UNITED STATES SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
FORM 10-K
(Mark One)
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x
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ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the fiscal year ended December 31, 2011
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or
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¨
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TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
For the transition period from _______________________ to ___________________
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Commission File Number 000-52015
WESTERN CAPITAL RESOURCES, INC.
(Exact name of registrant as specified in
its charter)
Minnesota
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47-0848102
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(State of incorporation)
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(I.R.S. Employer Identification No.)
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11550 “I” Street, Suite 150
Omaha, Nebraska
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68137
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(Address of principal executive offices)
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(Zip Code)
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Registrant’s telephone number, including
area code: (402) 551-8888
Securities registered pursuant to Section
12(b) of the Act:
Title of Each Class
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Name of Each Exchange on which Registered
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None
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N/A
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Securities registered pursuant to Section
12(g) of the Act: Common Stock, no par value per share
Indicate by check mark if the registrant is a well-known seasoned
issuer, as defined in Rule 405 of the Securities Act.
¨
Yes
x
No
Indicate by check mark if the registrant is not required to
file reports pursuant to Section 13 or Section 15(d) of the Act.
¨
Yes
x
No
Indicate by check mark whether the registrant (1) has filed
all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months
(or for such shorter period that the registrant was required to file such reports), and (2) has been subject to the filing requirements
for the past 90 days
x
Yes
¨
No
Indicate by check mark whether the registrant has submitted
electronically and posted on its corporate website, 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).
x
Yes
¨
No
Indicate by check mark if disclosure of delinquent filers pursuant
to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of registrant’s knowledge,
in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K.
¨
Indicate by check mark whether the registrant is a large accelerated
filer, an accelerated filer, a non-accelerated filer or a smaller reporting company. See definition of “accelerated filer,”
large accelerated filer” and “smaller reporting company” in Rule 12b-2 of the Exchange Act. (Check one):
Large accelerated filer
¨
Accelerated
filer
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Non-accelerated filer
¨
Smaller
reporting company
x
Indicate by check mark whether the registrant is a shell company
(as defined in Rule 12b-2 of the Act).
¨
Yes
x
No
The aggregate market value of the voting stock held by persons
other than officers, directors and more than 5% shareholders of the registrant as of June 30, 2011 was approximately $241,300
based on the closing sales price of $0.045 per share as reported on the OTCBB. As of March 30, 2012, there were 5,397,780 shares
of our common stock, no par value per share, outstanding.
DOCUMENTS INCORPORATED IN PART BY REFERENCE
None.
Western Capital Resources, Inc.
Form 10-K
Table of Contents
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Page
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PART I
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Item 1.
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Business
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1
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Item 1A.
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Risk Factors
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14
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Item 1B.
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Unresolved Staff Comments
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21
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Item 2.
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Properties
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21
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Item 3.
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Legal Proceedings
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22
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Item 4.
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Mine Safety Disclosures
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22
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PART II
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Item 5.
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Market for Registrant’s Common Equity, Related Shareholder Matters
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23
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Item 6.
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Selected Financial Data
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25
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Item 7.
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Management’s Discussion and Analysis of Financial Condition and Results of Operations
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25
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Item 7A.
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Quantitative and Qualitative Disclosures About Market Risk
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32
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Item 8.
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Financial Statements and Supplementary Data
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32
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Item 9.
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Changes in and Disagreements with Accountants on Accounting and Financial Disclosure
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33
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Item 9A.
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Controls and Procedures
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33
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Item 9B.
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Other Information
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34
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PART III
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Item 10.
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Directors, Executive Officers and Corporate Governance
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35
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Item 11.
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Executive Compensation
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38
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Item 12.
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Security Ownership of Certain Beneficial Owners and Management and Related Shareholder Matters
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40
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Item 13.
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Certain Relationships and Related Transactions and Director Independence
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41
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Item 14.
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Principal Accountant Fees and Services
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42
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PART IV
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Item 15.
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Exhibits and Financial Statement Schedules
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43
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Signatures
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45
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PART I
ITEM 1 BUSINESS
OVERVIEW
Western Capital Resources, Inc.
(“Western Capital Resources,” “the Company,” “we” or “us”) is a Minnesota corporation
that maintains two operating segments: one provides short-term consumer loans, commonly referred to as cash advance or “payday”
loans, and the other operates Cricket retail cellular wireless stores.
Payday operations are conducted
under our wholly owned subsidiary Wyoming Financial Lenders, Inc. The Federal Trade Commission describes these loans as “small,
short term high rate loans.” Our payday loans generally are offered and made in exchange for fees that, if treated as interest,
are at a rate extraordinarily higher than prime and are made to individuals who do not typically qualify for prime rate loans.
As a consequence, our loans may be considered a type of subprime loan. In Wisconsin and Colorado, the Payday division provides
short-term installment loans. The installment loan product has a rate of interest significantly higher than traditional financial
institutions. At December 31, 2011, we operated 52 payday lending stores in nine states, including Colorado, Iowa, Kansas, Nebraska,
North Dakota, South Dakota, Utah, Wisconsin and Wyoming. Our provision of payday and installment loans is typically heavily regulated
by the various states in which we operate, and our payday lending and installment loan business is extremely susceptible to the
adverse effects of any changes in federal or state laws and regulations that may further restrict or flatly prohibit payday lending.
Through our payday segment, we
also provide title and ancillary consumer financial products and services that are complementary to our payday and installment
lending business, such as check-cashing services, money transfers and money orders. Our check-cashing services involve the cashing
of checks for a fee; money-transfer services involve the transfer of money by wire for a fee; and our money-orders services involve
the issuing of money orders for a fee. We believe these services are complementary since customers typically come to our stores
for financial reasons and to procure financial services (i.e., obtain a loan). Once the loan has been obtained, a customer may,
for instance, decide to wire a payment of money or obtain a money order to satisfy a debt or other obligation. Our loans and other
services are subject to state regulations (which vary from state to state), and federal and local regulations, where applicable.
Our second segment operates retail
stores selling Cricket cellular phones and accessories. We are a premier Cricket dealer. Cricket phones are prepaid cellular phones
that function for a period of time for a flat fee, without usage limitations and without any long-term contract or commitment
required from the consumer. At December 31, 2011 we owned and operated 45 Cricket wireless retail stores in 13 states, including
Arizona, Colorado, Idaho, Illinois, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon and Texas. While
there are state regulations that affect our provision of Cricket phone products and services, our Cricket phone business is not
highly susceptible to the adverse effects of changes in federal or state laws and regulations.
For the fiscal year ended December
31, 2011, each of our major lines of business (i.e., payday and installment lending, sale of Cricket phone and accessory products
and Cricket sales and service fees) generated associated revenues. In 2011, we generated approximately:
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$10.20
million in payday
lending revenues
representing approximately
52.3% of our total
revenues,
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$4.59
million in phone
and accessory sales
representing approximately
23.6% of our total
revenues, and
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·
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$3.74
million in Cricket
related sales and
service fees representing
approximately 19.2%
of our total revenues.
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The table below summarizes our
financial results and condition as of December 31, 2011 and 2010 (audited):
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December 31, 2011
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December 31, 2010
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Revenues
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$
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19,487,920
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$
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17,978,447
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Net loss to common shareholders
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$
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664,769
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$
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751,059
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Current assets
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$
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8,418,534
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$
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7,958,443
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Current liabilities
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$
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7,883,414
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$
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6,452,628
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Total assets
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$
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22,021,776
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$
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20,770,882
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Total liabilities
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$
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9,623,479
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$
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7,707,816
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Shareholder equity
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$
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12,398,297
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$
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13,063,066
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The above figures include an
assumed preferred stock dividend relating to our Series A Convertible Preferred Stock in the amount of $2.1 million in 2011 and
2010.
Payday
lending BUSINESS
General Description
The short-term consumer loans
we provide are commonly referred to as “payday loans” or “cash advance” loans. Such loans are referred
to as “payday loans” because they are typically made to borrowers who have no available cash and promise to repay
the loan out of their next paycheck. In some cases, these same types of loans are referred to as “deferred deposit advances”
because the borrowers, instead of funding repayment of the loan out of a paycheck, promise to repay the loan with their next regular
fixed-income payment, such as a social security check.
When we make cash advance or
“payday” loans, we provide our customers with cash in exchange for a promissory note with a maturity of generally
up to four weeks that is supported by that customer’s post-dated personal check for the aggregate amount of the loan, plus
a fee. During 2011, we offered payday loans typically ranging from $10 to $500, with the average loan amount being approximately
$327. Approximately 75.0% of our loan transactions are made for a period of up to four weeks and approximately 25.0% of our loan
transactions involve loans whose initial maturity extends beyond four weeks. To repay the payday loans, customers may pay with
cash, in which case their personal check is returned to them, or allow their personal check to be presented to their bank for
collection.
As part of our payday lending
business, we offer short-term installment loans in Colorado and Wisconsin. In 2011 approximately 5.3% of loan revenue was derived
from installment lending.
The Payday Loan Process
Customers seeking to obtain a
payday loan must:
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complete
a loan application
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maintain
a personal checking
account
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have
a suitable source
of income
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have
a valid driver’s
license or other
form of picture
ID
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not
otherwise be in
default on a loan
from us where available
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enter
into a standard
loan agreement
and promissory
note with us, and
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deliver
their personal
post-dated check.
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Our standard payday loan application
with customers provides that we will not cash their check until the due date of the associated loan. To repay a payday loan, a
customer may pay with cash, in which case their personal check is returned to them, or allow the check to be presented to the
bank for collection. All of our loans are subject to state, federal, and where applicable, local regulations. State and local
regulations are not uniform. Where permitted by state regulation, a customer may renew a loan after full payment in cash of the
fee associated with the original loan. When applicable, a customer renewing a loan signs a new promissory note and provides us
with a new check.
We require that a payday loan
customer have and maintain a personal checking account for a number of reasons. First, we need to ascertain that the personal
post-dated check we receive from that customer is written against a valid and existing checking account. Second, we review recent
bank statements from the checking account for proof that the customer’s statements to us, and the representations made to
us in the related loan agreement, relating to their employment and level of income are accurate. Third, we also review the recent
bank statements for evidence of any returned checks. If an applicant had multiple returned checks on their recent bank statements,
we are unlikely to extend a loan to that person.
Ordinarily, we deem items such
as a recent pay stub, or a bank statement evidencing periodic deposits, as sufficient proof of current employment. We do not,
however, independently verify that a borrowing customer is employed at the time of a loan. Furthermore, we do not require or request
any information relating to whether a borrowing customer’s employment is on a full-time or part-time, or hourly or salaried,
basis; nor do we otherwise make any independent verification regarding these kinds of employment-related facts. We make loans
without proof of employment and without a recent bank statement only to repeat customers, who have not previously defaulted on
loans we have made to them, in states that do not require those items as prerequisites for a loan. An employment income source
is determined to be “suitable” if it appears to be valid from our review of the bank statements a borrower provides
us, and any pay stubs they may also offer as evidentiary support for their employment. Generally, we do not advance a payday customer
more than 25% of the monthly income that they appear to earn, based on our review of applicable documentation the customer provides
to us. We apply this limitation to all of our customers and in all circumstances, including attempts to roll over loans, except
for repeat customers who have had repaid all of their prior loans on time. For installment customers, we will loan up to 35% of
their monthly income.
We do not undertake any formal
or informal credit check of borrowers, or any review of their credit history in connection with a proposed loan transaction. When
making a loan to a first-time customer, we obtain reports from a third-party vendor that summarizes recent credit requests, existing
bad debt, and existing delinquencies. These reports are provided by Teletrack. If an applicant has a poor Teletrack report showing
multiple recent credit requests or existing delinquencies, or more than one returned check on their recent bank statements, we
are unlikely to extend a loan to that person. We do not order Teletrack reports for repeat customers.
As part of each payday loan transaction,
we enter into a standardized written contract with the borrowing customer. The standardized contracts vary slightly based on differing
state laws, but all of our standard contracts plainly state in simple terms the annual percentage rate (assuming the fees we charge
are computed as interest) in compliance with Regulation Z, and the consequences of defaulting on the loan. We retain copies of
our written contracts at the stores where the transactions are processed and also provide copies to our customers. Our standard
documentation includes:
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a
promise to repay
the loan and associated
loan fee
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an
express right to
prepay without
penalty (but without
return of any portion
of the associated
loan fee unless
required by state
law)
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a
statement that
the borrower will
pay an additional
fee in the event
that the post-dated
check is returned
for insufficient
funds
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the
borrower’s
right to rescind
the transaction,
without cost, at
any time prior
to the close of
business on the
business day immediately
following the date
of the loan, by
returning the borrowed
amount and acknowledgment
that the loan was
rescinded
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customary
representations
and warranties
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a
dispute-resolution
clause under which
the parties agree
to submit any claims
or controversies
to binding arbitration
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a
notice of financial
privacy rights
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an
affirmative check-the-box
representation
about whether the
borrower is a member
of the U.S. military,
and
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an
acknowledgment
that the borrower
has read and understands
the borrowing agreement.
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Upon completion of a loan application,
the provision of proof of an existing bank account, current income, a valid driver’s license or other acceptable photo identification,
and signed loan agreement and our acceptance of such agreement, the loan approval process is complete. At that point, the customer
signs a promissory note and provides us with a personal post-dated check for the principal loan amount plus a specified fee. All
documentation is reviewed and payday loans are approved at the store level only, barring extraordinary circumstances. Nearly all
of the loans we make are “payday loans” where the borrower provides us with a personal post-dated check. All checks
are drawn upon the borrower’s bank. We do not accept third-party checks in connection with a payday lending transaction.
We make very few “deferred deposit advance” loans, and we estimate that fewer than one percent of our total loans
during 2011 were loans of this type. In part, this is because we require reasonable proof of current employment as a condition
to obtaining a loan from us.
Beyond the steps described above,
we do not make any independent determination of the ability of a potential borrower to repay the loans we make to them. Instead,
we rely on a borrower’s representations to us and proof regarding their employment and ownership of an active bank account,
our review of their recent bank statement, and our general policy that limits payday loans to no more than 25% of a borrower’s
monthly income, and 35% of an installment loan customer’s monthly income.
In general, our lending process
and standards are extraordinarily different from those used by banks. To our knowledge, banks typically order and carefully review
credit reports, engage in some level of analysis relating to the ability of a potential borrower to repay the loan, and will typically
make independent verification of employment and earnings history through payroll deposits, phone calls, reviews of tax returns
and other processes—all in an effort to minimize the risk of a loan default. As a result, we generally experience a higher
default rate on our personal loans than banks do on their personal loans. At December 31, 2011, we had an aggregate of all loan
types of approximately:
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$4.63
million in current
outstanding loan
principal, fees
and interest due
to us
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$1.26
million of late
loans (customers’
repayment checks
presented as NSF
within the last
180 days or installment
loan balances not
past the final
installment due
date with 1 or
more payments delinquent)
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The Fees We Charge
The fee we charge for a payday
loan varies from state to state, based on applicable regulations, and generally ranges from $15 to $22 for each whole or partial
increment of $100 borrowed. We do not charge interest in connection with our payday loans but do charge interest on our short-term
installment loans made in Colorado and Wisconsin. If, however, we calculate the loan fees we charge as an annual percentage rate
of interest, such rate would range from 177% for a 31-day loan transacted in Kansas (on the low end) to approximately 574% for
a 14-day loan in Wisconsin (on the high end), with the actual average loan amount and average actual loan fees we charge involving
an imputed annual percentage rate of approximately 450% and 203% for a 14-day and 31-day loan, respectively. The term of a loan
significantly affects the imputed APR of the fees we charge for our loans. For instance, when a $15 fee is charged for a two-week
loan of $100, the resulting APR is 391%. When the same fee on $100 is charged for a four-week loan, the resulting APR is 195%.
When our general range of payday loan fees is applied to our average 2011 loan amount of $327, the fee ranges from $46.99 to $68.92
and the APR ranges from 391% to 574% for a two-week loan and from 195% to 287% for a four-week loan. Currently, we do not charge
the maximum fee permitted in all of the states where we operate. We do, however, charge a uniform fee for all transactions processed
in any particular state that involve the same range of payday loan amounts and the same term.
The table below sets forth the
uniform fees we charge and imputed APRs on non-interest payday loans in the states where we operated during 2011:
State
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Fees
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APR (%)
on a 14-
day $100
Loan
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APR
(%) on a
28-day
$100
Loan
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APR (%)
on a 14-
day $300
Loan
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APR (%)
on a 28-
day $300
Loan
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Iowa
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$15 on first $85 advanced; 11.1% on additional amounts (up to $445)
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435
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%
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217
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%
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338
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%
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169
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%
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Kansas
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$15 per $100 advanced
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391
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%
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196
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%
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391
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%
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196
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%
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Nebraska
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$17.50 per $100 advanced
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456
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%
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228
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%
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456
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%
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228
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%
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North Dakota
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$20 per $100 advanced
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521
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%
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261
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%
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521
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%
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261
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%
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South Dakota
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$20 per $100 advanced
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521
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%
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261
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%
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521
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%
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261
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%
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Utah
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$20 per $100 advanced
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521
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%
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261
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%
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521
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%
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261
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%
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Wisconsin
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$22 per $100 advanced
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574
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%
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287
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%
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574
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%
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287
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%
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Wyoming
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30% per $100 advanced if loan is less than $150 or 20% per $100 advanced if loan is equal to or greater than $150 (subject to numerous maximums)
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782
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%
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391
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%
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521
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%
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261
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%
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Of the nine states in which we
presently operate, three states (South Dakota, Utah and Wisconsin) do not limit the payday loan fees we may charge or the term
(i.e., the length) of the loans we may offer our customers. In addition, Utah does not limit the amount we may loan to customers
in a payday lending transaction.
In Colorado, we offer short-term
installment loans from $100 to $500 payable in six equal monthly payments. Loan terms include a 45% annual interest rate, an origination
fee of 20% on loan amounts up to $300 and 7.5% on loan amounts thereafter and a monthly maintenance fee. In 2011, we introduced
a short-term installment product in Wisconsin. Wisconsin installment loans are payable over four to six months at an annual percentage
rate of approximately 390%.
Many states have laws limiting
the amount of fees that may be charged in connection with any lending transaction (including payday lending transactions) when
calculated as an annual percentage rate or the payday lending is expressly prohibited. These limitations, combined with other
limitations and restrictions, effectively prohibit us from utilizing our present business model for cash advance or “payday”
lending in those jurisdictions. In addition, the federal government passed the “2007 Military Authorization Act” which
prohibits lenders from offering or making payday loans (or similar lending transactions) to members of the U.S. military when
the interest or fees calculated as an annual percentage rate, exceed 36%. Like the state limitations discussed above, this limitation
effectively prohibits us from utilizing our present business model for cash advance or “payday” lending when dealing
with members of the U.S. military. As a result of these restrictions, we do not conduct business with U.S. military personnel.
The above-described payday fees
are the only fees we assess and collect from our customers for payday loans. Nevertheless, we also charge a flat fee that ranges
from $15 to $30 (depending on the state) for returned checks in the event that a post-dated check we attempt to cash as repayment
for our loan is returned. In 2011, we had approximately 7,200 checks returned that were assessed a fee, compared to approximately
8,300 such checks during 2010. In 2011, we collected fees on returned checks on approximately 26% of the returned checks, for
a total of approximately $46,000. In 2010, we collected on approximately 34% of these returned checks, for a total of approximately
$55,000.
Extensions or “Rollovers”
of Payday Loans
When a customer “rolls
over” or extends the term of an outstanding loan, we treat that rollover or extension as a brand new loan and we again charge
the above-described loan fee for that transaction. This rollover has no effect on the imputed annual percentage rate of the loan
in those cases where the extended term is equal to the initial term of the loan. For example, a $100 four-week loan that costs
$20 to obtain is the APR equivalent of 261%. If a customer extends the term of that loan for an additional four-week period, the
customer will have paid $40 total in fees to obtain the $100 eight-week loan—which is again the APR equivalent of 261%.
In cases where a customer (1) extends or rolls over a loan for a length of time that is
less than
the original loan or
(2) repays the extended loan prior to the expiration of the fully extended term, the imputed APR will increase. For example, if
a customer who obtained an initial $100 four-week loan for $20 in loan fees (the APR equivalent of 261%) later extends the term
of that loan for only two additional weeks and pays the additional $20 loan fee, that customer will have borrowed $100 for a six-week
period at a total cost of $40—which is the APR equivalent of 347%. We do not charge any interest on the unpaid fee from
the initial term of the loan because, as a condition to agreeing to a loan extension, we will only accept cash payment of the
fee for extending the loan. In 2011, 10.2% of our total loan fee revenues were derived from loan fees charged and collected upon
the extension or rollover of payday loans. Approximately 10% of payday loans are rolled over or renewed.
Most states prohibit payday lenders
from extending or refinancing a payday loan. Nevertheless, four states in which we presently operate—South Dakota, North
Dakota, Utah and Wisconsin—do permit a loan to be extended or “rolled over” for a specified period. Specifically,
Wisconsin and North Dakota permit only one loan extension; South Dakota permits up to four loan extensions; and Utah has no limit
on the number of loan extensions but does limit the time period of extensions to 10 weeks from the origination date of the original
loan.
Summary of Loan Terms
The table below sets forth the
minimum and maximum loans we approve, the maximum fee we charge, the maximum term of the loan and whether an extension/rollover
is permitted in the state were we operate.
State
|
|
Minimum Loan
|
|
Maximum
Loan
|
|
Maximum Fee
|
|
Maximum
Term
|
|
Extension/
Rollover
Permitted
|
Colorado - Installment
|
|
No minimum
|
|
$
|
500
|
|
20% origination on first $300; 7.5% thereafter; 45% interest
and a monthly maintenance fee
|
|
Minimum
6
months
|
|
Yes
|
Iowa
|
|
No minimum
|
|
$
|
500
|
|
$5+10%
of first $100
10%
thereafter
1
|
|
31 days
|
|
No
|
Kansas
|
|
No minimum
|
|
$
|
500
|
|
$15 per $100
|
|
30 days
|
|
No
|
Nebraska
|
|
No minimum
|
|
$
|
500
|
|
15%
1
per $100
|
|
31 days
|
|
No
|
North Dakota
|
|
No minimum
|
|
$
|
600
|
|
20%
|
|
60 days
|
|
Yes (one)
|
South Dakota
|
|
No minimum
|
|
$
|
500
|
|
No limit
|
|
No limit
|
|
Yes (four)
|
Utah
|
|
No minimum
|
|
No limit
|
|
No limit
|
|
84 days
|
|
Yes
|
Wisconsin –Installment
|
|
No minimum
|
|
$
|
750
|
|
390%
|
|
7 months
|
|
Yes
|
Wisconsin - Payday
|
|
No minimum
|
|
$
|
1,500
|
|
No limit
|
|
No limit
|
|
Yes (one)
|
Wyoming
|
|
No minimum
|
|
No limit
|
|
20%
|
|
30 days
|
|
No
|
|
|
|
|
|
|
|
|
|
|
|
|
|
1
Denotes that the applicable percentage is calculated on the loan amount plus any finance charges.
Multiple Loans to Single Customers
We occasionally make multiple
loans to a single customer if permitted by applicable law and regulations. Based on our outstanding payday loans as of December
31, 2011, approximately 7.3% of our customers had more than one loan outstanding. In these cases, the average number of separate
loans outstanding was 2.03 and the average aggregate principal amount loaned was approximately $508.
Risks Associated With Our
Loans—Default and Collection
Ordinarily, our customers approach
us for a loan because they currently have insufficient funds to meet their present obligations, and so rarely if ever do our customers
have sufficient funds in their checking accounts to cover the personal post-dated checks they provide us at the time of the loan
transaction. The nature of our payday loan transactions present a number of risks, including the ultimate risk that the loan will
not be paid back. In addition, we do not obtain security for our payday loans principally because, even assuming our customers
would have potential collateral to offer as security for a payday loan, the small size of each particular lending transaction
does not justify the time, effort and expense of identifying the collateral and properly obtaining a security interest in such
collateral. As a consequence, all of our payday loans are unsecured. This means that, absent court or other legal action compelling
a customer to repay our loans, we rely principally on the willingness and ability of our customers to repay amounts they owe us.
In this regard, in many cases the costs of merely attempting to collect the amounts owed to us exceed the amounts we would seek
to collect—making it impractical to take formal legal action against a defaulted borrower.
When a customer defaults on a
loan, we engage in store-level collection practices that include attempts to contact the customer and obtain payment, and attempts
to contact the customer’s bank in order to determine whether funds are available to satisfy their personal post-dated check.
If funds are available, we present the check to the bank for repayment and an official check from the bank is obtained to pay
off the item. The costs involved in these initial collection efforts are minimal as they involve some employee time and possibly
a flat $15-30 bank fee to cover the cost of the cashier’s check. If funds are not available, we generally attempt to collect
returned checks for up to 90 days (or up to 180 days in cases where a bank account is still active and the customer has not initiated
a stop payment on the postdated check provided), principally through continued attempts to contact the customer. If our attempts
remain unsuccessful after 90 (or 180) days, we assign the item to a collection agency. Assignment to a collection agency may cost
us 30-40% of the amount eventually collected (if any) from the customer. Ordinarily, we do not recoup any costs of collection
from our customers.
Historically, we collect approximately
58% of the amount of all returned checks, which results in approximately 2.42% of our total payday loans being uncollectible.
In 2011, we made approximately 178,000 payday loan transactions, of which approximately:
|
·
|
83%
were paid in full
at or prior to
the expiration
of the original
loan term, accounting
for approximately
84% of our loan
fee revenues
|
|
·
|
11%
were refinanced,
extended, renewed
or otherwise paid
after the expiration
of their original
loan term, accounting
for approximately
11% of our payday
loan fee revenues,
and
|
|
·
|
6%
involved a personal
post-dated check
that was returned
for insufficient
funds.
|
Marketing Strategy
Our advertising and marketing
efforts are designed to introduce customers to our services, build customer loyalty and generate repeat visits and transactions.
Our principal means of advertising our payday lending services consists of Yellow Page directories used in our active markets
as well as building signage visible from local arterial roadways on which we are located. For our Cricket business, we rely primarily
on Cricket advertising and promotional items as well as building signage visible from local arterial roadways on which we are
located. Our Cricket locations are also listed on the Cricket Wireless website and are searchable by address, city or zip code.
Industry Information
There are an estimated 20,600
cash advance loan stores in the United States, which in the aggregate provide approximately $38.5 billion in short-term credit
to households experiencing cash-flow shortfalls. Industry trends indicate that there is likely to be a net decrease in total payday
lending stores over the next few years due to store closings resulting from a combination of regulatory or legal changes, a slowdown
in new store growth and general economic conditions.
According to the Community Financial
Services Association of America (CFSA), payday loan customers typically are middle-income or lower-middle-income, middle-educated
individuals who are a part of a young family (
See
Community Financial Services Association of America, citing to The Credit
Research Center, McDonough School of Business, Georgetown University, Gregory Elliehausen and Edward C. Lawrence, “Payday
Advance Credit in America: An Analysis of Customer Demand”). The CFSA is a lobbying organization for the payday loan industry.
The Credit Research Center study cited by the CFSA was based upon telephone interviews of 427 borrowers of payday loans in 2000
and 2001, and the answers provided in those interviews by the borrowers were not independently verified by the study’s authors.
Moreover, the authors of that study note that, of the 5,364 payday loan consumers whom they attempted to contact and interview
for the study, 1,113 were not able to be reached because their phones had been disconnected and another 1,043 refused to be interviewed
or else quit the interview prior to completion. We do not possess independent information that corroborates the findings of The
Credit Research Center, and we do not collect demographic data about our customers.
The Consumer Federation of America
(CFA), a nonprofit consumer advocacy organization, has submitted written comments to the Federal Trade Commission that make assertions
very different from those proponed by the CFSA. For example, the CFA asserts that “payday loan borrowers are typically female,
make around $25,000 a year, are renters, and more likely to be minorities than the general population. Payday lenders have clustered
around military bases, in low to moderate income neighborhoods, and in predominantly minority areas.” (
See
Comments
To the Federal Trade Commission Regarding the Fair Debt Collection Practices Act Collecting Consumer Debts: The Challenges of
Change By the Consumer Federation of America, June 20, 2007). The CFA presently does not make available to the public the research
data to support its claims, and as a consequence we are unable to evaluate their accuracy.
However,
other statistics concerning payday lending (such as default rates) that are contained in CFA website material conflict with our
statistics borne out by years of involvement in the business.
Predatory Lending and Regulatory
Concerns
The Federal Trade Commission
has issued an FTC Consumer Alert (Federal Trade Commission, March 2008, Consumer Alert entitled “Payday Loans Equal Very
Costly Cash: Consumers Urged to Consider the Alternatives”) that discourages consumers from obtaining payday loans such
as the loans we offer, primarily on the basis that payday loans are very costly and consumers should consider alternatives to
accepting a payday loan. For further information, you may obtain a copy of the alert at
www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt060.shtm
.
In general, the payday lending
suffers from the perception and widespread belief that payday lenders are in the nature of predatory lenders, offering loans to
low income and poorly educated consumers at costs that are too high to be good for consumers. This perception and belief results
in frequent efforts in the U.S. Congress and various state legislatures, often proponed by consumer advocacy groups and lobbyists
for traditional financial institutions such as banks, to further regulate and restrict or prohibit payday lending outright. For
example, the federal government passed the 2007 Military Authorization Act which prohibits any persons from offering or making
loans to members of the military when the interest and loan fees, calculated as an annual percentage rate, exceed 36%. This limitation
effectively prohibits payday lenders from making payday loans to members of the U.S. military.
In July 2010, the Dodd-Frank
Wall Street Reform and Consumer Protection Act was passed by the U.S. Congress and signed into law. Under the Act, a new Consumer
Financial Protection Bureau will consolidate most federal regulation of financial services offered to consumers, and replace the
Office of Thrift Supervision’s seat on the FDIC Board. Almost all credit providers, including mortgage lenders, providers
of payday loans, other nonbank financial companies, and banks and credit unions with assets over $10 billion, will be subject
to new regulations to be passed by the Bureau. While the Bureau does not appear to have authority to make rules limiting interest
rates or fees charged, the scope and extent of the Bureau’s authority will nonetheless be broad, and it is expected that
the Bureau will address issues such as rollovers or extensions of payday loans and compliance with federal rules and regulations.
Future restrictions on the payday lending industry could have serious consequences for the Company.
During the 2010 legislative session
in Colorado, House Bill 10-1351 was passed into law. This bill amended the Colorado Deferred Deposit Loan Act, the existing payday
lending law. The law became effective August 11, 2010 and modified traditional payday lending by changing the single payment advance
(with no minimum term) into a single or multiple payment loan with a minimum six month term. It also limited the amount and type
of fees that can be charged on these loans, effectively reducing by one-half the fees that can be charged and when the fees may
be realized. In 2010, we began offering an installment loan product at our store in Colorado and in 2011 at our four stores in
Wisconsin.
In May 2010, new laws were enacted
in Wisconsin that restrict the number of times a consumer may renew (or rollover) a payday loan. Previously, there were no limits
to the number of rollovers permitted. Effective January 1, 2011, consumers in Wisconsin were only allowed to renew a payday loan
once, and then lenders are required to offer a 60-day, interest free, payment plan to consumers.
In response to these
changes, the Company began offering unsecured installment loans in Wisconsin in lieu of payday loans beginning in May 2011.
By the fourth fiscal quarter, the Company had phased out payday loans in Wisconsin altogether.
Any
adverse change in present federal or state laws or regulations that govern or otherwise affect payday lending could, at any
point, result in our curtailment or cessation of operations in certain jurisdictions or locations. Furthermore, any failure
to comply with any applicable federal laws or regulations could result in fines, litigation, the closure of one or more store
locations or negative publicity. Any such change or failure would have a corresponding impact on our results of operations
and financial condition, primarily through a decrease in revenues resulting from the cessation or curtailment of operations,
decrease in our operating income through increased legal expenditures or fines, and could also negatively affect our general
business prospects as well if we are unable to effectively replace such revenues in a timely and efficient manner or if
negative publicity effects our ability to obtain additional financing a needed.
We do not believe the payday
lending is predatory, nor do we believe that our loans are too costly for consumers if they are judiciously obtained. In fact,
we believe that bank overdraft fees by themselves are typically far more costly for consumers, and bouncing a check can often
involve other negative consequences such as independent fees levied by the parties to whom a bad check is written, negative publicity,
etc. In this regard, the FDIC released a November 2008 report called “Study of Bank Overdraft Programs.” The report
indicates that the average amount obtained when bank customers overdraw their accounts is $60, and the average overdraft fee charged
by the bank is $27. This equates to an APR of 1,173% and 587% for a two-week and four-week $60 bank “loan,” respectively.
In sum, we believe that many of the bad perceptions about our industry are fueled primarily by:
|
·
|
the
effects of our
loans on consumers
who do not judiciously
obtain payday loans
|
|
·
|
a
lack of genuine
understanding about
the choices faced
by low and middle-income
people facing a
critical cash shortage,
and
|
|
·
|
anti-payday
lending lobbying
campaigns often
funded by traditional
financial institutions,
such as banks and
credit unions,
that would economically
benefit from the
elimination of
payday lending.
|
Finally, we have become aware
of continued aggressive enforcement and prosecution by the Federal Trade Commission against payday lenders using unfair and abusive
lending practices in violation of the Truth in Lending Act and Regulation Z, including failures to properly disclose loan terms
and imputed APRs. In particular, we believe that FTC regulators are expanding theories relating to “fair and adequate”
disclosure loan terms. This focus includes marketing and advertising materials (specifically, the layout and presentation of such
materials), and specific practices, that may detract attention from or diminish the prominence of disclosures relating to loan
terms, and the costs and risks involved with payday loans. Moreover, it has come to our attention that FTC regulators are more
keenly scrutinizing whether payday lending business practices match advertised claims. While we do not presently anticipate any
adverse regulatory issues or outcomes relating to our business, it is possible that one or more of our store locations could come
under FTC scrutiny and that any such scrutiny could negatively affect store performance and consume considerable time and attention
of our management.
Seasonality
We have experienced seasonality
in our payday lending 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.
Effect of General Economic
Conditions on our Payday Lending Business
We believe that consumer demand
for our payday lending services is increasing as a result of the
recent
economic recovery and slowly improving employment numbers; however, we expect improving economic conditions to be partially negated
by unemployment levels that remain high in the context of recent history. High unemployment levels generally reduce
the
pool of payday loan consumers that can meet all of our loan qualifications, particularly the employment requirement. In addition,
it seems likely that the continued economic situation and higher unemployment rates could result in greater loan losses than we
experienced in 2011 with unemployment rates expected to remain high for the foreseeable future. Our business experienced fluctuating
changes in our provision for loan losses in recent years. For instance, our provision for loan losses totaled $1.40 million for
2011, an increase of $.12 million from our provision of $1.28 million for 2010. Our provision for loan losses as a percentage
of loan fee revenue was 14.5% for 2011 and 12.1% during 2010. The less favorable loss ratio in 2011 reflected in part a more challenging
collections environment as a result of an increase in bankruptcy filings, higher energy prices and increased competition in the
lending industry. We believe that our new installment loan offering has also contributed to the increased loan loss percentage
for 2011. We also believe that as the country moves out of recession and into recovery, our consumer base will increase as individuals
are denied credit by traditional lenders because of recent unemployment, foreclosure or liquidity issues. Nevertheless, we are
not certain how improving economic conditions or an increase in our consumer base will affect our loan losses for 2012.
Credit
and financing
available
to us and
our industry has been negatively impacted by the
recent
economic situation, recent federal
and
state legislation, and the overall negative perception
associated
with
payday lending.
Future growth in our payday lending
business beyond reinvestment of our current profits may be limited due to the tighter credit markets. Furthermore, we anticipate
that the present condition of the financial markets and increased regulation related to payday lending currently under consideration
at the federal level will make it more difficult for us to borrow money to fund the expansion of our operations through acquisitions.
CRICKET PHONE BUSINESS
General Description
We are an authorized dealer of
Cricket Wireless products and services and operate Cricket retail stores in Arizona, Colorado, Idaho, Illinois, Indiana, Iowa,
Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon and Texas. Although Cricket Wireless owns a number of corporate stores, Cricket
Wireless is partnering with dealers in order to reach their market-penetration goals. Authorized dealers are permitted to sell
the Cricket line and generally locate their store operations in areas with a strong potential customer base where Cricket does
not maintain a corporate storefront. These locations are generally within the urban core or surrounding areas of a community.
We are an authorized premier Cricket dealer, and as such, we are only permitted to sell the Cricket line of prepaid cellular phones
at our Cricket retail stores. In addition, each store we operate must resemble a Cricket corporate store. Once we identify an
area to locate a new store, we contact Cricket Wireless to obtain approval. Once Cricket Wireless approves our recommended location,
we establish the storefront.
We profit in this business through
retail sales of cellular phones used with Cricket services, sales of phone accessories (e.g., face plates and phone chargers),
fees charged when a customer changes services (service reactivations, adding lines, plan changes, etc), or whenever a customer
pays his or her Cricket invoice at one of our store locations.
We bear no risk of non-payment
because of the prepaid nature of the service and because Leap Wireless Communications provides the cell phone services. Service
automatically terminates upon nonpayment, which is midnight of the date on which the payment is due if the account remains unpaid.
If a customer pays their service charge within 60 days of termination, the service is reinitiated and the phone number remains
unchanged. After 60 days, a customer is deemed to be a new customer and a new phone number is assigned.
Market Information and Marketing
At December 31, 2011, Cricket
cellular phone service was offered in 35 states and had approximately 5.9 million customers. Leap Wireless Communications, Inc.
is a Delaware public reporting corporation and the owner of Cricket Wireless. Cricket Wireless service offers customers unlimited
wireless voice, data, text, Muve Music
TM
and broadband data services for a flat monthly rate. In addition, our retail
stores in select markets offer Cricket PAYGo™ services, which is an unlimited prepaid wireless service. Cricket PAYGo is
a daily pay-as-you-go wireless and text messaging service designed for customers who prefer the flexibility and control offered
by traditional prepaid services but who are seeking greater value for their dollar.
Cricket products and services
are primarily targeted to market segments that are underserved by traditional communications companies. Based on disclosures made
by Leap Wireless Communications, Cricket customers tend to be younger, have lower incomes and include a greater percentage of
ethnic minorities. Cricket services are designed to appeal to customers who value unlimited wireless services with predictable
billing and who use the majority of those wireless services from within Cricket service areas. In contrast, the majority of wireless
customers in the U.S. subscribe to post-pay services that may require credit approval and a contractual commitment from the subscriber
for a period of at least one year and may include overage charges for call volumes in excess of a specified maximum. Like Leap
Wireless Communications, we believe that a significant portion of the remaining growth potential in the U.S. wireless market consists
of customers who are price-sensitive, who have lower credit scores or who prefer not to enter into fixed-term contracts. We believe
that our authorized Cricket store business directly caters and appeals strongly to these customer segments.
We expect that consumers may
wish to prepay their phone service or purchase prepaid cellular/Cricket phones:
|
·
|
to
avoid costly phone
purchase and long-term
and expensive service
contracts with
wireless carriers
|
|
·
|
because
poor credit histories
may prevent them
from successfully
obtaining a service
contract with a
wireless carrier,
or
|
|
·
|
due
to a short-term
need and circumstances
in which they expect
to engage in heavy
usage of phones,
and so they wish
to pay a flat fee
for a period of
time instead of
risking additional
per-minute charges
on their phone
usage.
|
Nevertheless, we do not formally
query our customers who purchase our phone products or services as to their motivations in purchasing those products or services,
and we do not have customer data indicating the extent to which our phone customers cannot obtain a service contract from a long-term
contract carrier of phone service or some other phone service provider.
Market Strategy
We believe that our business
model is scalable and can be expanded successfully into current adjacent and new markets as we continue to perfect our operational
protocols and our administrative office functions relating to our Cricket business. We are looking to acquire additional Cricket
dealerships in the midwest and launch additional stores in new Cricket markets that are currently underserved by competing service
providers.
Products and Services
Our authorized Cricket retail
stores offer the following products and services:
|
·
|
Cricket
Wireless service
plans, each designed
to attract customers
by offering simple,
predictable and
affordable wireless
voice, Muve Music
TM
,
text and data services
that are a competitive
alternative to
traditional wireless
and wireline services
by offering plans
with a flat-rate
and unlimited usage
within Cricket
service areas,
and without requiring
fixed-term contracts,
early termination
fees or credit
checks
|
|
·
|
Cricket
Wireless plan upgrades
(e.g., international
calling minutes
to Canada and/or
Mexico; roaming
service packages,
text messages)
and applications
(including customized
ring tones, wallpapers,
photos, greeting
cards, games and
news and entertainment
message deliveries)
on a prepaid basis
|
|
·
|
Cricket
broadband service
affording customers
unlimited wireless
access to the Internet
through their computers
at a flat rate
with no long-term
commitments or
credit checks,
and
|
|
·
|
Cricket
PAYGo service,
an unlimited prepaid
(daily pay-as-you-go)
wireless and text
messaging service
available in select
markets.
|
The service payment options for
Cricket customers include:
|
·
|
automatic
charge against
a debit or credit
card on bill cycle
due date
|
|
·
|
payment
at any corporate
Cricket store,
dealer location
or alternative
payment locations
(e.g., a local
grocery store),
and
|
|
·
|
payment
by telephone using
a credit or debit
card.
|
Customers also have an option
on the purchase of their cellular phone, including the latest in Android-based and Blackberry OS-based smartphones. The customer
can either purchase a new or refurbished phone from us or purchase a used phone from a previous customer. All phones must be paid
for in full because there is no contract for the monthly prepaid service. New phone prices range from $59 to high-end cellular
phones at $329 before promotional rebate offers.
Seasonality
Our customer activity is influenced
by seasonal effects related to traditional retail selling periods and other factors that arise from our target customer base.
We generally expect new sales activity to be highest in the first and fourth quarters. Nevertheless, our revenues can be strongly
affected by the launch of new markets, promotional activity and competitive actions, any of which have the ability to reduce or
outweigh certain seasonal effects.
REGULATION
We are subject to regulation
by federal, state and local governments that affect the products and services we provide. Generally, these regulations are designed
to protect consumers who deal with us and are not designed to protect our shareholders.
Regulation of Payday Lending
In those states where we currently
operate, we are licensed as a payday lender where required and are subject to various state regulations regarding the terms and
conditions of our payday loans and our lending policies, procedures and operations. In some states, payday lending is referred
to as “deferred presentment,” “cash advance loans”, “deferred deposit loans” or “consumer
installment loans.” State regulations normally limit the amount that we may lend to any single consumer and may limit the
number of loans that we may make to any consumer at one time or in the course of a single year. State regulations also limit the
amount of fees that we may assess in connection with any loan transaction and may limit a customer’s ability to extend or
“rollover” a loan with us. Often, state regulations also specify minimum and maximum maturity dates for payday loans
and, in some cases, specify mandatory cooling-off periods between transactions.
Our payday lending practices
must also comply with the disclosure requirements of the Federal Truth-In-Lending Act and Regulation Z under that Act. Our collection
activities for delinquent loans are generally subject to consumer protection laws regulating debt-collection practices. Finally,
our payday lending business subjects us to the Equal Credit Opportunity Act and the Gramm-Leach-Bliley Act.
During the last few years, legislation
has been introduced and passed in the U.S. Congress and in certain state legislatures proposing or effecting various restrictions
or an outright prohibition on payday lending. Currently, state laws in Arizona, Montana, Oregon and Georgia have effectively eliminated
the ability to conduct payday lending activities in those states. In addition, a 2007 federal law prohibits loans of any type
to U.S. military personnel and their family members with charges or interest in excess of 36% per annum. In 2010, Congress passed
the Dodd-Frank Wall Street Reform and Consumer Protection Act which consolidated most federal regulation of financial services
offered to consumers, and replaced the Office of Thrift Supervision’s seat on the FDIC Board. Almost all credit providers,
including mortgage lenders, providers of payday loans, other nonbank financial companies, and banks and credit unions with assets
over $10 billion, are now subject to new regulations to be passed by the Bureau. While the Bureau does not appear to have authority
to make rules limiting interest rates or fees charged, the scope and extent of the Bureau’s authority will nonetheless be
broad, and it is expected that the Bureau will address issues such as rollovers or extensions of payday loans and compliance with
federal rules and regulations. Future restrictions on the payday lending industry could have serious consequences for the Company.
For
more information, see “
PAYDAY LENDING BUSINESS—Predatory Lending and Regulatory Concerns
” above.
Financial Reporting Regulation
Regulations promulgated by the
United States Department of the Treasury under the Bank Secrecy Act require us to report all transactions involving currency in
an amount greater than $10,000. Generally, every financial institution must report each deposit, withdrawal, exchange of currency
or other payment or transfer that involves an amount greater than $10,000. In addition, multiple currency transactions must be
treated as a single transaction if we have knowledge that the transactions are by or on behalf of any one person and result, in
a single business day, in the transfer of cash in or out totaling more than $10,000. In addition, the regulations require us to
maintain information concerning sales of monetary instruments for cash in amounts from $3,000 to $10,000. The Bank Secrecy Act
requires us, under certain circumstances, to file a suspicious activity report.
The Money Laundering Act of 1994
requires us, as a money service business, to register with the United States Department of the Treasury. Money services businesses
include check cashers and sellers of money orders. Money services businesses must renew their registrations every two years, maintain
a list of their agents, update the agent list annually, and make the agent list available for examination.
Finally, we have established
various procedures designed to comply, and we continue to monitor and evaluate our business methods and procedures to ensure compliance,
with the USA PATRIOT Act.
Privacy Regulation
We are subject to a variety of
federal and state laws and regulations restricting the use and seeking to protect the confidentiality of customer identity and
other personal nonpublic customer information. We have identified our systems that capture and maintain nonpublic personal information,
as that term is understood under the Gramm-Leach-Bliley Act and associated regulations. We disclose our public information policies
to our customers as required by that law. We also have systems in place intended to safeguard this information as required by
the Gramm-Leach-Bliley Act, which specifically governs certain aspects of our payday lending business.
COMPETITION
Like most other payday lenders,
we believe that the primary competitive factors in our business are location and customer service. We face intense competition
in an industry with relatively low barriers to entry, and we believe that the payday lending markets are becoming more competitive
as the industry matures and consolidates. We compete with other payday lending and check cashing stores, and with financial service
entities and retail businesses that offer payday loans or similar financial services. For example, we consider credit card companies
that offer payday features, credit unions, banks that offer small loans, and creditors and loan services that can extend payment
terms on outstanding loans to be our competitors. In addition, we compete in part with services offered by traditional financial
institutions, most particularly with respect to the “overdraft protection” services those institutions may offer and
the charges they levy for checks written with insufficient funds.
Additional areas of competition
have recently arisen. Businesses now offer loans over the Internet as well as “loans by phone,” and these services
compete with the services we offer. There also has been increasing penetration of electronic banking and related services into
the check cashing and money transfer industry, including direct deposit of payroll checks, payroll or debit cards, stored-value
cards, prepaid credit and debit cards, and electronic transfer of government benefits.
We also believe that customer
service is critical to developing loyalty. In our industry, we believe that quality customer service means:
|
·
|
assisting
with the loan application
process and understanding
the loan terms,
|
|
·
|
treating
customers respectfully,
and
|
|
·
|
processing
transactions with
accuracy, efficiency
and speed.
|
Our Cricket store business competes
primarily with other actual or potential authorized sellers and distributors of Cricket products and services. The authorization
to sell Cricket products and services is granted by Cricket Communications, a Delaware corporation (sometimes referred to as “Cricket
Wireless, Inc.”) and wholly owned subsidiary of Leap Wireless International, Inc. Presently, we believe that our ability
to compete with other sellers of Cricket products and services will materially depend on the success with which we operate those
store locations for which we presently have authorization to operate. If we successfully manage those stores and are able to develop
and maintain a strong working relationship with Cricket Communications, we expect that we may be able to effectively compete for
additional store locations when and as they come available.
Competition within the cellular
phone industry in general is significant. We not only compete with other suppliers of Cricket or other prepaid service providers
but also with the other national cellular phone providers such as Verizon, AT&T and Sprint. It is estimated that there are
in excess of 32 million wireless subscriber connections in the U.S.
With the introduction of additional
prepaid phone providers such as Straight Talk service rolled out by Wal-Mart in October 2009, Wal-Mart’s Family Mobile
TM
powered by T-Mobile, which began in September 2010, that provides unlimited talk and text for 3 family members, and the
increase of national retailers offering numerous prepaid phone options, such as Cricket PAYGo™ services sold at Target stores
or Cricket phones sold at Best Buy or Dollar General, it is possible that current and potential new customers will purchase these
or other future competing services from these national resellers because of brand recognition, location or convenience, any of
which would negatively impact our sales and our ability to win authorizations for new locations to grow our Cricket business.
In addition, it is possible that Cricket Communications may itself, at some point in the future, determine to become more involved
in the direct operation of its retail stores and move away from an authorized distributor business model or modify its existing
model by changing the compensation structure to dealers or by increasing the number of dealer locations and thus reduce traffic
to existing locations. In any such event, our ability to maintain and grow our Cricket business will be negatively impacted.
Technology
and Information
We maintain an integrated system
of point of sale and management software applications and platforms for processing the various types of financial transactions
we offer. These systems provide us with customer service, internal control mechanisms, record-keeping and reporting information.
Both of our point-of-sale systems used at our payday and Cricket store locations integrate transaction data with our management
information systems on a real-time basis. These systems are designed to provide summary, detailed and exception information to
regional, area and store managers as well as corporate staff and are designed to collect customer information for demographic
analysis.
Security
We believe the principal security
risks to our operations are robbery and employee theft. We have established extensive security systems, dedicated security personnel
and management information systems to address both areas of potential loss. To protect against robbery, most payday lending store
employees work behind bullet-resistant glass and steel partitions, and the back office, safe and computer areas are locked and
closed to customers. Our security measures in most payday lending and Cricket stores include safes, electronic alarm systems monitored
by third parties, control over entry to customer service representative and inventory areas, detection of entry through perimeter
openings, walls and ceilings and the tracking of all employee movement in and out of secured areas. Payday segment employees use
cellular phones to ensure safety and security whenever they are outside secured areas. Additional security measures used in many
stores include some combination of alarm systems, remote control over alarm systems, the arming, disarming and changing of user
codes, and mechanically and electronically controlled time-delay safes.
Since we have high volumes of
cash and negotiable instruments at our payday stores and inventory volumes at our Cricket stores, we believe that daily monitoring,
unannounced audits and immediate responses to irregularities are critical to security and play an important role in our internal
controls. Our regional managers and corporate staff perform unannounced store audits and cash counts at our stores as well as
random inventory counts of cellular phones and accessories. We self-insure for employee theft and dishonesty at the store level.
EMPLOYEES
At December 31, 2011, we had
approximately 260 employees, consisting of 242 store personnel (121 of whom were employed at payday loan stores and 121 of which
were employed at Cricket retail stores), 12 corporate office employees and six corporate office managers. We believe our relationship
with our employees is good, and we have not suffered any work stoppages or labor disputes. We do not have any employees that operate
under collective-bargaining agreements.
CORPORATE INFORMATION
Our principal offices are located
at 11550 “I” Street, Suite 150, Omaha, Nebraska 68137, and our telephone number at that office is (402) 551-8888.
Western Capital Resources, Inc.
was originally incorporated and organized as a Minnesota corporation under the name URON Inc. in November 2001. From its incorporation
until August 2006, URON was wholly owned by Multiband Corporation, a Minnesota corporation. Multiband spun off URON to Multiband’s
shareholders in August 2006 and caused URON to become a public reporting corporation as part of the spinoff process. URON’s
principal business was the provision of dial-up internet service to residential and commercial customers, principally in the midwestern
United States, Texas, South Carolina and Florida. In December 2007, URON and Wyoming Financial Lenders, Inc., a Wyoming corporation,
engaged in
a merger transaction which caused
URON to acquire the payday lending business we currently operate through Wyoming Financial Lenders. In July 2008, and in connection
with the December 2007 merger,
we changed our corporate name from URON Inc. to “Western Capital Resources, Inc.”
The Company’s year ends
December 31. Neither the Company nor any of its predecessors have been in bankruptcy, receivership or any similar proceeding.
RECENT DEVELOPMENTS
Credit Facilities
On January 26, 2011, the Company
and Wyoming Financial Lenders, Inc. entered into a Loan Extension Agreement with WERCS. The Loan Extension Agreement extends the
maturity date for the payment of all obligations under the Business Loan Agreement to April 1, 2012. In connection with the extension
agreement, the Company made a principal payment of $1,000,000. On March 14, 2012, the Company paid the remaining principal balance
and all accrued and unpaid interest.
On October 18, 2011, the Company
entered into a borrowing arrangement with River City Equity, Inc. and delivered a related long-term promissory note in favor of
River City Equity. The borrowing arrangement allows the Company to borrow up to $2,000,000 at an interest rate of 12% per annum,
with interest payable on a monthly basis. The note matures on September 30, 2013, on which date all unpaid principal and accrued
but unpaid interest thereon is due and payable. The note includes a prepayment penalty and, under certain circumstances, permits
River City Equity to obtain a security interest in substantially all of the Company’s assets. As of December 31, 2011, $1,000,000
has been advanced under this arrangement.
Acquisitions
In September through December
2011, the Company acquired 17 retail storefronts: Arizona (2), Colorado (2), Idaho, (1), Illinois (4), Missouri (1), Nebraska
(1), Ohio (1), Oklahoma (3), and Oregon (2), for $1,373,000. Of these storefronts, 14 were previously Cricket corporate-owned
stores and three were acquired from another Cricket dealer.
In October
2011, the Company acquired one Payday store in Iowa for $48,000.
ITEM 1A RISK
FACTORS
You should consider the following
risk factors, in addition to the other information presented or incorporated by reference into this Annual Report on Form 10-K,
in evaluating our business and your investment in us.
The payday loan industry
is highly regulated under state laws. Changes in state laws and regulations governing lending practices, or changes in the interpretation
of such laws and regulations, could negatively affect our business
.
Our business is regulated under
numerous state laws and regulations, which are subject to change and which may impose significant costs or limitations on the
way we conduct or expand our business. As of the date of this report, approximately 38 states and the District of Columbia had
legislation permitting or not prohibiting payday loans. During the last few years, legislation has been adopted in some states
that prohibits or severely restricts payday loans.
There are nearly always bills
pending in various states to alter the current laws governing payday lending. Any of these bills, or future proposed legislation
or regulations prohibiting payday loans or making them less profitable, could be passed in any state at any time, or existing
laws permitting payday lending could expire.
For example, recent legislation
has been passed in Colorado, Wisconsin and Montana that restricts certain payday lending practices. In particular,
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During
2010,
Colorado
House
Bill
10-1351
was
passed
into
law
effective
August
11,
2010.
This
law
changed
the
single
payment
advance
(with
no
minimum
term)
into
a
single
or
multiple
payment
loan
with
a
minimum
six-month
term.
It
also
limited
the
amount
and
type
of
fees
that
can
be
charged
on
these
loans,
effectively
reducing
by
one-half
the
fees
that
can
be
charged,
and
when
the
fees
may
be
realized.
The
Company
restructured
its
lending
in
Colorado
to
replace
its
payday
advances
with
a
short-term
installment
loan.
Our
2011
gross
profit
from
Colorado
operations
was
negatively
affected
by
these
developments,
decreasing
22%
from
2010
gross
profit.
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In
Wisconsin,
new
legislation
effective
January
1,
2011
limited
payday
loans
to
the
lesser
of
$1,500
or
35%
of
the
applicant’s
monthly
income,
permits
borrowers
to
cancel
loans
within
24
hours
and
roll
their
loans
over
only
one
time.
In
addition,
payday
lenders
are
required
to
offer
a
60-day,
interest
free,
payment
plan
to
consumers
upon
maturity
of
their
payday
loans.
Our
2011
gross
profit
from
Wisconsin
operations
was
negatively
affected
by
these
developments,
decreasing
41%
from
2010
gross
profit.
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Finally,
on November 2,
2010, voters in
Montana passed
Petition Initiative
I-164. Effective
January 1, 2011,
Petition Initiative
I-164 capped fees
on payday loans
at an imputed interest
rate of 36%. The
Company discontinued
its operations
and closed all
four stores in
Montana due to
this law change.
In 2010, approximately
3.87% of the Company’s
Payday division
revenues were generated
in Montana.
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In addition, legislation banning
payday loans was introduced in Nebraska in 2008 but eventually was dropped. Nevertheless, since we derive approximately 28% of
our payday revenues in Nebraska, the passage of any such legislation in Nebraska would have a highly material and negative effect
on our business.
Statutes authorizing payday loans
typically provide state agencies that regulate banks and financial institutions with significant regulatory powers to administer
and enforce the laws relating to payday lending. Under statutory authority, state regulators have broad discretionary power and
may impose new licensing requirements, interpret or enforce existing regulatory requirements in different ways or issue new administrative
rules, even if not contained in state statutes, that affect the way we do business and may force us to terminate or modify our
operations in those jurisdictions. They may also impose rules that are generally adverse to our industry. Finally, in many states,
the attorney general has scrutinized or continues to scrutinize the payday loan statutes and the interpretations of those statutes.
Any adverse change in present
laws or regulations, or their interpretation, in one or more such states (or an aggregation of states in which we conduct a significant
amount of business) could result in our curtailment or cessation of operations in such jurisdictions. Any such action could have
a corresponding highly material and negative impact on our results of operations and financial condition, primarily through a
material decrease in revenues, and could also negatively affect our general business prospects as well if we are unable to effectively
replace such revenues in a timely and efficient manner.
Our business is subject
to complex federal laws and regulations governing lending practices, and changes in such laws and regulations could negatively
affect our business.
Although states provide the primary
regulatory framework under which we offer payday loans, certain federal laws also affect our business. For example, because payday
loans are viewed as extensions of credit, we must comply with the federal Truth-in-Lending Act and Regulation Z under that Act.
Additionally, we are subject to the Equal Credit Opportunity Act, the Gramm-Leach-Bliley Act and certain other federal laws. Additionally,
anti-payday loan legislation has occasionally been introduced in the U.S. Congress. For example:
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2006
legislation limits
the interest rate
and fees that may
be charged on any
loans, including
payday loans, to
any person in the
military to the
equivalent of 36%
per annum. The
military lending
prohibition became
effective on October
1, 2007.
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In
July 2010, the
Dodd-Frank Wall
Street Reform and
Consumer Protection
Act was passed
by the U.S. Congress
and signed into
law. Under the
Act, a new federal
agency, the Consumer
Financial Protection
Bureau, will consolidate
most federal regulation
of financial services
offered to consumers
and replaces the
Office of Thrift
Supervision’s
seat on the FDIC
Board. Almost all
credit providers,
including mortgage
lenders, providers
of payday loans,
other nonbank financial
companies, and
banks and credit
unions with assets
over $10 billion,
will be subject
to new regulations.
While the Bureau
does not appear
to have authority
to make rules limiting
interest rates
or fees charged,
the scope and extent
of the Bureau’s
authority will
nonetheless be
broad, and it is
expected that the
Bureau will address
issues such as
rollovers or extensions
of payday loans
and compliance
with federal rules
and regulations.
Future restrictions
on the payday lending
industry could
have serious consequences
for the Company.
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Any adverse change in present
federal laws or regulations that govern or otherwise affect payday lending could result in our curtailment or cessation of operations
in certain jurisdictions or locations. Furthermore, any failure to comply with any applicable federal laws or regulations could
result in fines, litigation, the closure of one or more store locations or negative publicity. Any such change or failure would
have a corresponding impact on our results of operations and financial condition, primarily through a decrease in revenues resulting
from the cessation or curtailment of operations, decrease in our operating income through increased legal expenditures or fines,
and could also negatively affect our general business prospects as well if we are unable to effectively replace such revenues
in a timely and efficient manner or if negative publicity effects our ability to obtain additional financing a needed.
Changes in local regulations
could have a material adverse effect on our business, results of operations and financial condition.
In addition to state and federal
laws and regulations, our business is subject to various local rules and regulations such as local zoning regulations and permit
licensing. We are aware of increasing efforts by local jurisdictions to restrict payday lending through the use of local zoning
and permitting laws. Any actions taken in the future by local zoning boards or other governing bodies to require special use permits
for, or impose other restrictions on, payday lenders could have a material adverse effect on the growth of our business and business
prospects primarily by restricting any efforts to grow our business “organically” by opening more lending store locations.
Litigation and regulatory
actions directed toward our industry or us could adversely affect our operating results, particularly in certain key states.
During the last few years, our
industry has been subject to regulatory proceedings, class action lawsuits and other litigation regarding the offering of payday
loans, and we could suffer losses resulting from interpretations of state laws in those lawsuits or regulatory proceedings, even
if we are not a party to those proceedings. For example, the North Carolina Commissioner of Banks recently issued a ruling in
which it determined that Advance America, which marketed, originated, serviced and collected payday loans on behalf of a state-chartered
bank located in Kentucky, violated various North Carolina consumer-protection statutes. Thus, the losses we could suffer could
be directly incurred through our involvement in litigation or regulatory proceedings, or could be indirectly incurred through
negative publicity regarding the industry in general that is generated by litigation on regulatory proceedings involving third
parties.
In addition, regulatory actions
taken with respect to a particular non-payday lending financial service that we offer could negatively affect our ability to offer
such other financial services. For example, if we were the subject of regulatory action related to our check-cashing business,
that regulatory action could adversely affect our ability to maintain our payday lending licenses. Moreover, the suspension or
revocation of our license or other authorization in one state could adversely affect our ability to maintain licenses in other
states. Accordingly, a violation of a law or regulation with respect to otherwise unrelated products or in other jurisdictions
could affect other parts of our business and adversely affect our business and operations as a whole.
We may need additional
financing in the future and any such financing may dilute our existing shareholders.
We anticipate that we will continue
to experience growth in our income and expenses for the foreseeable future and that our operating expenses will be a material
use of cash resources. Presently, we believe we have cash sufficient to maintain operations. In the event that our income does
not meet our expectations, we may sooner require additional financing for working capital. In addition, if we determine to grow
our business through acquisitions, any acquisitions we consummate will likely involve outside financing. Any additional financing,
for whatever purpose and for whatever reason, may dilute our existing shareholders.
Additional financing could be
sought from a number of sources, including but not limited to additional sales of equity or debt securities (including equity-linked
or convertible debt securities), loans from banks, loans from our affiliates or other financial institutions. We may not, however,
be able to sell any securities or obtain any such additional financing when needed, or do so on terms and conditions acceptable
or favorable to us, if at all. If financing is not available, we may be forced to consider strategic alternatives, such as (but
not limited to) curtailing certain aspects of our operations or closing certain operating locations. If we successfully enter
into a financing transaction, any additional equity or equity-linked financing would be dilutive to shareholders, and additional
debt financing, if available, may involve restrictive covenants and above-market interest rates.
The concentration of our
revenues in certain states could adversely affect us.
We currently provide payday lending
services in nine states. For the year ended December 31, 2011, revenues from our locations in Nebraska represented approximately
28% of our total payday revenues. For the foreseeable future, we expect that a material and significant portion of our revenues
will continue to be generated in Nebraska. We operate Cricket stores in 13 states. For the year ended December 31, 2011, revenues
from our Missouri and Indiana stores represented approximately 25% and 22% of our total Cricket revenues, respectively. As a result,
changes to prevailing economic, demographic, competitive, regulatory or any other conditions, including the legislative, regulatory
or litigation risks mentioned above, in the markets in which we operate, and in Nebraska and Missouri in particular, could lead
to a reduction in demand for our services and result in a decline in our revenues or an increase in our provision for doubtful
accounts, or even an outright legal prohibition on the conduct of our business. Any of these outcomes could in turn result in
a material and swift deterioration of our financial condition principally by impairing our revenues and affecting our ability
to obtain financing and operating liquidity, our operating results and our business prospects (again, principally by reducing
our revenues and impairing our ability to grow our business).
A default under our borrowing
arrangement could require us to seek financing on a short-term basis that may be disadvantageous to the Company.
On October 18, 2011, we entered
in a borrowing arrangement with River City Equity, Inc. Under this arrangement, we may borrow up to $2,000,000 at an interest
rate of 12% per annum, with interest payable on a monthly basis. The note we delivered to River City Equity matures on September
30, 2013, on which date all unpaid principal and accrued but unpaid interest thereon is due and payable. The note includes a prepayment
penalty and, under certain circumstances, permits River City Equity to obtain a security interest in substantially all of our
assets. As of December 31, 2011, $1,000,000 has been advanced under this arrangement.
If we are unable to comply with
the terms of our promissory note with River City Equity, we may need to seek additional financing. We may not be able to obtain
financing on a short-term basis. Furthermore, even if we are able to obtain needed short-term financing, we may be unable to do
so on terms that are favorable.
Failure to achieve and
maintain effective internal controls could limit our ability to detect and prevent fraud and thereby adversely affect our business
and stock price.
Effective internal controls are
necessary for us to provide reliable financial reports. Nevertheless, all internal control systems, no matter how well designed,
have inherent limitations. Even those systems determined to be effective can provide only reasonable assurance with respect to
financial statement preparation and presentation. Our most recent evaluation of our internal controls resulted in our conclusion
that our disclosure controls and procedures were effective. Our inability to maintain an effective control environment may cause
investors to lose confidence in our reported financial information, which could in turn have a material adverse effect on our
stock price.
The reliance on information
management and transaction systems to operate our business exposes us to cyber incidents and hacking of our sensitive information
if our outsourced service provider experiences a security breach.
Effective information security
internal controls are necessary for us to protect our sensitive information from illegal activities and unauthorized disclosure
in addition to denial of service attacks and corruption of our data. In addition, we rely on the information security internal
controls maintained by our outsourced service provider. Despite utilization of a service provider that maintains the highest level
of security around our information systems, the sophistication of hackers continues to increase. Our most recent evaluation of
ours and our service providers’ internal controls resulted in our conclusion that our disclosure controls and procedures
were effective. Our inability to maintain effective controls or utilization of an information technology provider that also maintains
effective controls, however, may increase our vulnerability to cyber attacks. Breaches of our information management system could
adversely affect our business reputation. We could also be subject to third-party lawsuits relating to the unauthorized disclosure
of personal information. Finally, significant information system disruptions could adversely affect our ability to effectively
manage operations or reliably report results.
A significant portion of
our assets consists of goodwill and other intangible assets.
As of December 31,
2011, 58% of our assets consisted of goodwill and other intangible assets.
Under generally accepted accounting principles,
the carrying value of goodwill is subject to periodic review and testing to determine if it is impaired. T
he
value of our assets will depend on market conditions, regulatory environment, the availability of buyers and similar factors.
While the value of these assets is based on management projections and assumptions and is determined by using the discounted cash
flow method for purposes of our impairment testing, those values may differ from what could ultimately be realized by us in a
sales transaction or otherwise and that difference, while not affecting cash flow, could have a material adverse impact on our
operating results and financial position.
Unpredictability in financing
markets could impair our ability to grow our business through acquisitions.
We anticipate that opportunities
to acquire similar businesses will materially depend on the availability of financing alternatives with acceptable terms. As a
result, poor credit and other market conditions or uncertainty in the financing markets or the payday lending business in particular
could materially limit our ability to grow through acquisitions since such conditions and uncertainty make obtaining financing
more difficult.
Public perception of payday
lending as being predatory or abusive could adversely affect our business.
Recently, consumer advocacy groups
and media reports have advocated governmental action to prohibit or severely restrict payday loans. The consumer groups and media
reports typically focus on the cost to a consumer for this type of loan, which is higher than the interest typically charged by
credit card issuers. The consumer groups and media reports typically characterize these transactions as predatory or abusive toward
consumers. If this negative characterization of our business becomes widely accepted by consumers, demand for our payday loans
could significantly decrease, which could adversely affect our results of operations primarily by decreasing our revenues. Negative
perception of our business activities could also result in our industry being subject to more restrictive laws and regulations
and greater exposure to litigation.
Any disruption in the availability
of our information systems could adversely affect our operations.
We rely upon our information
systems to manage and operate our business. Each location is part of an information network that permits us to maintain adequate
cash inventory, reconcile cash balances daily, and report revenues and loan losses in a timely manner. Our security measures could
fail to prevent a disruption in the availability of our information systems or our back-up systems could fail to operate properly.
Any disruption in the availability of our information systems could adversely affect our results of operations by impairing our
ability to efficiently effect transactions.
If we lose key managers
or are unable to attract and retain the talent required for our business, our operating results could suffer.
Our future success depends to
a significant degree upon the members of our executive management, particularly John Quandahl, who is our Chief Executive Officer.
Accordingly, the loss of these services would likely materially and adversely affect our business. The Company has an employment
agreement with Mr. Quandahl effective through March 31, 2013. Nevertheless, we cannot be certain that Mr. Quandahl will continue
providing services to us for any particular period of time. Our continued growth will also depend upon our ability to attract
and retain additional skilled management personnel. Competition for highly skilled and experienced management is intense and likely
to continue and increase. To the extent that we are unable to attract and retain the talent required for our business, our operating
results could suffer.
We lack product and business
diversification with a customer base primarily in urban areas, which creates a risk that our future revenues and earnings will
be susceptible to fluctuations.
Our primary payday business activity
is offering and servicing payday loans. We also provide certain related and other services, such as check cashing, money transfers
and money orders. The payday segment accounted for approximately 58% of our total revenues in 2011. Our Cricket retail segment
accounted for approximately 42% of our total revenues in 2011. If we are unable to further diversify our business products and
services and expand our customer-base outside of the urban areas, we may experience fluctuations in our revenues and earnings,
which may be significant, relating to our payday lending business and wireless cellular sales. Such fluctuations could result
from legal or regulatory changes in one or more jurisdictions, changes in economic conditions in the jurisdictions where we provide
services, or result from other risks or adverse events befalling us. Our susceptibility to fluctuations or the actual happening
of significant fluctuations in our revenues or earnings could cause our Company to be perceived as a less stable and therefore
less attractive investment in general, which would likely negatively affect the market price of our common stock and our ability
to obtain additional financing an acceptable terms.
Competition in the retail
financial services industry is intense and could cause us to lose market share and revenues.
We believe that the primary competitive
factors in the payday loan industry are store location and customer service. We face intense competition in the payday loan industry,
and we believe that the payday lending market is becoming more competitive as this industry matures and begins to consolidate.
The payday loan industry has low barriers to entry, and new competitors, such as Wal-Mart, may enter the market easily. We currently
compete with services, such as overdraft protection offered by traditional financial institutions, and with other payday loan
and check cashing stores and other financial service entities and retail businesses that offer payday loans or other similar financial
services, as well as a rapidly growing internet-based payday loan market. Some of our competitors have larger and more established
customer bases and substantially greater financial, marketing and other resources than we have. As a result, we could lose market
share and our revenues could decline, thereby affecting our earnings and potential for growth.
We face significant wireless
cellular competition that may reduce our market share and lower our profits.
We face significant competition
in our industry. We currently compete with resellers of our size including US Cellular and Metro PCS. We also compete with the
four national wireless service providers (AT&T, Sprint Nextel, T-Mobile and Verizon Wireless) and with Walmart’s Straight
Talk and Family Mobile plans. Our ability to compete effectively will depend on, among other things, the pricing of Cricket services
and equipment, the quality of our customer service, the reach and quality of our sales and distribution channels and our capital
resources. It will also depend on how successfully we anticipate and respond to various factors affecting our industry, including
new technologies and business models, changes in consumer preferences, demographic trends and economic conditions. Finally, operating
solely as a Cricket reseller, we are dependent upon pricing, channel strategies, product supply, credit terms, dealer compensation
structure, and up-to-date wireless technologies and infrastructure of Cricket Wireless.
The wireless industry also faces
competition from other communications and technology companies seeking to capture customer revenue and brand dominance with respect
to the provision of wireless products and services. For example, Apple Inc. is packaging software applications and content with
its handsets, and Google Inc. has developed and deployed an operating system and related applications for mobile devices.
General economic conditions
affect our loan losses, and accordingly, our results of operations could be adversely affected by a general economic slowdown
or other negative economic conditions such as high unemployment.
Provision for loan losses, net
of recoveries, is one of our largest operating expenses, constituting approximately 7% of total revenues for the fiscal year ended
December 31, 2011, with payday loan losses comprising most of the losses. Any changes in economic factors that adversely affect
our customers, such as an economic downturn or high unemployment, could result in higher loan loss experiences than anticipated,
which could in turn adversely affect our loan charge-offs and operating results.
If estimates of our loan
losses are not adequate to absorb actual losses, our financial condition and results of operations may be adversely affected.
We maintain an allowance for
loan losses at levels to cover the estimated incurred losses in the collection of our loan portfolio outstanding at the end of
each applicable period. At the end of each period, management considers recent collection history to develop expected loss rates,
which are used to establish the allowance for loan losses. Our allowance for loan losses was $1.0 million on December 31, 2011.
Our allowance for loan losses is an estimate, and if actual loan losses are materially greater than our allowance for losses,
our financial condition and results of operations could be adversely affected.
Because we maintain a significant
supply of cash in our locations, we may experience losses due to employee error and theft.
Because our business requires
us to maintain a significant supply of cash in our stores, we are subject to the risk of cash shortages resulting from employee
error and theft. We periodically experience employee error and theft in stores, which can significantly increase the operating
losses of those stores for the period in which the employee error or theft is discovered. We self-insure for employee error and
theft at the store level. If our controls to limit our exposure to employee error and theft at the store level and at our corporate
headquarters do not operate effectively or are structured ineffectively, our operating margins could be adversely affected by
costs associated with increased security and preventative measures.
Regular turnover among
our location managers and employees makes it more difficult for us to operate our locations and increases our costs of operation.
We experience a relatively stable
workforce among our location managers and employees. Turnover interferes with implementation of operating strategies. Increases
in our workforce turnover in the future would likely increase our operating pressures and operating costs and could restrict our
ability to grow. Additionally, high turnover would create challenges for us in maintaining high levels of employee awareness of
and compliance with our internal procedures and external regulatory compliance requirements. In sum, high turnover would increase
our training and supervisory costs, and result in decreased earnings with corresponding greater risks of regulatory non-compliance.
Our controlling shareholder
possesses controlling voting power with respect to our common stock and voting preferred stock, which will limit your influence
on corporate matters.
Our controlling shareholder,
WCR, LLC, has beneficial ownership of 10,791,250 shares (9,700,000 of which are issuable upon conversion of Series A Convertible
Preferred Stock). WCR has beneficial ownership of approximately 71.5% of our common stock. as of the date of this report. As a result,
WCR has the ability to outrightly control our management and affairs through the election and removal of our entire Board of Directors
and all other matters requiring shareholder approval, including the future merger, consolidation or sale of all or substantially
all of our assets. This concentrated control could discourage others from initiating any potential merger, takeover or other change-of-control
transaction that may otherwise be beneficial to our shareholders. Furthermore, this concentrated control will limit the practical
effect of your participation in Company matters, through shareholder votes and otherwise.
Our articles of incorporation
grant our Board of Directors the power to issue additional shares of common and preferred stock and to designate other classes
of preferred stock, all without shareholder approval.
Our authorized capital consists
of 250 million shares of capital stock. Pursuant to authority granted by our articles of incorporation, our Board of Directors,
without any action by our shareholders, may designate and issue shares in such classes or series (including other classes or series
of preferred stock) as it deems appropriate and establish the rights, preferences and privileges of such shares, including dividends,
liquidation and voting rights, provided it is consistent with Minnesota law. The rights of holders of other classes or series
of stock that may be issued could be superior to the rights of holders of our common shares. The designation and issuance of shares
of capital stock having preferential rights could adversely affect other rights appurtenant to shares of our common stock. Furthermore,
any issuances of additional stock (common or preferred) will dilute the percentage of ownership interest of then-current holders
of our capital stock and may dilute our book value per share.
Because we became public
by means of a reverse merger, we may not be able to attract the attention of major brokerage firms.
Additional risks to our investors
may exist since we became public through a “reverse merger.” Security analysts of major brokerage firms may not provide
coverage of the Company since, because we became public through a reverse merger, there is no incentive to brokerage firms to
recommend the purchase of our common stock. In addition, because of past abuses and fraud concerns stemming primarily from a lack
of public information about newly public businesses, there are many people in the securities industry and business in general
who view reverse merger/public shell transactions with suspicion. Without brokerage firm and analyst coverage, there may be fewer
people aware of us and our business, resulting in fewer potential buyers of our securities, less liquidity, and depressed stock
prices for our investors.
Our common stock trades
only in an illiquid trading market.
Trading of our common stock is
conducted on the OTC Bulletin Board (OTCBB: WCRS). This has an adverse effect on the liquidity of our common stock, not only in
terms of the number of shares that can be bought and sold at a given price, but also through delays in the timing of transactions
and reduction in security analysts’ and the media’s coverage of us and our common stock. This may result in lower
prices for our common stock than might otherwise be obtained and could also result in a larger spread between the bid and asked
prices for our common stock.
In addition, there has typically
been very little trading activity in our common stock. During 2011, the average daily trading volume (as reported by Google Finance)
was approximately 5,000 shares with the 52-week trading prices ranging from $0.01 to $0.06 per share. The trade volume was as
low as 2,000 shares for all of March and April 2011. The small trading volume will likely make it difficult for our shareholders
to sell their shares as and when they choose. Furthermore, small trading volumes generally depress market prices. As a result,
you may not always be able to resell shares of our common stock publicly at the time and prices that you feel are fair or appropriate.
There is not now and there
may not ever be an active market for shares of our common stock.
In general, there has been minimal
trading volume in our common stock. The small trading volume will likely make it difficult for our shareholders to sell their
shares as and when they choose. Furthermore, small trading volumes are generally understood to depress market prices. As a result,
you may not always be able to resell shares of our common stock publicly at the time and prices that you feel are fair or appropriate.
We do not intend to pay
dividends on our common stock for the foreseeable future. We will, however, pay dividends on our convertible preferred stock.
When permitted by Minnesota law,
we are required to pay dividends to the holders of our Series A Convertible Preferred Stock, each share of which carries a $2.10
stated value. There are 10 million shares of Series A Convertible Preferred Stock outstanding. Our Series A Convertible Preferred
Stock entitles its holders to (i) a cumulative 10% dividend, compounded and payable on a quarterly basis; (ii) in the event of
a liquidation or dissolution of the Company, a preference in the amount of all accrued but unpaid dividends plus the stated value
of such shares, before any payment shall be made or any assets distributed to the holders of any junior securities; (iii) convert
their preferred shares into our common stock on a share-for-share basis, subject to adjustment; and (iv) vote their preferred
shares on an as-if-converted basis.
We have the right to redeem some
or all such preferred shares, at any time upon 60 days’ advance notice, at a per-share price of $3.50 plus accrued but unpaid
dividends. Holders of Series A Convertible Preferred Stock have no preemptive or cumulative-voting rights.
We do not anticipate that we
will pay any dividends for the foreseeable future on our common stock. Accordingly, any return on an investment in us will be
realized only when you sell shares of our common stock. When legally permitted, we expect to pay dividends to our preferred stockholders.
ITEM 1B UNRESOLVED
STAFF COMMENTS
None.
ITEM 2 PROPERTIES
Our headquarters is in Omaha,
Nebraska. There, we have a 5,775-square-foot space, with additional space available, which is sufficient for our projected near-term
future growth. The monthly lease amount is currently $3,900 and escalates to $5,500 by the end of the lease term on December 31,
2014. The corporate phone number is (402) 551-8888.
As of December 31, 2011, we had
52 payday store locations. Our payday store locations typically range in size from 1,000 square feet to 2,000 square feet, and
have varying lease terms (none of which, however, have remaining terms of more than five years). As of the date of this report,
we have payday lending stores in the following cities:
|
·
|
Sterling, Colorado
|
|
·
|
Aberdeen, South Dakota
|
|
·
|
Council Bluffs, Iowa (two locations)
|
|
·
|
Rapid City, South Dakota
|
|
·
|
Des Moines, Iowa (four locations)
|
|
·
|
Sioux Falls, South Dakota
|
|
·
|
Sioux City, Iowa
|
|
·
|
Watertown, South Dakota
|
|
·
|
Dodge City, Kansas
|
|
·
|
Salt Lake City, Utah
|
|
·
|
Garden City, Kansas
|
|
·
|
Sandy, Utah
|
|
·
|
Columbus, Nebraska
|
|
·
|
Taylorsville, Utah
|
|
·
|
Grand Island, Nebraska
|
|
·
|
West Jordan, Utah
|
|
·
|
Hastings, Nebraska
|
|
·
|
Kenosha, Wisconsin
|
|
·
|
Lincoln, Nebraska (three locations)
|
|
·
|
Pleasant Prairie, Wisconsin
|
|
·
|
North Platte, Nebraska
|
|
·
|
Racine, Wisconsin (two locations)
|
|
·
|
Omaha, Nebraska (seven locations)
|
|
·
|
Casper, Wyoming (two locations)
|
|
·
|
Bismarck, North Dakota (two locations)
|
|
·
|
Gillette, Wyoming
|
|
·
|
Grand Forks, North Dakota (three locations)
|
|
·
|
Laramie, Wyoming
|
|
·
|
Fargo, North Dakota (four locations)
|
|
·
|
Sheridan, Wyoming
|
|
·
|
Minot, North Dakota
|
|
·
|
Rock Springs, Wyoming
|
As of December 31, 2011, we had
45 Cricket store locations. Our Cricket store locations typically range in size from 1,000 square feet to 2,500 square feet, and
have varying lease terms (none of which, however, have remaining terms of more than five years). As of the date of this report,
we have Cricket retail stores in the following cities:
|
·
|
Nogales, Arizona
|
|
·
|
Griffith, Indiana
|
|
·
|
Phoenix, Arizona
|
|
·
|
Council Bluffs, Iowa
|
|
·
|
Fort Collins, Colorado
|
|
·
|
Kansas City, Kansas
|
|
·
|
Greeley, Colorado
|
|
·
|
Kansas City, Missouri (four locations)
|
|
·
|
Coeur d’Alene, Idaho
|
|
·
|
St. Louis, Missouri (four locations)
|
|
·
|
Cahokia, Illinois
|
|
·
|
Wellston, Missouri
|
|
·
|
Fairview Heights, Illinois
|
|
·
|
Lincoln, Nebraska
|
|
·
|
Mundelein, Illinois
|
|
·
|
Omaha, Nebraska (seven locations)
|
|
·
|
Arlington Heights, Illinois
|
|
·
|
Cincinnati, Ohio
|
|
·
|
Round Lake Beach, Illinois
|
|
·
|
Oklahoma City, Oklahoma (two locations)
|
|
·
|
Elkhart, Indiana
|
|
·
|
Tulsa, Oklahoma
|
|
·
|
Gary, Indiana (two locations)
|
|
·
|
Hillsboro, Oregon
|
|
·
|
Merrillville, Indiana
|
|
·
|
Portland, Oregon
|
|
·
|
Mishawaka, Indiana
|
|
·
|
San Antonio, Texas (three locations)
|
|
·
|
South Bend, Indiana
|
|
|
|
ITEM 3 LEGAL
PROCEEDINGS
We are involved in a variety
of legal claims and proceedings incidental to our business, including customer bankruptcy and employment-related matters from
time to time, and other legal matters that arise in the normal course of business. We believe these claims and proceedings are
not out of the ordinary course for a business of the type and size in which we are engaged. While we are unable to predict the
ultimate outcome of these claims and proceedings, management believes there is not a reasonable possibility that the costs and
liabilities of such matters, individually or in the aggregate, will have a material adverse effect on our financial condition
or results of operations.
ITEM 4 MINE
SAFETY DISCLOSURES
Not applicable.
PART II
ITEM
5 MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED SHAREHOLDER MATTERS
MARKET INFORMATION
Our common stock is listed for
trading on the OTC Bulletin Board, the “OTCBB,” under the symbol “WCRS.” The transfer agent and registrar
for our common stock is Corporate Stock Transfer, Inc., 3200 Cherry Creek Drive South, Suite 430, Denver, Colorado 80209. The
following table sets forth the high and low bid prices for our common stock as reported by the OTC Bulletin Board in 2011 and
2010. These quotations reflect inter-dealer prices, without retail mark-up, markdown, or commission, and may not represent actual
transactions. Trading in the Company’s common stock during the period represented was sporadic, exemplified by low trading
volume and many days during which no trades occurred. On or about March 1, 2010, our common stock also began tradingon the “OTCQB”,
which is the OTC Markets’ middle-tier over-the-counter quotation platform. OTC Markets is the entity formerly known as “The
Pink Sheets.”
|
|
Market
Price (high/low)
|
|
For the Fiscal Year
|
|
2011
|
|
|
2010
|
|
First Quarter
|
|
$
|
0.04 – 0.02
|
|
|
$
|
0.30 – 0.08
|
|
Second Quarter
|
|
$
|
0.06 – 0.02
|
|
|
$
|
0.18 – 0.02
|
|
Third Quarter
|
|
$
|
0.03 – 0.01
|
|
|
$
|
0.08 – 0.02
|
|
Fourth Quarter
|
|
$
|
0.04 – 0.01
|
|
|
$
|
0.19 – 0.02
|
|
HOLDERS
As of the date of this report,
we had 5,397,780 shares of common stock outstanding held by approximately 539 holders of record.
DIVIDENDS
Holders of our common stock are
entitled to share pro rata in dividends and distributions with respect to the common stock when, as and if declared by our Board
of Directors out of funds legally available therefore. We have not paid any dividends on our common stock and intend to retain
earnings, if any, to finance the development and expansion of our business. In addition, we must first pay preferred dividends
on its Series A Convertible Preferred Stock as described under the caption “Description of Equity Securities” below.
The current dividend payable to the holders of Series A Convertible Preferred Stock aggregates to $525,000 on a quarterly basis.
Other than with respect to shares of Series A Convertible Preferred Stock, future dividend policy is subject to the sole discretion
of our Board of Directors and will depend upon a number of factors, including future earnings, capital requirements and our financial
condition. As of the date of this report, the Company had an outstanding accrued but unpaid and cumulated dividends on its Series
A Convertible Preferred Stock aggregating to $3,550,000.
SECURITIES AUTHORIZED FOR
ISSUANCE UNDER EQUITY COMPENSATION PLANS
The table below sets forth certain
information, as of the close of business on December 31, 2011, regarding equity compensation plans (including individual compensation
arrangements) under which securities of Western Capital were then authorized for issuance.
|
|
|
Number of Securities to
be Issued Upon Exercise
of Outstanding Options,
Warrants and Rights
|
|
|
|
Weighted-Average
Exercise Price of
Outstanding Options,
Warrants and Rights
|
|
|
|
Number of Securities
Remaining Available for
Issuance Under Equity
Compensation Plans
(excluding securities reflected
in column a)
|
|
|
|
|
(a)
|
|
|
|
(b)
|
|
|
|
(c)
|
|
Equity compensation plans approved by securityholders
|
|
|
None
|
|
|
|
n/a
|
|
|
|
None
|
|
Equity compensation plans not approved by securityholders
|
|
|
None
|
|
|
|
n/a
|
|
|
|
2,000,000
|
(1)
|
|
(1)
|
In February 2008, our Board of Directors
adopted the 2008 Stock Incentive Plan which permits the issuance of
various incentives, including options or similar rights to purchase
or acquire up to 2,000,000 shares of common stock. As of the date
of this report, no incentives have been issued under such plan. We
are not required by applicable state law or the listing standards
of any self-regulatory organization or quotation service (e.g., the
OTC Markets, NASD, AMEX or NYSE) to obtain the approval of its security
holders prior to issuing any such compensatory options, warrants or
other rights to purchase securities of the Company.
|
SALES OF UNREGISTERED SECURITIES
AND REPURCHASES OF EQUITY SECURITIES BY THE ISSUER
We repurchased shares of common
stock, effective as at the end of 2011, as follows:
Period
|
|
Total Number of
Shares Purchased
|
|
|
Average Price Paid
Per Share
|
|
|
Total Number of
Shares Purchased as
Part of Publicly
Announced Plans or
Programs
|
|
|
Maximum Number
of Shares that May
Yet Be Purchased
Under the Plans or
Programs
|
|
December 2011
|
|
|
1,678,963
|
(1)
|
|
$
|
0.15
|
|
|
|
0
|
|
|
|
0
|
|
|
(1)
|
These shares were repurchased as
a result of private negotiation with three shareholders who approached
the Company regarding the potential repurchase of their shares by
the Company. The Company obtained full and complete releases of all
potential claims in the agreements governing these repurchase transactions.
|
DESCRIPTION OF EQUITY SECURITIES
Our authorized capital stock
consists of 250 million shares of capital stock, no par value per share (unless otherwise determined by the Board of Directors).
All shares of common stock have equal voting rights and are entitled to one vote per share on all matters to be voted upon by
our shareholders. Shares of our common stock have no preemptive, subscription, conversion or redemption rights and may be issued
only as fully-paid and non-assessable shares. Cumulative voting in the election of directors is not permitted. In the event of
our liquidation, each holder of our common stock is entitled to receive a proportionate share of our assets available for distribution
to stockholders after the payment of liabilities. All shares of our common stock issued and outstanding are fully-paid and non-assessable.
Of our 250 million shares of
authorized capital, we have designated 10,000,000 for issuance as “Series A Convertible Preferred Stock.” Each share
of Series A Convertible Preferred Stock carries a $2.10 stated value and entitles its holders to (i) a cumulative 10% dividend,
compounded and payable on a quarterly basis; (ii) in the event of a liquidation or dissolution of the Company, a preference in
the amount of all accrued but unpaid dividends plus the stated value of such shares, before any payment shall be made or any assets
distributed to the holders of any junior securities; (iii) convert their preferred shares into common shares of the Company on
a share-for-share basis (subject to adjustment); and (iv) vote their preferred shares on an as-if-converted basis. The Company
has the right to redeem some or all of such preferred shares, at any time upon 60 days’ advance notice, at a price of $3.50
per share plus accrued but unpaid dividends. Holders of Series A Convertible Preferred Stock have no preemptive or cumulative-voting
rights.
ITEM
6 SELECTED FINANCIAL DATA
Not
applicable.
ITEM
7 MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
The following discussion should
be read in conjunction with the financial statements and related notes that appear elsewhere in this report. This discussion contains
forward-looking statements that involve significant uncertainties. Our actual results could differ materially from those anticipated
in these forward-looking statements as a result of various factors, including those discussed in “Risk Factors” elsewhere
in this report. For further information, see “Forward-Looking Statements” below.
OVERVIEW
We provide (through Wyoming Financial
Lenders, Inc.) retail financial services to individuals primarily in the midwestern and southwestern United States. These services
include non-recourse cash advance loans and installment loans, check cashing and other money services, including title loans.
At the close of business on December 31, 2011 and as of the date of this report, we owned and operated 52 stores in nine states,
including Colorado, Iowa, Kansas, Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming.
We provide short-term consumer
loans—known as “payday” or “cash advance” loans—in amounts 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 four weeks
and the customer’s post-dated 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 $22 for each whole or partial increment of $100
borrowed.
In October 2008, we began operating
Cricket Wireless retail stores as an authorized dealer of Cricket Wireless products and services. Authorized dealers are permitted
to sell the Cricket line and generally locate their store operations in areas with a strong potential customer base where Cricket
does not maintain a corporate storefront. We are an authorized premier Cricket dealer, and as such, we are only permitted to sell
the Cricket line of prepaid cellular phones at our Cricket retail stores. In addition, each store we operate must resemble a Cricket
corporate store. At the close of business on December 31, 2011, we owned and operated 45 Cricket wireless retail stores in 13
states, including Arizona, Colorado, Illinois, Idaho, Indiana, Iowa, Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon and Texas.
Our expenses primarily relate
to the operations of our various stores. The most significant expenses include salaries and benefits for our store employees,
phones and accessories, provisions for payday loan losses and occupancy expenses for our leased real estate. Our other significant
expenses are general and administrative, which includes compensation of employees, professional fees for accounting, audit and
legal services, and management / consulting fees.
With respect to our cost structure,
salaries and benefits are one of our largest costs and are driven primarily by the number of storefronts operated throughout the
year and seasonal fluctuation in sales volumes. Phone and accessory cost of sales and occupancy costs make up our second and third
largest expense items, respectively. Our provision for losses is also a significant expense. We have experienced some 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.
We evaluate our stores based
on revenue growth, gross profit contributions and loss ratio (which, for the payday segment, is losses as a percentage of revenues),
with consideration given to the length of time the storefront has been open and its geographic location. We evaluate changes in
comparable storefront financial and other measures on a routine basis to assess operating efficiency. We define comparable storefronts
as those that are open during the full periods for which a comparison is being made. For example, comparable storefronts for the
annual analysis we undertook as of December 31, 2011 have been open at least 24 months on that date. We monitor newer storefronts
for their progress toward profitability and rate of loan growth or units sold.
Revenues increased to $19.49
million in 2011 from $17.98 million in 2010. Payday loan revenues totaled $9.66 million in 2011 compared to $10.61 million in
2010. Revenues from our Cricket phone sales increased in 2011 to $4.59 million compared to $4.10 million during 2010. Store salaries
and benefits expense was $4.70 million in 2011 compared to $4.57 million in 2010, an increase that resulted mainly from the acquisition
of additional Cricket cellular retail storefronts in 2011. Our 2011 phone and accessories cost of sales was $2.86 million compared
to $1.71 million in 2010. The increase in our Cricket Wireless segment revenues had a corresponding upward impact to our costs
of sales. Income from stores increased to $5.38 million in 2011 compared to $5.08 million in 2010. Primarily as a result of these
factors, net income increased to $1.44 million in 2011 from net income of $1.35 million in 2010.
We have 10,000,000 shares of
Series A Convertible Preferred Stock (10% cumulative dividends, $0.01 par value, $2.10 stated value) authorized, issued and outstanding.
One-fourth of the $2.1 million annual preferred dividend accrues each quarter, whether paid or not. Our Board of Directors votes
to approve payment of dividends when appropriate and as permitted by Minnesota law. The dividend can be paid either in cash or
in shares of our common stock at the discretion of the preferred shareholder. This preferred dividend is included in the net income
or loss available to common shareholders. As a result, we had a net loss available to common shareholders in 2011 and 2010.
Our obligation to pay preferred
dividends significantly impacts our cash flow and our ability to grow through acquisitions, which is the most significant way
in which we expect to grow. For instance, our use of cash in satisfaction of the dividend-payment obligations prevents us from
using that cash as part of acquisition transactions. The present condition of the credit markets available to businesses in our
industry also makes it difficult for us to surmount this obstacle through borrowing. In addition, our use of cash in satisfaction
of the dividend-payment obligations requires us to manage our cash in ways that we will ensure the availability of cash for lending
to our payday loan customers during the fall and winter months, which is typically the busiest time of year for payday lending.
The preferred dividend obligation
also significantly affects our net income available to common shareholders. For example, absent the 2011 preferred dividend of
$2.1 million, our net income available to common shareholders would have been approximately $1.44 million. For this reason, we
are continuing to explore ways in which we may be able to retire or redeem the Series A Convertible Preferred Stock. During 2011,
we had engaged in discussions with WCR, LLC regarding the conversion of preferred stock on terms more favorable than those contained
in the Certificate of Designation for the preferred stock, but we were unable to reach a definitive agreement in this regard.
It is difficult for us to forecast what success, if any, we may have in this endeavor since the preferred stockholders are not
obligated to surrender their shares, exchange them, or engage in any sort of recapitalization transaction.
The growth of 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 involved with the efforts of the various industry lobbying efforts. To the extent that states enact legislation or regulations
that negatively impacts payday lending, whether through preclusion, fee reduction or loan caps, our business could be adversely
affected. In Nebraska, legislation was introduced in 2008 (but did not advance) to ban all cash advance or payday loans in Nebraska.
Despite the defeat of this legislation, since we derived approximately 28% of our 2011 total payday segment revenues in Nebraska,
any subsequent attempts to pass similar legislation in Nebraska, or other legislation that would restrict our ability to make
cash advance loans in Nebraska, would pose significant risks to our business.
With payday loan industry growth
and fragmentation, we believe there are opportunities to grow our business, primarily through acquisitions as opposed to organic
growth. We continually evaluate opportunities in numerous states in which we currently operate and evaluate the regulatory environment
and market potential in the various states in which we currently do not have stores. In addition to expanding our geographic reach,
our strategic expansion plans also involve the expansion and diversification of our product and service offerings. For this reason,
we have focused, and will continue to focus, a significant amount of time and resources on the development of our Cricket Wireless
retail stores. We will also explore growth opportunity through the conversion (or partial conversion) of payday stores into pawn
stores. We believe that successful expansion, both geographically and product- and service-wise, will help to mitigate the regulatory
and economic risk inherent in our business by making us less reliant on (i) cash advance lending alone and (ii) any particular
aspect of our business that concentrated geographically.
RESULTS OF OPERATIONS:
YEAR ENDED DECEMBER 31, 2011
COMPARED TO YEAR ENDED DECEMBER 31, 2010
For the year ended December 31,
2011, net income was $1.44 million compared to a net income of $1.35 million in 2010. Income from continuing operations before
income taxes was $2.32 million in 2011 compared to $2.10 million in 2010. The major components of each of revenues, store expenses,
general and administrative expenses, total operating expenses and income tax expense are discussed below.
Revenues
Revenues totaled $19.49 million
in 2011 compared to $17.98 million in 2010, an increase of $1.51 million or 8.40%. The increase in total revenues resulted primarily
from the following factors impacting the Cricket Wireless division: an increase in the number of Cricket storefronts in the last
four months of 2011 compared to 2010 and a higher per unit selling price of phones. We originated approximately $67.5 million
in payday loans during 2011 compared to $71.88 million in payday loans during the prior year. The average loan (including fee)
totaled $382 in 2011 versus $367 in the prior year. Our average fee for 2011 was $55 compared to $54 for 2010. We closed four
payday storefronts in Montana late in the fourth quarter of 2010 because of recent state legislation. Revenues from Cricket phone
sales totaled $4.59 million in 2011 compared to $4.09 million in 2010. Cricket service fee revenue totaled $3.74 million in 2011
compared to $1.42 million in 2010, an increase related primarily to a change in dealer compensation arrangement in 2011. We had
49 Cricket retail storefronts open and operating during at least some part of fiscal 2011 compared to 37 storefronts during fiscal
2010. During 2011, we added 18 Cricket storefronts and closed four. In comparison, during 2010, we added four Cricket storefronts
and closed six. Other revenues, including installment interest income, check cashing, title loans, service change fees and other
sources, totaled $1.50 million and $1.86 million for 2011 and 2010, respectively.
The following table summarizes
our revenues:
|
|
Year Ended December 31,
|
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
|
(percentage of revenues)
|
|
Payday loan fees
|
|
$
|
9,663,130
|
|
|
$
|
10,607,136
|
|
|
|
49.6
|
%
|
|
|
59.0
|
%
|
Phones and accessories
|
|
|
4,585,584
|
|
|
|
4,094,049
|
|
|
|
23.5
|
%
|
|
|
22.8
|
%
|
Cricket service fees
|
|
|
3,741,495
|
|
|
|
1,419,446
|
|
|
|
19.2
|
%
|
|
|
7.9
|
%
|
Installment interest income
|
|
|
538,273
|
|
|
|
-
|
|
|
|
2.8
|
%
|
|
|
-
|
%
|
Check cashing fees
|
|
|
682,094
|
|
|
|
739,733
|
|
|
|
3.5
|
%
|
|
|
4.1
|
%
|
Other income and fees
|
|
|
277,344
|
|
|
|
1,118,083
|
|
|
|
1.4
|
%
|
|
|
6.2
|
%
|
Total
|
|
$
|
19,487,920
|
|
|
$
|
17,978,447
|
|
|
|
100
|
%
|
|
|
100
|
%
|
We expect that our sources of
revenue for 2012 may continue to diversify as we continue to improve and increase sales in our Cricket retail operations and look
to open new Cricket retail and pawn storefronts.
Store Expenses
Total expenses associated with
store operations for 2011 were $14.10 million compared to $12.90 million for 2010, an increase of $1.20 million or 9.30%. The
major components of these expenses are salaries and benefits for our store employees, provision for loan losses, costs of sales
for phones and accessories, occupancy costs primarily relating to our store leaseholds, advertising expenses, depreciation of
store equipment, amortization of intangible assets and other expenses associated with store operations.
Overall, our most significant
increases in store expenses from 2011 to 2010 related to salaries and benefits for our store employees, the provision for loan
losses, and phones and accessories. Our most significant decrease in store expenses over that same period relates to our costs
of occupancy. A discussion and analysis of the various components of our store expenses appears below.
Salaries and Benefits
.
Payroll and related costs at the store level were $4.70 million in 2011 compared to $4.58 million in 2010, an increase of $.13
million. This increase is a result of an increase in the number of storefronts operating throughout 2011. As a result of additional
Cricket retail storefronts in 2011, we expect that salaries and benefits for 2012 will increase because the additional storefronts
will be operating the entire year. Our salaries and benefits expenses will further increase if we add additional storefronts in
2012.
Provisions for Loan Losses
.
Our provision for losses for 2011 totaled $1.40 million and $1.28 million for 2010. Our provision for loan losses as a percentage
of loan fee revenue was 14.5% during 2011 versus 12.1% during 2010. The less favorable loss ratio is due primarily to higher loss
percentages with installment lending. Due to our inability to foretell the speed and scope of the current economic recovery or
the economy in general, we believe there are currently uncertainties in what loan losses for 2012 may be.
Phone and Accessories Cost
of Sales.
The increase in our Cricket Wireless phone and accessory revenues resulted in corresponding increase
in costs of sales. For the year ended December 31, 2011, our costs of sales were $2.86 million compared to $1.71 million
in 2010. Also contributing to the increase was a 2011 change in the dealer compensation arrangement with Cricket that
resulted in lower margins, partially offset by increased fees income.
Occupancy Costs
. Occupancy
expenses, consisting primarily of store leases were $1.69 million during 2011 compared to $1.85 million in 2010, a decrease of
$.16 million primarily resulting from a higher number of storefront days (number of storefronts times days leased for year) in
2010 compared to 2011. Occupancy expenses as a percentage of revenues decreased from 10.3% in 2010 to 8.65% in 2010.
Advertising
. Advertising
and marketing related expense was $.33 million in 2011 compared to $.36 million in 2010. We believe that our advertising expenses
in 2012 may increase slightly over those in 2011, mainly as a result of the need to increase advertisement of our Cricket wireless
cellular segment and for pawn stores we open in 2012.
Depreciation
. Depreciation
decreased by $.01 million in 2011. Depreciation was $.27 million for 2011 and $.28 million for 2010.
Amortization of Intangible
Assets
. Amortization of the customer relationship and other intangible assets was $.44 million for 2011 and $.52
million for 2010. This has been decreasing as intangibles become fully amortized.
Other Store Expenses
.
Other store expenses increased from $2.33 million in 2010 to $2.42 million in 2011. Other store expenses include bank fees, collection
costs, repair and maintenance, supplies, telephone, utilities and network lines, and others. The increase in these expenses during
2011 was primarily due to increased supplies related to our Cricket store acquisitions.
General and Administrative
Expenses
Total general and administrative
costs for 2011 were $3.07 million compared to $2.98 million for 2010. The major components of these costs for 2011 are salaries
and benefits for our corporate headquarters operations and executive management, interest expense, and other general and administrative
expenses.
Salaries and Benefits
.
Salaries and benefits expenses for 2011 were $1.74 million compared to $1.53 million for 2010, with the increase being mainly
attributable to an increase in the management bonus pool established pursuant to the employment agreement with the Company’s
CEO. The Company expects that during 2012 salaries and benefits expenses associated with executive management and corporate headquarters
will remain consistent with their 2011 levels.
Interest Expense
. The
Company had $.29 million of interest expense in 2011 compared to $.41 million in 2010, a 29.3% decrease due to a reduction in
notes payable balances.
Other General and Administrative
Expenses
. Other general and administrative expenses, such as professional fees, management / consulting fees, utilities, office
supplies, and other minor costs associated with corporate headquarters activities were $1.01 million in 2011 compared to $1.03
million during 2010. The decrease in these expenses is mainly attributable to a decrease in nonrecurring professional fees, partially
offset by management / consulting fees.
Total Operating Expenses
Total operating expenses for
2011 and 2010 were $17.17 million and $15.88 million, respectively. We anticipate our total operating expenses in 2012 to increase
compared to 2011 due to the increase in number of storefronts during 2011 and 2012.
Income Tax Expense
Income tax expense on continuing
operations increased to $.88 million in 2011 compared to $.75 million in 2010 for an effective rate of 38% and 36%, respectively.
LIQUIDITY AND CAPITAL RESOURCES
Summary cash flow data is as
follows:
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
Cash flows provided (used) by :
|
|
|
|
|
|
|
|
|
Operating activities
|
|
$
|
2,149,115
|
|
|
$
|
2,743,235
|
|
Investing activities
|
|
|
(1,562,729
|
)
|
|
|
(103,964
|
)
|
Financing activities
|
|
|
(769,330
|
)
|
|
|
(2,073,447
|
)
|
Net increase (decrease) in cash
|
|
|
(182,944
|
)
|
|
|
565,824
|
|
Cash, beginning of period
|
|
|
2,092,386
|
|
|
|
1,526,562
|
|
Cash, end of period
|
|
$
|
1,909,442
|
|
|
$
|
2,092,386
|
|
At December 31, 2011, we had
cash of $1.91 million compared to cash of $2.09 million on December 31, 2010. For 2012, we believe that our available cash, combined
with expected cash flows from operations, will be sufficient to fund our liquidity and capital expenditure requirements through
March of 2013. Our expected short-term uses of cash include the reduction in accruals related to operations, scheduled principal
and interest payments on long-term debts, repayment of short-term debt, and capital expenditures.
Our overall cash and liquidity position has been significantly
enhanced by the past and current willingness of the holders of our Series A Convertible Preferred Stock to not insist that the
Company pay dividends to those stockholders to the greatest extent permitted by Minnesota state law. Minnesota state law
indicates that a corporation can only pay a dividend in circumstances where the corporation will be able to pay its debts in the
ordinary course of business after making the dividend. In the case where those stockholders were to insist that the Company pay
dividends to the greatest extent permitted by state law (as required by the terms of the preferred stock), our liquidity position
would likely be negatively affected, perhaps materially, such that we would be required to arrange for or engage in additional
borrowing to ensure that we would have capital available to fund cash advance loans and otherwise.
Credit Facilities
On January 26, 2011, the Company
and Wyoming Financial Lenders, Inc. entered into a Loan Extension Agreement with WERCS. The Loan Extension Agreement extends the
maturity date for the payment of all obligations under the Business Loan Agreement to April 1, 2012. In connection with the extension
agreement, the Company made a principal payment of $1,000,000. On March 14, 2012, the Company paid the remaining principal balance
and all accrued and unpaid interest.
On October 18, 2011, the Company
entered into a borrowing arrangement with River City Equity, Inc. and delivered a related long-term promissory note in favor of
River City Equity. The borrowing arrangement allows the Company to borrow up to $2,000,000 at an interest rate of 12% per annum,
with interest payable on a monthly basis. The note matures on September 30, 2013, on which date all unpaid principal and accrued
but unpaid interest thereon is due and payable. The note includes a prepayment penalty and, under certain circumstances, permits
River City Equity to obtain a security interest in all of the Company’s assets. As of December 31, 2011, $1,000,000 has
been advanced under this arrangement.
CRITICAL
ACCOUNTING POLICIES
Our consolidated financial statements
and accompanying notes have been prepared in accordance with accounting principles generally accepted in the United States of
America applied on a consistent basis. The preparation of these financial statements requires us to make a number of estimates
and assumptions that affect the reported amounts of assets and liabilities, the disclosure of contingent assets and liabilities
at the date of the financial statements and the reported amounts of revenues and expenses during the reporting periods. We evaluate
these estimates and assumptions on an ongoing basis. We base these estimates on the information currently available to us and
on various other assumptions that we believe are reasonable under the circumstances. Actual results could vary materially from
these estimates under different assumptions or conditions.
Our significant accounting policies
are discussed in Note 1, “Nature of Business and Summary of Significant Accounting Policies,” of the notes to our
consolidated financial statements included in this report. We believe that the following critical accounting policies affect the
more significant estimates and assumptions used in the preparation of our consolidated financial statements:
Loans Receivable Allowance
We maintain a loan loss allowance
for anticipated losses for our payday, installment and title loans. To estimate the appropriate level of the loan loss allowance,
we consider the amount of outstanding loans owed to us, historical loans charged off, current and expected collection patterns
and current economic trends. Our current loan loss allowance is based on our net write offs, typically expressed as a percentage
of loan amounts originated for the last 24 months applied against the principal balance of outstanding loans that we write off.
We also periodically perform a look-back analysis on our loan loss allowance to verify the historical allowance established tracks
with the actual subsequent loan write-offs and recoveries. We are aware that as conditions change, we may also need to make additional
allowances in future periods.
Included in loans receivable
are payday loans that are currently due or past due and payday loans that have not been repaid. This generally is evidenced where
a customer’s personal check has been deposited and the check has been returned due to non-sufficient funds in the customer’s
account, a closed account, or other reasons. Also included in loans receivable are current and delinquent installment and title
loans. Loans are carried at cost less the loans receivable allowance. We do not specifically reserve for any individual loan.
We aggregate loan types for purposes of estimating the loss allowance using a methodology that analyzes historical portfolio statistics
and management’s judgment regarding recent trends noted in the portfolio. This methodology takes into account several factors,
including the maturity of the store location and charge-off and recovery rates. We utilize a software program to assist with the
tracking of its historical portfolio statistics. As a result of the Company’s collection efforts, it historically writes
off approximately 42% of the returned items. Based on days past the check return date, write-offs of returned items
historically have tracked at the following approximate percentages: 1 to 30 days – 42%; 31 to 60 days –
66%; 61 to 90 days – 82%; 91 to 120 days – 88%; and 121 to 180 days – 90%. All returned items are charged-off
after 180 days, as collections after that date have not been significant. The loan loss allowance is reviewed monthly and any
adjustment to the loans receivable allowance as a result of historical loan performance, current and expected collection patterns
and current economic trends is recorded.
At December 31, 2011 and 2010
our outstanding loans receivable aging was as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Current
|
|
$
|
4,626,000
|
|
|
$
|
4,542,000
|
|
1-30
|
|
|
297,000
|
|
|
|
276,000
|
|
31 – 60
|
|
|
220,000
|
|
|
|
234,000
|
|
61 – 90
|
|
|
223,000
|
|
|
|
209,000
|
|
91 - 120
|
|
|
171,000
|
|
|
|
220,000
|
|
121 – 150
|
|
|
189,000
|
|
|
|
227,000
|
|
151 – 180
|
|
|
163,000
|
|
|
|
201,000
|
|
|
|
|
5,889,000
|
|
|
|
5,909,000
|
|
Allowance for losses
|
|
|
(1,001,000
|
)
|
|
|
(1,165,000
|
)
|
|
|
$
|
4,888,000
|
|
|
$
|
4,744,000
|
|
A rollforward of our loans receivable
allowance for the years ended December 31, 2011 and 2010 is as follows:
|
|
Year Ended December 31
|
|
|
|
2011
|
|
|
2010
|
|
Loans receivable allowance, beginning of year
|
|
$
|
1,165,000
|
|
|
$
|
1,237,000
|
|
Provision for loan losses charged to expense:
|
|
|
1,397,000
|
|
|
|
1,280,000
|
|
Charge-offs, net
|
|
|
(1,561,000
|
)
|
|
|
(1,352,000
|
)
|
|
|
|
|
|
|
|
|
|
Loans receivable allowance, end of year
|
|
$
|
1,001,000
|
|
|
$
|
1,165,000
|
|
Valuation of Long-lived and
Intangible Assets
The Company assesses the possibility
of impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. Factors that could trigger an impairment review include significant underperformance relative to expected
historical or projected future cash flows, significant changes in the manner of use of acquired assets or the strategy for the
overall business, and significant negative industry events or trends. In addition, we conduct an
annual
goodwill impairment test as of October 1 each year
. W
e assess our goodwill for impairment at
the reporting unit level by applying a fair value test. This fair value test involves a two-step process. The first step is to
compare the carrying value of our net assets to our fair value. If the fair value is determined to be less than the carrying value,
a second step is performed to measure the amount of the impairment, if any.
A reporting unit is an operating
segment, or under certain circumstances, a component of an operating segment that constitutes a business. Our reporting units
consist of multiple state and multi-state based operations and therefore the cessation of operations in any particular state does
not imply that goodwill for the relevant reporting unit will be impaired.
Due to the effect of our capital
structure involving preferred stock and related cumulative preferred dividends, the market capitalization approach of valuing
the reporting unit as a whole is not practical. The discounted future cash flows method is utilized in estimating value. When
estimated future cash flows are less than the carrying value of the net assets and related goodwill, an impairment test is performed
to measure and recognize the amount of the impairment loss, if any. Impairment losses, which are limited to the carrying value
of goodwill, represent the excess of the carrying amount of a reporting unit's goodwill over the implied fair value of that goodwill.
In determining the estimated
future discounted cash flows, we consider current and projected future levels of income, as well as strategic plans, business
trends, prospects, and market and economic conditions. Impairment tests involve the use of judgments and estimates related to
the fair market value of the business operations with which goodwill is associated, taking into consideration both historical
operating performance and anticipated financial position and future earnings. We believe that the estimates of future cash flows
and fair value determined as of October 1, 2011 are reasonable. Changes in estimates of those cash flows and fair value, however,
could affect the evaluation.
Based upon this evaluation, we concluded that the fair value exceeded
the carrying value of net assets and there was no impairment.
As of December 31, 2011,
we evaluated whether any triggering events or changes in circumstances had occurred subsequent to our annual impairment test.
As part of this evaluation, we considered additional qualitative factors, including whether there had been any significant adverse
changes in legal factors or in our business climate, adverse action or assessment by a regulator, unanticipated competition, loss
of key personnel or likely sale or disposal of all or a significant portion of our reporting unit. This analysis resulted in a
determination that no triggering events or changes in circumstances had occurred.
OFF BALANCE
SHEET ARRANGEMENTS
We have
no off balance sheet arrangements.
FORWARD-LOOKING
STATEMENTS
Some of the statements made in
this report are “forward-looking statements,” as that term is defined under Section 27A of the Securities Act and
Section 21E of the Securities Exchange Act of 1934. These forward-looking statements are based upon our current expectations and
projections about future events. Whenever used in this report, the words “believe,” “anticipate,” “intend,”
“estimate,” “expect” and similar expressions, or the negative of such words and expressions, are intended
to identify forward-looking statements, although not all forward-looking statements contain such words or expressions. The forward-looking
statements in this report are primarily located in the material set forth under the headings “Description of Business,”
“Risk Factors,” “Management’s Discussion and Analysis of Financial Condition and Results of Operations,”
but are found in other parts of this report as well. These forward-looking statements generally relate to our plans, objectives
and expectations for future operations and are based upon management’s current estimates and projections of future results
or trends. Although we believe that our plans and objectives reflected in or suggested by these forward-looking statements are
reasonable, we may not achieve these plans or objectives. You should read this report completely and with the understanding that
actual future results may be materially different from what we expect. We will not update forward-looking statements even though
our situation may change in the future.
Specific factors that might cause
actual results to differ from our expectations or may affect the value of the common stock, include, but are not limited to:
|
·
|
Changes
in local, state
or federal laws
and regulations
governing lending
practices, or changes
in the interpretation
of such laws and
regulations
|
|
·
|
Litigation
and regulatory
actions directed
toward our industry
or us, particularly
in certain key
states
|
|
·
|
Our
need for additional
financing, and
|
|
·
|
Unpredictability
or uncertainty
in financing markets
which could impair
our ability to
grow our business
through acquisitions.
|
Other factors that could cause
actual results to differ from those implied by the forward-looking statements in this report are more fully described in the “Risk
Factors” section and of this report.
Industry data and other statistical
information used in this report are based on independent publications, government publications, reports by market research firms
or other published independent sources. Some data are also based on our good faith estimates, derived from our review of internal
surveys and the independent sources listed above. Although we believe these sources are reliable, we have not independently verified
the information.
ITEM
7A QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Not applicable.
ITEM
8 FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
INDEX OF FINANCIAL INFORMATION
CONTENTS
|
|
Page(s)
|
|
|
|
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
|
|
F-1
|
|
|
|
CONSOLIDATED FINANCIAL STATEMENTS
|
|
|
|
|
|
Consolidated Balance Sheets
|
|
F-2
|
|
|
|
Consolidated Statements of Income
|
|
F-3
|
|
|
|
Consolidated Statements of Shareholders’ Equity
|
|
F-4
|
|
|
|
Consolidated Statements of Cash Flows
|
|
F-5
|
|
|
|
Notes to Consolidated Financial Statements
|
|
F-6
|
REPORT OF INDEPENDENT REGISTERED
PUBLIC ACCOUNTING FIRM ON CONSOLIDATED FINANCIAL STATEMENTS
Board of Directors
Western Capital Resources, Inc.
Omaha, Nebraska
We have audited the accompanying
consolidated balance sheets of Western Capital Resources, Inc. and Subsidiaries as of December 31, 2011 and 2010, and the related
consolidated statements of income, shareholders’ equity, and cash flows for the years then ended. These consolidated financial
statements are the responsibility of the Company’s management. Our responsibility is to express an opinion on these consolidated
financial statements based on our audits.
We conducted our audits in accordance
with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and
perform the audit to obtain reasonable assurance about whether the consolidated financial statements are free of material misstatement.
The Company is not required to have, nor were we engaged to perform, an audit of its internal control over financial reporting.
Our audit included consideration of internal control over financial reporting as a basis for designing audit procedures that are
appropriate in the circumstances, but not for the purpose of expressing an opinion on the effectiveness of the Company’s
internal control over financial reporting. Accordingly, we express no such opinion. An audit also includes examining, on a test
basis, evidence supporting the amounts and disclosures in the consolidated financial statements, assessing the accounting principles
used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe
that our audits provide a reasonable basis for our opinion.
In our opinion, the consolidated
financial statements referred to above present fairly, in all material respects, the financial position of Western Capital Resources,
Inc. and Subsidiaries as of December 31, 2011 and 2010 and the results of their operations and their cash flows for the years
then ended in conformity with accounting principles generally accepted in the United States of America.
Minneapolis, Minnesota
/s/ Lurie Besikof Lapidus &
Company, LLP
March 30, 2012
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
BALANCE SHEETS
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
|
|
|
|
|
ASSETS
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT ASSETS
|
|
|
|
|
|
|
|
|
Cash
|
|
$
|
1,909,442
|
|
|
$
|
2,092,386
|
|
Loans receivable (less allowance for losses of $1,001,000 and $1,165,000)
|
|
|
4,887,813
|
|
|
|
4,743,906
|
|
Inventory
|
|
|
756,528
|
|
|
|
502,415
|
|
Prepaid expenses and other
|
|
|
451,751
|
|
|
|
152,736
|
|
Deferred income taxes
|
|
|
413,000
|
|
|
|
467,000
|
|
TOTAL CURRENT ASSETS
|
|
|
8,418,534
|
|
|
|
7,958,443
|
|
|
|
|
|
|
|
|
|
|
PROPERTY AND EQUIPMENT
|
|
|
757,747
|
|
|
|
824,102
|
|
|
|
|
|
|
|
|
|
|
GOODWILL
|
|
|
12,393,869
|
|
|
|
11,458,744
|
|
|
|
|
|
|
|
|
|
|
INTANGIBLE ASSETS
|
|
|
309,552
|
|
|
|
434,413
|
|
|
|
|
|
|
|
|
|
|
OTHER
|
|
|
142,074
|
|
|
|
95,180
|
|
|
|
|
|
|
|
|
|
|
TOTAL ASSETS
|
|
$
|
22,021,776
|
|
|
$
|
20,770,882
|
|
|
|
|
|
|
|
|
|
|
LIABILITIES AND SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
CURRENT LIABILITIES
|
|
|
|
|
|
|
|
|
Accounts payable and accrued liabilities
|
|
$
|
2,323,730
|
|
|
$
|
1,477,607
|
|
Income tax payable
|
|
|
-
|
|
|
|
435,670
|
|
Note payable – short-term
|
|
|
1,000,000
|
|
|
|
2,000,000
|
|
Current portion long-term debt
|
|
|
695,123
|
|
|
|
769,330
|
|
Preferred dividend payable
|
|
|
3,550,000
|
|
|
|
1,450,000
|
|
Deferred revenue
|
|
|
314,561
|
|
|
|
320,021
|
|
TOTAL CURRENT LIABILITIES
|
|
|
7,883,414
|
|
|
|
6,452,628
|
|
|
|
|
|
|
|
|
|
|
LONG-TERM LIABILITIES
|
|
|
|
|
|
|
|
|
Note payable – long-term
|
|
|
1,210,065
|
|
|
|
905,188
|
|
Deferred income taxes
|
|
|
530,000
|
|
|
|
350,000
|
|
TOTAL LONG-TERM LIABILITIES
|
|
|
1,740,065
|
|
|
|
1,255,188
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES
|
|
|
9,623,479
|
|
|
|
7,707,816
|
|
|
|
|
|
|
|
|
|
|
SHAREHOLDERS’ EQUITY
|
|
|
|
|
|
|
|
|
Series A convertible preferred stock 10% cumulative dividends, $0.01 par value, $2.10 stated value. 10,000,000 shares authorized, issued and outstanding
|
|
|
100,000
|
|
|
|
100,000
|
|
Common stock, no par value, 240,000,000 shares authorized, 7,446,007 and 7,446,007 shares issued and outstanding.
|
|
|
-
|
|
|
|
-
|
|
Additional paid-in capital
|
|
|
18,221,777
|
|
|
|
18,221,777
|
|
Accumulated deficit
|
|
|
(5,923,480
|
)
|
|
|
(5,258,711
|
)
|
TOTAL SHAREHOLDERS’ EQUITY
|
|
|
12,398,297
|
|
|
|
13,063,066
|
|
|
|
|
|
|
|
|
|
|
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY
|
|
$
|
22,021,776
|
|
|
$
|
20,770,882
|
|
See notes
to consolidated financial statements.
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF INCOME
|
|
Year ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
REVENUES
|
|
|
|
|
|
|
|
|
Payday loan fees
|
|
$
|
9,663,130
|
|
|
$
|
10,607,136
|
|
Phones and accessories
|
|
|
4,585,584
|
|
|
|
4,094,049
|
|
Cricket service fees
|
|
|
3,741,495
|
|
|
|
1,419,446
|
|
Installment interest income
|
|
|
538,273
|
|
|
|
-
|
|
Check cashing fees
|
|
|
682,094
|
|
|
|
739,733
|
|
Other income and fees
|
|
|
277,344
|
|
|
|
1,118,083
|
|
|
|
|
19,487,920
|
|
|
|
17,978,447
|
|
|
|
|
|
|
|
|
|
|
STORE EXPENSES
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
4,702,051
|
|
|
|
4,573,346
|
|
Provisions for loan losses
|
|
|
1,396,724
|
|
|
|
1,279,547
|
|
Phone and accessories cost of sales
|
|
|
2,857,294
|
|
|
|
1,706,160
|
|
Occupancy
|
|
|
1,686,373
|
|
|
|
1,852,279
|
|
Advertising
|
|
|
333,453
|
|
|
|
363,171
|
|
Depreciation
|
|
|
275,389
|
|
|
|
280,250
|
|
Amortization of intangible assets
|
|
|
435,861
|
|
|
|
517,656
|
|
Other
|
|
|
2,417,441
|
|
|
|
2,327,611
|
|
|
|
|
14,104,586
|
|
|
|
12,900,020
|
|
|
|
|
|
|
|
|
|
|
INCOME FROM STORES
|
|
|
5,383,334
|
|
|
|
5,078,427
|
|
|
|
|
|
|
|
|
|
|
GENERAL & ADMINISTRATIVE EXPENSES
|
|
|
|
|
|
|
|
|
Salaries and benefits
|
|
|
1,735,686
|
|
|
|
1,527,797
|
|
Depreciation
|
|
|
23,741
|
|
|
|
17,677
|
|
Interest expense
|
|
|
290,913
|
|
|
|
405,249
|
|
Other
|
|
|
1,014,763
|
|
|
|
1,026,763
|
|
|
|
|
3,065,103
|
|
|
|
2,977,486
|
|
|
|
|
|
|
|
|
|
|
INCOME BEFORE INCOME TAXES
|
|
|
2,318,231
|
|
|
|
2,100,941
|
|
|
|
|
|
|
|
|
|
|
INCOME TAX EXPENSE
|
|
|
883,000
|
|
|
|
752,000
|
|
|
|
|
|
|
|
|
|
|
NET INCOME
|
|
|
1,435,231
|
|
|
|
1,348,941
|
|
|
|
|
|
|
|
|
|
|
SERIES A CONVERTIBLE PREFERRED STOCK DIVIDENDS (assumes all paid)
|
|
|
(2,100,000
|
)
|
|
|
(2,100,000
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS AVAILABLE TO COMMON STOCKHOLDERS
|
|
$
|
(664,769
|
)
|
|
$
|
(751,059
|
)
|
|
|
|
|
|
|
|
|
|
NET LOSS PER COMMON SHARE -
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
$
|
(0.09
|
)
|
|
$
|
(0.10
|
)
|
|
|
|
|
|
|
|
|
|
WEIGHTED AVERAGE COMMON SHARE OUTSTANDING -
|
|
|
|
|
|
|
|
|
Basic and diluted
|
|
|
7,446,007
|
|
|
|
7,584,637
|
|
See notes
to consolidated financial statements.
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF SHAREHOLDERS’ EQUITY
|
|
Series A Convertible
Preferred Stock
|
|
|
Common Stock
|
|
|
Additional
Paid-In
|
|
|
Retained
|
|
|
Shareholders’
|
|
|
|
Shares
|
|
|
Amount
|
|
|
Shares
|
|
|
Amount
|
|
|
Capital
|
|
|
Deficit
|
|
|
Equity
|
|
BALANCE - December 31, 2009
|
|
|
10,000,000
|
|
|
$
|
100,000
|
|
|
|
7,996,007
|
|
|
$
|
-
|
|
|
$
|
18,478,337
|
|
|
$
|
(4,676,212
|
)
|
|
$
|
13,902,125
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Shares retired
|
|
|
-
|
|
|
|
-
|
|
|
|
(550,000
|
)
|
|
|
-
|
|
|
|
(256,560
|
)
|
|
|
168,560
|
|
|
|
(88,000
|
)
|
Dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,100,000
|
)
|
|
|
(2,100,000
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,348,941
|
|
|
|
1,348,941
|
|
BALANCE - December 31, 2010
|
|
|
10,000,000
|
|
|
|
100,000
|
|
|
|
7,446,007
|
|
|
|
-
|
|
|
|
18,221,777
|
|
|
|
(5,258,711
|
)
|
|
|
13,063,066
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Dividends
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
(2,100,000
|
)
|
|
|
(2,100,000
|
)
|
Net income
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
-
|
|
|
|
1,435,231
|
|
|
|
1,435,231
|
|
BALANCE - December 31, 2011
|
|
|
10,000,000
|
|
|
$
|
100,000
|
|
|
|
7,446,007
|
|
|
$
|
-
|
|
|
$
|
18,221,777
|
|
|
$
|
(5,923,480
|
)
|
|
$
|
12,398,297
|
|
See notes to
consolidated financial statements.
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
CONSOLIDATED
STATEMENTS OF CASH FLOWS
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
OPERATING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net Income
|
|
$
|
1,435,231
|
|
|
$
|
1,348,941
|
|
Adjustments to reconcile net income to net cash provided by operating activities:
|
|
|
|
|
|
|
|
|
Depreciation
|
|
|
299,130
|
|
|
|
297,927
|
|
Amortization
|
|
|
435,861
|
|
|
|
517,656
|
|
Shares received for reimbursement of expenses
|
|
|
-
|
|
|
|
(88,000
|
)
|
Deferred income taxes
|
|
|
234,000
|
|
|
|
119,000
|
|
Loss on disposal of property and equipment
|
|
|
28,172
|
|
|
|
57,650
|
|
Changes in operating assets and liabilities:
|
|
|
|
|
|
|
|
|
Loans receivable
|
|
|
(100,876
|
)
|
|
|
131,964
|
|
Inventory
|
|
|
(254,113
|
)
|
|
|
(128,557
|
)
|
Prepaid expenses and other assets
|
|
|
(334,283
|
)
|
|
|
97,944
|
|
Accounts payable and accrued liabilities
|
|
|
411,453
|
|
|
|
414,515
|
|
Deferred revenue
|
|
|
(5,460
|
)
|
|
|
(25,805
|
)
|
Net cash provided by operating activities
|
|
|
2,149,115
|
|
|
|
2,743,235
|
|
|
|
|
|
|
|
|
|
|
INVESTING ACTIVITIES
|
|
|
|
|
|
|
|
|
Purchases of property and equipment
|
|
|
(145,947
|
)
|
|
|
(103,964
|
)
|
Acquisition of stores, net of cash acquired
|
|
|
(1,416,782
|
)
|
|
|
-
|
|
Net cash used by investing activities
|
|
|
(1,562,729
|
)
|
|
|
(103,964
|
)
|
|
|
|
|
|
|
|
|
|
FINANCING ACTIVITIES
|
|
|
|
|
|
|
|
|
Net advances on notes payable
|
|
|
-
|
|
|
|
205,628
|
|
Payments on notes payable – long-term
|
|
|
(769,330
|
)
|
|
|
(629,075
|
)
|
Dividends
|
|
|
-
|
|
|
|
(1,650,000
|
)
|
Net cash used by financing activities
|
|
|
(769,330
|
)
|
|
|
(2,073,447
|
)
|
|
|
|
|
|
|
|
|
|
NET INCREASE (DECREASE) IN CASH
|
|
|
(182,944
|
)
|
|
|
565,824
|
|
|
|
|
|
|
|
|
|
|
CASH
|
|
|
|
|
|
|
|
|
Beginning of year
|
|
|
2,092,386
|
|
|
|
1,526,562
|
|
End of year
|
|
$
|
1,909,442
|
|
|
$
|
2,092,386
|
|
|
|
|
|
|
|
|
|
|
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Income taxes paid
|
|
$
|
1,094,468
|
|
|
$
|
343,103
|
|
Interest paid
|
|
$
|
290,954
|
|
|
$
|
401,594
|
|
|
|
|
|
|
|
|
|
|
Noncash investing and financing activities:
|
|
|
|
|
|
|
|
|
Refinancing of note payable – short-term
|
|
$
|
-
|
|
|
$
|
1,636,044
|
|
See notes
to consolidated financial statements.
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
1.
|
Basis
of Presentation, Nature of Business
and Summary of Significant Accounting
Policies –
|
Nature of Business/ Basis
of Presentation
Western Capital Resources, Inc.
(WCR) through its wholly owned operating subsidiaries, Wyoming Financial Lenders, Inc. (WFL) and PQH, Inc. (PQH), collectively
referred to as the Company, provides retail financial services and retail cellular phone sales to individuals primarily in the
Midwestern United States. The Company operated 52 “Payday” stores in nine states (Colorado, Iowa, Kansas,
Nebraska, North Dakota, South Dakota, Utah, Wisconsin and Wyoming) as of December 31, 2011 and 51 “Payday” stores
in 2010. The Company operated 45 Cricket wireless retail stores in 13 states (Arizona, Colorado, Idaho, Illinois, Indiana, Iowa,
Kansas, Missouri, Nebraska, Ohio, Oklahoma, Oregon and Texas) as of December 31, 2011 and 31 Cricket wireless retail stores in
eight states (Illinois, Indiana, Iowa, Kansas, Maryland, Missouri, Nebraska and Texas) as of December 31, 2010. The
consolidated financial statements include the accounts of WCR, WFL, and PQH. All significant intercompany balances and transactions
have been eliminated in consolidation.
The Company, through its “payday”
division, provides non-recourse cash advance and installment loans, check cashing and other money services. The short-term
consumer loans, known as cash advance loans or “payday” loans, are in amounts that typically range from $100 to $500.
Cash advance loans provide customers with cash in exchange for a promissory note with a maturity of generally two to four weeks
and the 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 $22 per each $100 borrowed. To repay a cash advance loan,
a customer may pay with cash, in which case their personal check is returned to them, or allow the check to be presented to the
bank for collection. Installment loans provide customers with cash in exchange for a promissory note with a maturity of generally
three to six months and are unsecured. The fee and interest rate on installment loans vary based on applicable regulations.
The Company also provides title
loans and other ancillary consumer financial products and services that are complementary to its cash advance-lending business,
such as check-cashing services, money transfers and money orders. In our check cashing business, we primarily cash
payroll checks, but we also cash government assistance, tax refund and insurance checks or drafts. Our fees for cashing payroll
checks average approximately 2.5% of the face amount of the check, subject to local market conditions, and this fee is deducted
from the cash given to the customer for the check. We display our check cashing fees in full view of our customers on a menu board
in each store and provide a detailed receipt for each transaction. Although we have established guidelines for approving check-cashing
transactions, we have no preset limit on the size of the checks we will cash.
Our loans and other related services
are subject to state regulations (which vary from state to state), federal regulations and local regulations, where applicable.
The Company also operates a Cricket
Wireless Retail division that is a premier dealer for Cricket Wireless, Inc. reselling cellular phones and accessories and accepting
service payments from Cricket customers.
Use of Estimates
The preparation of consolidated
financial statements in conformity with accounting principles generally accepted in the United States of America requires management
to make estimates and assumptions that may affect certain reported amounts and disclosures in the consolidated financial statements
and accompanying notes. Management bases its estimates on historical experience and on various other assumptions that are believed
to be reasonable under the circumstances. Actual results could differ from those estimates. Significant management estimates relate
to the loans receivable allowance, allocation of and carrying value of goodwill and intangible assets, inventory valuation and
obsolescence and deferred taxes and tax uncertainties.
Revenue Recognition
The Company recognizes fees on
cash advance loans on a constant-yield basis ratably over the loans’ terms. Title and installment loan fees and interest
are recognized using the interest method, except that installment loan origination fees are recognized as they become non-refundable
and installment loan maintenance fees are recognized when earned. The Company records revenue from check cashing fees, sales of phones,
and accessories and fees from all other services in the period in which the sale or service is completed.
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Loans Receivable Allowance
We maintain a loan loss allowance
for anticipated losses for our payday, installment and title loans. To estimate the appropriate level of the loan loss allowance,
we consider the amount of outstanding loans owed to us, historical loans charged off, current and expected collection patterns
and current economic trends. Our current loan loss allowance is based on our net write offs, typically expressed as a percentage
of loan amounts originated for the last 24 months applied against the principal balance of outstanding loans that we write off.
The Company also periodically performs a look-back analysis on its loan loss allowance to verify the historical allowance established
tracks with the actual subsequent loan write-offs and recoveries. The Company is aware that as conditions change, it may also
need to make additional allowances in future periods.
Included in loans receivable
are payday loans that are currently due or past due and payday loans that have not been repaid. This generally is evidenced
where a customer’s personal check has been deposited and the check has been returned due to non-sufficient funds in the
customer’s account, a closed account, or other reasons. Also included in loans receivable are current and delinquent
installment and title loans. Loans are carried at cost less the loans receivable allowance. The Company does not specifically
reserve for any individual loan. The Company aggregates loan types for purposes of estimating the loss allowance using
a methodology that analyzes historical portfolio statistics and management’s judgment regarding recent trends noted in the
portfolio. This methodology takes into account several factors, including the maturity of the store location and charge-off
and recovery rates. The Company utilizes a software program to assist with the tracking of its historical portfolio
statistics. As a result of the Company’s collection efforts, it historically writes off approximately 42% of
the returned items. Based on days past the check return date, write-offs of returned items historically have tracked
at the following approximately percentages: 1 to 30 days – 42%; 31 to 60 days – 66%; 61 to 90 days – 82%; 91
to 120 days – 88%; and 121 to 180 days – 90%. All returned items are charged-off after 180 days, as collections
after that date have not been significant. The loans receivable allowance is reviewed monthly and any adjustment to
the loan loss allowance as a result of historical loan performance, current and expected collection patterns and current economic
trends is recorded.
At December 31, 2011 and 2010
our outstanding loans receivable aging was as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Current
|
|
$
|
4,626,000
|
|
|
$
|
4,542,000
|
|
1-30
|
|
|
297,000
|
|
|
|
276,000
|
|
31 – 60
|
|
|
220,000
|
|
|
|
234,000
|
|
61 – 90
|
|
|
223,000
|
|
|
|
209,000
|
|
91 - 120
|
|
|
171,000
|
|
|
|
220,000
|
|
121 – 150
|
|
|
189,000
|
|
|
|
227,000
|
|
151 – 180
|
|
|
163,000
|
|
|
|
201,000
|
|
|
|
|
5,889,000
|
|
|
|
5,909,000
|
|
Allowance for losses
|
|
|
(1,001,000
|
)
|
|
|
(1,165,000
|
)
|
|
|
$
|
4,888,000
|
|
|
$
|
4,744,000
|
|
A rollforward of the Company’s
loans receivable allowance for the years ended December 31, 2011 and 2010 is as follows:
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Loans receivable allowance, beginning of year
|
|
$
|
1,165,000
|
|
|
$
|
1,237,000
|
|
Provision for loan losses charged to expense
|
|
|
1,397,000
|
|
|
|
1,280,000
|
|
Charge-offs, net
|
|
|
(1,561,000
|
)
|
|
|
(1,352,000
|
)
|
Loans receivable allowance, end of year
|
|
$
|
1,001,000
|
|
|
$
|
1,165,000
|
|
Inventory
Inventory, consisting of phones
and accessories, is stated at cost, determined on the specific identification and a first-in, first-out basis, respectively.
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Property and Equipment
Property and equipment are recorded
at cost less accumulated depreciation. Depreciation is provided on the straight-line method over the estimated useful lives of
the related assets. Useful lives generally range from five to seven years for furniture, equipment, and vehicles. Leasehold improvements
are amortized using the straight-line method over the lesser of the estimated useful lives of the related assets or the leases
term, and this amortization is included with depreciation.
Goodwill
Goodwill represents the excess
of cost over the fair value of net assets acquired using purchase accounting and is not amortized.
Intangible Assets
Customer relationships represent
the fair values management assigned to relationships with customers acquired through business acquisitions and is amortized over
three years on an accelerated basis based on management’s estimates of attrition of the acquired customers.
Long- Lived Assets
The Company assesses the possibility
of impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value
may not be recoverable. Factors that could trigger an impairment review include significant underperformance relative to expected
historical or projected future cash flows, significant changes in the manner of use of acquired assets or the strategy for the
overall business, and significant negative industry events or trends. In addition, we conduct an
annual
goodwill impairment test as of October 1 each year
. W
e assess our goodwill for impairment at
the reporting unit level by applying a fair value test. This fair value test involves a two-step process. The first step is to
compare the carrying value of our net assets to our fair value. If the fair value is determined to be less than the carrying value,
a second step is performed to measure the amount of the impairment, if any.
Due to the effect of our capital
structure involving preferred stock and related cumulative preferred dividends, the market capitalization approach of valuing
the reporting unit as a whole is not practical. The discounted future cash flows method is utilized in estimating value. When
estimated future cash flows are less than the carrying value of the net assets and related goodwill, an impairment test is performed
to measure and recognize the amount of the impairment loss, if any. There were no impairment charges recorded in 2011 or 2010.
Concentrations of Credit Risk
Financial instruments that
potentially subject the Company to concentrations of credit risk consist of cash and loans receivable. The Company’s cash
is placed with high quality financial institutions. From time to time, cash balances exceed federally insured limits. The Company
has not experienced any significant losses with respect to its cash. Loans receivable, while concentrated in geographical areas,
are dispersed among numerous customers.
Income Taxes
Deferred income taxes reflect
the tax consequences in future years of differences between the tax basis of assets and liabilities and their financial reporting
amounts, based on enacted tax laws and statutory tax rates applicable in the periods in which the differences are expected to
affect taxable income. Valuation allowances are established when necessary to reduce deferred tax assets to the amounts expected
to be realized. The provision for income taxes represents taxes paid or payable for the current year and changes during the year
in deferred tax assets and liabilities.
Net Loss Per Common Share
Basic net loss per common share
is computed by dividing the loss available to common shareholders by the weighted average number of common shares outstanding
for the year. Diluted net loss per common share is computed by dividing the net loss available to common shareholders’ by
the sum of the weighted average number of common shares outstanding plus potentially dilutive common share equivalents (convertible
preferred shares) when dilutive. The 10 million shares of potentially dilutive Series A Convertible Preferred Stock outstanding
at December 31, 2011 and 2010 were anti-dilutive and therefore excluded from the dilutive net loss per share computation:
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
|
Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Series A Convertible Preferred Stock
|
|
|
10,000,000
|
|
|
|
10,000,000
|
|
Fair Value of Financial Instruments
The amounts reported in the balance
sheets for cash, loans receivable, inventory, and accounts payable are short-term in nature and their carrying values approximate
fair values. The amounts reported in the balance sheets for notes payable are both long-term and short-term and their carrying
value approximates fair value.
Recent Accounting Pronouncements
In July 2010, the Financial Accounting
Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2010-20 “
Receivables (Topic 310) – Disclosures
about the Credit Quality of Financing Receivables and the Allowance for Credit Losses.”
ASU 2010-20 requires
extensive new disclosures about financing receivables, including credit risk exposures and the allowance for credit losses. For
public entities, ASU 2010-20 disclosures of period-end balances are effective for interim or annual reporting periods ending on
or after June 15, 2011, as updated by ASU 2011-01. Disclosures related to activity that occurs during the reporting
period are required for interim and annual reporting periods beginning on or after December 15, 2010. The Company adopted this
standard with no material impact on its consolidated financial statements.
In May 2011, the FASB issued
ASU No. 2011-04 “
Fair Value Measurement (Topic820) – Amendments to Achieve Common Fair Value Measurement and Disclosure
Requirements in U.S. GAAP and IFRS
.” ASU 2011-04 results in common fair value measurement and disclosure requirements
in U.S. GAAP and IFRSs. For public entities, ASU 2011-04 is effective for interim or annual reporting periods ending on or after
December 15, 2011. We are assessing the impact of ASU 2011-04 on our consolidated financial statements.
In September 2011, the Financial
Accounting Standards Board (FASB) issued Accounting Standards Update (ASU) No. 2011-08 “
Intangibles – Goodwill
and Other (Topic 350) – Testing Goodwill for Impairment.”
ASU 2011-08 allows an entity the option to make a qualitative
evaluation about the likelihood of goodwill impairment to determine whether it should perform additional steps to determine if
there is goodwill impairment. The amendments are effective for annual and interim goodwill tests performed for fiscal years beginning
after December 15, 2011, early adoption being permitted. The adoption of ASU 2011-08 is not expected to have an impact on our
consolidated financial statements.
|
2.
|
Acquisitions/Dispositions
–
|
In 2011 the Company purchased
the assets of various stores in separate transactions. The aggregate purchase price totaled $1,421,000.
In September through December
2011, the Company acquired 17 retail storefronts (Arizona (2), Colorado (2), Idaho, (1), Illinois (4), Missouri (1), Nebraska
(1), Ohio (1), Oklahoma (3) and Oregon (2)) for $1,373,000. Fourteen of the storefronts were previously Cricket corporate owned
stores and 3 were acquired from another Cricket dealer.
In October
2011, the Company acquired one Payday store in Iowa for $48,000.
The Company
made no material acquisitions in 2010.
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Under the
purchase method of accounting the assets and liabilities of the aforementioned acquisitions were recorded at their respective
fair values as of the purchase date as follows:
|
|
Year Ended
December 31, 2011
|
|
Cash
|
|
$
|
4,000
|
|
Loans receivable
|
|
|
43,000
|
|
Property and equipment
|
|
|
115,000
|
|
Intangible assets
|
|
|
311,000
|
|
Goodwill
|
|
|
935,000
|
|
Other non-current assets
|
|
|
12,000
|
|
Other
|
|
|
1,000
|
|
|
|
$
|
1,421,000
|
|
The results
of the operations for the acquired locations have been included in the consolidated financial statements since the date of the
acquisitions. The following table presents the unaudited pro forma results of operations for the year ended December 31, 2011
and 2010, as if the acquisitions had been consummated at the beginning of 2010. The pro forma results of operations are prepared
for comparative purposes only and do not necessarily reflect the results that would have occurred had the acquisition occurred
at the beginning of the 2010 or the results which may occur in the future.
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Pro forma revenue
|
|
$
|
25,996,000
|
|
|
$
|
25,788,000
|
|
Pro forma net loss
|
|
$
|
(148,100
|
)
|
|
$
|
(232,400
|
)
|
Pro forma net loss per common share – basic and diluted
|
|
$
|
(0.02
|
)
|
|
$
|
(0.03
|
)
|
The Company has grouped its operations
into two segments – Payday Operations and Cricket Wireless Retail Operations. The Payday Operations segment provides
financial and ancillary services. The Cricket Wireless Retail Operations segment is a dealer for Cricket Wireless,
Inc., reselling cellular phones and accessories and serving as a payment center for Cricket customers.
Segment information related to
the years ended December 31, 2011 and 2010:
|
|
For the Year Ended December 31, 2011
|
|
|
For the Year Ended December 31, 2010
|
|
|
|
Payday
|
|
|
Cricket
Wireless
|
|
|
Total
|
|
|
Payday
|
|
|
Cricket
Wireless
|
|
|
Total
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Revenues
|
|
$
|
11,211,739
|
|
|
$
|
8,276,181
|
|
|
$
|
19,487,920
|
|
|
$
|
11,753,254
|
|
|
$
|
6,225,193
|
|
|
$
|
17,978,447
|
|
Depreciation and amortization
|
|
$
|
151,249
|
|
|
$
|
583,742
|
|
|
$
|
734,991
|
|
|
$
|
183,186
|
|
|
$
|
632,397
|
|
|
$
|
815,583
|
|
Interest expense
|
|
$
|
-
|
|
|
$
|
290,913
|
|
|
$
|
290,913
|
|
|
$
|
144
|
|
|
$
|
405,105
|
|
|
$
|
405,249
|
|
Income tax expense (benefit)
|
|
$
|
963,000
|
|
|
$
|
(80,000
|
)
|
|
$
|
883,000
|
|
|
$
|
1,009,000
|
|
|
$
|
(257,000
|
)
|
|
$
|
752,000
|
|
Net income (loss)
|
|
$
|
1,575,757
|
|
|
$
|
(140,526
|
)
|
|
$
|
1,435,231
|
|
|
$
|
1,745,791
|
|
|
$
|
(396,850
|
)
|
|
$
|
1,348,941
|
|
Total segment assets
|
|
$
|
15,037,112
|
|
|
$
|
6,984,665
|
|
|
$
|
22,021,776
|
|
|
$
|
15,481,283
|
|
|
$
|
5,289,599
|
|
|
$
|
20,770,882
|
|
Expenditures for segmented assets
|
|
$
|
55,216
|
|
|
$
|
1,451,856
|
|
|
$
|
1,507,072
|
|
|
$
|
101,991
|
|
|
$
|
51,973
|
|
|
$
|
153,964
|
|
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
4.
|
Property and Equipment –
|
Property and equipment consisted
of the following:
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Furniture and equipment
|
|
$
|
1,076,225
|
|
|
$
|
938,535
|
|
Leasehold improvements
|
|
|
727,570
|
|
|
|
705,909
|
|
Other
|
|
|
71,766
|
|
|
|
71,983
|
|
|
|
|
1,875,561
|
|
|
|
1,716,427
|
|
Less accumulated depreciation
|
|
|
1,117,814
|
|
|
|
892,325
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
757,747
|
|
|
$
|
824,102
|
|
Depreciation expense on all operations
for the year ended December 31, 2011 and 2010 was $299,130 and $297,927, respectively.
Intangible assets consisted of
the follows:
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Customer relationships
|
|
$
|
4,453,912
|
|
|
$
|
4,142,912
|
|
Less accumulated amortization
|
|
|
4,144,360
|
|
|
|
3,708,499
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
309,552
|
|
|
$
|
434,413
|
|
As of December 31, 2011, estimated
future amortization expense for the customer relationships is as follows:
2012
|
|
$
|
175,000
|
|
2013
|
|
|
88,000
|
|
2014
|
|
|
47,000
|
|
|
|
$
|
310,000
|
|
|
6.
|
Note Payable – Short Term –
|
The Company’s short-term
debt is as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Note payable to WERCS with interest payable monthly at the fixed rate of 12%. The note was extended to April 1, 2012, is collateralized by substantially all assets of WFL and shares of stock of WFL, and contains certain financial and compliance covenants, as defined.
|
|
$
|
1,000,000
|
|
|
$
|
2,000,000
|
|
|
|
$
|
1,000,000
|
|
|
$
|
2,000,000
|
|
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
7.
|
Notes Payable – Long Term –
|
The Company’s long-term
debt is as follows:
|
|
December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Note payable (with a credit limit of $2,000,000) to River City Equity, Inc., a related party, with interest payable monthly at 12% due September 30, 2013 and upon certain events can be collateralized by substantially all assets of WCR.
|
|
$
|
1,000,000
|
|
|
$
|
-
|
|
Note payable to a related party with interest payable monthly at 10%, due March 1, 2013 and collateralized by substantially all assets of select locations of PQH.
|
|
|
449,340
|
|
|
|
770,638
|
|
Note payable to a related party with interest payable monthly at 10%, due April 1, 2013 and collateralized by substantially all assets of select locations of PQH.
|
|
|
440,499
|
|
|
|
711,140
|
|
Note payable with interest payable monthly at 7%, amortized through January 1, 2012 and collateralized by substantially all assets of select locations of PQH.
|
|
|
15,349
|
|
|
|
192,740
|
|
Total
|
|
|
1,905,188
|
|
|
|
1,674,518
|
|
Less current maturities
|
|
|
(695,123
|
)
|
|
|
(769,330
|
)
|
|
|
$
|
1,210,065
|
|
|
$
|
905,188
|
|
Estimated repayments are as follows:
2012
|
|
$
|
695,123
|
|
2013
|
|
|
1,210,065
|
|
|
|
$
|
1,905,188
|
|
The Company’s provision
for income taxes is as follows:
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Current:
|
|
|
|
|
|
|
|
|
Federal
|
|
$
|
549,000
|
|
|
$
|
525,000
|
|
State
|
|
|
100,000
|
|
|
|
108,000
|
|
|
|
|
649,000
|
|
|
|
633,000
|
|
|
|
|
|
|
|
|
|
|
Deferred:
|
|
|
|
|
|
|
|
|
Federal
|
|
|
197,000
|
|
|
|
100,000
|
|
State
|
|
|
37,000
|
|
|
|
19,000
|
|
|
|
|
234,000
|
|
|
|
119,000
|
|
|
|
|
|
|
|
|
|
|
|
|
$
|
883,000
|
|
|
$
|
752,000
|
|
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
Deferred income tax assets
(liabilities) are summarized as follows:
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
|
|
Current
|
|
|
Non-Current
|
|
|
Current
|
|
|
Non-Current
|
|
Deferred income tax assets:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Allowance for loan receivable
|
|
$
|
380,000
|
|
|
$
|
-
|
|
|
$
|
442,000
|
|
|
$
|
-
|
|
Other
|
|
|
33,000
|
|
|
|
-
|
|
|
|
25,000
|
|
|
|
-
|
|
|
|
|
413,000
|
|
|
|
-
|
|
|
|
467,000
|
|
|
|
-
|
|
Deferred income tax liabilities:
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Property and equipment
|
|
|
-
|
|
|
|
(163,000
|
)
|
|
|
-
|
|
|
|
(194,000
|
)
|
Goodwill and intangible assets
|
|
|
-
|
|
|
|
(367,000
|
)
|
|
|
-
|
|
|
|
(156,000
|
)
|
|
|
|
-
|
|
|
|
(530,000
|
)
|
|
|
-
|
|
|
|
(350,000
|
)
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
|
Net
|
|
$
|
413,000
|
|
|
$
|
(530,000
|
)
|
|
$
|
467,000
|
|
|
$
|
(350,000
|
)
|
Reconciliations from the statutory
federal income tax rate to the effective income tax rate are as follows:
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Income tax expense using the statutory federal rate
|
|
$
|
788,000
|
|
|
$
|
714,000
|
|
State income taxes, net of federal benefit
|
|
|
92,000
|
|
|
|
83,000
|
|
Shares received for reimbursement of expenses
|
|
|
-
|
|
|
|
(33,000
|
)
|
Other
|
|
|
3,000
|
|
|
|
(12,000
|
)
|
|
|
|
|
|
|
|
|
|
Income tax expense
|
|
$
|
883,000
|
|
|
$
|
752,000
|
|
It is the Company’s practice
to recognize penalties and/or interest related to income tax matters in interest and penalties expense. As of December 31, 2011
and 2010, the Company had an immaterial amount of accrued interest and penalties.
The Company is subject to income
taxes in the U.S. federal jurisdiction and various states and local jurisdictions. Tax regulations within each jurisdiction are
subject to the interpretation of the related tax laws and regulations and require significant judgment to apply. Accounting principles
generally accepted in the United States of America require management to evaluate tax positions taken by the Company and recognize
a tax liability (or asset) if the company has taken an uncertain position that more likely than not would not be sustained upon
examination by the Internal Revenue Service. Management has analyzed the tax positions taken by the Company and has concluded
that as of December 31, 2011, there are no uncertain positions taken or expected to be taken that would require recognition of
a liability (or asset) or disclosure in the financial statements. The Company is subject to routine audits by taxing jurisdictions;
however, there are currently no audits for any tax periods in progress. Management believes it is no longer subject to income
tax examinations for years prior to 2008.
|
9.
|
Shareholders’ Equity –
|
Capitalization
At December 31, 2011, the Company’s
authorized capital stock consists of 250,000,000 shares of no par value capital stock. All shares have equal voting rights and
are entitled to one vote per share.
Of the 250,000,000 shares of
authorized capital, 240,000,000 have been designated as common stock and 10,000,000 as Series A Convertible Preferred Stock. The
Series A Convertible Preferred Stock has a 10% cumulative dividend and can be converted on a share-for-share basis into common
stock. The Company has the right to redeem some or all of the Series A Convertible Preferred Stock at any time, upon 60 days notice,
at $3.50 per share, plus any cumulative unpaid dividends.
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
2008 Stock Incentive Plan
On February 2, 2008, the Board
of Directors of the Company approved and adopted the Company’s 2008 Stock Incentive Plan, pursuant to which an aggregated
of 2,000,000 shares of common stock have been reserved for issuance. No options under this plan have been granted as
of December 31, 2011.
The Company had no stock options
or stock warrants outstanding at December 31, 2011.
|
10.
|
Preferred Stock Dividend –
|
Reconciliations of the cumulative
preferred stock dividend payable are as follows:
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Balance due, beginning of year
|
|
$
|
1,450,000
|
|
|
$
|
1,000,000
|
|
Current year preferred dividends payable
|
|
|
2,100,000
|
|
|
|
2,100,000
|
|
Preferred dividends paid
|
|
|
-
|
|
|
|
(1,650,000
|
)
|
|
|
|
|
|
|
|
|
|
Balance due, end of year
|
|
$
|
3,550,000
|
|
|
$
|
1,450,000
|
|
In addition, the Company has
$525,000 of fourth quarter unaccrued cumulative preferred dividends at December 31, 2011 and 2010 that became due and payable
January 15, 2012 and 2011, respectively.
|
11.
|
Operating Lease Commitments –
|
The Company leases its facilities
under operating leases with terms ranging from month to month to six years, with rights to extend for additional periods. Rent
expense on all operations was approximately $1,704,000 and $1,863,000 in 2011 and 2010, respectively. Future minimum
lease payments are approximately as follows:
Year Ending December 31,
|
|
Amount
|
|
2012
|
|
$
|
1,411,000
|
|
2013
|
|
|
899,000
|
|
2014
|
|
|
548,000
|
|
2015
|
|
|
234,000
|
|
2016 and thereafter
|
|
|
70,000
|
|
|
|
$
|
3,162,000
|
|
|
12.
|
Related Party Transactions –
|
The Company leases two properties
from an officer of the Company and another related party under operating leases, one that extends through October, 2016 requiring
monthly lease payments of $1,680 and one that extends through June, 2015 requiring monthly lease payments of $1,200.
On August 31, 2011, the Company
entered into two operating leases for property owned by Ladary, Inc. Ladary, which acquired the two properties in foreclosure
sales, is a corporation partially owned by the Chief Executive Officer of the Company, two directors and two employees of the
management company that manages the Company’s largest shareholder. The new leases, one of which replaced an earlier
lease that the Company had entered into with the prior landlord, have four-year terms, require aggregate monthly rental payments
of $6,000, and are on terms and conditions substantially similar to those contained in the replaced leases.
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On October 18, 2011 the Company
entered into a long-term Promissory Note with River City Equity, Inc. River City Equity, Inc. is a related party due to the relationship
of one of its minority shareholders to the Company’s CEO. Terms of the note are for up to $2,000,000 of principal to be
loaned at a rate of 12% with interest payable on a monthly basis. The note matures and all accrued and unpaid interest and the
unpaid principal is due and payable on September 30, 2013. The note includes a prepayment penalty and terms providing a security
interest, under certain circumstances, in substantially all assets of the Company.
Mr. Richard Miller is the
Company’s Board Chairman. Mr. Miller provides management consulting services to the Company in addition to his services
as Chairman of the Board. In accordance with the consulting agreement, his compensation is $100,000 per year. He was paid
$100,000 and $75,000 in 2011 and 2010, respectively, under this consulting agreement.
Rent expense to related parties
for 2011 and 2010 was approximately $57,000 and $33,000, respectively.
Interest expense for 2011 and
2010 on the related party notes payable was approximately $139,000 and $176,000, respectively.
At the time of executing the
credit facility with WERCS, the CEO was a non-controlling and non-affiliate (under 10%) shareholder of WERCS. As of December 31,
2010, the CEO was no longer a shareholder of WERCS.
|
13.
|
Stock Purchase and Sale –
|
On February 23, 2010, WERCS,
a Wyoming
corporation
(“WERCS”)
,
entered into a definitive Stock Purchase and Sale Agreement by and between WERCS, and WCR Acquisition, Inc., a Delaware
corporation, pursuant to which WERCS agreed to sell to WCR Acquisition, Inc. all shares of
common
stock
and Series A Convertible Preferred Stock of the Company owned by WERCS. The parties later
amended
the Stock Purchase and Sale Agreement to substitute
WCR, LLC, a Delaware limited liability company,
as
the buyer of Company stock from WERCS
. The sale of the shares of
common
stock
and Series A Convertible Preferred Stock was consummated
on
March 31, 2010. WCR, LLC purchased the
common
stock
and the Series A Convertible Preferred Stock for aggregate consideration of approximately $4,770,000.
Since the 10,000,000 shares of
Series A Convertible Preferred Stock vote on an as-converted basis (presently one-for-one) with shares of the Company’s
common stock, the purchase and sale transaction effects a change in the voting control of the Company, with WCR, LLC possessing
approximately 61.8% of the voting power of the Company’s shares.
|
14.
|
Employment Agreement /Management Bonus
Pool –
|
On March 31, 2010, the Company
entered into an Employment Agreement with John Quandahl, its Chief Executive Officer, Chief Operating Officer, and interim Chief
Financial Officer. The Employment Agreement provides Mr. Quandahl with an annual base salary and eligibility for an annual performance-based
cash bonus pool for management.
The performance-based bonus provisions
permit management to receive annual bonus payments in cash based on adjusted EBITDA and other targets established by the Board
of Directors annually. The Employment Agreement sets the 2011 and 2010 adjusted EBITDA target at $4 million. If the Company’s
actual adjusted EBITDA performance for a particular annual period ranges from 85-100% of the established adjusted EBITDA target,
the cash bonus pool will be 7.5% of adjusted EBITDA. If the Company’s actual EBITDA performance for a particular annual
period exceeds 100% of the established adjusted EBITDA target, 15% of adjusted EBITDA over the established target will be added
to the cash bonus pool. The cash bonus pool for 2010 is limited to 75% of the calculated annual amount due to the mid-year implementation
of the agreement. The Board approved modifications to the threshold calculations for 2011 by modifying them to exclude from the
capital expenditures and working capital requirement calculations the Cricket store acquisition transactions and related long-term
debt. The bonus pool for 2011 is approximately $334,000. Certain targets were not achieved for 2010 due to transactions approved
by the Board. The Board did, however, approve a bonus pool for management of approximately $215,000 for 2010, the amount that
would have been earned under this plan had all the targets been achieved.
|
15.
|
Management and Advisory Agreement
–
|
Effective April 1, 2010, the
Company entered into a Management and Advisory Agreement with Blackstreet Capital Management, LLC (“Blackstreet”),
to provide certain financial, managerial, strategic and operating advice and assistance. Blackstreet employs two of the Company’s
directors and is affiliated with another entity to which a third director provides consulting services. The annual fees for this
contract will be the greater of 5% of EBITDA or $300,000 (increased by 5% annually effective April 1, 2011). Management and advisory
fees for 2011 and 2010 were $311,250 and $225,000, respectively.
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
16.
|
Risks Inherent in the Operating Environment
–
|
The Company’s payday or
short-term consumer loan activities are highly regulated under numerous local, state, and federal laws and regulations, which
are subject to change. New laws or regulations could be enacted that could have a negative impact on the Company’s lending
activities. Over the past few years, consumer advocacy groups and certain media reports have advocated governmental and regulatory
action to prohibit or severely restrict deferred presentment cash advances.
The Federal Trade Commission
has issued an FTC Consumer Alert (Federal Trade Commission, March 2008, Consumer Alert entitled “Payday Loans Equal
Very Costly Cash: Consumers Urged to Consider the Alternatives”) that discourages consumers from obtaining payday loans
such as the loans we offer, primarily on the basis that the types of loans we offer are very costly and consumers should consider
alternatives to accepting a payday loan. For further information, you may obtain a copy of the alert at www.ftc.gov/bcp/edu/pubs/consumer/alerts/alt060.shtm. The
federal government also passed legislation, the 2007 Military Authorization Act, prohibiting us from offering or making our loans
to members of the military when the interest and fees calculated as an annual percentage rate exceeds 36%. This limitation effectively
prohibits us from utilizing our present business model for cash advance or “payday” lending when dealing with members
of the U.S. military, and as a result we do not and do not plan to conduct payday lending business with U.S. military personnel.
These facts evidence the widespread belief that our charges relating to our loans are too expensive to be good for consumers.
Some consumer advocates and others have characterized payday lending as “predatory.” As a result, there are frequently
attempts in the various state legislatures, and occasionally in the U.S. Congress, to limit, restrict or prohibit payday lending.
In July 2010, the Dodd-Frank
Wall Street Reform and Consumer Protection Act was passed by the U.S. Congress and signed into law. Under the Act, a new Consumer
Financial Protection Bureau will consolidate most federal regulation of financial services offered to consumers, and replace the
Office of Thrift Supervision’s seat on the FDIC Board. Almost all credit providers, including mortgage lenders, providers
of payday loans, other nonbank financial companies, and banks and credit unions with assets over $10 billion, will be subject
to new regulations to be passed by the Bureau. While the Bureau does not appear to have authority to make rules limiting interest
rates or fees charged, the scope and extent of the Bureau’s authority will nonetheless be broad, and it is expected that
the Bureau will address issues such as rollovers or extensions of payday loans and compliance with federal rules and regulations.
Future restrictions on the payday lending industry could have serious consequences for the Company.
Any adverse change in present
federal laws or regulations that govern or otherwise affect payday lending could result in our curtailment or cessation of operations
in certain jurisdictions or locations. Furthermore, any failure to comply with any applicable federal laws or regulations could
result in fines, litigation, the closure of one or more store locations or negative publicity. Any such change or failure would
have a corresponding impact on our results of operations and financial condition, primarily through a decrease in revenues resulting
from the cessation or curtailment of operations, decrease in our operating income through increased legal expenditures or fines,
and could also negatively affect our general business prospects as well if we are unable to effectively replace such revenues
in a timely and efficient manner or if negative publicity effects our ability to obtain additional financing a needed.
During the 2010 legislative session
in Colorado, House Bill 10-1351 was passed into law. This bill amended the Colorado Deferred Deposit Loan Act, the existing payday
lending law. The law became effective August 11, 2010 and modified traditional payday lending by changing the single payment advance
(with no minimum term) into a single or multiple payment loan with a minimum six month term. It also limited the amount and type
of fees that can be charged on these loans, effectively reducing by one-half the fees that can be charged and when the fees may
be realized. The Company continues to operate its sole store in Colorado offering short-term installment loans.
In May 2010, new laws were enacted
in Wisconsin that restrict the number of times a consumer may renew (or rollover) a payday loan. Previously, there were no limits
to the number of rollovers permitted. Effective January 1, 2011, consumers in Wisconsin are only be allowed to renew a payday
loan once, and then lenders will be required to offer a 60-day, interest free, payment plan to consumers. In 2011 we introduced
an installment loan product in Wisconsin.
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
On November 2, 2010, voters in
Montana passed Petition Initiative I-164. Effective January 1, 2011, Petition Initiative I-164 capped fees on payday loans at
an imputed interest rate of 36%. The Company discontinued its payday loan operations in that state on December 31, 2010.
The passage of federal or state
laws and regulations could, at any point, essentially prohibit the Company from conducting its payday lending business in its
current form. Any such legal or regulatory change would certainly have a material and adverse effect on the Company, its operating
results, financial condition and prospects, and perhaps even its viability.
For the years ended December
31, 2011 and 2010, the Company had significant revenues by state (shown as a percentage of applicable division’s revenue
when 10% or more) as follows:
Payday Division
|
|
Cricket Wireless Division
|
|
|
2011
% of
Revenues
|
|
|
2010
% of
Revenues
|
|
|
|
|
2011
% of
Revenues
|
|
2010
% of
Revenues
|
|
Nebraska
|
|
28
|
%
|
|
28
|
%
|
|
Missouri
|
|
25
|
%
|
31
|
%
|
Wyoming
|
|
15
|
%
|
|
14
|
%
|
|
Nebraska
|
|
18
|
%
|
16
|
%
|
North Dakota
|
|
18
|
%
|
|
16
|
%
|
|
Texas
|
|
11
|
%
|
12
|
%
|
Iowa
|
|
12
|
%
|
|
12
|
%
|
|
Indiana
|
|
22
|
%
|
28
|
%
|
A breakout of other expense is
as follows:
|
|
For the Year Ended December 31,
|
|
|
|
2011
|
|
|
2010
|
|
Store expenses
|
|
|
|
|
|
|
|
|
Bank fees
|
|
$
|
273,868
|
|
|
$
|
223,757
|
|
Collection costs
|
|
|
386,230
|
|
|
|
408,180
|
|
Repair and Maintenance
|
|
|
155,579
|
|
|
|
178,825
|
|
Supplies
|
|
|
248,011
|
|
|
|
167,624
|
|
Telephone
|
|
|
133,945
|
|
|
|
142,592
|
|
Utilities and network lines
|
|
|
486,355
|
|
|
|
503,703
|
|
Other
|
|
|
733,453
|
|
|
|
702,930
|
|
|
|
$
|
2,417,441
|
|
|
$
|
2,327,611
|
|
|
|
|
|
|
|
|
|
|
General & administrative expenses
|
|
|
|
|
|
|
|
|
Professional fees
|
|
$
|
235,380
|
|
|
$
|
452,244
|
|
Management and consulting fees
|
|
|
411,250
|
|
|
|
300,000
|
|
Other
|
|
|
368,133
|
|
|
|
274,519
|
|
|
|
$
|
1,014,763
|
|
|
$
|
1,026,763
|
|
On March 26, 2010, the
Company and all of the then-current members of its Board of Directors, among others, were sued by our former Chief Financial Officer
and another former member of management, Messrs. Steven Staehr and David Stueve, respectively. In that lawsuit, the plaintiffs
have alleged, among other things, that our Board of Directors breached certain of their fiduciary duties primarily in connection
with the sale by WERCS of its capital stock in the Company to WCR, LLC. The complaint seeks injunctive and declaratory relief
and unspecified money damages. The Company believes the claims are without merit. After the filing of the lawsuit, the Company
removed the lawsuit to federal court and the plaintiffs sought to remand the case back to state court. On October 26, 2010, the
plaintiffs’ motion to remand the case to state court was denied by the federal court. On July 6, 2011, the U.S. District
Court for the District of Minnesota granted the Company’s motion to dismiss the action brought by Messrs. Steven Staehr
and David Stueve. The lawsuit was dismissed without prejudice. The Company obtained a full and complete release from Steven Staehr
pursuant to a Stock Redemption Agreement entered into on March 1, 2012, effective as of February 28, 2012. The redemption transaction
contemplated by the agreement was consummated on March 12, 2012.
WESTERN
CAPITAL RESOURCES, INC. AND SUBSIDIARIES
NOTES
TO CONSOLIDATED FINANCIAL STATEMENTS
|
19.
|
Special Committee of the Board of
Directors
|
In June 2011, the Board
of Directors appointed Mr. Ellery Roberts to a special committee of the board. The appointment was made for a period of
six months. In November 2011 this appointment was extended through August 2012. In consideration for his additional service
on the committee, the Company will pay Mr. Roberts $13,000 per month from June 2011 through November 2011 and $10,000 per month
from December 2011 through November 2012.
TX store acquisition
In February, 2012, the
Company acquired three additional Cricket corporate owned stores for approximately $350,000. Two of the stores are located in
McAllen, Texas and one in Laredo, Texas.
Common Stock Repurchase
Also in February-March,
2012, the Company repurchased an aggregate of 2,048,227 shares of its common stock from four shareholders at $0.15 per share for
a total repurchase cost of $307,234.
Credit Facility
On March 14, 2012, the
Company paid the remaining principal balance and all accrued and unpaid interest owing under the WERCS credit facility.
Related-Party Consulting
Agreement
On March 7, 2012, a
consulting agreement with Mr. Richard Miller was approved by the Company’s Board of Directors. The agreement provides for
consulting fees in the amount of $100,000 and the same terms and conditions as the agreement that expires March 31, 2012.
ITEM 9 CHANGES
IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A. CONTROLS
AND PROCEDURES
EVALUATION OF DISCLOSURE CONTROLS
AND PROCEDURES
We maintain disclosure controls
and procedures designed to provide reasonable assurance that information required to be disclosed in our reports filed pursuant
to the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the
SEC’s rules and forms, and that such information is accumulated and communicated to our management, including our Chief
Executive Officer and Chief Financial Officer as appropriate, to allow timely decisions regarding required disclosure. A control
system, no matter how well conceived and operated, can provide only reasonable, not absolute, assurance the objectives of the
control system are met.
As of December 31, 2011, our
Chief Executive Officer and Interim Chief Financial Officer carried out an evaluation of the effectiveness of our disclosure controls
and procedures as such term is defined in Rule 13a-15(e) under the Securities and Exchange Act of 1934. Based on that evaluation,
our Chief Executive Officer and Chief Financial Officer concluded our disclosure controls and procedures are effective as of December
31, 2011.
MANAGEMENT’S REPORT
ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Our management is responsible
for establishing and maintaining adequate internal control over financial reporting. Internal control over financial reporting
is a set of processes designed by, or under the supervision of, a company’s principal executive and principal financial
officers, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements
for external purposes in accordance with GAAP and includes those policies and procedures that:
|
·
|
pertain
to the maintenance
of records that in
reasonable detail
accurately and fairly
reflect our transactions
and dispositions
of our assets
|
|
·
|
provide
reasonable assurance
our transactions
are recorded as necessary
to permit preparation
of our financial
statements in accordance
with GAAP, and that
receipts and expenditures
are being made only
in accordance with
authorizations of
our management and
directors, and
|
|
·
|
provide
reasonable assurance
regarding prevention
or timely detection
of unauthorized acquisition,
use or disposition
of our assets that
could have a material
effect on the financial
statement.
|
Because of its inherent limitations,
internal control over financial reporting may not prevent or detect misstatements. It should be noted that any system of internal
control, however well designed and operated, can provide only reasonable, and not absolute, assurance that the objectives of the
system will be met. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls
may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
Under the supervision and with
the participation of management, including its principal executive officer and principal financial officer, the Company’s
management assessed the design and operating effectiveness of internal control over financial reporting as of December 31,
2011 based on the framework set forth in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations
of the Treadway Commission.
Based on this assessment, management
concluded that the Company’s internal control over financial reporting was effective as of December 31, 2011. Lurie, Besikof,
Lapidus & Company, LLP, an independent registered public accounting firm, is not required to issue, and thus has not issued,
an attestation report on the Company’s internal control over financial reporting as of December 31, 2011.
CHANGES IN INTERNAL CONTROL
OVER FINANCIAL REPORTING
There were no changes in our
internal controls over financial reporting that occurred during the fiscal quarter covered by this report that materially affected,
or were reasonably likely to materially affect such controls.
ITEM
9B OTHER INFORMATION
On
March 1, 2012, we entered into Stock Redemption Agreement with Mr. Steven Staehr for the repurchase by us of 369,264 common shares.
On March 12, 2012, we completed the transactions contemplated by the Stock Redemption Agreement by accepting the shares transferred
to us and paying the redeemed stockholder. We agreed to pay a per-share price of $0.15, resulting in an aggregate purchase price
of approximately $55,390. The Stock Redemption Agreement contained standard representations and warranties, mutual releases of
any and all potential claims, and a covenant from the selling shareholder not to reacquire any shares of Western Capital capital
stock, and was in substantially identical form to that entered into with three other shareholders whose common shares were earlier
redeemed by the Company and reported on a Form 8-K filed on February 21, 2012. Redemption proceeds were paid in cash. The Stock
Redemption Agreements entered into with each of the four shareholders are filed as exhibits to this report.
On
March 7, 2012, the Board of Directors approved an amendment and restatement of the Company’s Code of Ethics effective March
30, 2012. The amended and restated Code of Ethics is filed as an exhibit to this report.
PART III
ITEM
10 DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
MANAGEMENT
Our Board of Directors consists
of Richard E. Miller, Angel Donchev, Thomas H. Ripley, Ellery Roberts and John Quandahl. During fiscal 2011, the board seat occupied
by Mr. Ripley was occupied by Mr. Aldus Chapin, II The following table sets forth the name and position of each of our current
directors and executive officers.
Name
|
|
Age
|
|
Positions
|
John Quandahl
|
|
45
|
|
Chief Executive Officer, Chief Operating Officer and Director
|
Steve Irlbeck
|
|
47
|
|
Chief Financial Officer
|
Rich Horner
|
|
48
|
|
Vice President, Wyoming Financial Lenders
|
Richard Miller
|
|
64
|
|
Director (Chairman)
|
Angel Donchev
|
|
30
|
|
Director
|
Thomas H. Ripley
|
|
43
|
|
Director
|
Ellery Roberts
|
|
41
|
|
Director
|
The biographies of the above-identified
individuals are set forth below:
John Quandahl
, the Company’s
Chief Executive and Operating Officer, currently also serves as the President of Wyoming Financial Lenders, Inc., a position he
has held since 2007. Mr. Quandahl served as the Company’s Interim Chief Financial Officer from January 1, 2008 to May 10,
2011. From 2005 until joining Wyoming Financial Lenders, Mr. Quandahl was the President of Houlton Enterprises, Inc., and prior
to that served as that corporation’s Chief Operating Officer from 1999 until 2004. During his tenure at Wyoming Financial
Lenders and Houlton Enterprises, Mr. Quandahl and the respective employers were based in Omaha, Nebraska. Mr. Quandahl was the
controller as Silverstone Group, Inc., from 1993 until 1998, and before that began his career at the Nebraska Department of Revenue
as a tax auditor in 1989. Mr. Quandahl is a certified public accountant (inactive) and earned a degree in accounting from the
University of Nebraska - Lincoln. Mr. Quandahl served as Chief Operating Officer of Wyoming Financial Lenders prior to its merger
with the Company has continued to serve as our Chief Operating Officer since that time. Effective January 1, 2009, Mr. Quandahl
was appointed as our Chief Executive Officer and until May 2011, our interim Chief Financial Officer. Mr. Quandahl was appointed
to the Board of Directors on March 9, 2009.
Steve Irlbeck
was appointed
the Company’s Chief Financial Officer in May 2011. Mr. Irlbeck joined the Company in January 2009 as the Company’s
Senior Director of Accounting. From 1995 until 2008, Mr. Irlbeck was employed at Lutz & Company, PC, a public accounting and
consulting firm in Omaha, Nebraska where he was a tax partner. Mr. Irlbeck is a certified public accountant (inactive) and earned
a degree in accounting from Creighton University.
Rich Horner,
the Company’s
Vice President of Wyoming Financial Lenders, joined Wyoming Financials Lenders in 2000 as its general manager. Since that time,
he has served as the Wyoming Financial Lenders controller from 2007 to present. Mr. Horner was promoted to Vice President of Wyoming
Financial Lenders in January 2009. Prior to joining Wyoming Financial Lenders, Mr. Horner served in a finance and budgetary capacity
for InfoUSA. Mr. Horner has an MBA in finance and management from the University of Nebraska-Omaha.
Richard Miller
is an independent
business consultant. Previously, Mr. Miller was Chief Executive Officer of Pirelli Tire North America, a $120 million tire
manufacturer, and Chief Executive Officer of Dunn Tire Corporation, a $25 million regional tire retailer. Prior experience
also includes senior operating positions with Dunlop Tire and Michelin Tire. Mr. Miller has served as Executive Chairman
of True Home Value, Inc., and currently serves as Chairman of Flow Dry Industries and Swift Spinning, Inc. ― two private
companies to which Blackstreet Capital Management, LLC provides management and advisory services. Mr. Miller is a highly
decorated former Marine Captain and holds a BA from Chapman College in California. Mr. Miller serves as Chairman of the Board.
Angel Donchev
was appointed
as a director of the Company on March 31, 2010 in connection with the acquisition of voting control of the Company by WCR, LLC.
Mr. Donchev is employed by Blackstreet Capital Management, LLC, a Delaware limited liability company principally engaged in the
management of private investments. Mr. Donchev joined Blackstreet Capital Management in 2005 and currently serves as a director
of American Combustion Industries, Flow Dry Technology, Inc., and Swift Spinning, Inc. (all of which are private companies).
Mr. Donchev has been involved in control buyouts of companies with combined revenues in excess of $300 million over the past five
years. Previously, Mr. Donchev worked as a generalist in the Corporate Finance division of Stephens Inc., a middle market
investment bank, where he gained experience in a variety of M&A and public offering transactions. Prior to that, Mr.
Donchev worked for Teton Capital, an Austin, Texas based hedge fund, where he provided research and analysis on potential investments.
Mr. Donchev graduated summa cum laude from the McCombs School of Business at the University of Texas at Austin, where he received
a BBA in Business Honors and Finance.
Thomas H
.
Ripley,
was appointed as a director of the Company on February 17, 2012 to fill the vacancy
created by Aldus Chapin, II.
Mr. Ripley is an independent operating partner that has worked with Blackstreet Capital Management,
LLC. since April 2008 and currently serves as the Chairman of the Board of American Combustion Industries, and is also the President
and a director of ThinkDirect Marketing Group. Mr. Ripley has been an operating partner and member of the executive team
of several companies since 2001. Prior to his private equity experience, Mr. Ripley worked on Wall Street for Bear Stearns,
and Goldman Sachs. Mr. Ripley was a Captain in the U.S. Marine Corps and holds a Masters in Business from the University
of Chicago, and completed his undergraduate studies at the Virginia Military Institute.
Ellery Roberts
was appointed
by the Board of Directors to serve as a director on May 10, 2010. Mr. Roberts is the co-founder and co-managing principal of RW
Capital Partners LLC, a lower middle-market mezzanine fund. Mr. Roberts brings over 15 years of private equity investing experience
having been one of the founding members and Managing Director of Parallel Investment Partners, LP (formerly SKM Growth Investors,
LP), a Dallas based private equity fund focused on re-capitalizations, buyouts and growth capital investments in lower middle
market companies throughout the United States. Mr. Roberts was responsible for approximately $400 million in invested capital
across two funds. Also during his tenure with Parallel, Mr. Roberts sat on the boards of Environmental Lighting Concepts,
Hat World Corporation, Senex Financial Corporation, Builders TradeSource Corporation, Action Sports, Weisman Discount Home Centers,
Winnercom, Mealey's Furniture, Regional Management Corporation, Marmalade Cafes and Diesel Service and Supply (all of which are
private companies). Prior to Parallel, Mr. Roberts was a Vice President with Lazard Freres & Co. While at
Lazard, he focused on and also gained experience in the home building, health care, retail, industrial and lodging sectors.
Prior to joining Lazard in 1997, Mr. Roberts was with Colony Capital, Inc., where he analyzed and executed transactions for Colony
Investors II, L.P., a $625 million private equity fund and prior to that was with the Corporate Finance Division of Smith Barney,
Inc. where he participated in a wide variety of investment banking activities. During his career Mr. Roberts has been
directly involved with over $3.0 billion in direct private equity investments. Mr. Roberts received his B.A. degree in English from
Stanford University.
Under our corporate bylaws, all
of our directors serve for indefinite terms expiring upon the next annual meeting of our shareholders.
When considering whether directors
and nominees have the experience, qualifications, attributes and skills to enable the Board of Directors to satisfy its oversight
responsibilities effectively in light of the Company’s business and structure, the Board of Directors focuses primarily
on the industry and transactional experience, and other background, in addition to any unique skills or attributes associated
with a director. With regard to Mr. Quandahl, the Board of Directors considered his significant experience, expertise and background
with regard to accounting, financial and tax matters, his particular experience with the payday lending industry as well as retail
operations, and his demonstrated experience and skills in managing and evaluating the coordination and integration of the Company’s
two principal operating segments. With regard to Mr. Donchev, the Board of Directors considered his background and experience
with the public securities markets and his former employment and experience with the investment banking field. With regard to
Mr. Ripley, the Board of Directors considered his experience in business acquisitions and post-acquisition operational improvements
with emphasis upon cost reduction and revenue growth. With regard to Mr. Miller, the Board of Directors considered his leadership
experience as well as his background and experience in retail operations. Finally, with regards to Mr. Roberts, the Board of Directors
considered his extensive experience in finance and capital structures, his prior board leadership experience as well as his prior
experience in retail operations.
FAMILY RELATIONSHIPS
The Board of Directors has affirmatively
determined that there are no familial relationships among any of our officers or directors.
INVOLVEMENT IN CERTAIN LEGAL
PROCEEDINGS
During the past ten years, no
officer, director, control person or promoter of the Company has been:
|
·
|
involved
in any petition
under the federal
bankruptcy laws
or any state insolvency
law that was filed
by or against,
or a receiver,
fiscal agent or
similar officer
appointed by a
court for the business
or property of
such person, or
any partnership
in which he was
a general partner
at or within two
years, or any corporation
or business association
of which he was
an executive officer
at or within two
years within the
date of this report;
|
|
·
|
convicted
in a criminal proceeding
or named subject
of a pending criminal
proceeding (excluding
traffic violations
and other minor
offenses);
|
|
·
|
the
subject of any
order, judgment,
or decree, not
subsequently reversed,
suspended or vacated,
of any court of
competent jurisdiction,
permanently or
temporarily enjoining
him from, or otherwise
limiting, the following
activities: (1)
acting as a futures
commission merchant,
introducing broker,
commodity trading
advisor, commodity
pool operator,
floor broker, leverage
transaction merchant,
any other person
regulated by the
Commodity Futures
Trading Commission,
or an associated
person of any of
the foregoing,
or as an investment
adviser, underwriter,
broker or dealer
in securities,
or as an affiliated
person, director
or employee of
any investment
company, bank,
savings and loan
association or
insurance company,
or engaging in
or continuing any
conduct or practice
in connection with
such activity;
(2) engaging in
any type of business
practice; or (3)
engaging in any
activity in connection
with the purchase
or sale of any
security or commodity
or in connection
with any violation
of federal or state
securities laws
or federal commodities
laws;
|
|
·
|
the
subject of any
order, judgment
or decree, not
subsequently reversed,
suspended or vacated,
of any federal
or state authority
barring, suspending
or otherwise limiting
for more than 60
days the right
of such person
to engage in any
activity described
in paragraph (f)(3)(i)
of this section,
or to be associated
with persons engaged
in any such activity;
|
|
·
|
found
by a court of competent
jurisdiction in
a civil action
or by the SEC to
have violated any
federal or state
securities law,
and the judgment
in such civil action
or finding by the
SEC has not been
subsequently reversed,
suspended, or vacated;
|
|
·
|
found
by a court of competent
jurisdiction in
a civil action
or by the Commodity
Futures Trading
Commission to have
violated any federal
commodities law,
and the judgment
in such civil action
or finding by the
Commodity Futures
Trading Commission
has not been subsequently
reversed, suspended
or vacated;
|
|
·
|
the
subject of, or
a party to, any
federal or state
judicial or administrative
order, judgment,
decree, or finding,
not subsequently
reversed, suspended
or vacated, relating
to an alleged violation
of: (1) any federal
or state securities
or commodities
law or regulation;
or (2) any law
or regulation respecting
financial institutions
or insurance companies
including, but
not limited to,
a temporary or
permanent injunction,
order of disgorgement
or restitution,
civil money penalty
or temporary or
permanent cease-and-desist
order, or removal
or prohibition
order; or (3) any
law or regulation
prohibiting mail
or wire fraud or
fraud in connection
with any business
entity; or
|
|
·
|
the
subject of, or
a party to, any
sanction or order,
not subsequently
reversed, suspended
or vacated, of
any self-regulatory
organization (as
defined in Section
3(a)(26) of the
Exchange Act (15
U.S.C. 78c(a)(26))),
any registered
entity (as defined
in Section 1(a)(29)
of the Commodity
Exchange Act (7
U.S.C. 1(a)(29))),
or any equivalent
exchange, association,
entity or organization
that has disciplinary
authority over
its members or
persons associated
with a member.
|
AUDIT COMMITTEE FINANCIAL
EXPERT
The Board of Directors has determined
that at least one member of the Audit Committee, Mr. Ellery Roberts, is an “audit committee financial expert” as that
term is defined in Regulation S-K promulgated under the Exchange Act. Mr. Robert’s relevant experience is detailed in ITEM
10 above. As noted above, Mr. Roberts qualifies as an “independent director,” as such term is defined in Section 5605(a)(2)
of the Nasdaq listing rules, and meets the criteria for independence set forth in Rule 10A-3(b)(1) under the Exchange Act. The
Board of Directors has determined that each of the Audit Committee members is able to read and understand fundamental financial
statements and that at least one member of the Audit Committee has past employment experience in finance or accounting.
CODE OF ETHICS
We have adopted a Code of Ethics
which governs the conduct of our officers, directors and employees in order to promote honesty, integrity, loyalty and the accuracy
of our financial statements. Our Code of Ethics was amended and restated effective as of March 30, 2012, and a copy of that amended
and restated Code of Ethics is filed as an exhibit to this report. You may obtain a copy of the Code of Ethics without charge
by writing us and requesting a copy, attention: John Quandahl, 11550 “I” Street, Omaha, Nebraska 68137. You may also
request a copy by calling us at (402) 551-8888.
COMPLIANCE WITH SECTION 16(A)
OF THE EXCHANGE ACT
Section 16(a) of the Securities
Exchange Act of 1934 requires the Company’s officers, directors and persons considered to be beneficial owners of more than
ten percent of a registered class of the Company’s equity securities to file reports of ownership and changes in ownership
with the Securities and Exchange Commission and Nasdaq. Officers, directors and greater-than-ten-percent shareholders are required
by SEC regulations to furnish the Company with copies of all Section 16(a) forms they file. Based solely on a review of the copies
of such forms furnished to the Company by its officers and directors and by WCR, LLC, the Company believes that all such filings
were filed on a timely basis for fiscal year 2011. The Company does not have any information relative to Mr. Steven Staehr and
when any filings reporting his disposition of shares during 2011 may have been due.
ITEM 11 EXECUTIVE
COMPENSATION
SUMMARY COMPENSATION TABLE
The following table sets forth
the cash and non-cash compensation for awarded to or earned by: (i) each individual who served as the principal executive officer
and principal financial officer of Western Capital during the year ended December 31, 2011; and (ii) each other individual that
served as an executive officer of either Western Capital or Wyoming Financial Lenders, Inc. at the conclusion of the year ended
December 31, 2011 and who received more than $100,000 in the form of salary and bonus during such fiscal year. For purposes of
this report, these individuals are collectively the “named executives” of the Company.
Name and Principal Position
|
|
|
|
|
Salary
|
|
|
Other Annual
Compensation
|
|
|
Stock Option
Awards
|
|
|
Total
|
|
John Quandahl
(1)
|
|
|
2011
|
|
|
$
|
246,000
|
|
|
$
|
80,114
|
|
|
$
|
0
|
|
|
$
|
326,114
|
|
Pres. and Chief Operating Officer
|
|
|
2010
|
|
|
$
|
246,000
|
|
|
$
|
70,313
|
|
|
$
|
0
|
|
|
$
|
316,313
|
|
Steve Irlbeck
(2)
|
|
|
2011
|
|
|
$
|
140,000
|
|
|
$
|
70,000
|
|
|
$
|
0
|
|
|
$
|
210,000
|
|
Chief Financial Officer
|
|
|
2010
|
|
|
$
|
120,000
|
|
|
$
|
55,000
|
|
|
$
|
0
|
|
|
$
|
175,000
|
|
Rich Horner
(3)
|
|
|
2011
|
|
|
$
|
148,000
|
|
|
$
|
64,000
|
|
|
$
|
0
|
|
|
$
|
212,000
|
|
Treasurer of WFL
|
|
|
2010
|
|
|
$
|
145,500
|
|
|
$
|
50,000
|
|
|
$
|
0
|
|
|
$
|
195,500
|
|
|
(1)
|
Mr. Quandahl is the President and
Chief Operating Officer of Wyoming Financial Lenders, Inc., the wholly
owned and principal operating subsidiary of Western Capital that offers
payday lending services. Mr. Quandahl also began serving as the Chief
Operating Officer of Western Capital effective November 29, 2007,
and continues to serve in that capacity. Effective January 1, 2009,
Mr. Quandahl was also appointed to serve as the Company’s President
and Chief Executive Officer. From January 1, 2009 through May 10,
2011, Mr. Quandahl also served as interim Chief Financial Officer.
|
|
(2)
|
Mr. Irlbeck is the Chief Financial
Officer of Western Capital Resources. Mr. Irlbeck began serving as
our Chief Financial Officer on May 10, 2011. Prior to May 10, 2011,
Mr. Irlbeck was the Company’s Senior Director of Accounting.
|
|
(3)
|
Mr. Horner is the Company’s
Controller became the Treasurer of Wyoming Financial Lenders in January
2009. Prior to January 2009, Mr. Horner served as the Company’s
Controller.
|
OUTSTANDING EQUITY AWARDS
AT FISCAL YEAR END
We had no outstanding equity
awards as of December 31, 2011 for any named executives.
EMPLOYMENT AND CHANGE-IN-CONTROL
AGREEMENTS
We do not currently have change-in-control
agreements with any named executives or any other current members of our executive management. On March 31, 2010, we entered into
an Employment Agreement with Mr. Quandahl to serve as our Chief Executive Officer and Chief Operating Officer. Prior to that time,
Mr. Quandahl served in such capacities without any written agreement. Mr. Quandahl receives an annual base salary of $246,000
and is eligible for an annual performance-based cash bonus.
The performance-based bonus provisions
of the Employment Agreement permit Mr. Quandahl and other members of management to receive annual bonus payments based on adjusted
EBITDA targets annually established by the Board of Directors. The 2011 and 2010 adjusted EBITDA target was $4 million. If the
Company’s actual adjusted EBITDA performance for a particular annual period ranges from 85-100% of the established adjusted
EBITDA target, management will be entitled to receive a cash bonus consisting of 7.5% of the actual adjusted EBITDA. Mr. Quandahl’s
share of the bonus pool for any particular year is expected to be 10-50% and the bonus pool will be payable to other management-level
participants in the bonus pool selected from time to time by the Board of Directors. If the Company’s actual adjusted EBITDA
performance for a particular annual period is less than 85% of the established adjusted EBITDA target, no bonus will be payable,
and if such performance exceeds 100% of the established adjusted EBITDA target, the bonus pool will include15% of the amount by
which such performance exceeds the target. In addition to the adjusted EBITDA threshold, the agreement also contains capital expenditure
and working capital thresholds.
During 2011 and 2010, the Board
of Directors authorized certain transactions that resulted in the capital expenditure limitation and working capital threshold
eligibility requirements not being satisfied. The board waived compliance with these two eligibility requirements in 2010 and
approved the exclusion of such transactions when testing these two eligibility requirements in 2011. The board also authorized
the adjusted EBITDA calculation to exclude certain expenditures. The effect of those actions permitted eligible participants to
benefit under the management bonus pool arrangement in both 2010 and 2011.
The
Employment Agreement also contains customary provisions prohibiting Mr. Quandahl from soliciting customers and employees of the
Company for three years after any termination of his employment with the Company, and from competing with the Company for either
three years (if Mr. Quandahl is terminated for good cause or if he resigns without good reason) or two years (if the Company terminates
Mr. Quandahl’s employment for without good cause or if he resigns with good reason). If Mr. Quandahl’s employment
is terminated by the Company without “good cause” or if Mr. Quandahl voluntarily resigns with “good reason,”
then Mr. Quandahl will be entitled to (i) severance pay for a period of 12 months and (ii) reimbursement for health insurance
premiums for his family if he elects continued coverage under COBRA
.
COMPENSATION OF DIRECTORS
Name and Principal Position
|
|
|
|
|
Compensation
|
|
|
Other Annual
Compensation
|
|
|
Stock Option
Awards
|
|
|
Total
|
|
Richard Miller
(1)
|
|
|
2011
|
|
|
$
|
0
|
|
|
$
|
100,000
|
|
|
$
|
0
|
|
|
$
|
100,000
|
|
Chairman
|
|
|
2010
|
|
|
$
|
0
|
|
|
$
|
75,000
|
|
|
$
|
0
|
|
|
$
|
75,000
|
|
Ellery Roberts
(2)
|
|
|
2011
|
|
|
$
|
102,583
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
102,583
|
|
Director
|
|
|
2010
|
|
|
$
|
11,666
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
11,666
|
|
Angel Donchev
|
|
|
2011
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Director
|
|
|
2010
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Aldus Chapin II
(3)
|
|
|
2011
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
Director
|
|
|
2010
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
$
|
0
|
|
|
(1)
|
Mr. Miller provides management
consulting services to the Company in addition to his services
as Chairman of the Board. In accordance with the consulting agreement,
his compensation is $100,000 per year.
All compensation reflected in the table for Mr. Miller was
paid pursuant to his consulting agreement with the Company.
|
|
(2)
|
Mr. Roberts serves on a special
committee of the Board of Directors. In connection with this
service, the Board of Directors approved the payment of compensation
to Mr. Roberts in the amount of $13,000 per month from June 2011
to November 2011, and $10,000 per month from December 2011 through
November 2012.
|
|
(3)
|
Mr. Chapin resigned from the
Board of Directors effective February 17, 2012.
|
ITEM
12 SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED SHAREHOLDER MATTERS
As of the close of business on
March 26, 2012, we had outstanding two classes of voting securities—common stock, of which there were 5,397,780 shares issued
and outstanding; and Series A Convertible Preferred Stock, of which there were 10,000,000 shares issued and outstanding. Each
share of capital stock is currently entitled to one vote on all matters put to a vote of our shareholders. The following table
sets forth the number of common shares, and percentage of outstanding common shares, beneficially owned as of March 26, 2012,
by:
|
·
|
each
person known by
the Company to
be the beneficial
owner of more than
five percent of
the Company’s
outstanding common
stock
|
|
·
|
each
executive officer
of the Company
and other persons
identified as a
named executive
in ITEM 11 above,
and
|
|
·
|
all
current executive
officers and directors
as a group.
|
Unless otherwise indicated, the
address of each of the following persons is 11550 “I” Street, Omaha, Nebraska 68137, and each such person has sole
voting and investment power with respect to the shares set forth opposite his, her or its name.
Name and Address
|
|
Common Shares
Beneficially Owned
(1)
|
|
|
Percentage of
Common Shares
(1)
|
|
Richard Miller
(2)
|
|
|
333,750
|
|
|
|
5.9
|
%
|
Ellery Roberts
(3)
|
|
|
-
|
|
|
|
-
|
|
Angel Donchev
(3)
|
|
|
-
|
|
|
|
-
|
|
Thomas H. Ripley
(3)
|
|
|
-
|
|
|
|
-
|
|
Rich Horner
(4)
|
|
|
100,000
|
|
|
|
1.9
|
%
|
Steve Irlbeck
(5)
|
|
|
400,000
|
|
|
|
7.4
|
%
|
John Quandahl
(6)
|
|
|
-
|
|
|
|
-
|
|
All current executive officers and directors as a group
(7)
|
|
|
833,750
|
|
|
|
14.6
|
%
|
WCR, LLC
(8)
|
|
|
10,791,250
|
|
|
|
71.5
|
%
|
c/o Blackstreet Capital Advisors II
|
|
|
|
|
|
|
|
|
5425 Wisconsin Avenue
|
|
|
|
|
|
|
|
|
Suite #701
|
|
|
|
|
|
|
|
|
Chevy Chase, MD 20815
|
|
|
|
|
|
|
|
|
Alpha Capital Anstalt
|
|
|
416,667
|
|
|
|
7.72
|
%
|
* less than 1%
|
(1)
|
Beneficial ownership is determined
in accordance with the rules of the SEC, and includes general voting
power and/or investment power with respect to securities. Shares of
common stock issuable upon exercise of options or warrants that are
currently exercisable or exercisable within 60 days of the record
rate, and shares of common stock issuable upon conversion of other
securities currently convertible or convertible within 60 days, are
deemed outstanding for computing the beneficial ownership percentage
of the person holding such securities but are not deemed outstanding
for computing the beneficial ownership percentage of any other person.
Under the applicable SEC rules, each person’s beneficial ownership
is calculated by dividing the total number of shares with respect
to which they possess beneficial ownership by the total number of
outstanding shares of the Company. In any case where an individual
has beneficial ownership over securities that are not outstanding,
but are issuable upon the exercise of options or warrants or similar
rights within the next 60 days, that same number of shares is added
to the denominator in the calculation described above. Because the
calculation of each person’s beneficial ownership set forth
in the “Percentage of Common Shares” column of the table
may include shares that are not presently outstanding, the sum total
of the percentages set forth in such column may exceed 100%.
|
|
(2)
|
Mr. Miller is a director of the
Company. Share figures contained in the table are taken from Mr. Miller’s
most recent filing under §13 of the Securities Exchange Act of
1934 on Schedule 13G/A, filed with the SEC on November 3, 2010.
|
|
(3)
|
Messrs. Roberts, Donchev, and Riley
are directors of the Company.
|
|
(4)
|
Mr. Horner became the Treasurer
of Wyoming Financial Lenders, Inc. in January 2009.
|
|
(5)
|
Mr. Irlbeck became the Company’s
Chief Financial Officer on May 10, 2011 and was the Company’s
Senior Director of Accounting from January 1, 2009 to May 10, 2011.
|
|
(6)
|
Mr. Quandahl is the Company’s
Chief Executive Officer and a director of the Company.
|
|
(7)
|
Consists of Messrs. Miller, Roberts,
Donchev, Riley, Irlbeck, Horner and Quandahl.
|
|
(8)
|
Consists of 1,091,250 shares of
common stock and 9,700,000 shares of Series A Convertible Preferred
Stock which are convertible into an equal number of shares of common
stock. Share figures contained in the table are taken from WCR LLC’s
most recent filing under §13 of the Securities Exchange Act of
1934 on Schedule 13D/A, filed on November 5, 2010.
|
ITEM
13 CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS AND DIRECTOR INDEPENDENCE
CERTAIN RELATIONSHIPS AND
TRANSACTIONS
On
October 18, 2011 the Company entered into a borrowing arrangement with River City Equity, Inc. and delivered a related long-term
promissory note in favor of River City Equity. The borrowing arrangement allows the Company to borrow up to $2,000,000 at an interest
rate of 12% per annum, with interest payable on a monthly basis. The note matures on September 30, 2013, on which date all unpaid
principal and accrued but unpaid interest thereon is due and payable. The note includes a prepayment penalty and, under certain
circumstances, permits River City Equity to obtain a security interest in substantially all of the Company’s assets. As
of December 31, 2011, $1,000,000 has been advanced under this arrangement. After the initial advancement from River City Equity
under the borrowing arrangement, the brother of the Company’s Chief Executive Officer obtained an ownership interest in
River City Equity. Since such time, there have been additional advancements. The Board of Directors has been apprized of the fact
that, subsequent to the transactions creating the arrangement with River City Equity, that entity has become a “related
party” under applicable SEC disclosure rules. The Company may in the future seek advancements from the $1,000,000 remaining
available under the borrowing arrangement. In any such case, advancements will be approved in the manner required under the board’s
related-party transaction policy discussed below.
RELATED
PARTY TRANSACTION POLICY
The
Board of Directors has adopted a written Conflict of Interest and Related Party Transaction Policy. That policy governs the approval
of all related-party transactions, subject only to certain customary exceptions (e.g., compensation, certain charitable donations,
transactions made available to all employees generally, etc.). The policy contains a minimum dollar threshold of $5,000.
The
entire Board of Directors administers the policy and approves any related-party transactions. At each calendar year’s first
regularly scheduled meeting,, management discloses any related-party transactions to be entered into by the Company for that calendar
year, including the proposed aggregate value of such transactions if applicable. After full disclosure of all material facts,
review and discussion, the board approves or disapproves such transactions. If a related-party transaction will be ongoing, the
board may establish guidelines for management to follow in its ongoing dealings with the related party. However, management is
generally required to update the board as to any material change to the related-party transactions approved at the first calendar
year meeting.
In
the event management recommends any related-party transactions after the first calendar year meeting, such transactions are generally
presented to the board for approval in advance, or preliminarily entered into by management subject to ratification by the board.
If ratification is not obtained, management must make all reasonable efforts to cancel or annul such transaction.
Procedurally,
no director is allowed vote in any approval of a related-party transaction for which he or she is the related party, except that
such a director may otherwise participate in a related discussion and shall provide to the board all material information concerning
the related-party transaction and the director’s interest therein.
DIRECTOR INDEPENDENCE
The Company does not have a standing
nominating committee. Instead, the entire Board of Directors shares the responsibility of identifying potential director-nominees
to serve on the Board of Directors.
The Board of Directors does have
a standing Compensation Committee and Audit Committee. The Compensation Committee is composed of Mr. Roberts. The Audit Committee
is composed of Messrs. Roberts and Donchev, with Mr. Roberts serving as the chairperson. The Board of Directors has determined
that only Mr. Roberts is “independent,” as such term is defined in Section 5605(a)(2) of the Nasdaq listing rules,
and meets the criteria for independence set forth in Rule 10A-3(b)(1) under the Exchange Act. The preceding disclosure respecting
director independence is required under applicable SEC rules. However, as a corporation whose shares are listed for trading on
the OTCBB, the Company is not required to have any independent directors at all on its Board of Directors, or any independent
directors serving on any particular committees of the Board of Directors.
ITEM
14 PRINCIPAL ACCOUNTANT FEES AND SERVICES
Aggregate fees billed by our
principal independent registered public accounting firm for the fiscal years indicated:
|
|
2011
|
|
|
2010
|
|
Audit Fees
|
|
$
|
63,353
|
|
|
$
|
106,462
|
|
Lurie Besikof Lapidus & Company,
LLP did not perform any other audit-related, tax-related or other services for fees during either of fiscal 2010 or 2011.
Audit Fees
. The fees identified
under this caption were for professional services rendered by Lurie Besikof Lapidus & Company, LLP for years ended 2011 and
2010 in connection with the audit of our annual financial statements and review of the financial statements included in our quarterly
reports on Form 10-Q. The amounts also include fees for services that are normally provided by the independent public registered
accounting firm in connection with statutory and regulatory filings and engagements for the years identified.
Approval Policy
. Our Audit
Committee approves in advance all services provided by our independent registered public accounting firm. All engagements of our
independent registered public accounting firm in years ended 2011 and 2010 were pre-approved by the Audit Committee and Board
of Directors, respectively.
PART
IV
ITEM
15 EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
Financial
Statements
Item
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Page
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Report of Independent Registered Public Accounting Firm on Consolidated Financial Statements
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F-1
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Consolidated Balance Sheets – December 31, 2011 and December 31, 2010
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F-2
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Consolidated Statements of Income – Years ended December 31, 2011 and December 31,
2010
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F-3
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Consolidated Statement of Shareholders’ Equity – Years ended December 31, 2011
and December 31, 2010
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F-4
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Consolidated Statements of Cash Flows – Years ended December 31, 2011 and December
31, 2010
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F-5
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Notes to Consolidated Financial Statements
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F-6
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Exhibits
Exhibit No.
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Description
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2.1
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Stock Purchase Agreement with PQH Wireless, Inc., John Quandahl, Mark Houlton and
Charles Payne, dated October 15, 2008 (incorporated by reference to Exhibit 2.3 to the registrant’s registration statement
on Form S-1/A filed with the SEC on November 24, 2008).
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3.1
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Amended and Restated Articles of Incorporation, filed with the Minnesota Secretary of State
on May 25, 2007 (incorporated by reference to Exhibit 3.1 to the registrant’s annual report on Form 10-K filed on April
7, 2008) (see also Exhibits 3.2 and 3.4 below).
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3.2
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Amendment to Amended and Restated Articles of Incorporation, filed with the Minnesota Secretary
of State on December 27, 2007 (incorporated by reference to Exhibit 3.2 to the registrant’s annual report on Form 10-K
filed on April 7, 2008).
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3.3
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Articles of Merger relating to the merger of WFL Acquisition Corp. with and into Wyoming
Financial Lenders, Inc. (incorporated by reference to Exhibit 3.1 to the registrant’s current report on Form 8-K filed
on January 7, 2008) (see also Exhibit 2.1 above).
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3.4
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Certificate of Designation for Series A Convertible Preferred Stock (incorporated by reference
to Exhibit 3.2 to the registrant’s current report on Form 8-K filed on January 7, 2008).
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3.5
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Amendment to Articles of Incorporation, filed with the Minnesota Secretary of State on March
18, 2008 (incorporated by reference to Exhibit 3.5 to the registrant’s annual report on Form 10-K filed on April 7,
2008).
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3.6
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Amended and Restated Bylaws (incorporated by reference to Exhibit 3.1 to the registrant’s
current report on Form 8-K filed on June 23, 2008).
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3.7
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Amendment to Articles of Incorporation, filed with the Minnesota Secretary of State on July
29, 2008 (incorporated by reference to the registrant’s current report on Form 8-K filed on July 29, 2008).
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3.8
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Amendment to Articles of Incorporation, filed with the Minnesota Secretary of State on March
30, 2010 (incorporated by reference to the registrant’s current report on Form 8-K filed on April 2, 2010).
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10.1
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2008 Stock Incentive Plan (incorporated by reference to Exhibit 10.3 to the registrant’s
annual report on Form 10-K filed on April 7, 2008).
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10.2
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Term Promissory Note in principal amount of $1,000,000 in
favor of John Quandahl (incorporated by reference to Exhibit 10.7 to the registrant’s registration statement on Form
S-1/A filed with the SEC on November 24, 2008).
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10.3
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Term Promissory Note in principal amount of $1,000,000 in favor of
Mark
Houlton
(incorporated by reference to Exhibit
10.8
to the registrant’s registration statement on Form S-1/A filed with the SEC on November 24, 2008).
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10.4
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Form of Security Agreement with Charles Payne, John Quandahl and Mark Houlton (incorporated
by reference to Exhibit 10.9 to the registrant’s registration statement on Form S-1/A filed with the SEC on November
24, 2008).
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10.5
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Business Loan Agreement between Wyoming Financial
Lenders, Inc. and WERCS, dated as of April 2, 2010 (incorporated by reference to Exhibit 10.5 to the registrant’s quarterly
report on Form 10-Q filed on May 13, 2010).
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10.6
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Promissory Note of Wyoming Financial Lenders, Inc. to WERCS,
dated as of April 2, 2010 (incorporated by reference to Exhibit 10.6 to the registrant’s quarterly report on Form 10-Q
filed on May 13, 2010).
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10.7
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Commercial Pledge Agreement between Western Capital Resources,
Inc. and WERCS, dated as of April 2, 2010 (incorporated by reference to Exhibit 10.7 to the registrant’s quarterly report
on Form 10-Q filed on May 13, 2010).
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10.8
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Commercial Security Agreement between Wyoming Financial Lenders,
Inc. and WERCS, dated as of April 2, 2010 (incorporated by reference to Exhibit 10.8 to the registrant’s quarterly report
on Form 10-Q filed on May 13, 2010).
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10.9
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Employment Agreement with John Quandahl dated as of March
31, 2010 (incorporated by reference to Exhibit 10.4 to the registrant’s quarterly report on Form 10-Q filed on May 13,
2010).
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10.10
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Management and Advisory Agreement with Blackstreet Capital
Management, LLC, dated as of May 10, 2010 (incorporated by reference to Exhibit 10.4 to the registrant’s quarterly report
on Form 10-Q filed on August 13, 2010).
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10.11
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Promissory
Note delivered in favor of River City Equity, Inc. dated as of October 18, 2011 (
filed herewith
).
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10.12
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Security
Agreement delivered in favor of River City Equity, Inc. dated as of October 18, 2011 (
filed herewith
).
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10.13
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Stock Redemption
Agreement with Mill City Ventures II, LP, dated effective as of December 31, 2011 (
filed herewith
).
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10.14
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Stock Redemption
Agreement with Lantern Advisers, dated effective as of December 31, 2011 (
filed herewith
).
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10.15
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Stock Redemption
Agreement with Boosalis Childrens’ Irrevocable Trust, dated effective as of December 31, 2011 (
filed herewith
).
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10.16
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Stock Redemption
Agreement with Steven Staehr, dated as of February 28, 2012 (
filed herewith
).
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10.17
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Consulting Agreement with Ric Miller Consulting, Inc. dated as of April 1, 2012 (
filed
herewith
).
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14
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Code of Ethics
(amended and restated as of March 30, 2012)
(filed herewith
).
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21
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List of Subsidiaries (
filed herewith
).
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31.1
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Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (
filed herewith
).
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31.2
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Certification pursuant to Section 302 of the Sarbanes Oxley Act of 2002 (
filed herewith
).
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32
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Certification pursuant to Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002 (
filed herewith
).
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SIGNATURES
Pursuant to the requirements
of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on
its behalf by the undersigned, thereunto duly authorized.
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Western Capital Resources, Inc.
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/s/ John Quandahl
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3/30/12
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John Quandahl
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Chief Executive Officer
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/s/ Steve Irlbeck
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3/30/12
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Steve Irlbeck
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Chief Financial Officer
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Pursuant to the requirements
of the Securities Exchange Act of 1934, this report has been signed below by the following persons on behalf of the registrant
and in the capacities and on the dates indicated.
/s/ John Quandahl
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3/30/12
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/s/ Richard Miller
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3/30/12
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John Quandahl, Director,
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Richard Miller, Director
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Chief Executive Officer, Chief Operating
Officer
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(Chairman)
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(principal executive officer)
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/s/ Angel Donchev
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3/30/12
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Angel Donchev, Director
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/s/ Steve Irlbeck
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3/30/12
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/s/ Thomas H. Ripley
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3/30/12
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Steve Irlbeck, Chief Financial Officer
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Thomas Ripley, Director
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(principal financial officer and principal
accounting
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officer)
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/s/ Ellery Roberts
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3/30/12
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Ellery Roberts, Director
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Western Capital Resources (CE) (USOTC:WCRS)
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