

There are three similar purported class action lawsuits filed in North Carolina against three other companies unrelated to the Company. In December 2005, the judge in those three cases (1) granted the defendants’ motions to stay the purported class action lawsuits and to compel arbitration in accordance with the terms of the arbitration provisions contained in the consumer loan contracts, (2) ruled that the class action waivers in those consumer loan contracts are valid, and (3) denied plaintiffs’ motions for class certifications. The plaintiffs in those three cases, who are represented by the same law firms as the plaintiffs in the case filed against the Company, appealed that ruling. In January 2007, the North Carolina Court of Appeals heard the appeal in the three companion cases. In May 2008, the appellate court remanded the three companion cases to the state court to review its ruling in light of a recent North Carolina Supreme Court decision. In June 2009, the trial court denied defendants’ motion to compel arbitration and granted each of the respective plaintiffs’ motions for class certification. It is expected that defendants will appeal these rulings.

The judge handling the lawsuit against the Company in North Carolina is the same judge who is handing the three companion cases. The Company has not had a ruling on the similar pending motions by the plaintiffs and the Company in its North Carolina case. There is a stay in the North Carolina lawsuit, pending the final outcome in the other three North Carolina cases concerning the enforceability of the arbitration provision in the consumer contracts. With the trial court’s recent decision in the companion cases, it is expected that the stay in the Company’s case will end. Once this happens, the Company will begin limited discovery on its own motion to compel arbitration and plaintiffs’ motion for class certification. If this happens as expected, it is possible that the Company would receive a ruling on these motions from the trial court by late 2009 or early 2010.

South Carolina . On October 30, 2008, a subsidiary of the Company was sued in the Fifth Judicial Circuit Court of Common Pleas in South Carolina in a putative class action lawsuit filed by Carl G. Ferrell, a customer of the South Carolina subsidiary. Mr. Ferrell alleges that the subsidiary violated the South Carolina Deferred Presentment Services Act by including an arbitration provision and class action waiver in its loan agreements. Mr. Ferrell alleges further that the subsidiary did not appropriately take into account his ability to repay his loan with the subsidiary, and it is his contention that this alleged failure violates the South Carolina Deferred Presentment Services Act, is negligent, breaches the covenant of good faith and fair dealing, and serves as the basis for a civil conspiracy. Mr. Ferrell makes the same allegations in the same case against several other lenders.

On December 11, 2008, the Company removed the case from state court to the United States District Court for the District of South Carolina based upon the diversity of citizenship between the subsidiary and the proposed class. On December 18, 2008, the Company filed a motion to dismiss the case based upon the parties’ arbitration agreement. Mr. Ferrell has challenged both the removal of the case to federal court and the Company’s motion to dismiss. In March 2009, the federal court ruled against the Company’s efforts to remove the case to federal court and remanded the case to state court. It did not rule on the Company’s motion to dismiss. In May 2009, the federal court issued its written ruling. The Company has appealed this decision to the Fourth Circuit Court of Appeals.

California. On September 5, 2008, a subsidiary of the Company was sued in the Superior Court of California, San Diego County in a putative class action lawsuit filed by Jennifer M. Winters, a customer of the California subsidiary. Ms. Winters alleges that the Company violated California’s Deferred Deposit Transaction Law, Unfair Competition Law, and Consumer Legal Remedies Act. Ms. Winters alleges that the Company improperly charged California consumers a fee to extend or “roll over” their loan transactions, that the Company did not have authority to deduct funds electronically, and that the Company’s use of a class action waiver in its loan agreements is unconscionable. In October 2008, the Company filed its answer, denying all allegations. It also filed a claim against Ms. Winters for failing to pay her final loan. The parties are currently engaged in discovery on plaintiff’s class action allegations. Because this case is in its preliminary stages, it is unlikely any ruling on the merits of the claims will occur until early 2010 or later.

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

 

Page 20

---

Table of Contents

Note 18 – Certain Concentrations of Risk

The Company is subject to regulation by federal and state governments that affect the products and services provided by the Company, particularly payday loans. The Company currently operates in 24 states throughout the United States. The level and type of regulation of payday loans varies greatly from state to state, ranging from states with no regulations or legislation to other states with very strict guidelines and requirements.

Company branches located in the states of Missouri, California, Kansas, Arizona, South Carolina, Washington and Illinois represented approximately 25%, 12%, 8%, 8%, 7%, 5% and 5%, respectively, of total revenues for the six months ended June 30, 2009. Company branches located in the states of Missouri, Arizona, California, Illinois, South Carolina and Kansas represented approximately 27%, 11%, 11%, 7%, 7%, and 6%, respectively, of total branch gross profit for the six months ended June 30, 2009. To the extent that laws and regulations are passed that affect the Company’s ability to offer loans or the manner in which the Company offers its loans in any one of those states, the Company’s financial position, results of operations and cash flows could be adversely affected. For example, the law under which the Company provides short-term loans in Arizona terminates on June 30, 2010. To the extent that the industry is not able to obtain an amendment of the termination clause in the law or the Company is not able to develop alternative products that serve its customers, the revenues and gross profit derived from Arizona would cease. Also, amendments to the Washington law become effective January 1, 2010, which are likely to adversely affect the revenues and profitability of our Washington branches.

Note 19 – Subsequent Events

Dividends. On July 29, 2009, the Company’s board of directors declared a quarterly dividend of $0.05 per common share. The dividend is payable on September 1, 2009 to stockholders of record as of August 18, 2009. The Company estimates that the total amount of the dividend will be approximately $900,000.

The Company has evaluated events and transactions subsequent to the balance sheet date through August 7, 2009, the date these financial statements were issued.

 

Page 21

---

Table of Contents

Item 2.

Management’s Discussion and Analysis of Financial Condition and Results of Operations

FORWARD-LOOKING STATEMENTS

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

These forward-looking statements are based on our current expectations and are subject to a number of risks and uncertainties, which could cause actual results to differ materially from those forward-looking statements. These risks include (1) changes in laws or regulations or governmental interpretations of existing laws and regulations governing consumer protection or payday lending practices, (2) litigation or regulatory action directed towards us or the payday loan industry, (3) volatility in our earnings, primarily as a result of fluctuations in loan loss experience and the rate of growth in or closure of branches, (4) risks associated with the leverage of the Company, (5) negative media reports and public perception of the payday loan industry and the impact on federal and state legislatures and federal and state regulators, (6) changes in our key management personnel, (7) integration risks and costs associated with future acquisitions, and (8) the other risks detailed under Item 1A. “Risk Factors” in our Annual Report on Form 10-K for the year ended December 31, 2008 filed with the Securities and Exchange Commission . In light of these risks, uncertainties and assumptions, the forward-looking statements in this report may not occur, and actual results could differ materially from those anticipated or implied in the forward-looking statements. When investors consider these forward-looking statements, they should keep in mind the risk factors and other cautionary statements in this discussion.

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

The discussion in this item is intended to clarify and focus on our results of operations, certain changes in financial position, liquidity, capital structure and business developments for the periods covered by the consolidated financial statements included under Item 1 of this Form 10-Q. This discussion should be read in conjunction with these consolidated financial statements, the audited financial statements included in our Annual Report on Form 10-K for the year ended December 31, 2008, and the related notes thereto and is qualified by reference thereto.

EXECUTIVE SUMMARY

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

We derive our revenues primarily by providing short-term consumer loans, known as payday loans, which represented approximately 72.6% of our total revenues for the six months ended June 30, 2009. We earn fees for various other financial services, such as installment loans, credit services, check cashing services, title loans, open-end credit, money transfers and money orders. We operated 557 short-term lending branches in 24 states at June 30, 2009. In all but one of these states, Texas, we fund our payday loans directly to the customer and receive a fee. Fees charged to customers vary from state to state, generally ranging from $15 to $20 per $100 borrowed, and in most cases, are limited by state law. Through five locations in the Kansas City area, we also sell used automobiles and finance most of those sales, earning income on the automotive sales and interest on the automotive loans.

 

Page 22

---

Table of Contents

In Texas, through one of our subsidiaries, we operate as a credit service organization (CSO) on behalf of consumers in accordance with Texas laws. We charge the consumer a CSO fee for arranging for an unrelated third-party to make a loan to the consumer and for providing related services to the consumer, including a guarantee of the consumer’s obligation to the third-party lender. In Illinois, New Mexico, Arizona and Montana, we offer an installment loan product, which is an amortizing loan generally over four to twelve months with principal amounts ranging between $300 and $1,000.

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

We evaluate our branches based on revenue growth, gross profit contributions and loss ratio (which is losses as a percentage of revenues), with consideration given to the length of time the branch has been open and its geographic location. We evaluate changes in comparable branch metrics on a routine basis to assess operating efficiency. We define comparable branches as those branches that are open during the full periods for which a comparison is being made. For example, comparable branches for the quarterly analysis as of June 30, 2009 have been open at least 15 months on that date. We monitor newer branches for their progress to profitability and rate of loan growth.

With respect to our cost structure, salaries and benefits are one of our largest costs and have historically been driven by the addition of branches throughout the year and growth in loan volumes. Our provision for losses is also a significant expense. If a customer’s check is returned by the bank as uncollected, we make an immediate charge-off for the amount of the customer’s loan, which includes accrued fees and interest. If any amount is collected on loans previously charged off, we record it as a recovery. We have experienced seasonality in our operations, with the first and fourth quarters typically being our strongest periods as a result of broader economic factors, such as holiday spending habits at the end of each year and income tax refunds during the first quarter.

Over the last five years, we have grown from 294 branches to 557 branches through a combination of acquisitions and new branch openings. During this period, we opened 307 de novo branches, acquired 104 branches and closed 148 branches. In response to changes in the overall market, over the past three years we have generally ceased our de novo branch expansion efforts, and have reduced our overall number of branches from 613 at December 31, 2006 to 557 at June 30, 2009. During the first six months of 2009, we closed 29 of our lower performing branches in various states (which included five branches that were consolidated into nearby branches). In accordance with GAAP, we recorded approximately $1.4 million in pre-tax charges during the six months ended June 30, 2009 associated with these closings.

The following table summarizes our changes in the number of short-term lending branches locations since January 1, 2004.

 

		2004			2005			2006			2007			2008			June 30, 2009
Beginning branch locations		294			371			532			613			596			585
De novo branches opened during period		54			174			46			20			12			1
Acquired branches during period		29			10			51			13			1
Branches closed during period		(6	)		(23	)		(16	)		(50	)		(24	)		(29	)
Ending branch locations		371			532			613			596			585			557

 

Page 23

---

Table of Contents

We intend to evaluate opportunities for new branch development to complement existing branches within a given state or market. Additionally, we utilize a disciplined acquisition strategy for both the payday and the buy here, pay here businesses. During the remainder of 2009, we expect to open up to 5 payday-focused branches. In January 2009, we acquired the assets related to two automotive sale and finance locations in Missouri.

According to the Community Financial Services Association of America (CFSA), industry analysts estimate that the industry has approximately 22,000 payday loan branches in the United States and these branches extend approximately $40 billion in short-term credit to millions of middle-class households that experience cash-flow shortfalls between paydays. We believe our industry is highly fragmented as 10 companies operate approximately 10,100 branches in the United States. After a number of years of growth, the industry has contracted slightly in the last two years, primarily due to changes in laws that govern the payday product. Absent changes in regulations and laws, we do not expect significant fluctuations in the industry’s number of branches in the foreseeable future.

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

During 2009, payday loan-related legislation was passed in various states, including South Carolina and Washington, that may affect our profitability beginning in 2010. We will continue to monitor and evaluate the laws as they are finalized in each of these states. During 2008, the industry undertook ballot initiatives in Arizona and Ohio in an effort to stabilize the regulatory environment with respect to providing short-term loans to customers in those states. While the outcome of those initiatives was not favorable, there is little immediate impact on us. In Arizona, we will continue to operate under the existing legislation, while working to eliminate the June 2010 sunset provision that would remove short-term loans as an alternative for Arizona customers. In Ohio, we closed 13 branches in the third quarter of 2008 in response to legislation that effectively precludes payday lending in that state, but are offering customers a new product at our remaining Ohio branches under a different statute.

 

Page 24

---

Table of Contents

RESULTS OF OPERATIONS

Three Months Ended June 30, 2009 Compared with the Three Months Ended June 30, 2008

The following table sets forth our results of operations for the three months ended June 30, 2009 compared to the three months ended June 30, 2008:

 

		Three Months Ended June 30,								Three Months Ended June 30,
		2008				2009				2008			2009
		(in thousands)								(percentage of revenues)
Revenues
Payday loan fees		$	43,112			$	38,474			82.4	%		74.0	%
Other			9,182				13,541			17.6	%		26.0	%
Total revenues			52,294				52,015			100.0	%		100.0	%
Branch expenses
Salaries and benefits			11,820				11,321			22.6	%		21.8	%
Provision for losses			14,084				11,746			26.9	%		22.6	%
Occupancy			6,470				6,030			12.4	%		11.6	%
Depreciation and amortization			1,077				1,035			2.1	%		2.0	%
Other			3,741				4,420			7.1	%		8.4	%
Total branch expenses			37,192				34,552			71.1	%		66.4	%
Branch gross profit			15,102				17,463			28.9	%		33.6	%
Regional expenses			3,309				3,382			6.3	%		6.5	%
Corporate expenses			6,126				5,225			11.7	%		10.0	%
Depreciation and amortization			688				827			1.3	%		1.6	%
Interest expense, net			1,010				811			1.9	%		1.6	%
Other expense, net			241				18			0.6	%		0.1	%
Income from continuing operations before income taxes			3,728				7,200			7.1	%		13.8	%
Provision for income taxes			1,433				2,726			2.7	%		5.2	%
Income from continuing operations			2,295				4,474			4.4	%		8.6	%
Loss from discontinued operations, net of income tax			(800	)			(217	)		(1.5	)%		(0.4	)%
Net income		$	1,495			$	4,257			2.9	%		8.2	%

The following table sets forth selected information of our comparable branches for the three months ended June 30, 2008 and 2009:

Comparable Branch Information (a):

 

		Three Months Ended June 30,
		2008			2009
Total revenues generated by all comparable branches (in thousands)		$	51,144		$	48,346
Total number of comparable branches			548			548
Average revenue per comparable branch		$	93,328		$	88,222

 

(a)	Comparable branches are those branches that were open for all of the two periods being compared, which means the 15 months since March 31, 2008.

 

Page 25

---

Table of Contents

The following table sets forth selected financial and statistical information for the three months ended June 30, 2008 and 2009:

 

		Three Months Ended June 30,
		2008				2009
Branch Information:
Number of branches, beginning of period			597				563
De novo branches opened			4
Acquired branches
Branches closed			(4	)			(6	)
Number of branches, end of period			597				557
Average number of branches open during period			597				561
Average number of branches open during period (excluding branches reported as discontinued operations)			561				558
Other Information:
Payday Loans:
Payday loan volume (in thousands)		$	309,170			$	277,913
Average loan (principal plus fee)			369.13				367.67
Average fees per loan			53.37				53.34
Installment Loans:
Installment loan volume (in thousands)		$	7,997			$	7,665
Average loan (principal)			528.91				497.72
Average term (days)			190				184
Automotive Loans:
Automotive loan volume (in thousands)		$	439			$	2,545
Average loan (principal)			7,706				8,628
Average term (months)			33				30

Income from continuing operations. For the three months ended June 30, 2009, income from continuing operations was $4.5 million compared to $2.3 million for the same period in 2008. A discussion of the various components of net income follows.

Revenues. For the three months ended June 30, 2009, revenues were $52.0 million, a slight decrease from $52.3 million during the three months ended June 30, 2008. The decrease in revenues was primarily due to reduced payday loan volumes, largely offset by higher automotive loan volumes (due to an increase in locations).

Revenues from our payday loan product represent our largest source of revenues and were approximately 74.0% of total revenues for the three months ended June 30, 2009. With respect to payday loan volume, we originated approximately $277.9 million in loans during second quarter 2009, which was a decline of 10.1% from the $309.2 million during second quarter 2008. This decline is attributable to reduced payday loan demand in most states, including Virginia, where we began offering an open-end credit product in late 2008. During second quarter 2009, we re-introduced the payday loan product in Virginia and no longer offer the open-end product. The average payday loan (including fee) totaled $367.67 in second quarter 2009 versus $369.13 during second quarter 2008. Average fees received from customers per loan declined from $53.37 in second quarter 2008 to $53.34 in second quarter 2009. Our average fee rate per $100 for second quarter 2009 was $16.97 compared to $16.90 in second quarter 2008.

 

Page 26

---

Table of Contents

The following table summarizes other revenues (in thousands) :

 

		Three Months Ended June 30,						Three Months Ended June 30,
		2008			2009			2008			2009
		(in thousands)						(percentage of revenues)
Installment loan interest		$	4,285		$	4,221		8.2	%		8.1	%
Buy here, pay here sales and interest			578			3,247		1.1	%		6.2	%
Credit service fees			1,414			1,490		2.7	%		2.9	%
Check cashing fees			1,339			1,254		2.6	%		2.4	%
Title loan fees			905			757		1.7	%		1.5	%
Open-end credit interest and fees						1,760					3.4	%
Other fees			661			812		1.3	%		1.5	%
Total		$	9,182		$	13,541		17.6	%		26.0	%

Revenues from installment loans, CSO fees, check cashing, title loans, buy here, pay here and other sources totaled $13.5 million during second quarter 2009, up approximately $4.3 million or 46.7% from $9.2 million in the comparable prior year quarter.

The increase in revenues from our buy here, pay here operations was a result of operating five branches during second quarter 2009 compared to two branches during second quarter 2008. The revenues from the open-end credit reflect the introduction of the product in Virginia in late 2008. As noted above, we are no longer offering this product in Virginia and have re-introduced the payday product. The decline in installment loans, check cashing fees and title loan fees reflects a decrease in customer demand for these products.

We evaluate our branches based on revenue growth, with consideration given to the length of time a branch has been open. The following table summarizes our revenues and average revenue per branch per month for the three months ended June 30, 2008 and 2009 based on the year that a branch was opened or acquired.

 

Year Opened/Acquired		Number of Branches		Revenues									Average Revenue/Branch/Month
				2008			2009			% Change			2008			2009
				(in thousands)									(in thousands)
Pre - 1999		33		$	5,967		$	5,413		(9.3	)%		$	60		$	55
1999		38			4,781			4,416		(7.6	)%			42			39
2000		45			5,033			4,631		(8.0	)%			37			34
2001		31			3,498			3,178		(9.1	)%			38			34
2002		51			5,211			4,882		(6.3	)%			34			32
2003		41			3,995			3,823		(4.3	)%			32			31
2004		66			5,163			4,953		(4.1	)%			26			25
2005		136			10,122			9,786		(3.3	)%			25			24
2006		84			5,818			5,568		(4.3	)%			23			22
2007		19			1,310			1,329		1.4	%			23			23
2008		12			265			713		(b	)			7			20
2009		1						19		(b	)						6
Sub-total		557			51,163			48,711		(4.8	)%		$	31		$	29
Closed branches (a)					531			22
Buy here, pay here					578			3,247
Other					22			35
Total				$	52,294		$	52,015		(0.5	)%

 

(a)	Amounts for closed branches do not include revenue from branches that are reported as discontinued operations.

(b)	Not meaningful.

 

Page 27

---

Table of Contents

We define comparable branches as those branches that are open during the full periods for which a comparison is being made. For example, comparable branches for the quarterly analysis as of June 30, 2009 have been open at least 15 months. Our revenues from comparable branches decreased by $2.8 million, from $51.1 million during second quarter 2008 to $48.3 million in second quarter 2009. This decrease is primarily attributable to reduced customer demand across most states.

We expect that the remainder of 2009 will present various challenges and opportunities for our customers and our branch operations given the dynamic state of the economy and markets. We believe that our customers used 2008 stimulus checks to reduce their borrowings, including borrowings with us. Likewise, we believe that stimulus checks and refundable tax credits during 2009 have been used by our customers to reduce their borrowings, including borrowings with us. With increasing unemployment rates, low consumer spending and negative consumer confidence, we anticipate that customer demand will continue to be lower than the prior year and therefore, revenue improvements will be unlikely during 2009 for our core short-term lending branches. Prior to second quarter 2009, we had expected revenues from our buy here, pay here operations to improve by $12 million to $15 million over 2008, due to the two locations we acquired in January 2009 and the continued growth in our three existing locations. Based on macroeconomic factors, we now expect that revenues from our buy here, pay here operations will improve by $8 million to $12 million over 2008.

Branch Expenses. Total branch expenses decreased $2.6 million, or 7.0%, from $37.2 million during second quarter 2008 to $34.6 million in second quarter 2009. Branch operating costs, exclusive of loan losses, decreased to $22.8 million during second quarter 2009 compared to $23.1 million in second quarter 2008. The decrease was attributable to a reduction in overtime compensation and occupancy costs, partially offset by higher cost of sales associated with our automotive sales locations.

The provision for losses decreased from $14.1 million in second quarter 2008 to $11.7 million during second quarter 2009. Our loss ratio was 22.6% in second quarter 2009 and 26.9% in second quarter 2008. This improvement reflects lower returned items and a better collection rate quarter-to-quarter, partially offset by a higher allowance associated with our open-end credit product in Virginia. Our charge-offs as a percentage of revenue were 36.9% during second quarter 2009 and 44.7% during second quarter 2008. Our collections as a percentage of charge-offs were 47.8% during second quarter 2009 and 45.6% during second quarter 2008. We received approximately $258,000 from the sale of certain payday loan receivables during second quarter 2009 that had previously been written off compared to $243,000 during second quarter 2008.

We believe the very favorable collections experience during the first half of 2009 reflects our customers’ desire to reduce debt and strengthen their financial position. With respect to the remainder of 2009, we anticipate that the collections environment will begin to return to historical levels as customers adapt to the current state of the economy. We also anticipate that our loss ratio will continue to be negatively affected by the transition in Virginia from the open-end product back to the payday loan product. Our past experience has indicated that the introduction of new products has increased our loss ratio as our customers transition to the new product (e.g., from payday loans to installment loans in Illinois and New Mexico).

Comparable branches totaled $11.1 million in loan losses during second quarter 2009 compared to $14.4 million for the same period in the prior year. In our comparable branches, the loss ratio was 23.0% during second quarter 2009 compared to 28.2% during second quarter 2008.

Branch Gross Profit. Branch gross profit was $17.5 million in second quarter 2009 versus $15.1 million in second quarter 2008. Branch gross margin, which is branch gross profit as a percentage of revenues, increased from 28.9% during second quarter 2008 to 33.6% during second quarter 2009. Comparable branches during second quarter 2009 reported a gross margin of 36.0% versus 30.5% in second quarter 2008.

 

Page 28

---

Table of Contents

The following table summarizes our gross profit (loss), gross margin (gross profit as a percentage of revenues) and loss ratio (losses as a percentage of revenues) of branches for the three months ended June 30, 2008 and 2009 based on the year that a branch was opened or acquired.

 

Year Opened/Acquired		Branches		Gross Profit (Loss)								Gross Margin %						Loss Ratio
				2008				2009				2008			2009			2008			2009
				(in thousands)
Pre - 1999		33		$	2,504			$	2,620			42.0	%		48.4	%		26.1	%		20.7	%
1999		38			1,631				1,782			34.1	%		40.3	%		25.0	%		19.0	%
2000		45			1,720				1,838			34.2	%		39.7	%		28.3	%		23.8	%
2001		31			1,391				1,375			39.8	%		43.3	%		24.2	%		19.5	%
2002		51			1,973				1,825			37.9	%		37.4	%		24.9	%		25.7	%
2003		41			1,422				1,502			35.6	%		39.3	%		26.4	%		23.0	%
2004		66			1,606				1,694			31.1	%		34.2	%		23.1	%		20.1	%
2005		136			1,979				2,775			19.6	%		28.4	%		32.8	%		24.2	%
2006		84			1,267				1,608			21.8	%		28.9	%		32.2	%		25.3	%
2007		19			84				233			6.4	%		17.6	%		42.2	%		32.9	%
2008		12			(52	)			197			(19.6	)%		27.7	%		36.2	%		19.9	%
2009		1							(38	)					(c	)					(c	)
Sub-total		557			15,525				17,411			30.3	%		35.7	%		28.2	%		23.0	%
Closed branches (a)					(261	)			(80	)
Buy here, pay here					(112	)			120			(19.4	)%		3.7	%		28.4	%		32.1	%
Other (b)					(50	)			12
Total				$	15,102			$	17,463			28.9	%		33.6	%		26.9	%		22.6	%

 

(a)	Amounts for closed branches do not include gross losses from branches that are reported as discontinued operations.

(b)	Includes the sale of older debt for approximately $258,000 and $243,000 for the three months ended June 30, 2009 and 2008, respectively.

(c)	Not meaningful.

Regional and Corporate Expenses. Regional and corporate expenses declined by $800,000, from $9.4 million in second quarter 2008 to $8.6 million in second quarter 2009. The decline resulted from our cost management efforts during 2009.

Income Tax Provision. The effective income tax rate during second quarter 2009 declined to 37.9% from 38.4% in prior year’s second quarter. The decline is primarily due to certain expenses for government affairs that were not deductible for income tax purposes during second quarter 2008.

 

Page 29

---

Table of Contents

Six Months Ended June 30, 2009 Compared with the Six Months Ended June 30, 2008

The following table sets forth our results of operations for the six months ended June 30, 2009 compared to the six months ended June 30, 2008:

 

		Six Months Ended June 30,								Six Months Ended June 30,
		2008				2009				2008			2009
		(in thousands)								(percentage of revenues)
Revenues
Payday loan fees		$	85,600			$	77,749			81.5	%		72.6	%
Other			19,426				29,323			18.5	%		27.4	%
Total revenues			105,026				107,072			100.0	%		100.0	%
Branch expenses
Salaries and benefits			23,326				22,981			22.2	%		21.5	%
Provision for losses			22,458				20,353			21.4	%		19.0	%
Occupancy			12,754				12,273			12.1	%		11.5	%
Depreciation and amortization			2,162				2,066			2.1	%		1.9	%
Other			7,820				9,953			7.4	%		9.3	%
Total branch expenses			68,520				67,626			65.2	%		63.2	%
Branch gross profit			36,506				39,446			34.8	%		36.8	%
Regional expenses			6,752				6,846			6.4	%		6.4	%
Corporate expenses			13,031				11,176			12.4	%		10.4	%
Depreciation and amortization			1,364				1,560			1.3	%		1.5	%
Interest expense, net			2,208				1,858			2.1	%		1.7	%
Other expense, net			319				153			0.4	%		0.1	%
Income from continuing operations before income taxes			12,832				17,853			12.2	%		16.7	%
Provision for income taxes			5,012				6,886			4.8	%		6.4	%
Income from continuing operations			7,820				10,967			7.4	%		10.3	%
Loss from discontinued operations, net of income tax			(931	)			(953	)		(0.8	)%		(0.9	)%
Net income		$	6,889			$	10,014			6.6	%		9.4	%

The following table sets forth selected information of our comparable branches for the six months ended June 30, 2008 and 2009:

Comparable Branch Information (a):

 

		Six Months Ended June 30,
		2008			2009
Total revenues generated by all comparable branches (in thousands)		$	102,234		$	97,870
Total number of comparable branches			544			544
Average revenue per comparable branch		$	187,930		$	179,908

 

(a)	Comparable branches are those branches that were open for all of the two periods being compared, which means the 18 months since December 31, 2007.

 

Page 30

---

Table of Contents

The following table sets forth selected financial and statistical information for the six months ended June 30, 2008 and 2009:

 

		Six Months Ended June 30,
		2008				2009
Branch Information:
Number of branches, beginning of period			596				585
De novo branches opened			6				1
Acquired branches			1
Branches closed			(6	)			(29	)
Number of branches, end of period			597				557
Average number of branches open during period (excluding branches reported as discontinued operations)			561				559
Other Information:
Payday loans:
Payday loan volume (in thousands)		$	605,449			$	551,050
Average loan (principal plus fee)			369.77				368.53
Average fees per loan			53.51				53.32
Installment Loans:
Installment loan volume (in thousands)		$	13,677			$	14,056
Average loan (principal)			524.87				500.83
Average term (days)			189				190
Automotive Loans:
Automotive loan volume (in thousands)		$	811			$	6,387
Average loan (principal)			7,798				8,725
Average term (months)			33				31
Locations, end of period			2				5

Income from continuing operations. For the six months ended June 30, 2009, income from continuing operations was $11.0 million compared to $7.8 million for the same period in 2008. A discussion of the various components of net income follows.

Revenues. For the six months ended June 30, 2009, revenues were $107.1 million, a 2.0% increase from $105.0 million during the six months ended June 30, 2008. The increase in revenues reflects higher automobile sales due to increase in automotive locations, partially offset by reduced payday loan volume. We originated approximately $551.1 million through payday loans during the six months ended June 30, 2009, which was a decrease of 9.0% from the $605.4 million during the same period in the prior year. The average loan (including fee) totaled $368.53 during the first six months of 2009 versus $369.77 in comparable 2008. Average fees received from customers per loan were $53.51 during first six months of 2008 compared to $53.32 during first six months of 2009. Our average fee rate per $100.00 was $16.91 for the first six months 2009 and $16.92 for the same period in 2008.

We anticipate that our average fee rate may decline in 2009 as rates are modified based on changing legislation or regulation and as we enter into or expand in states that have lower fee structures.

 

Page 31

---

Table of Contents

The following table summarizes other revenues:

 

		Six Months Ended June 30,						Six Months Ended June 30,
		2008			2009			2008			2009
		(in thousands)						(percentage of revenues)
Installment loan interest		$	8,890		$	8,698		8.5	%		8.1	%
Buy-here, pay-here sales and interest			1,179			7,626		1.1	%		7.1	%
Credit service fees			2,817			3,083		2.7	%		2.9	%
Check cashing fees			3,296			3,191		3.1	%		3.0	%
Title loan fees			1,838			1,556		1.8	%		1.5	%
Open-end credit interest and fees						3,429					3.3	%
Other fees			1,406			1,740		1.3	%		1.5	%
Total		$	19,426		$	29,323		18.5	%		27.4	%

Revenues from installment loans, CSO fees, check cashing, title loans, buy-here, pay-here and other sources totaled $29.3 million and $19.4 for the six months ended June 30, 2009 and 2008, respectively. The increase in other revenues is primarily a result of an increase in automobile sales and the introduction of the open-end credit product during 2009.

We evaluate our branches based on revenue growth, with consideration given to the length of time a branch has been open. The following table summarizes our revenues and average revenue per branch per month for the six months ended June 30, 2008 and 2009 based on the year that a branch was opened or acquired.

 

Year Opened/Acquired		Number of Branches		Revenues									Average Revenue/Branch/Month
				2008			2009			% Change			2008			2009
				(in thousands)									(in thousands)
Pre - 1999		33		$	12,173		$	11,071		(9.1	)%		$	61		$	56
1999		38			9,582			8,988		(6.2	)%			42			39
2000		45			10,338			9,451		(8.6	)%			38			35
2001		31			6,986			6,575		(5.9	)%			38			35
2002		51			10,538			10,021		(4.9	)%			34			33
2003		41			8,014			7,770		(3.0	)%			33			32
2004		66			10,426			10,021		(3.9	)%			26			25
2005		136			20,136			19,910		(1.1	)%			25			24
2006		84			11,472			11,320		(1.3	)%			23			22
2007		19			2,569			2,743		6.7	%			23			24
2008		12			296			1,377		(b	)			4			19
2009		1						19		(b	)						3
Sub-total		557			102,530			99,266		(3.2	)%		$	31		$	30
Closed branches (a)					1,271			117
Buy here, pay here					1,179			7,626
Other					46			63
Total				$	105,026		$	107,072		1.9	%

 

(a)	Amounts for closed branches do not include revenues from branches that are reported as discontinued operations.

(b)	Not meaningful.

Revenues for comparable branches decreased 4.2%, or $4.3 million, to $97.9 million for the six months ended June 30, 2009. This decrease is primarily attributable to reduced customer demand across most states.

Branch Expenses. Total branch expenses decreased by $900,000, or 1.3%, from $68.5 million during first six months of 2008 to $67.6 million in first six months of 2009. Branch operating costs, exclusive of loan losses,

 

Page 32

---

Table of Contents

increased 2.6% to $47.3 million during the six months ended June 30, 2009 compared to $46.1 million during the same period in the prior year. This increase was primarily due to higher cost of sales for automobile purchases, partially offset by reduced salaries and benefits and a slight decrease in occupancy costs. Branch-level salaries and benefits declined by $345,000 for the six months ended June 30, 2009 compared to the same period in the prior year primarily due to a reduction in overtime compensation.

The provision for losses declined from $22.5 million for the six months ended June 30, 2008 to $20.4 million during six months ended June 30, 2009. Our loss ratio improved to 19.0% for the six months ended June 30, 2009 versus 21.4% for the six months ended June 30, 2008. We sold approximately $552,000 of older debt during the first half of 2009 compared to $243,000 during the first half of 2008. Our charge-offs as a percentage of revenue were 37.2% during the six months ended June 30, 2009 compared to 44.2% in the same period of the prior year. Our collections as a percentage of charge-offs were 55.3% during the six months ended June 30, 2009 compared to 50.9% during the same period in the prior year.

Comparable branches totaled $18.7 million in loan losses for the first six months of 2009 compared to $22.8 million in loan losses for the first six months of 2008. In our comparable branches, the loss ratio was 19.2% for the six months ended June 30, 2009 compared to 22.3% for the same period in 2008.

Branch Gross Profit. Branch gross profit increased by $2.9 million, or 7.9%, from $36.5 million for the six months ended June 30, 2008 to $39.4 million for the six months ended June 30, 2009. Branch gross margin increased from 34.8% to 36.8%. The higher gross profit during 2009 reflects improvements in most states, partially offset by reduced gross profit in Virginia as we transitioned to the open-end credit product, and then back to the payday loan product.

The following table summarizes our gross profit (loss), gross margin (gross profit as a percentage of revenues) and loss ratio (losses as a percentage of revenues) of branches for the six months ended June 30, 2008 and 2009 based on the year that a branch was opened or acquired.

 

Year Opened/Acquired		Branches		Gross Profit (Loss)								Gross Margin %						Loss Ratio
				2008				2009				2008			2009			2008			2009
				(in thousands)
Pre - 1999		33		$	5,870			$	5,941			48.2	%		53.7	%		19.4	%		14.9	%
1999		38			3,693				3,814			38.5	%		42.4	%		20.0	%		15.8	%
2000		45			3,966				4,004			38.4	%		42.4	%		24.7	%		20.7	%
2001		31			3,005				3,131			43.0	%		47.6	%		20.0	%		15.4	%
2002		51			4,596				3,998			43.6	%		39.9	%		19.2	%		22.5	%
2003		41			3,326				2,939			41.5	%		37.8	%		19.8	%		23.7	%
2004		66			3,909				3,872			37.5	%		38.6	%		15.9	%		14.8	%
2005		136			5,072				6,445			25.2	%		32.4	%		26.3	%		19.9	%
2006		84			3,081				3,607			26.9	%		31.9	%		26.1	%		21.5	%
2007		19			191				675			7.5	%		24.6	%		39.4	%		26.5	%
2008		12			(110	)			388			(37.3	)		28.2	%		34.1	%		16.9	%
2009		1							(79	)					(c	)					(c	)
Sub-total		557			36,599				38,735			35.7	%		39.0	%		22.3	%		19.1	%
Closed branches (a)					(371	)			(241	)
Buy here, pay here					(138	)			(231	)		(11.7	)%		(3.0	)%		25.1	%		35.9	%
Other (b)					416				1,183
Total				$	36,506			$	39,446			34.8	%		36.8	%		21.4	%		19.0	%

 

(a)	Amounts for closed branches do not include gross losses from branches that are reported as discontinued operations.

(b)	Includes the sale of older debt for approximately $552,000 for the six months ended June 30, 2009 and $243,000 for six months ended June 30, 2008.

(c)	Not meaningful.

 

Page 33

---

Table of Contents

Comparable branches for the six months ended June 30, 2009 reported a gross margin of 39.3% versus 35.9% in the comparable prior year period, with the improvement in 2009 resulting from stronger results in the majority of states.

Regional and Corporate Expenses. Regional and corporate expenses decreased $1.8 million from $19.8 million during the six months ended June 30, 2008 to $18.0 million in the current year period. This decline reflects reduced governmental affairs and public education expenditures during 2009 compared to 2008. During 2008, the industry undertook ballot initiatives in Arizona and Ohio in an effort to stabilize the regulatory environment with respect to providing short-term loans to customers in those states.

Interest and Other Expenses. Interest expense totaled $1.9 million during the six months ended June 30, 2009 compared to interest expense of $2.2 million during the six months ended June 30, 2008. The lower level of interest expense reflects lower average debt balances and interest rates during the six months ended June 30, 2009.

Income Tax Provision. The effective income tax rate for the six months ended June 30, 2009 was 38.6% compared to 39.1% for the six months ended June 30, 2008. The decline is primarily due to certain expenses for government affairs during 2008 that were not deductible for income tax purposes.

Discontinued Operations. During first half of 2009, we closed 29 of our lower performing branches in various states (which included 24 branches reported as discontinued operations and five branches that were consolidated into nearby branches). In accordance with GAAP, we recorded approximately $1.4 million in pre-tax charges during the six months ended June 30, 2009 associated with the closings reported as discontinued operations. The charges included an $810,000 loss for the disposition of fixed assets, $596,000 for lease terminations and other related occupancy costs, $15,000 in severance and benefit costs and $10,000 for other costs.

During third quarter 2008, the Company closed 13 of its 32 branches in Ohio, primarily due to a new law that went into effect on September 1, 2008 that effectively precludes payday loans. In accordance with GAAP, the Company recorded approximately $943,000 in pre-tax charges during 2008 associated with these closings. The charges included a $554,000 loss for the disposition of fixed assets, $342,000 for lease terminations and other related occupancy costs, $40,000 in severance and benefit costs and $7,000 for other costs.

As noted above, the closure of branches during first half of 2009 included 24 branches that were not consolidated into nearby branches. These branches and the Ohio branches that closed during third quarter 2008 are reported as discontinued operations in accordance with Statement of Financial Accounting Standards No. 144 – Accounting for the Impairment or Disposal of Long-Lived Assets (SFAS 144). In accordance with SFAS 144, the Consolidated Statements of Income and related disclosures in the accompanying notes present the results of these branches as discontinued operations for all periods presented. With respect to the Consolidated Balance Sheets, the Consolidated Statements of Cash Flows and related disclosures in the accompanying notes, the items associated with the discontinued operations are included with the continuing operations for all periods presented. Summarized financial information for discontinued operations during the three and six months ended June 30, 2008 and 2009 is presented below (in thousands) :

 

		Three Months Ended June 30,								Six Months Ended June 30,
		2008				2009				2008				2009
Total revenues		$	1,596			$	67			$	3,308			$	865
Provision for losses			954				(23	)			1,723				479
Other branch expenses (income)			1,404				316				2,553				1,264
Branch gross loss			(762	)			(226	)			(968	)			(878	)
Other, net			(561	)			(132	)			(571	)			(697	)
Loss before income taxes			(1,323	)			(358	)			(1,539	)			(1,575	)
Benefit for income taxes			523				141				608				622
Loss from discontinued operations		$	(800	)		$	(217	)		$	(931	)		$	(953	)

 

Page 34

---

Table of Contents

LIQUIDITY AND CAPITAL RESOURCES

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

 

		Six Months Ended June 30,
		2008				2009
Cash flows provided by (used for):
Operating activities		$	15,437			$	17,806
Investing activities			(1,608	)			(5,091	)
Financing activities			(20,245	)			(16,548	)
Net decrease in cash and cash equivalents			(6,416	)			(3,833	)
Cash and cash equivalents, beginning of year			24,145				17,314
Cash and cash equivalents, end of period		$	17,729			$	13,481

Cash Flow Discussion. Our primary source of liquidity is cash provided by operations. On December 7, 2007, we entered into an Amended and Restated Credit Agreement with a syndicate of banks that provides for a term loan of $50 million and a revolving line of credit (including provisions permitting the issuance of letters of credit and swingline loans) in the aggregate principal amount of up to $45 million. The credit facility expires on December 6, 2012. The maximum borrowings under the amended credit facility may be increased to $120 million pursuant to bank approval in accordance with the terms set forth in the credit facility. We used the proceeds of the term loan to pay a $2.50 per common share special cash dividend in December 2007.

Recently, the capital and credit markets have become increasingly volatile as a result of adverse conditions that have caused the failure or near failure of a number of large financial services companies. If the capital and credit markets continue to experience volatility and the availability of funds remains limited, it is possible that our ability to access the capital and credit markets may be limited at a time when we would like or need to do so, which could have an impact on our ability to fund our operations, refinance maturing debt or react to changing economic and business conditions. At this time, we believe that our available short-term and long-term capital resources are sufficient to fund our working capital requirements, scheduled debt payments, interest payments, capital expenditures, income tax obligations, anticipated dividends to our stockholders, and anticipated share repurchases for the foreseeable future.

In accordance with GAAP, amounts drawn on our revolving credit facility are shown as debt due within one year. Under the terms of our credit agreement, however, our revolving credit facility does not mature until December 2012, and no amounts are due thereon prior to the maturity of the credit facility. Accordingly, so long as we are in compliance with our financial and other covenants in the credit facility, we do not face a refinancing risk until the term loan and the revolving credit facility mature in December 2012.

Net cash provided by operating activities for the six months ended June 30, 2009 was $17.8 million, approximately $2.4 million higher than the $15.4 million in comparable 2008. This increase is primarily attributable to net income and changes in working capital items, which can vary from period to period based on the timing of cash receipts and cash payments.

Net cash used by investing activities for the six months ended June 30, 2009 was $5.1 million, which consisted of approximately $4.2 million for the acquisition of two buy here, pay here locations in Missouri and $938,000 for capital expenditures. The capital expenditures primarily included $415,000 for renovations to existing and acquired branches and $318,000 for technology and other furnishings at the corporate office. Net cash used by investing activities for the six months ended June 30, 2008 was $1.6 million, which consisted of approximately

 

Page 35

---

Table of Contents

$1.4 million for capital expenditures and approximately $206,000 in acquisition costs. The capital expenditures primarily consisted of $264,000 to open six de novo branches in 2008, $620,000 for renovations to existing and acquired branches and $407,000 for technology and other furnishings at the corporate office.

Net cash used for financing activities for the six months ended June 30, 2009 was $16.5 million, which primarily consisted of $24.5 million in repayments of indebtedness under the credit facility, $5.9 million in repayments on the term loan, $1.8 million in dividend payments to stockholders and $1.3 million for the repurchase of 228,000 shares of common stock. These items were partially offset by proceeds received from the borrowing of $16.8 million under the credit facility. Cash used for financing activities for the six months ended June 30, 2008 was $20.2 million, which primarily consisted of $25.3 million in repayments of indebtedness under the credit facility, $2.0 million in repayments on the term loan and $11.1 million for the repurchase of 1.4 million shares of common stock. These items were partially offset by proceeds received from the borrowing of $19.1 million under the credit facility.

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

Future Capital Requirements. We believe that our available cash, expected cash flow from operations, and borrowings available under our revolving credit facility will be sufficient to fund our liquidity and capital expenditure requirements during 2009. Expected short-term uses of cash include funding of any increases in payday loans, automotive inventory, debt repayments (including any mandatory prepayment of our term loan), interest payments on outstanding debt, dividend payments, to the extent approved by the board of directors, repurchases of company stock, and financing of new branch expansion and acquisitions, if any. We funded the purchase of the assets associated with two buy here, pay here locations with a draw on our credit facility. We expect that the majority of our cash requirements will be satisfied through internally generated cash flows, with any shortfall being funded through borrowings under our revolving credit facility.

In November 2008, our board of directors established a regular quarterly dividend of $0.05 per common share. The declaration of dividends is subject to the discretion of our board of directors and will depend on our operating results, financial condition, cash and capital requirements and other factors that the board of directors deems relevant. On July 29, 2009, our board of directors declared a quarterly dividend of $0.05 per common share. The quarterly dividend is payable September 1, 2009, to stockholders of record as of August 18, 2009.

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

As part of our business strategy, we intend to open de novo branches and consider acquisitions in existing and new markets. We believe our current cash position, the availability under the credit facility and our expected cash flow from operations should provide the capital needed to fund this level of branch growth, assuming no material acquisitions in 2009.

The capital costs of opening a de novo branch include leasehold improvements, signage, computer equipment and security systems, and the costs vary depending on the branch size, location and the services being offered. During 2007 and 2008, we opened 32 de novo branches. The average cost of capital expenditures for these new branches was approximately $44,000 per branch. Existing branches require minimal ongoing capital expenditure, with the majority of any expenditures related to discretionary renovation or relocation projects.

As of December 31, 2008, we had three buy here, pay here locations. In addition, we purchased two buy here, pay here lots in January 2009 for approximately $4.2 million and we may open one additional lot during 2009. During the start-up of these operations, capital requirements are not material. As the business grows, however,

 

Page 36

---

Table of Contents

the business requires ongoing replenishment of automotive inventory. Sales of automobiles are typically completed through a small down payment and an installment loan. As a result, the initial phase of a buy here, pay here operation is cash flow negative. Based on initial information and industry research, it appears that a typical location requires approximately $2.5 million to $3.5 million of capital availability over a two to four year period. As this business progresses, we will evaluate the capital requirements and the associated return on investment. We have the ability to manage the capital needs of the business through reduction of the number of automobiles held at each location, although reduced inventory levels may limit sales because of the appearance of limited vehicle selection for the customer.

Concentration of Risk . Our branches located in the states of Missouri, California, Kansas, Arizona, South Carolina, Washington and Illinois represented approximately 25%, 12%, 8%, 8%, 7%, 5% and 5%, respectively, of total revenues for the six months ended June 30, 2009. Our branches located in the states of Missouri, Arizona, California, Illinois, South Carolina, and Kansas represented approximately 27%, 11%, 11%, 7%, 7% and 6%, respectively, of total branch gross profit for the six months ended June 30, 2009. To the extent that laws and regulations are passed that affect our ability to offer payday loans or the manner in which we offer payday loans in any one of those states, our financial position, results of operations and cash flows could be adversely affected. The current Arizona payday loan statutory authority expires by its terms on June 30, 2010, and amendments to the Washington law become effective January 1, 2010, which are likely to adversely affect revenues and profitability of our Washington branches.

Seasonality

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

Off-Balance Sheet Arrangements

In September 2005, we began operating through a subsidiary as a CSO in our Texas branches. As a CSO, we act as a credit services organization on behalf of consumers in accordance with Texas laws. We charge the consumer a fee for arranging for an unrelated third-party lender to make a loan to the consumer and for providing related services to the consumer, including a guarantee of the consumer’s obligation to the third-party lender. We also service the loan for the lender. We are not involved in the loan approval process or in determining the loan approval procedures or criteria, and we do not acquire or own any participation interest in the loans. Consequently, loans made by the lender will not be included in our loans receivable balance and will not be reflected in the Consolidated Balance Sheet. Under the agreement with the current lender, however, we absorb all risk of loss through our guarantee of the consumer’s loan from the lender. As of December 31, 2008 and June 30, 2009, consumers had total loans outstanding with the lender of approximately $3.6 million and $2.2 million, respectively. The decline in loans outstanding was primarily due to the closure of 11 branches in Texas during first quarter 2009. Because of the economic exposure for potential losses related to the guarantee of these loans, we record a payable at fair value to reflect the anticipated losses related to uncollected loans. The balance of the liability for estimated losses reported in accrued liabilities was approximately $180,000 as of December 31, 2008 and $100,000 as of June 30, 2009. With respect to the CSO, we recorded a provision for losses for the six months ended June 30, 2008 and 2009 totaling $1.5 million and $1.1 million, respectively. For the six months ended June 30, 2009, charge-offs and recoveries associated with the CSO were $1.7 million and $481,000, respectively.

 

Page 37

---

Table of Contents

Item 3.

Quantitative and Qualitative Disclosures About Market Risk

We have had no significant changes in our Quantitative and Qualitative Disclosures About Market Risk from that previously reported in our Annual Report on Form 10-K for the year ended December 31, 2008.

 

Item 4.

Controls and Procedures

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

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

 

Page 38

---

Table of Contents

PART II - OTHER INFORMATION

 

Item 1.

Legal Proceedings

There have been no material developments in the second quarter 2009 in any cases material to the Company as reported in our 2008 Annual Report on Form 10-K, other than the dismissal of plaintiff’s lawsuit in Missouri and plaintiff filing her arbitration action in Missouri. See Note 17 of notes to consolidated financial statements in Part I of this report.

 

Item 2.

Unregistered Sales of Equity Securities and Use of Proceeds

Issuer Purchases of Equity Securities. The following table sets forth certain information about the shares of common stock we repurchased during the second quarter 2009.

 

Period		Total Number of Shares Purchased		Average Price Paid Per Share			Total Number of Shares Purchased as Part of Publicly Announced Program		Maximum Approximate Dollar Value of Shares that May Yet Be Purchased Under the Program
April 1 – April 30		32,100		$	6.24		32,100		$	8,738,672
May 1 – May 31		36,598			6.65		36,598			8,495,287
June 1 – June 30		42,373			6.22		42,373			8,231,589
Total		111,071		$	6.37		111,071		$	8,231,589

On June 3, 2009, our board of directors extended our common stock repurchase program through June 30, 2011. The board of directors has previously authorized us to repurchase up to $60 million of our common stock in the open market and through private purchases. As of June 30, 2009, we have repurchased 4.7 million shares at a total cost of approximately $51.8 million, which leaves approximately $8.2 million that may yet be purchased under the current program.

 

Item 4.

Submission of Matters to a Vote of Security Holders

Our annual meeting of stockholders was held in Overland Park, Kansas, on June 3, 2009. At that meeting, the stockholders considered and acted upon the following proposals:

Proposal 1. The Election of Directors. By the vote referenced below, the stockholders elected the following individuals to serve as directors for a term of one year and until their respective successors are duly elected and qualified:

 

Director		For		Withheld Authority
Don Early		16,582,241		687,508
Mary Lou Early		16,548,924		720,825
Richard B. Chalker		16,410,656		859,093
Gerald F. Lamberti		16,418,340		851,409
Francis P. Lemery		16,445,856		823,893
Mary V. Powell		16,444,956		824,793

 

Page 39

---

Table of Contents

Proposal 2. Increase the number of shares available for issuance under the 2004 Equity Incentive Plan. By the vote referenced below, the stockholders voted to increase the number of shares of common stock available for issuance under the Company’s 2004 Equity Incentive Plan from 3,000,000 to 5,000,000 shares.

 

For		Against		Abstain		Broker Non-Votes
15,036,559		1,544,941		3,571		684,678

Proposal 3. Increase the maximum number of shares an individual may receive in any calendar year under the 2004 Equity Incentive Plan. By the vote referenced below, the stockholders voted to increase the maximum number of shares of common stock underlying options and other equity-based awards that may be granted to an individual in any calendar year under the Company’s 2004 Equity Incentive Plan from 200,000 to 400,000 shares.

 

For		Against		Abstain		Broker Non-Votes
14,938,070		1,644,901		2,100		684,678

Proposal 4. Ratification of Independent Auditor. By the vote referenced below, the stockholders voted to ratify the appointment of Grant Thorton LLP as independent registered public accounting firm for the Company for the year ending December 31, 2009.

 

For		Against		Abstain		Broker Non-Votes
17,213,745		55,832		172		—

No other matters were submitted to a vote of the stockholders at the annual meeting.

 

Item 6.

Exhibits

 

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

 

Page 40

---

Table of Contents

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the Company has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized and in the capacities indicated on August 7, 2009.

 

QC Holdings, Inc.

/s/ Darrin J. Andersen

Darrin J. Andersen

President and Chief Operating Officer

/s/ Douglas E. Nickerson

Douglas E. Nickerson

Chief Financial Officer

(Principal Financial and Accounting Officer)

 

Page 41