EDMONTON, Dec. 10, 2012 /PRNewswire/ - The Cash Store Financial Services Inc. ("Cash Store Financial" or the "Company") (TSX: CSF; NYSE: CSFS) today announced that it will restate the previously issued unaudited consolidated interim financial statements ("interim financial statements") for the three and six months ended March 31, 2012 and three and nine months ended June 30, 2012.
As disclosed in the three and six months ended March 31, 2012 interim financial statements, the Company acquired a portfolio of consumer loans from third-party lenders for total consideration of $116.3 million. In addition to the consumer loans receivable, the Company also acquired intangible assets comprised of non-compete agreements from the third-party lenders, benefits of continuing to have favourable relationships and access to the capital of those third-party lenders and acquired proprietary knowledge of the third-party lenders. The total consideration was originally attributed to the consumer loans receivable and these intangible assets. The determination of fair value of each component of the transaction was subject to management judgment and estimates of future cash flows, collection rates, forecasts and assumptions that a market participant would use in pricing the components.
During the preparation of the September 30, 2012 annual consolidated financial statements the Company determined that approximately $36.8 million of the total consideration paid to acquire the portfolio of loans represented a premium paid on acquisition. The pre-existing contractual broker arrangements between the Company and the third-party lenders did not obligate the Company to pay retention payments, compensate for loan losses without cause or provide a guaranteed rate of return on the pool of funds advanced. However, the compensation paid to the third party lenders as part of the transaction recognized the loss of future retention payments and the ability to earn future returns on capital under the existing broker contracts. In accordance with U.S. GAAP, the Company has determined that the premium of $36.8 million should have been recognized as an expense as a settlement of pre-existing business relationships with third-party lenders. The Company will restate the fair value of the loans receivable acquired to $50.0 million and the fair value of intangible assets acquired to $32.0 million with a corresponding deferred tax liability of $2.5 million. The Company will also adjust the interim financial statements for the periods ended March 31, 2012 and June 30, 2012 for any corresponding impact that these restatements have on other financial statement line items.
Of the $50 million of loans receivable acquired on January 31, 2012 the Company has collected a net amount of $43.5 million to September 30, 2012, of which $5.0 million (three months ended September 30, 2012 - $1.8 million) represents late interest and default fees from the acquired loans. These amounts collected on the acquired portfolio were entirely applied to reduce the value of the acquired loans receivable on the balance sheet as at September 30, 2012 in accordance with U.S. GAAP.Between February 1 and September 30, 2012 the Company generated over $475 million in loan volume as a result of the acquisition of the consumer loan portfolio. In the three months ended September 30, 2012 the Company generated loan volume of $207 million, $184 million of which was as a result of the acquisition of the consumer loan portfolio. In addition, the Company determined that its provision for loan losses on internally generated loans was understated. As a result, the Company will record an additional expense of $3.3 million and $3.7 million for the three month periods ended March 31, 2012 and June 30, 2012, respectively. As a result of the restatement, the Company will recognize approximately $10 million in additional deferred tax assets. To address these matters, the Company expects to file amendments to its previously issued interim financial statements and MD&A for the three and six months ended March 31, 2012 and the three and nine months ended June 30, 2012 to reflect the corrections, and accordingly, the referenced interim financial statements and MD&A should not be relied upon until such time as the Company files its restated interim financial statements. The decision to restate prior interim financial statements and MD&A based on these matters was made by the Company's Board of Directors, upon the recommendation of management and the Audit Committee. The Company believes these corrections will not impact its current cash or liquidity position. In connection with this matter, the Company has re-evaluated its conclusions regarding the effectiveness of its internal control over financial reporting for the affected periods and determined that material weaknesses existed at March 31, 2012 and June 30, 2012. As a result of the material weaknesses, the Company has now concluded that such controls were ineffective. Accordingly, the Company will restate its disclosure as of March 31, 2012 and June 30, 2012 to include the identification of material weaknesses related to the restatements. About Cash Store Financial Cash Store Financial is the only lender and broker of short‐term advances and provider of other financial services in Canada that is listed on the Toronto Stock Exchange (TSX: CSF). Cash Store Financial also trades on the New York Stock Exchange (NYSE: CSFS). Cash Store Financial operates 512 branches across Canada under the banners "Cash Store Financial", "Instaloans" and "The Title Store". Cash Store Financial also operates 25 branches in the United Kingdom. Cash Store Financial and Instaloans primarily act as lenders and brokers to facilitate short-term advances and provide other financial services to income-earning consumers who may not be able to obtain them from traditional banks. Cash Store Financial also provides a private-label debit card (the "Freedom" card) and a prepaid credit card (the "Freedom MasterCard") as well as other financial services, including bank accounts.
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