-----BEGIN PRIVACY-ENHANCED MESSAGE----- Proc-Type: 2001,MIC-CLEAR Originator-Name: webmaster@www.sec.gov Originator-Key-Asymmetric: MFgwCgYEVQgBAQICAf8DSgAwRwJAW2sNKK9AVtBzYZmr6aGjlWyK3XmZv3dTINen TWSM7vrzLADbmYQaionwg5sDW3P6oaM5D3tdezXMm7z1T+B+twIDAQAB MIC-Info: RSA-MD5,RSA, AOHcFnRP4mjaLLKvaoQBFa016xdba3ZSkllHjYPss83xJvYVEprDn+MKO12JAhhc yIn3L7+DsDS9WebTRIY3Bg== 0000950134-01-002941.txt : 20010402 0000950134-01-002941.hdr.sgml : 20010402 ACCESSION NUMBER: 0000950134-01-002941 CONFORMED SUBMISSION TYPE: 10-K405 PUBLIC DOCUMENT COUNT: 4 CONFORMED PERIOD OF REPORT: 20001231 FILED AS OF DATE: 20010330 FILER: COMPANY DATA: COMPANY CONFORMED NAME: CASH AMERICA INTERNATIONAL INC CENTRAL INDEX KEY: 0000807884 STANDARD INDUSTRIAL CLASSIFICATION: RETAIL-MISCELLANEOUS RETAIL [5900] IRS NUMBER: 752018239 STATE OF INCORPORATION: TX FISCAL YEAR END: 1231 FILING VALUES: FORM TYPE: 10-K405 SEC ACT: SEC FILE NUMBER: 001-09733 FILM NUMBER: 1587551 BUSINESS ADDRESS: STREET 1: 1600 W 7TH ST CITY: FT WORTH STATE: TX ZIP: 76102 BUSINESS PHONE: 8173351100 MAIL ADDRESS: STREET 1: 1600 WEST 7TH STREET CITY: FORT WORTH STATE: TX ZIP: 76102 FORMER COMPANY: FORMER CONFORMED NAME: CASH AMERICA INVESTMENTS INC /TX/ DATE OF NAME CHANGE: 19920520 10-K405 1 d85451e10-k405.txt FORM 10-K FOR FISCAL YEAR END DECEMBER 31, 2000 1 - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- SECURITIES AND EXCHANGE COMMISSION Washington, D.C. 20549 --------------------- FORM 10-K (MARK ONE) [X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [FEE REQUIRED] FOR THE FISCAL YEAR ENDED DECEMBER 31, 2000 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 [NO FEE REQUIRED] FOR THE TRANSITION PERIOD FROM TO COMMISSION FILE NUMBER 1-9733 --------------------- CASH AMERICA INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) TEXAS 75-2018239 (State or other jurisdiction of (I.R.S. Employer incorporation or organization) Identification No.)
1600 WEST 7TH STREET FORT WORTH, TEXAS 76102-2599 (Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (817) 335-1100 --------------------- Securities registered pursuant to Section 12(b) of the Act:
NAME OF EACH EXCHANGE TITLE OF EACH CLASS ON WHICH REGISTERED ------------------- --------------------- Common Stock, $.10 par value per share New York Stock Exchange
Securities registered Pursuant to Section 12(g) of the Act: COMMON STOCK PURCHASE RIGHTS Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X] 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. [X] The aggregate market value of 23,796,505 shares of the registrant's common stock held by nonaffiliates on March 28, 2001 was approximately $135,878,000. At March 28, 2001 there were 24,723,726 shares of the registrant's Common Stock, $.10 par value, issued and outstanding. DOCUMENTS INCORPORATED BY REFERENCE Portions of the Registrant's Annual Report to Shareholders for the year ended December 31, 2000 and definitive Proxy Statement pertaining to the 2001 Annual Meeting of Shareholders are incorporated herein by reference into Parts II and IV, and Part III, respectively. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- 2 CASH AMERICA INTERNATIONAL, INC. YEAR ENDED DECEMBER 31, 2000 INDEX TO FORM 10-K PART I ................................................................................................................1 Item 1. Business...............................................................................................1 Item 2. Properties............................................................................................13 Item 3. Legal Proceedings.....................................................................................15 Item 4. Submission of Matters to a Vote of Security Holders...................................................16 PART II ...............................................................................................................16 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters.................................16 Item 6. Selected Financial Data...............................................................................16 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition.................16 Item 8. Financial Statements and Supplementary Data...........................................................16 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure..................16 PART III ...............................................................................................................17 Item 10. Directors and Executive Officers of the Registrant...................................................17 Item 11. Executive Compensation...............................................................................17 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................17 Item 13. Certain Relationships and Related Transactions.......................................................17 PART IV ...............................................................................................................17 Item 14. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................................17 SIGNATURES..............................................................................................................19
i 3 INTRODUCTION Cash America International, Inc. (the "Company") was incorporated in Texas on October 4, 1984, to succeed to the business, assets and liabilities of a predecessor corporation formed one year earlier to engage in the pawnshop business. As of December 31, 2000, the Company owns pawnshops through wholly-owned subsidiaries in sixteen states and the United Kingdom and Sweden. The Company also provides tire and wheel rental services in four states through its subsidiary Rent-A-Tire, Inc. and check cashing services in twenty states through its subsidiary Mr. Payroll Corporation. The Company's principal executive offices are located at 1600 West Seventh Street, Fort Worth, Texas 76102, and its telephone number is (817) 335-1100. As used herein, the "Company" includes Cash America International, Inc. and its subsidiaries. PART I ITEM 1. BUSINESS GENERAL The Company is a specialty financial services enterprise principally engaged in acquiring, establishing and operating pawnshops which advance money on the security of pledged tangible personal property. Pawnshops function as convenient sources of consumer loans and as sellers primarily of previously-owned merchandise acquired when customers do not redeem their pawned goods. One convenient aspect of a pawn transaction is that the customer has no legal obligation to repay the amount advanced. Instead, the Company relies on the value of the pawned property as security. As a result, the creditworthiness of the customer is not a factor, and a decision not to redeem pawned property has no effect on the customer's personal credit status. (Although pawn transactions can take the form of an advance of funds secured by the pledge of property or a "buy-sell agreement" involving the actual sale of the property with an option to repurchase it, the transactions are referred to throughout this report as "loans" for convenience.) The Company contracts for a finance and service charge to compensate it for the use of the funds advanced. The finance and service charge is typically calculated as a percentage of the loan amount based on the size and duration of the transaction, in a manner similar to which interest is charged on a loan, and has generally ranged from 12% to 300% annually, as permitted by applicable state pawnshop laws. The pledged property is held through the term of the transaction, which, in the Company's domestic operations, is generally one month with an automatic sixty day redemption period unless otherwise earlier repaid, renewed or extended. (For finance and service charges and transaction periods applicable to the Company's foreign operations, see "Business--Regulation." ). A majority of the amounts advanced by the Company are paid in full, together with accrued finance and service charges, or are renewed or extended through payment of accrued finance and service charges. For the years 1998, 1999, and 2000, loans repaid or renewed as a percentage of loans made were 66.9%, 67.4%, and 67.5% respectively. In the event that the borrower does not redeem his pawned goods, the unredeemed collateral is forfeited and becomes merchandise available for disposition by the Company. The Company's growth has been the result of its business strategy of acquiring existing pawnshops and establishing new pawnshops that can benefit from the Company's centralized management and standardized operations. The Company intends to continue its business strategy of acquiring and establishing pawnshops, increasing its share of consumer loan business, and concentrating multiple pawnshops in regional and local markets in order to expand market penetration, enhance name recognition and reinforce marketing programs. Studies indicate to the Company that a large portion of its customers consists of individuals who do not regularly transact loan business with banks. (See, for example, John P. Caskey, Fringe Banking - 1 4 Check Cashing Outlets, Pawnshops and the Poor, 1994.) These generally are persons who may not have checking accounts and conduct as many of their transactions as possible on a cash basis. Pursuant to the Company's business expansion strategy, the Company added a net 63 lending locations in 1998, a net 2 lending locations in 1999, and closed a net 3 lending locations in 2000. Of these net 62 lending locations added, 66 were acquisitions in individual purchase transactions and 12 were start-ups, while 16 locations were either combined, closed or sold. As of December 31, 2000, the Company had 410 domestic and 53 foreign operating locations. The Company plans to continue to expand its operating locations through new start-ups and acquisitions. Franchising. The Company offers and sells franchises to third parties for their independent ownership and operation of "Cash America" pawnshops. The Company added four franchise lending locations in 1998, six franchise lending locations in 1999, and five franchise lending locations in 2000. Three of the six franchises added in 1999 were previously company-owned locations. As of December 31, 2000, there were 16 franchised lending locations in operation. The Company plans to continue to expand its franchise locations through new franchise sales. While the Company's primary business involves the acquisition, establishment and operation of pawnshops, it also provides tire and wheel rental services through its subsidiary, Rent-A-Tire, Inc. ("Rent-A- Tire") and manned check cashing services through its subsidiary, Mr. Payroll Corporation ("Mr. Payroll"). At December 31, 2000, Rent-A-Tire owned and operated 34 tire and wheel rental stores and managed an additional 9 tire and wheel rental stores, which are located in Texas, Arizona, Oklahoma and Louisiana. Rent-A-Tire leases all of its rental stores and its corporate headquarters. At December 31, 2000, Rent-A-Tire had 266 employees. For additional information concerning Rent-A-Tire and the relation of its financial condition and results of operations to that of the Company, see Note 4 and Note 13 of Notes to Consolidated Financial Statements in the portion of the Annual Report that is incorporated herein by reference. During 1999, the Company restructured its check cashing operations. In January 1999, the Company transferred its manned check cashing operations into Mr. Payroll. Mr. Payroll earns franchise fees from the sale of manned check cashing franchises, royalties from franchisees based on a percentage of the gross revenue from a franchisee's manned check cashing business, and check cashing fees from its owned manned centers. As of December 31, 2000, Mr. Payroll operated 125 franchised and 7 company owned manned check cashing centers in 20 states with 18 employees. In March 1999, Wells Fargo Cash Centers, Inc. ("Cash Centers"), a wholly owned subsidiary of Wells Fargo Bank, N.A., contributed cash and assets to the Company's check cashing machine subsidiary (now known as "innoVentry") and received newly issued convertible Series A voting preferred stock of innoVentry. In addition, certain members of the newly constituted management of innoVentry subscribed for newly issued shares of common stock of innoVentry. The Company assigned 10% of its voting interest in innoVentry, represented by its shares of newly issued convertible Series A voting preferred stock, to the former owners of innoVentry's predecessor in consideration for the termination of an option issued in conjunction with the Company's original acquisition of innoVentry's predecessor. Concurrently, certain members of innoVentry's new management subscribed for newly issued shares of common stock of innoVentry, representing 10% of its voting interest. Upon completion of the transactions, the Company's residual ownership interest in innoVentry was 40.5%. The Company de-consolidated innoVentry and began using the equity method of accounting for its investment and its share of the results of innoVentry's operations after March 9, 1999. In October 1999, the Company, Cash Centers, and a third party each purchased $10.0 million of innoVentry's newly issued convertible Series B voting preferred stock. During 1999 and 2000, innoVentry also issued additional shares of common stock. As of December 31, 2000, the Company's voting interest was 37.9%. See Note 3 of Notes to Consolidated Financial Statements in the portion of the Annual Report that is incorporated herein by reference. 2 5 LENDING FUNCTION The Company is engaged primarily in the business of lending money on the security of pledged goods. The pledged goods in the Company's domestic operations are generally tangible personal property other than securities or printed evidences of indebtedness and generally consist of jewelry, tools, televisions and stereos, musical instruments, firearms, and other miscellaneous items. In the Company's foreign operations, the pledged goods predominately consist of jewelry. Pawn loans are made without personal liability to the borrower. Because the loan is made without the borrower's personal liability, the Company does not investigate the creditworthiness of the borrower, but relies on the pledged personal property, and the possibility of its forfeiture, as a basis for its lending decision. The pledged tangible personal property is intended to provide security to the Company for the repayment of the amount advanced. The Company contracts for a finance and service charge as compensation for the use of the funds advanced. Finance and service charges contributed approximately 58% of the Company's net revenue (total revenue less costs of revenue) in 1998, 58% in 1999, and 56% in 2000. At the time a pawn transaction is entered into, a pawn transaction agreement, commonly referred to as a pawn ticket, is delivered to the borrower (pledgor) that sets forth, among other items, the name and address of the pawnshop and the pledgor, the pledgor's identification number from his or her driver's license or other approved identification, the date, the identification and description of the pledged goods, including applicable serial numbers, the amount financed, the finance and service charge, the maturity date, the total amount that must be paid to redeem the pledged goods on the maturity date and the annual percentage rate. With regard to domestic operations, the amount that the Company is willing to finance is typically based on a percentage of the pledged personal property's estimated disposition value. The sources for the Company's determination of the estimated disposition value are numerous and include the Company's automated product valuation system as well as catalogues, blue books, newspapers and previous similar pawn loan transactions. These sources, together with the employees' experience in disposing of similar items of merchandise in particular pawnshops, influence the determination of the estimated disposition value of such items. The Company does not utilize a standard or mandated percentage of estimated disposition value in determining the amount to be financed. Rather, the employees have the authority to set the percentage for a particular item and determine the ratio of loan amount to estimated disposition value with the expectation that, if the item is forfeited to the pawnshop, its subsequent disposition would yield a gross profit margin consistent with the Company's historical experience. The pledged property is held through the term of the transaction, which generally is one month with an automatic sixty day redemption period (see "Regulation" for exceptions in certain states), unless earlier repaid, renewed or extended. A majority of the amounts advanced by the Company are paid in full with accrued finance and service charges or are renewed or extended through payment of accrued finance and service charges. In the event the pledgor does not repay, renew or extend his loan, the unredeemed collateral is forfeited to the Company and then becomes merchandise available for disposition. The Company does not record loan losses or charge-offs inasmuch as, if the pledged goods are not redeemed, the amount advanced becomes the carrying cost of the forfeited collateral that is to be recovered through the merchandise disposition function described below. With regard to the Company's foreign operations, the amount that the pawnshop is willing to finance in a pledge of jewelry is typically based on a fixed amount per gram of the gold or silver content of the pledged property plus additional amounts for diamonds and other features which, in the unit management's assessment, enhance the market value of the pledged property. Declines in gold and silver prices historically have resulted in a reduction of the amount that the pawnshop is willing to lend against an item, which reduces the amount of the pawnshop's loan portfolio and related finance and service charge revenue. The pawn loans are made for a term of six months with an approximate annual blended yield on average foreign pawn loans outstanding in 2000 of 49%. The collateral is held through the term of the loan, and, in the event that the loan is not repaid or renewed on or before maturity, the unredeemed collateral is disposed of at auction or privately (or in some cases at the pawnshop premises). 3 6 The recovery of the amount advanced, as well as realization of a profit on disposition of merchandise, is dependent on the Company's initial assessment of the property's estimated disposition value. Improper assessment of the disposition value of the collateral in the lending function could result in the disposition of the merchandise for an amount less than the amount advanced. However, the Company historically has experienced profits from the disposition of such merchandise. Declines in gold and silver prices generally will also reduce the disposition value of jewelry items acquired in pawn transactions and could adversely affect the Company's ability to recover the carrying cost of the acquired collateral. For 1998, 1999 and 2000, the Company experienced gross profit margins on dispositions of merchandise of 36%, 32%, and 33%, respectively. At December 31, 2000, the Company had approximately 1,165,000 outstanding loans totaling $117,982,000, for an average of $101 per loan. Presented below is information with respect to pawn loans made, acquired, repaid and forfeited for the years ended December 31, 1998, 1999 and 2000:
Year Ended December 31, ----------------------------------------- 1998 1999 2000 --------- --------- --------- ($ in thousands) Loans made ................................................................ $ 435,341 $ 439,970 $ 408,091 Loans acquired, net of loans sold ......................................... 7,178 559 -- Loans repaid .............................................................. (249,752) (255,931) (238,937) Loans renewed ............................................................. (41,619) (40,561) (36,629) Loans forfeited: Available for disposition ............................................ (124,415) (136,579) (122,832) Disposed of at auction ............................................... (9,999) (9,085) (12,693) Effect of exchange rate translation ...................................... (337) (1,661) (4,367) --------- --------- --------- Net increase (decrease) in pawn loans outstanding at end of period ... $ 16,397 $ (3,288) $ (7,367) ========= ========= ========= Loans repaid or renewed as a percent of loans made ........................ 66.9% 67.4% 67.5% ========= ========= =========
In addition, the Company recently began offering a small consumer cash advance product through many of its existing stores. The product was introduced into 330 of the domestic lending units by the end of 2000, including 187 units that offer the product on behalf of a third party financial institution (the "Bank"), which pays the Company a fee for its administrative services. The product that is offered by the Company in 143 locations provides customers with cash in exchange for a promissory note or other repayment agreement supported by that customer's check for the amount of the cash advanced plus a service fee. The Company holds the check for a short period, typically less than 17 days. To repay the advance, customers may redeem their checks by paying cash or they may allow the checks to be processed for collection. (Although these cash advance transactions may take the form of loans or deferred check deposit transactions, the transactions are referred to throughout this report as "payday loans" for convenience.) During 2000, $10,066,000 of payday loans were written, including $1,446,000 extended to customers by the Bank, for an average of $187 per loan. As of December 31, 2000, $1,636,000 of gross payday loans were outstanding, including $581,000 extended to customers by the Bank that is not included in the Company's 4 7 consolidated balance sheet. A loan loss reserve of $243,000, representing 23.1% of the Company's gross payday loans outstanding of $1,055,000, has been provided in the consolidated financial statements. MERCHANDISE DISPOSITION FUNCTION The Company engages in the disposition of merchandise acquired when a pawn loan is not repaid, when used goods are purchased from the general public and when new merchandise is acquired from vendors. New goods consist primarily of accessory merchandise which enhances the marketability of existing merchandise, such as tools, consumer electronics and jewelry. For the year ended December 31, 2000, $145,805,000 of merchandise was added to merchandise held for disposition, of which $122,832,000 was from loans not repaid and $22,973,000 was purchased from customers and vendors. The Company does not provide its customers with warranties on used merchandise purchased from the Company. The Company permits its customers to purchase merchandise on a layaway plan whereby the customer agrees to purchase an item by making an initial cash deposit representing a small part of the disposition price and making additional, non-interest bearing payments of the balance of the disposition price in accordance with a specified schedule. The Company then segregates the item and holds it until the disposition price is paid in full. Should the customer fail to make a required payment, the item is placed with the other merchandise held for disposition. At December 31, 2000, the Company held approximately $3,931,000 in customer layaway deposits. The Company provides an allowance for shrinkage and valuation of its merchandise based on management's evaluation. Management's evaluation takes into consideration historical shrinkage, the quantity and age of slow-moving merchandise on hand and markdowns necessary to liquidate slow-moving merchandise. At December 31, 2000, total lending operations merchandise on hand was $58,817,000, after deducting an allowance for shrinkage and valuation of merchandise of $2,012,000. OPERATIONS Unit Management Each location has a unit manager who is responsible for supervising its personnel and assuring that it is managed in accordance with Company guidelines and established policies and procedures. Each unit manager reports to a Market Manager who typically oversees approximately ten unit managers. As of December 31, 2000, the Company has two operating divisions in the United States, each of which is managed by a Division Executive Vice President. Each operating division has three geographic operating regions, each of which is managed by a Region Vice President. Each Market Manager reports to a Region Vice President. The Harvey & Thompson and Svensk Pantbelaning chains follow a similar management organization, with a Managing Director overseeing each of these operations. Trade Name The Company operates its pawnshops under the trade name "Cash America Pawn" in the U.S., "Harvey & Thompson Pawnbrokers" in the U.K., and "Svensk Pantbelaning" in Sweden. The Company has registered the "Cash America" mark and descriptive logos and phrases with the United States Patent and Trademark Office. 5 8 Personnel At December 31, 2000, the Company employed 3,035 persons in its lending operations in 16 states, the United Kingdom and Sweden. Of the total employees, approximately 222 were in executive and administrative functions. The Company has an established training program that provides a combination of classroom instruction, video presentation and on-the-job loan and merchandise disposition experience. The new employee is introduced to the business through an orientation program and through a three-month training program that includes classroom and on-the-job training in loans, layaways, merchandise and general administration of unit operations. The experienced employee receives training and an introduction to the fundamentals of management to acquire the skills necessary to move into management positions within the organization. Manager training involves a twelve month program and includes additional management principles and more extensive training in income maximization, recruitment, merchandise control and cost efficiency. FUTURE EXPANSION The Company's objective is to continue to expand the number of pawnshops it owns and operates through acquisitions and by establishing new units. Management believes that such anticipated expansion will continue to provide economies of scale in supervision, purchasing, administration and marketing by decreasing the overall average cost of such functions per unit owned. The primary pawnshop acquisition criteria include evaluation of the volume of annual loan transactions, outstanding loan balances, merchandise on hand, disposition history, and location and condition of the facility, including lease terms or fair market value of the facility if it is to be purchased. The primary pawnshop start-up criteria include the facility-related items noted above and conditions in the surrounding community indicating a sufficient level of potential customers. The Company's business strategy is to continue expanding its pawnshop business within its existing geographic markets and into other markets which meet the risk/reward considerations of the Company. The Company's expansion has not only been in acquiring previously owned pawnshops, but also in establishing new locations. After a suitable location has been found and a lease and license are obtained, the new location can be ready for business within four to six weeks, with completion of counters, vaults and security system and transfer of merchandise from other locations. The approximate start-up costs, defined as the investment in property and equipment, for recently established pawnshops have ranged from $132,000 to $194,000, with an average cost per location of approximately $163,000 in 2000. This amount does not include merchandise transferred from other locations, funds to advance on pawn loans and operating expenses. The Company's expansion program is subject to numerous factors which cannot be predicted, such as the availability of attractive acquisition candidates or sites on suitable terms and general economic conditions. Further, there can be no assurance that future expansion can be continued on a profitable basis. Among other factors, the following factors will impact the Company's future planned expansion. Statutory Requirements. The Company's ability to add newly-established locations in Texas counties having a population of more than 250,000 is limited by a law that became effective September 1, 1999, which restricts the establishment of new pawnshops within a certain distance of existing pawnshops. In addition, the present statutory and regulatory environment of some states renders expansion into those states impractical. See "Business -- Regulation." 6 9 Competition. The Company faces competition in its expansion program. Several competing pawnshop companies have implemented expansion and acquisition programs. A number of smaller companies have also entered the market. While the Company believes that it is the largest pawnshop operator in the United States, there can be no assurance that the Company will be more successful than its competitors in pursuing acquisition opportunities and leases for attractive start-up locations. Increased competition could also increase prices for attractive acquisition candidates. Capital Requirements. In some states, the Company is required by law to maintain a minimum amount of certain unencumbered net assets (currently $150,000 in Texas) for each pawnshop location. The Company's expansion plans will therefore be limited in these states to the extent the Company is unable to maintain these required levels of unencumbered net assets. Availability of Qualified Unit Management Personnel. The Company's ability to expand may also be limited by the availability of qualified unit management personnel. While the Company seeks to train its existing personnel to enable those capable of doing so to assume management positions and to create attractive compensation packages to retain existing management personnel, there can be no assurance that sufficient qualified personnel will be available to satisfy the Company's needs with respect to its planned expansion. COMPETITION The Company encounters significant competition in connection with its lending and merchandise disposition operations. Some competitors may have greater financial resources than the Company. Several competing pawnshop companies have implemented expansion and acquisition programs. See "Business -- Future Expansion." These competitive conditions may adversely affect the Company's revenues and profitability. The Company, in connection with the lending of money, competes with other pawnshops and other forms of financial institutions such as consumer finance companies, which generally lend on an unsecured as well as a secured basis. Other lenders may lend money on terms more favorable than the Company. The pawnshop industry is characterized by a large number of independent owner-operators, some of whom own and operate multiple pawnshops. REGULATION The Company's pawnshop operations are subject to extensive regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations in the sixteen states and two foreign countries in which it operates. (For a geographic breakdown of operating locations, see "Properties.") Set forth below is a summary of the state pawnshop regulations in those states containing a preponderance of the Company's domestic operating locations. Texas Pawnshop Regulations. Pursuant to the terms of the Texas Pawnshop Act, the Texas Consumer Credit Commissioner has primary responsibility for the regulation of pawnshops and enforcement of laws relating to pawnshops in Texas. The Company is required to furnish the Texas Consumer Credit Commissioner with copies of information, documents and reports which are required to be filed by it with the Securities and Exchange Commission. The Texas Pawnshop Act prescribes the stratified loan amounts and the maximum allowable rates of pawn service charge that pawnbrokers in Texas may charge for the lending of money within each stratified range of loan amounts. That is, the Texas law establishes the maximum allowable pawn service charge rates based on the amount financed per pawn loan. The maximum allowable rates under the Texas Pawnshop Act for the various stratified loan amounts for the fiscal years ended June 30, 1999, 2000 and 2001 are as follows: 7 10
Year Ended June 30, 1999 Year Ended June 30, 2000 Year Ended June 30, 2001 - ------------------------------------ ---------------------------------------- -------------------------------------- Maximum Maximum Maximum Amount Allowable Amount Allowable Amount Allowable Financed Annual Financed Annual Financed Annual Per Pawn Percentage Per Pawn Percentage Per Pawn Percentage Loan Rate Loan Rate Loan Rate - ------------------- ---------- -------------------- ---------- --------------------- ---------- $ 1 to $ 138 ...... 240% $ 1 to $ 141 ........ 240% $ 1 to $ 144 ..... 240% 139 to 460 ...... 180 142 to 470 ........ 180 145 to 480 ..... 180 461 to 1,380 ...... 30 471 to 1,410 ........ 30 481 to 1,440 ..... 30 1,381 to 11,500 ...... 12 1,411 to 11,750 ........ 12 1,441 to 12,000 ..... 12
These rates are reviewed and established annually. The maximum allowable service charge rates were established and have not been revised since 1971 when the Texas Pawnshop Act was enacted. Since 1981, the ceiling amounts for stratification of the loan amounts to which these rates apply have been revised each July 1 in relation to the Consumer Price Index. The Texas Pawnshop Act also prescribes the maximum allowable pawn loan. Under current Texas law, a pawn loan may not exceed $12,000. In addition to establishing maximum allowable service charge rates and loan ceilings, the Texas Pawnshop Act also provides for the licensing of pawnshops and pawnshop employees. To be eligible for a pawnshop license in Texas, an applicant must (i) be of good moral character, (ii) have net assets of at least $150,000 readily available for use in conducting the business of each licensed pawnshop, (iii) show that the pawnshop will be operated lawfully and fairly in accordance with the Texas Pawnshop Act, (iv) show that the applicant has the financial responsibility, experience, character, and general fitness to command the confidence of the public in its operations, and (v) in the case of a business entity, the good moral character requirement shall apply to each officer, director and holder of 5% or more of the entity's outstanding shares. As part of the license application process, any existing pawnshop licensee who would be affected by the granting of the proposed application may request a public hearing at which to appear and present evidence for or against the application. For an application for a new license in a county with a population of 250,000 or more, the proposed facility must not be located within two miles of an existing licensed pawnshop. The Texas Consumer Credit Commissioner may, after notice and hearing, suspend or revoke any license for a Texas pawnshop upon finding, among other things, that (i) any fees or charges have not been paid; (ii) the licensee violates (whether knowingly or unknowingly without due care) any provisions of the Texas Pawnshop Act or any regulation or order thereunder; or (iii) any fact or condition exists which, if it had existed at the time the original application was filed for a license, would have justified the Commissioner in refusing such license. Under the Texas Pawnshop Act, a pawnbroker may not accept a pledge from a person under the age of 18 years; make any agreement requiring the personal liability of the borrower; accept any waiver of any right or protection accorded to a pledgor under the Texas Pawnshop Act; fail to exercise reasonable care to protect pledged goods from loss or damage; fail to return pledged goods to a pledgor upon payment of the full amount due; make any charge for insurance in connection with a pawn transaction; enter into any pawn transaction that has a maturity date of more than one month; display for disposition in storefront windows or sidewalk display cases, pistols, swords, canes, blackjacks and similar weapons; operate a pawnshop between the hours of 9:00 p.m. and 7:00 a.m.; or purchase used or secondhand personal property or certain building construction materials unless a record is established containing the name, address and identification of the seller, a complete description of the property, including serial number, and a signed statement that the seller has the right to sell the property. 8 11 Florida Pawnshop Regulations. The Florida Pawnbroking Act, adopted in 1996, provides for the licensing and bonding of pawnbrokers in Florida and for the Department of Agriculture and Consumer Services' Division of Consumer Services to investigate the general fitness of applicants and generally to regulate pawnshops in the state. The statute limits the pawn service charge that a pawnbroker may collect to a maximum of 25% of the amount advanced in the pawn for each 30 day period of the transaction. The law also requires pawnbrokers to maintain detailed records of all transactions and to deliver such records to the appropriate local law enforcement officials. Among other things, the statute prohibits pawnbrokers from falsifying or failing to make entries in pawn transaction forms, refusing to allow appropriate law enforcement officials to inspect their records, failing to maintain records of pawn transactions for at least two years, making any agreement requiring the personal liability of a pledgor, failing to return pledged goods upon payment in full of the amount due (unless the pledged goods had been taken into custody by a court or law enforcement officer or otherwise lost or damaged), or engaging in title loan transactions at licensed pawnshop locations. It also prohibits pawnbrokers from entering into pawn transactions with a person who is under the influence of alcohol or controlled substances, a person who is under the age of eighteen, or a person using a name other than his own name or the registered name of his business. Tennessee Pawnshop Regulations. Tennessee state law provides for the licensing of pawnbrokers in that state. It also (i) requires that pawn transactions be reported to local law enforcement agencies, (ii) requires pawnbrokers to maintain insurance coverage on the property held on pledge for the benefit of the pledgor, (iii) establishes certain hours during which pawnshops may be open for business and (iv) requires that certain bookkeeping records be maintained. Tennessee law prohibits pawnbrokers from selling, redeeming or disposing of any goods pledged or pawned to or with them within 48 hours after making their report to local law enforcement agencies. The Tennessee statute establishes a maximum allowable interest rate of 24% per annum; however, the pawnshop operator may charge an additional fee of up to one-fifth of the amount of the loan per month for investigating the title, storing and insuring the security and various other expenses. Georgia Pawnshop Regulations. Georgia state law requires pawnbrokers to maintain detailed permanent records concerning pawn transactions and to keep them available for inspection by duly authorized law enforcement authorities. The Georgia statute prohibits pawnbrokers from failing to make entries of material matters in their permanent records; making false entries in their records; falsifying, obliterating, destroying, or removing permanent records from their places of business; refusing to allow duly authorized law enforcement officers to inspect their records; failing to maintain records of each pawn transaction for at least four years; accepting a pledge or purchase from a person under the age of eighteen or who the pawnbroker knows is not the true owner of the property; making any agreement requiring the personal liability of the pledgor or seller or waiving any of the provisions of the Georgia statute; or failing to return or replace pledged goods upon payment of the full amount due (unless the pledged goods have been taken into custody by a court or a law enforcement officer). In the event pledged goods are lost or damaged while in the possession of the pawnbroker, the pawnbroker must replace the lost or damaged goods with like kinds of merchandise. Under Georgia law, total interest and service charges may not, during each thirty-day period of the loan, exceed 25% of the principal amount advanced in the pawn transaction (except that after ninety days from the original date of the loan, the maximum rate declines to 12.5% for each subsequent thirty-day period). The statute provides that municipal authorities may license pawnbrokers, define their powers and privileges by ordinance, impose taxes upon them, revoke their licenses, and exercise such general supervision as will ensure fair dealing between the pawnbroker and his customers. Oklahoma Pawnshop Regulations. The Company's Oklahoma operations are subject to the Oklahoma Pawnshop Act. Following substantially the same statutory scheme as the Texas Pawnshop Act, the Oklahoma Pawnshop Act provides for the licensing and bonding of pawnbrokers in Oklahoma and 9 12 provides for the Oklahoma Administrator of Consumer Credit to investigate the general fitness of the applicant and generally regulate pawnshops in that state. The Administrator has broad rule-making authority with respect to Oklahoma pawnshops. In general, the Oklahoma Pawnshop Act prescribes the stratified loan amounts and the maximum rates of service charges which pawnbrokers in Oklahoma may charge for lending money in Oklahoma within each stratified range of loan amounts. The regulations provide for a graduated rate structure similar to that utilized in federal income tax computations. For example, under this method of calculation a $500 pawn loan earns interest as follows: (a) the first $150 at 240%, annually, (b) the next $100 at 180%, annually and (c) the remaining $250 at 120%, annually. The maximum allowable pawn service charges for the various stratified loan amounts under the Oklahoma statute are as follows:
Maximum Amount Allowable Financed Annual Per Pawn Percentage Loan Rate - -------------------- ---------- $ 1 to $ 150 ........ 240% 151 to 250 ........ 180 251 to 500 ........ 120 501 to 1,000 ........ 60 1,001 to 25,000 ........ 36
A pawn loan in Oklahoma may not exceed $25,000. Louisiana Pawnshop Regulations. Louisiana law provides for the licensing and bonding of pawnbrokers in that state. In addition, the act requires that pawn transactions be reported to local law enforcement agencies, establishes hours during which pawnbrokers may be open for business and requires certain bookkeeping practices. Under the Louisiana statute, no pawnbroker may sell any jewelry pledged as collateral until the lapse of six months from the time the loan was made or extended by payment of accrued interest. All other unredeemed collateral from loans can be sold after the lapse of three months. Louisiana state law establishes maximum allowable rates of interest on pawn loans of 10% per month. In addition, Louisiana law provides that the pawnbroker may also charge a one-time fee not to exceed 10% for all other services. Various municipalities and parishes in the state of Louisiana have promulgated additional ordinances and regulations pertaining to pawnshops. Although pawnshop regulations vary from state to state to a considerable degree, the regulations summarized above are representative of the regulatory frameworks affecting the Company in the various states in which its operating units are located. United Kingdom Regulations. Pawnshops in the United Kingdom conduct pawn operations in a manner that is similar to the Company's domestic operations, except that pawnshops generally lend money only on the security of jewelry and gold and silver items. The Consumer Credit Act 1974 in the United Kingdom requires that the pawnbroker notify the customer following the expiration of the six month loan term and before the pledged items are sold by the pawnbroker. Unredeemed items are generally sold at auction. For loans exceeding 75 pounds sterling, any amounts received on the auction sale in excess of the principal amount of the loan, accrued finance and service charge and disposition expenses must be held by the pawnbroker to be reclaimed by the customer. If the pawnbroker is the highest bidder at the auction, it reclaims the merchandise for later disposition from its pawnshop premises and may realize gross profit on resale. For loans of 75 pounds sterling or less, unredeemed merchandise is automatically forfeited to the 10 13 pawnbroker, and the pawnbroker may dispose of such merchandise to the public from the pawnshop premises and retain any excess sales proceeds. Pawnbrokers in the United Kingdom are licensed and regulated by the Office of Fair Trading (the "OFT") pursuant to the Consumer Credit Act 1974. Licenses are valid for five years, subject to possible revocation, suspension, or variance by the OFT. Unlike most state statutes in the United States governing pawnbrokers, the Consumer Credit Act 1974 and the regulations promulgated thereunder do not specify a maximum allowable interest rate chargeable by pawnbrokers in the United Kingdom. Rather, the statute prohibits pawnbrokers from entering into "extortionate credit bargains" with customers. Currently, the Company typically charges a rate of six percent (6%) per month. Sweden Regulations. The regulatory environment for pawnshops in Sweden is very similar to that in the United Kingdom. Sweden's 1949 statute governing pawnbroking was repealed and replaced with a new pawnbroking act effective January 1, 1996. The new act provides that the loan term may not exceed one year, that the pawnbroker is entitled to default interest on arrears for a maximum of four months from the due date, and that the pawnbroker may not dispose of unredeemed merchandise less than two months after the due date. The disposition must take place at a public auction, and the original customer is entitled to any excess disposition proceeds. Like Sweden's previous pawnbroking statute, the new act provides for licensing and supervision of pawnshops by the local County Administrative Boards. The act does not specify a maximum allowable interest rate for pawn loans, and, unlike the previous statute, it does not authorize the local County Administrative Boards to regulate the rates that pawnbrokers may charge. Currently, the Company typically charges a rate of between 2.75% and 3.75% per month. Also, the act grants Swedish pawnbrokers the new authority to purchase unredeemed merchandise at the public auction and then dispose of the merchandise to the public from the pawnshop premises. Payday Loans. The Company recently began offering a small consumer cash advance product referred to as "payday loans" through many of its existing stores. (See "Lending Function.") Each state in which the Company offers the product has specific laws dealing with the conduct of this business. Typically, the applicable regulations restrict the amount of finance and service charges that may be assessed and limit customers' ability to renew these transactions. In many instances, the regulations also limit the aggregate amount that a provider may advance (and, in some cases, the number of advances the provider may make) to any one customer at one time. Providers typically must obtain a separate license from the state licensing authority in order to offer this product. The Company must also comply with the various disclosure requirements under the federal Truth in Lending Act (and "Regulation Z" promulgated under that Act) in connection with "payday loan" transactions. Other Regulatory Matters, Etc. With respect to firearm sales, each of the pawnshops must comply with the Brady Handgun Violence Prevention Act (the "Brady Act"), which took effect on February 28, 1994. The Brady Act imposes a background check requirement in connection with the disposition of firearms by federally licensed firearms dealers. In addition, the Company must continue to comply with the longstanding regulations promulgated by the Department of the Treasury, Bureau of Alcohol, Tobacco and Firearms which require each pawnshop dealing in guns to maintain a permanent written record of all receipts and dispositions of firearms. In addition to the state statutes and regulations described above, many of the Company's pawnshops are subject to municipal ordinances, which may require, for example, local licenses or permits and specified recordkeeping procedures, among other things. Each of the Company's pawnshops voluntarily or pursuant to municipal ordinance provides to the police department having jurisdiction copies of all daily transactions involving pawn loans and over-the-counter purchases. These daily transaction reports are designed to provide 11 14 the local police with a detailed description of the goods involved including serial numbers, if any, and the name and address of the owner obtained from a valid identification card. A copy of the transaction ticket is provided to local law enforcement agencies for processing by the National Crime Investigative Computer to determine conflicting claims of rightful ownership. Goods held to secure pawn loans or goods purchased which are determined to belong to an owner other than the borrower or seller are subject to recovery by the rightful owner. However, the Company historically has not experienced a material number of claims of this sort, and the claims experienced have not had a material adverse effect on the Company's results of operations. Casualty insurance, including burglary coverage, is maintained for each of the Company's pawnshops, and fidelity coverage is maintained on each of the Company's employees. Management of the Company believes its operations are conducted in material compliance with all federal, state and local laws and ordinances applicable to its business. EXECUTIVE OFFICERS The following sets forth, as of March 12, 2001, certain data concerning the executive officers of the Company, all of whom are elected on an annual basis. There is no family relationship between any of the executive officers.
Name Age Position ----------------------- --- ---------------------------------------------------------------------- Daniel R. Feehan 50 Chief Executive Officer, President and Director Thomas A. Bessant, Jr. 42 Executive Vice President - Chief Financial Officer Robert D. Brockman 46 Executive Vice President - Administration Jerry D. Finn 54 Executive Vice President - U.S. Operations - Western Division Michael D. Gaston 56 Executive Vice President - Business Development William R. Horne 58 Executive Vice President - Information Technology James H. Kauffman 56 Executive Vice President - Foreign Operations; Chief Executive Officer - Rent-A-Tire, Inc. Hugh A. Simpson 41 Executive Vice President - General Counsel and Secretary
Daniel R. Feehan has been Chief Executive Officer and President since February 2000. He has served as President and Chief Operating Officer since January 1990. He served as Chairman and Co-Chief Executive Officer of Mr. Payroll Corporation from February 1998 to February 1999 before returning to the position of President and Chief Operating Officer of the Company. Thomas A. Bessant, Jr. joined the Company in May 1993 as Vice President - Finance and Treasurer. He was elected Senior Vice President - Chief Financial Officer in July 1997 and has served as Executive Vice President - Chief Financial Officer since July 1998. Prior to joining the Company, Mr. Bessant was a Senior Manager in the Corporate Finance Consulting Services Group of Arthur Andersen & Co., S. C. in Dallas, Texas from June 1989. Prior to that time, Mr. Bessant was Vice President in the Corporate Banking Division of NCNB Texas, N.A., and its predecessor banking corporations, beginning in 1981. Robert D. Brockman joined the Company in July 1995 as Executive Vice President-Administration. Prior to that, he served as Vice President - Human Resources of THORN Americas, Inc., the operator of the Rent-A-Center chain of rent-to-own stores, from December 1986 to June 1995. Jerry D. Finn joined the Company in August 1994 and has served in various operations management positions since then, including Division Vice President from January 1995 to July 1997, Division Senior Vice 12 15 President from July 1997 to April 1998, and Executive Vice President since April 1998. Prior to joining the Company, he served as District Supervisor for Kelly-Moore Paint Co. from March 1981 to August 1994. Michael D. Gaston joined the Company in April 1997 as Executive Vice President - Business Development. Prior to joining the Company, Mr. Gaston served as President of the Gaston Corporation, a private consulting firm, from 1984 to April 1997, and Executive Vice President of Barkley & Evergreen, an advertising and consulting agency, from 1991 to April 1997. William R. Horne joined the Company in February 1991 as Vice President-MIS. He was elected Senior Vice President-Information Technology in July 1997 and has served as Executive Vice President-Information Technology since October 1999. James H. Kauffman joined the Company in July 1996 as Executive Vice President - Chief Financial Officer. He served as President - Cash America Pawn from July 1997 to July 1998, and since then has served as Chief Executive Officer of Rent-A-Tire, Inc. He has also served as Executive Vice President-Foreign Operations since October 1999. Prior to joining the Company, Mr. Kauffman served as President of Keystone Steel & Wire Company, a wire products manufacturer, from July 1991 to June 1996. Hugh A. Simpson joined the Company in December 1990 as Vice President and General Counsel and was elected Vice President - General Counsel and Secretary in April 1991. He was elected Senior Vice President - General Counsel and Secretary in July 1997 and has served as Executive Vice President - General Counsel and Secretary since July 1998. ITEM 2. PROPERTIES As of March 12, 2001, the Company owns the real estate and building for one of its domestic pawnshop locations and four of its pawnshop locations in the United Kingdom. During 1999, the Company sold to an unaffiliated party and leased back the real estate and buildings for 11 of its pawnshop locations under non-cancelable operating leases with terms of 15 years. The Company also sold the real estate and building for one pawnshop location to a franchisee. Since May 1992, the Company's headquarters have been located in a nine-story building adjacent to downtown Fort Worth, Texas. The Company purchased the building in January 1992. On March 28, 2000, a tornado severely damaged the building. Headquarters operations have been relocated to temporary facilities. The Company's operating locations were not affected. Restoration of the building began in the fourth quarter of 2000 and is planned for completion in the fourth quarter of 2001. The Company's insurance coverage provides proceeds for repairs to the building; replacement of furniture, improvements, and equipment; recovery of losses resulting from business interruption; and recovery of other general expenses. All of the Company's other locations are leased from unaffiliated parties under non-cancelable operating leases with terms ranging from 3 to 10 years. The following table sets forth, as of March 12, 2001, the geographic markets served by the Company and the number of lending locations in such markets in which it presently operates.
Number of Locations in Area ------------------- TEXAS: Houston........................................................................ 44 Central/South Texas............................................................ 57 Dallas/Fort Worth.............................................................. 35 West Texas..................................................................... 22 Rio Grande Valley.............................................................. 10 --- Total Texas .............................................................. 168 ---
13 16 FLORIDA: Tampa/St. Petersburg........................................................... 15 Orlando........................................................................ 14 Jacksonville................................................................... 10 Other ......................................................................... 23 --- Total Florida.............................................................. 62 --- TENNESSEE: Memphis........................................................................ 23 Nashville...................................................................... 5 --- Total Tennessee............................................................ 28 -- GEORGIA: Atlanta........................................................................ 14 Savannah....................................................................... 5 Other ......................................................................... 2 --- Total Georgia.............................................................. 21 --- LOUISIANA: New Orleans.................................................................... 9 Baton Rouge.................................................................... 3 Other ......................................................................... 8 --- Total Louisiana............................................................ 20 --- OKLAHOMA: Oklahoma City.................................................................. 13 Tulsa ......................................................................... 5 --- Total Oklahoma............................................................. 18 --- MISSOURI: Kansas City.................................................................... 11 St. Louis...................................................................... 5 --- Total Missouri............................................................. 16 --- INDIANA: Indianapolis................................................................... 9 Fort Wayne..................................................................... 3 Other ......................................................................... 1 --- Total Indiana.............................................................. 13 --- NORTH CAROLINA: Charlotte...................................................................... 7 Greensboro/Winston Salem....................................................... 3 Other ......................................................................... 1 --- Total North Carolina....................................................... 11 --- ALABAMA: Mobile......................................................................... 4 Birmingham..................................................................... 4 Other ......................................................................... 1 --- Total Alabama.............................................................. 9 ---
14 17 KENTUCKY: Louisville..................................................................... 9 --- ILLINOIS: Chicago........................................................................ 6 Other.......................................................................... 1 --- Total Illinois ............................................................ 7 SOUTH CAROLINA: Charleston..................................................................... 4 Greenville..................................................................... 3 --- Total South Carolina....................................................... 7 --- UTAH: Salt Lake City................................................................. 7 --- OHIO: Cincinnati..................................................................... 6 --- COLORADO: Colorado Springs............................................................... 3 Denver......................................................................... 1 Other ......................................................................... 1 --- Total Colorado............................................................. 5 --- Total United States........................................................ 407 --- UNITED KINGDOM: London......................................................................... 28 Other ......................................................................... 14 --- Total United Kingdom....................................................... 42 --- SWEDEN: Stockholm...................................................................... 4 Other.......................................................................... 7 --- Total Sweden............................................................... 11 --- GRAND TOTAL.................................................................... 460 ===
The Company considers its equipment, furniture and fixtures and owned buildings to be in good condition. The Company has its own construction supervisors who engage local contractors to selectively remodel and upgrade its domestic pawnshop facilities throughout the year. The Company's leases typically require the Company to pay all maintenance costs, insurance costs and property taxes. For additional information concerning the Company's leases see Note 16 of Notes to Consolidated Financial Statements in the Annual Report which is incorporated herein by reference. ITEM 3. LEGAL PROCEEDINGS The Company is a defendant in certain lawsuits encountered in the ordinary course of its business. Certain of these matters are covered to an extent by insurance. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity. The Alabama Supreme Court recently upheld a trial court judgment awarding 15 18 $300,000 in damages plus interest to a former employee who claimed that the Company did not pay him certain incentive compensation he believed he had earned. Of the total award, $225,000 consisted of punitive damages. The Company has petitioned the United States Supreme Court to hear the case and rule on the propriety of awarding punitive damages in this particular case. Although the Company is optimistic that it will achieve a favorable outcome in this case, there can be no assurance that the U.S. Supreme Court will grant its petition to hear the case or that it will rule in the Company's favor. ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS There were no matters submitted to the Company's security holders during the fourth quarter ended December 31, 2000. PART II ITEM 5. MARKET FOR REGISTRANT'S COMMON EQUITY AND RELATED STOCKHOLDER MATTERS Information contained under the caption "Common Stock Data" in the Annual Report is incorporated herein by reference in response to this Item 5. ITEM 6. SELECTED FINANCIAL DATA Information contained under the caption "Five Year Summary of Selected Financial Data" in the Annual Report is incorporated herein by reference in response to this Item 6. ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION Information contained under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Annual Report is incorporated herein by reference in response to this Item 7. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information contained under the captions "Consolidated Financial Statements," "Notes to Consolidated Financial Statements," and "Income Statement Quarterly Data" in the Annual Report is incorporated herein by reference in response to this Item 8. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE The Company had no disagreements on accounting or financial disclosure matters with its independent public accountants to report under this Item 9. 16 19 PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information contained under the caption "Election of Directors" in the Company's Proxy Statement is incorporated herein by reference in response to this Item 10. See Item 1, "Executive Officers" for information concerning executive officers. ITEM 11. EXECUTIVE COMPENSATION Information contained under the caption "Executive Compensation" in the Company's Proxy Statement is incorporated herein by reference in response to this Item 11. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT Information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement is incorporated herein by reference in response to this Item 12. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information contained under the caption "Executive Compensation" in the Company's Proxy Statement is incorporated herein by reference in response to this Item 13. PART IV ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (1) The following financial statements of the Company and Report of Independent Accountants are contained in the Annual Report and are incorporated herein by reference. CONSOLIDATED FINANCIAL STATEMENTS: Consolidated Balance Sheets as of December 31, 2000 and 1999. Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998. Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT ACCOUNTANTS 17 20 (2) The following financial statement schedule of the Company, as well as the following financial statements of innoVentry Corp. and its predecessor, Mr. Payroll Corporation, are included herein. Schedule II -- Valuation Accounts. Report of Independent Accountants on Financial Statement Schedule. All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included elsewhere in the financial statements. Separate Financial Statements of Fifty Percent or Less Owned Persons- FINANCIAL STATEMENTS OF INNOVENTRY CORP.: Balance Sheets as of December 31, 2000 and 1999 Statements of Operations for the years ended December 31, 2000 and 1999 Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2000 and 1999 Statements of Cash Flows for the years ended December 31, 2000 and 1999 NOTES TO FINANCIAL STATEMENTS REPORT OF INDEPENDENT AUDITORS FINANCIAL STATEMENTS OF MR. PAYROLL CORPORATION: Consolidated Balance Sheet as of December 31, 1998 Consolidated Statement of Operations for the year ended December 31, 1998 Consolidated Statement of Shareholder's Equity (Deficit) for the year ended December 31, 1998 Consolidated Statement of Cash Flows for the year ended December 31, 1998 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT ACCOUNTANTS (3) The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index on pages 66 through 69. (4) During the fourth quarter ended December 31, 2000, the Company did not file any reports on Form 8-K. 18 21 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, on March 30, 2001. CASH AMERICA INTERNATIONAL, INC. By: /s/ DANIEL R. FEEHAN ------------------------------------- Daniel R. Feehan Chief Executive Officer and President Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on March 30, 2001 on behalf of the registrant and in the capacities indicated.
Signature Title Date /s/ JACK R. DAUGHERTY Chairman of the Board March 30, 2001 - ------------------------------------------- of Directors Jack R. Daugherty /s/ DANIEL R. FEEHAN Chief Executive Officer, March 30, 2001 - ------------------------------------------- President and Director Daniel R. Feehan (Principal Executive Officer) /s/ THOMAS A. BESSANT, JR. Executive Vice President - March 30, 2001 - ------------------------------------------- Chief Financial Officer Thomas A. Bessant, Jr. (Principal Financial and Accounting Officer) /s/ A. R. DIKE Director March 30, 2001 - ------------------------------------------- A. R. Dike /s/ JAMES H. GRAVES Director March 30, 2001 - -------------------------------------------- James H. Graves /s/ B. D. HUNTER Director March 30, 2001 - ------------------------------------------- B. D. Hunter
19 22 /s/ TIMOTHY J. McKIBBEN Director March 30, 2001 - ------------------------------------------- Timothy J. McKibben /s/ ALFRED M. MICALLEF Director March 30, 2001 - ------------------------------------------- Alfred M. Micallef /s/ CLIFTON H. MORRIS, JR. Director March 30, 2001 - ------------------------------------------- Clifton H. Morris, Jr. /s/ CARL P. MOTHERAL Director March 30, 2001 - ------------------------------------------- Carl P. Motheral /s/ SAMUEL W. RIZZO Director March 30, 2001 - ------------------------------------------- Samuel W. Rizzo /s/ ROSALIN ROGERS Director March 30, 2001 - ------------------------------------------- Rosalin Rogers
20 23 CASH AMERICA INTERNATIONAL, INC. SCHEDULE II--VALUATION ACCOUNTS For the Three Years Ended December 31, 2000 (Dollars in thousands)
Additions Balance ------------------------- at Charged Charged Balance Beginning to to at End Description of Period Expense Other Deductions of Period - ----------- --------- ------- ------- ---------- --------- Allowance for valuation of inventory: Year Ended: December 31, 2000.............. $2,008 $1,060 $ -0- $1,056(a) $2,012 ====== ====== ====== ====== ====== December 31, 1999.............. $2,163 $1,358 $ -0- $1,513(a) $2,008 ====== ====== ====== ====== ====== December 31, 1998.............. $2,158 $1,338 $ -0- $1,333(a) $2,163 ====== ====== ====== ====== ====== Allowance for valuation of deferred tax assets: Year Ended: December 31, 2000.............. $2,604 $5,457 $ -0- $ 142 $7,919 ====== ====== ====== ====== ====== December 31, 1999.............. $1,482 $2,172 $ 17 $1,067 $2,604 ====== ====== ====== ====== ====== December 31, 1998.............. $ 405 $ -0- $1,077 $ -0- $1,482 ====== ====== ====== ====== ======
- ---------- (a) Deducted from allowance for write-off or other disposition of inventory. 21 24 REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE To the Board of Directors and Stockholders Cash America International, Inc. Our audits of the consolidated financial statements referred to in our report dated March 28, 2001, appearing in the 2000 Annual Report to Shareholders of Cash America International, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. PRICEWATERHOUSECOOPERS LLP Fort Worth, Texas March 28, 2001 22 25 innoVentry Corp. Balance Sheets (In thousands, except share and per share data)
DECEMBER 31, 2000 1999 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 16,137 $ 30,892 Short-term investments in marketable securities (amortized cost of $1,001 at December 31, 1999) -- 997 Accounts receivable, net of allowance of $130 and $120 at December 31, 2000 and 1999, respectively 419 680 Accounts receivable from stockholder and affiliate 1,792 -- Prepaid expenses 1,462 268 ------------ ------------ Total current assets 19,810 32,837 Property, equipment, internal use software, and leasehold improvements, net of accumulated depreciation and amortization of $9,756 and $3,364 at December 31, 2000 and 1999, respectively 62,240 25,645 Capitalized software development costs, net of accumulated amortization of $7,008 and $4,114 at December 31, 2000 and 1999, respectively 4,900 10,222 Other assets 4,484 3,035 ------------ ------------ Total assets $ 91,434 $ 71,739 ============ ============ LIABILITIES AND STOCKHOLDERS' EQUITY (DEFICIT) Current liabilities: Accounts payable and accrued expenses $ 30,166 $ 9,566 Accounts payable to stockholder and affiliate -- 7,865 Borrowings under line of credit with affiliate 97,422 2,348 Due to affiliate under contract cash arrangement 13,030 12,951 Current portion of capital lease obligations with affiliate 3,103 885 Other current liabilities 1,345 525 ------------ ------------ Total current liabilities 145,066 34,140 Note and interest payable to stockholder 3,257 3,053 Capital lease obligations with affiliate, net of current portion 27,686 4,816 Other noncurrent liabilities 422 671 ------------ ------------ Total liabilities 176,431 42,680 Stockholders' equity (deficit): Convertible preferred stock, $0.0001 par value; 62,241,759 shares authorized, issued and outstanding at December 31, 2000 and 1999; aggregate liquidation preference of $84,000, at December 31, 2000 and 1999 6 6 Common stock, $0.0001 par value; 100,000,000 shares authorized; 9,064,736 and 8,200,000 shares issued and outstanding at December 31, 2000 and 1999, respectively 1 1 Additional paid-in capital 91,081 84,997 Accumulated other comprehensive loss -- (4) Deferred stock compensation (1,121) (4,321) Notes receivable from stockholders (965) (1,432) Accumulated deficit (173,999) (50,188) ------------ ------------ Total stockholders' equity (deficit) (84,997) 29,059 ------------ ------------ Total liabilities and stockholders' equity (deficit) $ 91,434 $ 71,739 ============ ============
See accompanying notes. 23 26 innoVentry Corp. Statements of Operations (In thousands)
DECEMBER 31, 2000 1999 --------- --------- Revenue: Financial services vending fees $ 18,548 $ 15,379 Check cashing fees 10,808 2,362 Credit card cash advance fees 2,459 1,548 --------- --------- 31,815 19,289 Less: Revenue sharing (15,241) (10,172) --------- --------- Total net revenue 16,574 9,117 Expenses: Operations 50,778 15,467 Depreciation and amortization 13,689 7,701 Sales and marketing 19,746 4,821 General and administrative 43,596 18,432 Impairment loss on RPM equipment -- 4,727 Amortization of deferred stock compensation 2,462 1,270 --------- --------- Total expenses 130,271 52,418 --------- --------- Loss from operations (113,697) (43,301) Interest expense (9,417) (769) Other income (expense), net (676) 241 --------- --------- Loss before income taxes (123,790) (43,829) Income tax benefit (expense) (21) 2,787 --------- --------- Net loss $(123,811) $ (41,042) ========= =========
See accompanying notes. 24 27 innoVentry Corp. Statements of Stockholders' Equity (Deficit) Years ended December 31, 2000 and 1999 (In thousands, except share data)
CONVERTIBLE PREFERRED STOCK COMMON STOCK ADDITIONAL ----------------------------- ----------------------------- PAID-IN SHARES AMOUNT SHARES AMOUNT CAPITAL ----------- ----------- ----------- ----------- ----------- Balance at January 1, 1999 10,000 $ 10 10,000,000 $ 2,000 $ 34,165 Net loss -- -- -- -- -- Unrealized loss from investments -- -- -- -- -- Comprehensive loss -- -- -- -- -- Capital contributions and cancellation of convertible preferred stock by Cash America International, Inc. (10,000) (10) -- 34,175 (34,165) Issuance of Series A convertible preferred stock in exchange for cash, common stock, note payable, assets acquired, and tax benefits acquired 54,000,000 5 (10,000,000) (36,175) 47,606 Issuance of Series B convertible preferred stock for cash 8,241,759 1 -- -- 29,999 Issuance of restricted and unrestricted common stock for cash, notes receivable and services -- -- 8,200,000 1 1,801 Deferred stock compensation -- -- -- -- 5,591 Amortization of deferred stock compensation -- -- -- -- -- ----------- ----------- ----------- ----------- ----------- Balance at December 31, 1999 62,241,759 6 8,200,000 1 84,997 Net loss -- -- -- -- -- Unrealized loss from investments -- -- -- -- -- Comprehensive loss -- -- -- -- -- Issuance of restricted and unrestricted common stock for cash and services -- -- 569,287 -- 1,256 Issuance of warrants to purchase common stock in exchange for guarantee of debt and lease line -- -- -- -- 6,352 Cancellations of stock options -- -- -- -- (1,226) Repurchase of restricted stock -- -- (478,125) -- (467) Amortization of deferred stock compensation -- -- -- -- -- Exercise of stock options -- -- 773,574 -- 169 ----------- ----------- ----------- ----------- ----------- Balance at December 31, 2000 62,241,759 $ 6 9,064,736 $ 1 $ 91,081 =========== =========== =========== =========== =========== ACCUMULATED NOTES OTHER DEFERRED RECEIVABLE COMPREHENSIVE STOCK FROM ACCUMULATED DUE FROM LOSS COMPENSATION STOCKHOLDERS DEFICIT STOCKHOLDER ----------- ----------- ----------- ----------- --------- Balance at January 1, 1999 $ -- $ -- $ -- $ (9,146) $ (6,637) Net loss -- -- -- (41,042) -- Unrealized loss from investments (4) -- -- -- -- Comprehensive loss -- -- -- -- -- Capital contributions and cancellation of convertible preferred stock by Cash America International, Inc. -- -- -- -- -- Issuance of Series A convertible preferred stock in exchange for cash, common stock, note payable, assets acquired, and tax benefits acquired -- -- -- -- 6,637 Issuance of Series B convertible preferred stock for cash -- -- -- -- -- Issuance of restricted and unrestricted common stock for cash, notes receivable and services -- -- (1,432) -- -- Deferred stock compensation -- (5,591) -- -- -- Amortization of deferred stock compensation -- 1,270 -- -- -- ----------- ----------- ----------- ----------- --------- Balance at December 31, 1999 (4) (4,321) (1,432) (50,188) -- Net loss -- -- -- (123,811) -- Unrealized loss from investments 4 -- -- -- -- Comprehensive loss -- -- -- -- -- Issuance of restricted and unrestricted common stock for cash and services -- (488) -- -- -- Issuance of warrants to purchase common stock in exchange for guarantee of debt and lease line -- -- -- -- -- Cancellations of stock options -- 1,226 -- -- -- Repurchase of restricted stock -- -- 467 -- -- Amortization of deferred stock compensation -- 2,462 -- -- -- Exercise of stock options -- -- -- -- -- ----------- ----------- ----------- ----------- --------- Balance at December 31, 2000 $ -- $ (1,121) $ (965) $ (173,999) $ -- =========== =========== =========== =========== ========= TOTAL STOCKHOLDERS' EQUITY(DEFICIT) ----------- Balance at January 1, 1999 $ 20,392 Net loss (41,042) Unrealized loss from investments (4) ----------- Comprehensive loss (41,046) ----------- Capital contributions and cancellation of convertible preferred stock by Cash America International, Inc. -- Issuance of Series A convertible preferred stock in exchange for cash, common stock, note payable, assets acquired, and tax benefits acquired 18,073 Issuance of Series B convertible preferred stock for cash 30,000 Issuance of restricted and unrestricted common stock for cash, notes receivable and services 370 Deferred stock compensation -- Amortization of deferred stock compensation 1,270 ----------- Balance at December 31, 1999 29,059 Net loss (123,811) Unrealized loss from investments 4 ----------- Comprehensive loss (123,807) ----------- Issuance of restricted and unrestricted common stock for cash and services 768 Issuance of warrants to purchase common stock in exchange for guarantee of debt and lease line 6,352 Cancellations of stock options -- Repurchase of restricted stock -- Amortization of deferred stock compensation 2,462 Exercise of stock options 169 ----------- Balance at December 31, 2000 $ (84,997) ===========
See accompanying notes. 25 28 innoVentry Corp. Statements of Cash Flows (In thousands)
DECEMBER 31, 2000 1999 --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net loss $(123,811) $ (41,042) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 13,689 7,701 Amortization of warrants issued for loan fees and loan guarantees 2,457 -- Impairment loss on RPM equipment -- 4,727 Write-off of capitalized software 4,855 -- Amortization of deferred stock compensation 2,462 1,270 Net gain on asset disposals (224) -- Changes in assets and liabilities: Accounts receivable 261 189 Accounts receivable from stockholder and affiliate (1,792) -- Prepaid expenses (1,194) (170) Other assets (122) (320) Accounts payable and accrued expenses 20,600 6,191 Accounts payable to stockholder and affiliate (7,865) 8,390 Due to affiliate under contract cash arrangement 79 12,951 Note and interest payable to stockholder 204 153 Other current liabilities 820 (50) Other noncurrent liabilities (248) (2,580) --------- --------- Net cash used in operating activities (89,829) (2,590) CASH FLOWS FROM INVESTING ACTIVITIES Purchases of short-term investments in marketable securities -- (4,212) Proceeds from sale of entertainment business 9,727 -- Proceeds from the sale and maturity of short-term investments in marketable securities 997 3,010 Proceeds from insurance claim for tornado damage, net 3,400 -- Purchase of property, equipment, internal use software, and leasehold improvements (55,941) (23,735) Purchase of capitalized software development costs (2,427) (7,238) --------- --------- Net cash used in investing activities (44,244) (32,175) CASH FLOWS FROM FINANCING ACTIVITIES Proceeds from borrowings on line of credit with affiliate 199,887 25,665 Proceeds from borrowings on capital lease obligations with affiliate 28,521 5,815 Repayment of borrowings on line of credit with affiliate (104,813) (23,317) Repayment of capital lease obligations with affiliate (5,214) (200) Proceeds from the issuance of common stock and exercise of stock options 937 370 Proceeds from capital contribution -- 2,046 Proceeds from the issuance of convertible preferred stock -- 50,975 --------- --------- Net cash provided by financing activities 119,318 61,354 --------- --------- Net increase in cash and cash equivalents (14,755) 26,589 Cash and cash equivalents, beginning of year 30,892 4,303 --------- --------- Cash and cash equivalents, end of year $ 16,137 $ 30,892 ========= =========
26 29 innoVentry Corp. Statements of Cash Flows (continued) (In thousands)
DECEMBER 31, 2000 1999 --------- --------- SUPPLEMENTAL DISCLOSURE Interest paid during the period $ 5,254 $ 537 ========= ========= SUPPLEMENTAL DISCLOSURE OF NONCASH INVESTING AND FINANCING ACTIVITIES Issuance of common stock for warrant $ 6,352 $ -- ========= ========= Issuance of common stock for note receivable $ -- $ 1,482 ========= ========= Deferred stock compensation $ 488 $ 5,591 ========= =========
See accompanying notes. 27 30 innoVentry Corp. Notes to Financial Statements December 31, 2000 1. ORGANIZATION AND BUSINESS innoVentry Corp. ("innoVentry"), formerly known as Mr. Payroll Corporation ("Mr. Payroll"), develops and provides the necessary infrastructure to operate unmanned electronic transaction devices, which are generally marketed under the brand name RPM, that combine automated check cashing, credit card cash advance, debit card withdrawal, multimedia advertising, and facial biometric customer identification capabilities with traditional automated teller machine functionality. innoVentry operates owned and leased RPMs, and sells RPMs to third parties. At December 31, 2000, innoVentry operated RPMs in 27 states. Mr. Payroll was incorporated and commenced operations as a check cashing service in August 1990. In 1994, Cash America International, Inc. ("Cash America") paid $2,000,000 for a 49% interest in Mr. Payroll. Effective December 31, 1996, Cash America acquired the remaining 51% in a purchase transaction. Mr. Payroll operated as a wholly owned subsidiary of Cash America until March 9, 1999. References in these Notes to Financial Statements to innoVentry include Mr. Payroll, unless the context requires otherwise. innoVentry and Wells Fargo Cash Centers, Inc. ("Cash Centers"), a wholly owned subsidiary of Wells Fargo Bank, N.A. ("Wells Fargo"), entered into a joint venture, innoVisions, LLC ("innoVisions"), to develop and distribute a new generation of RPMs targeted at the entertainment industry. Cash Centers contributed its entertainment-related assets, including approximately 200 RPMs operating in entertainment establishments and an initial $1,000,000 working capital line of credit. innoVentry agreed to contribute transaction services and technology support, including a royalty-free license of its intellectual property rights used in the technology to operate the RPMs. innoVentry also agreed to provide RPMs to innoVisions at cost. During the period from May 1998 to March 9, 1999, these assets were operated through the joint venture. In March 1999, innoVisions was dissolved. 28 31 innoVentry Corp. Notes to Financial Statements (continued) 1. ORGANIZATION AND BUSINESS (CONTINUED) In March 1999, Cash Centers obtained 27,000,000 shares of new Series A convertible preferred stock in exchange for cash consideration of $20,975,000 and certain net assets formerly used by innoVisions. Concurrent with that transaction, innoVentry issued 27,000,000 shares of new Series A convertible preferred stock to Cash America in exchange for 10,000,000 shares of its common stock, representing all of the then currently issued and outstanding common stock of innoVentry. Subsequently, Cash America assigned 10% of its shares to third parties. Upon completion of these transactions, Cash Centers and Cash America owned approximately 45% and 41%, respectively, of the outstanding stock of innoVentry. In October 1999, innoVentry issued 8,241,759 shares of new Series B convertible preferred stock to Cash Centers, Cash America, and a strategic supplier, in exchange for cash consideration of $30,000,000. At December 31, 2000 and 1999, Cash Centers, Cash America, and the supplier owned approximately 42%, 38%, and 4%, respectively, of the outstanding stock of innoVentry. On February 2, 2001, innoVentry issued 80,312,386 shares of Series C convertible preferred stock to related parties in exchange for cash consideration of approximately $77,464,000 and the cancellation of approximately $38,270,000 of indebtedness. In addition, innoVentry renegotiated its line of credit, contract cash and lease finance arrangements with Wells Fargo (See Note 4 -Debt Obligations). These transactions are referred to herein as the Series C Financing. Concurrent with the Series C Financing, innoVentry also entered into a technology and knowledge-sharing agreement with Capital One, a stockholder (See Note 7 - Stock-Based Compensation). Subsequent to these transactions, Capital One, Cash Centers, and Cash America owned approximately 24%, 37% and 19%, respectively, of innoVentry's outstanding stock. innoVentry has experienced operating losses since 1996 and had a working capital deficit and net capital deficit at December 31, 2000. innoVentry expects to incur substantial losses for at least the next year. Since its formation, innoVentry has raised capital through private placements of convertible preferred stock. Future capital requirements, however, depend on many factors, including innoVentry's ability to execute its business plan. innoVentry may need to raise additional capital through the issuance of debt or equity securities. There can be no assurance that innoVentry will be able to raise additional financing, or that such financing will be available to innoVentry on acceptable terms. 29 32 innoVentry Corp. Notes to Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES Basis of Presentation and Use of Estimates The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States that require management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. These estimates are based on information available as of the date of the financial statements. Actual results could differ from those estimates. Cash and Cash Equivalents Cash and cash equivalents include cash on hand, cash and checks held by third party vendors for RPM operations, demand deposits with financial institutions, and cash and checks held by the Company under a contract cash arrangement. At December 31, 2000 and 1999, cash held by third party vendors was $3,839,000 and $5,464,000, respectively, and cash held under a contract cash arrangement totaled $13,030,000 and $12,951,000, respectively (see Note 4 - Debt Obligations). innoVentry considers all highly liquid investments with maturity of three months or less from the date of purchase to be cash equivalents. The carrying amount reported in the balance sheet for cash and cash equivalents approximates fair value. Property, Equipment, Internal Use Software, and Leasehold Improvements Property, equipment, internal use software, and leasehold improvements are recorded at the lower of cost or fair value, less accumulated depreciation and amortization. Depreciation on property and equipment, including assets held under capital lease obligations, is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 5 years. Internal use software is accounted for in accordance with Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP No. 98-1") and is amortized on a straight-line basis over estimated useful lives of 3 to 5 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the asset's useful life or corresponding lease term. 30 33 innoVentry Corp. Notes to Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Capitalized Software Development Costs innoVentry accounts for the cost of developing software to be used in connection with the RPM machines in accordance with Statement of Financial Accounting Standard ("SFAS") No. 86, "Accounting for the Cost of Computer Software to Be Sold, Leased, or Otherwise Marketed," under which certain computer software development costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. Technological feasibility is established upon the completion of a working model. Amortization of capitalized computer software development costs begins when a project is available for use and is computed using the straight-line method, on a project-by-project basis, over the remaining estimated economic life of the software. During the year ended December 31, 2000, innoVentry significantly modified the scope of its software development project. As a result of this modification, innoVentry wrote-off $4,855,000 in previously capitalized software development costs. innoVentry was able to utilize a portion of the code from the previous software product to accelerate the development of a replacement software product. The new software product reached technological feasibility in September 2000, and innoVentry has capitalized subsequent software development costs of $2,427,000, which will be amortized over a four-year period beginning on the date of release. For the year ended December 31, 1999, innoVentry capitalized $7,238,000, of costs related to software development and recorded related amortization of $4,114,000. During the year ended December 31, 1999, innoVentry changed the estimated useful life of certain capitalized software development costs from 5 years to 2 years, which increased the related amortization expense by approximately $1,463,000. Revenue Recognition innoVentry recognizes fee revenue from transactions conducted through innoVentry and third party-owned RPMs. Financial services fees are based on a flat usage fee or a percentage of the transaction value. Check cashing fees and credit card cash advance fees are based on a percentage of the transaction value. All fee revenue is recognized at the time service is rendered. innoVentry allocates a portion of its revenue to channel partners under the terms of revenue sharing arrangements based on the volume and nature of transactions conducted by innoVentry through RPMs located on the channel partner's premises. 31 34 innoVentry Corp. Notes to Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Revenue Recognition (continued) innoVentry sells machines to third parties and receives fees related to services provided to purchasers of these machines, including post-contract customer support. Machine sales revenue less the cost of the machines is deferred and amortized over the contractual service period. During the years ended December 31, 2000 and 1999, innoVentry did not have significant machine sales. Stock-Based Compensation SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. innoVentry has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB Opinion No. 25") and related interpretations. For equity instruments granted to non-employees, innoVentry follows the guidance provided by Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF Issue No. 96-18"). Segment Reporting SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" establishes standards for disclosures about operating segments, products and services, geographic areas, and major customers. innoVentry has determined that it has one operating and reportable segment, which is the development, operation, and sale of RPMs that provide check cashing, credit card cash advance, debit card withdrawal, and other financial services. innoVentry markets its products in the United States through its direct sales force. Revenues are generated by users in the United States. Advertising Expenses innoVentry expenses the costs of advertising, including promotional expenses, as incurred. For the years ended December 31, 2000 and 1999, innoVentry recognized advertising expenses of $5,589,000 and $613,000, respectively, which were included in "Sales and marketing" expenses in the accompanying Statements of Operations. 32 35 innoVentry Corp. Notes to Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) Income Taxes innoVentry uses the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial reporting and tax reporting bases of existing assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense represents the net change in the deferred tax asset or liability balance during the year. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. This amount, together with income taxes currently payable or refundable for the current year, represents the total income tax expense for the year. For the periods prior to March 9, 1999, innoVentry was included in the consolidated federal income tax return, and in certain consolidated and combined state and local income tax returns, filed by Cash America. For periods beginning and subsequent to March 9, 1999, innoVentry has filed separate federal and certain separate state and local tax returns according to the taxable activity of its operations. Pursuant to the terms of innoVentry's tax matters agreement with Cash America, any reduction of consolidated federal income tax liability that Cash America realizes as a result of innoVentry's net operating losses prior to March 9, 1999 are not to be treated as a benefit payable from Cash America to innoVentry. Concentration of Credit Risk Financial instruments that potentially expose innoVentry to concentrations of credit risk consist primarily of demand deposits with financial institutions, short-term investments and trade accounts receivable. innoVentry invests cash that is not required for immediate operating needs in a diversified portfolio of financial instruments issued by institutions with investment grade credit ratings. innoVentry limits the amount of credit exposure to any one type of investment. Cash, cash equivalents and short-term investments are deposited with Wells Fargo. These securities generally mature within one year and, therefore, bear minimal risk. innoVentry has not realized any significant losses on these investments nor has it realized any significant credit losses from its accounts receivable. 33 36 innoVentry Corp. Notes to Financial Statements (continued) 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED) New Accounting Standards SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", and its amendments, SFAS 137 and 138, establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that derivatives be recognized on the balance sheet at fair value and specifies the accounting for changes in fair value. innoVentry does not currently engage in hedging activities and does not hold any derivative financial instruments. Accordingly, innoVentry's adoption of SFAS 133, as amended, on January 1, 2001, had no impact on the Company's financial position or operations. 3. PROPERTY, EQUIPMENT, INTERNAL USE SOFTWARE, AND LEASEHOLD IMPROVEMENTS The following is a summary of property, equipment, internal use software, and leasehold improvements (in thousands):
DECEMBER 31, 2000 1999 -------- -------- RPM equipment $ 35,672 $ 11,731 RPM - assembly-in-process 16,122 8,295 Computer equipment, office equipment, and vehicles 8,006 3,829 Leasehold improvements 3,794 3,169 Leasehold improvements - work-in-process 4,005 -- Internal use computer software 4,397 1,985 -------- -------- 71,996 29,009 Accumulated depreciation and amortization (9,756) (3,364) -------- -------- $ 62,240 $ 25,645 ======== ========
Computer equipment, office equipment, vehicles, and RPM equipment include assets held under capital lease obligations with a cost basis of $32,684,000 and $5,958,000 at December 31, 2000 and 1999, respectively. Accumulated depreciation and amortization includes depreciation related to capital leased assets of $3,507,000 and $417,000 at December 31, 2000 and 1999, respectively. RPM - assembly-in-process includes subassembly components for RPMs that are available-for-sale or use by innoVentry which have not yet been put into service. As such, no depreciation expense has been recorded related to this equipment. 34 37 innoVentry Corp. Notes to Financial Statements (continued) 3. PROPERTY, EQUIPMENT, INTERNAL USE SOFTWARE, AND LEASEHOLD IMPROVEMENTS (CONTINUED) For the years ended December 31, 2000 and 1999, innoVentry capitalized $1,063,000 and $624,000 of costs related to internal use software and recognized related amortization of $144,000 and $75,000, respectively. innoVentry periodically evaluates the carrying amount of its long-lived assets and applies the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable. During the year ended December 31, 1999, innoVentry determined that certain RPM equipment and RPM assembly-in-progress would not support future technological requirements. innoVentry recognized the impairment of those assets by adjusting the cost basis of the equipment scheduled for trade-in to reflect current market value and recorded an impairment loss on RPM equipment of $4,727,000 during the year ended December 31, 1999. 4. DEBT OBLIGATIONS Line of Credit with Affiliate Under a revolving secured credit agreement with Wells Fargo, innoVentry can borrow up to $62,000,000 at December 31, 2000. Interest is payable monthly at one of the following rates: base rate (the greater of 1% below the prime rate or 0.5% below the Federal Funds rate), one-month LIBOR, three-month LIBOR or six-month LIBOR. The credit facility matures in February 2001 and is guaranteed by Wells Fargo & Co. At December 31, 2000, there was $61,500,000 outstanding on the line of credit. In addition to the amount owed pursuant to the credit facility, innoVentry had overdrafted its depository accounts by approximately $35,922,000 at December 31, 2000. This overdraft was settled with the proceeds of the Series C Financing in February 2001. 35 38 innoVentry Corp. Notes to Financial Statements (continued) 4. DEBT OBLIGATIONS (CONTINUED) Line of Credit with Affiliate (continued) Throughout the year ending December 31, 2000, innoVentry and Wells Fargo signed several new amendments to the existing credit agreement to increase the aggregate amount of borrowings available under the line of credit from $8,000,000 at December 31, 1999 to $62,000,000 at December 31, 2000, guarantee indebtedness of innoVentry up to $64,955,000 by Wells Fargo & Co. and extend the maturity to January 2001. In consideration for these amendments, innoVentry granted Wells Fargo & Co., or its assigns, warrants to purchase up to 1,197,630 shares of innoVentry common stock at $0.01 per share and paid arrangement fees of $284,375 to Wells Fargo. The estimated fair value of the warrants was $2,168,000. The warrants were fully vested, non-forfeitable and exercisable at the date of grant and expire in 2010. The arrangement fees and estimated fair value of the warrants was amortized to interest expense over the term of the related amendments. In connection with the Series C Financing effective February 2, 2001, Wells Fargo cancelled $35,000,000 of debt payable by innoVentry under the revolving secured credit agreement in exchange for 24,283,632 shares of Series C convertible preferred stock. In addition, innoVentry and Wells Fargo entered into a new amended and restated credit agreement (the "Restated Credit Agreement"), which provides for up to $55,000,000 in aggregate secured borrowings and matures on April 30, 2002. Upon the occurrence of certain events, including innoVentry's election, an asset sale with cash proceeds greater than $1,000,000, or incurrence of other indebtedness (other than that provided for in the Restated Credit Agreement), the commitment amount may be reduced to an amount not less than $15,000,000. The terms of the revolving secured credit agreement establish certain limitations on indebtedness, liens, mergers and acquisitions, asset sales and investments. Under the terms of the Restated Credit Agreement, interest is payable monthly at the one of the following rates: base rate (the greater of 1.00% below the (a) prime rate or (b) the Federal Funds rate plus 0.5%) or Wells Fargo's Eurodollar Rate (one-month LIBOR divided by 1.0 less the LIBOR reserve Requirement) plus 0.75%. innoVentry paid an arrangement fee of $150,000 related to Restated Credit Agreement. 36 39 innoVentry Corp. Notes to Financial Statements (continued) 4. DEBT OBLIGATIONS (CONTINUED) Due to Affiliate Under Contract Cash Arrangement Under a contract cash arrangement, Wells Fargo supplies all cash requirements for RPMs in substantially all locations where Wells Fargo is able to transact operations. The cash remains the property of Wells Fargo until dispensed from the machine through cash withdrawal transactions. Once the customer transactions are processed by various third party processors with which innoVentry contracts, reimbursements of amounts withdrawn and related fees are deposited by the third party processors into innoVentry's demand deposit accounts. innoVentry then reimburses Wells Fargo for the amounts withdrawn. The arrangement expires in June 2001 and is renewable by either party for one-year intervals. The arrangement is cancelable with 90-day notice after the initial term by either innoVentry or Wells Fargo. The arrangement requires monthly interest payments based on rates ranging from 1% to the Federal Funds rate plus 50 basis points on average daily cash balance. At December 31, 2000 and 1999, cash in innoVentry's demand deposit accounts due but not yet remitted to Wells Fargo under the arrangement was $13,030,000 and $12,951,000, respectively. For the years ended December 31, 2000 and 1999, interest expense incurred related to the arrangement was $1,349,000 and $389,000, respectively, and is included in "Interest expense" in the accompanying Statements of Operations. In conjunction with the Series C Financing, Wells Fargo and innoVentry entered into a Restructured RPM Funding Arrangement (the "RPM Funding Arrangement"), which expires on April 30, 2002. Under the terms of the RPM Funding Arrangement, Wells Fargo will provide up to $750,000,000 of currency for use in innoVentry's network of RPM machines, subject to certain per machine cash limitations. The RPM Funding Arrangement requires a monthly fee based on rates ranging from 1.00% to the Federal Funds rate plus 50 basis points based on the average daily cash balance. The terms of the RPM Funding Arrangement also provide for the establishment of a restricted deposit account in Wells Fargo's name for the processing and collection of checks deposited into the RPMs. 37 40 innoVentry Corp. Notes to Financial Statements (continued) 4. DEBT OBLIGATIONS (CONTINUED) Note Payable to Stockholder During 1999, innoVentry executed a note payable in the amount of $2,900,000 to Cash America. The note accrues interest at 7.0% annually. At December 31, 2000 and 1999, accrued interest related to the note payable to stockholder of $357,000 and $153,000, respectively, was included within "Note and interest payable to stockholder" in the accompanying Balance Sheets. In conjunction with the Series C Financing, Cash America cancelled this note payable and accrued interest in exchange for 2,269,066 shares of innoVentry's Series C convertible preferred stock. 5. COMMITMENTS AND CONTINGENCIES Lease Commitments innoVentry leases facilities and equipment under non-cancelable operating and capital lease agreements that expire through October 2010. For the years ended December 31, 2000 and 1999, innoVentry recorded rent expense related to operating leases on facilities of $4,425,000 and $1,320,000, respectively, included in "Operations" expense in the accompanying Statements of Operations. Certain facility leases entered into by innoVentry contain options that may extend the lease term beyond the initial commitment period, subject to terms agreed to at lease inception. For operating leases that contain predetermined fixed escalations of minimum rentals, innoVentry recognizes the related rental expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the leases as deferred rent. At December 31, 2000 and 1999, this liability amounted to $551,000 and $147,000, respectively, and is included in "Other non-current liabilities" in the accompanying Balance Sheets. Effective October 1, 2000, innoVentry entered into a new lease agreement for office space. The lease is secured by a $2,800,000 irrevocable letter of credit issued by Wells Fargo. In conjunction with the facility lease, innoVentry placed cash of $208,000 and 268,000 shares of common stock in escrow for the benefit of the lessor. The shares were to be released to the lessor upon achievement of certain milestones documented in the lease. On February 1, 2001, the shares were released from escrow into the custody of the lessor. The estimated fair market value of the common shares was $488,000 which will be recognized as rent expense. 38 41 innoVentry Corp. Notes to Financial Statements (continued) 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) Lease Commitments (continued) innoVentry has entered into a master lease facility with Wells Fargo Equipment Finance, Inc., guaranteed by Wells Fargo & Company, which provides for the sale to Wells Fargo Equipment Finance, Inc. and lease back of up to $17,000,000 of RPM equipment by innoVentry. In conjunction with the Series C Financing, Wells Fargo Equipment Finance increased this lease line commitment from $17,000,000 to $85,050,000. The new lease line commitment is available until April 30, 2002. The lease arrangements are secured by pledges of all equipment leased under the arrangements. Principal and interest are payable monthly at rates ranging between 1% to 2% above the 5-year treasury note rate and are fixed at the time of financing for 5 year terms each. During the years ended December 31, 2000 and 1999, $8,906,000 and $5,751,000 of equipment to be used by innoVentry in ongoing operations was sold and leased back under this facility. innoVentry has also entered into a master lease facility with Diebold Credit Corporation ("Diebold") that allows innoVentry to lease from Diebold up to $56,700,000 of RPM equipment. The lease arrangements are secured by pledges of all equipment leased under the arrangements. Principal and interest are payable monthly at various rates and are fixed at the time of each financing for a term of 63 months. During the year ended December 31, 2000, $17,536,000 of equipment to be used by innoVentry in ongoing operations was leased under this facility. As consideration for guaranteeing payments under the aforementioned lease with Diebold, innoVentry granted to Wells Fargo & Co. warrants for the purchase of 4,000,000 shares of common stock at $0.01 per share. The warrants were fully vested, non-forfeitable and exercisable at the date of grant and expire in 2010. The estimated fair value of these warrants was $4,196,000 on the date of grant, which is being amortized over the lease term as a component of interest expense. 39 42 innoVentry Corp. Notes to Financial Statements (continued) 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) Lease Commitments (continued) The following is a summary of future minimum rental commitments for non-cancelable leases at December 31, 2000 (in thousands):
CAPITAL LEASES OPERATING LEASES -------------- -------------- 2001 $ 5,742 $ 3,653 2002 7,877 3,522 2003 8,024 3,488 2004 9,081 3,422 2005 7,920 3,427 Thereafter 294 15,937 -------------- -------------- $ 38,938 $ 33,449 ============== Less: Amount representing interest (8,149) -------------- Present value of net minimum capital lease payments $ 30,789 ==============
Purchase Commitments During the years ended December 31, 2000, and 1999 innoVentry purchased $13,847,000 and $14,088,000, respectively, of RPM components and services from Diebold, a significant investor in innoVentry's Series B convertible preferred stock that was issued in October 1999. At December 31, 1999 $7,777,000 was due to Diebold and is included in "Accounts payable to stockholder and affiliate" in the accompanying Balance Sheet. At December 31, 1999, innoVentry had remaining purchase commitments of approximately $26,853,000 with Diebold. This purchase commitment was fulfilled during the year ended December 31, 2000 through the aforementioned purchase and activity under the Diebold master lease facility. Additionally, at December 31, 2000, and 1999, innoVentry had firm purchase commitments with various other equipment suppliers totaling $3,000,000 and $7,290,000, respectively. 40 43 innoVentry Corp. Notes to Financial Statements (continued) 5. COMMITMENTS AND CONTINGENCIES (CONTINUED) Claims and Legal Proceedings innoVentry is party to various claims, investigations, and legal proceedings arising out of the normal course of its business. While there can be no assurance that an adverse determination of any such matters could not have a material adverse impact in any future period, management does not believe, based upon information known to it, that the final resolution of any of these matters will have a material adverse effect upon innoVentry's financial position and annual results of operations and cash flows. 6. STOCKHOLDERS' EQUITY (DEFICIT) Effective January 1, 1999, Cash America returned 1,500 shares of Series A preferred stock and 8,500 shares of Series B preferred stock to innoVentry. This represented all of the issued and outstanding preferred stock of innoVentry, and the return of this preferred stock was recorded as additional paid-in capital on the common stock held by Cash America. No additional shares of common stock were issued in exchange for the contributed preferred stock. In March 1999, innoVentry's Board of Directors eliminated the then-existing designation of Series A and Series B preferred stock. The Board of Directors of innoVentry authorized new Series A and Series B convertible preferred stock ("Preferred Stock") on March 9, 1999, and September 29, 1999, respectively. On February 2, 2001, innoVentry's Board of Directors amended the articles of incorporation and increased the aggregate number of shares authorized from 162,241,759 shares to 691,241,759 shares consisting of 400,000,000 shares of common stock and 291,241,759 shares of Preferred Stock. Four series of Preferred Stock have been designated: Series A Preferred Stock (54,000,000 shares), Series B Preferred Stock (8,241,759 shares), Series C Preferred Stock (175,000,000 shares) and Series D Preferred Stock (54,000,000 shares). Subsequent to the Series C Financing, 152,540,269 shares of Preferred Stock are issued and outstanding and are comprised of Series A Preferred Stock (54,000,000 shares), Series B Preferred Stock (8,241,759 shares) and Series C Preferred Stock (80,298,510 shares). No Series D Preferred Stock is outstanding. The description of the preferred stock terms that follows reflect the terms established in the articles of incorporation dated February 2, 2001. 41 44 innoVentry Corp. Notes to Financial Statements (continued) 6. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) The Series C and D Preferred Stock shareholders are entitled to receive liquidation preference prior and in preference to any distribution to the holders of Series A and B Preferred Stock, and the common shareholders in an amount equal to all declared but unpaid dividends, if any, plus $1.4413 per share of Series C and Series D Preferred Stock, respectively, adjusted for any combinations, consolidations, stock distributions or dividends. After payment of the full liquidation preference, holders of the Series A and Series B Preferred Stock are entitled to receive liquidation preference prior and in preference to any distribution to the holders of common stock in an amount equal to all declared but unpaid dividends, if any, plus $1.00 and $3.64 per share of Series A and Series B Preferred Stock, respectively, adjusted for any combinations, consolidations, stock distributions or dividends. The liquidation preference for Series A and Series B Preferred Stock was $84,000,000 at December 31, 2000 and 1999. If the distributable assets are insufficient to permit payment to the Series C and D Preferred Stock shareholders of their preferential amount, then the entire amount of distributable assets, shall be distributed pro rata among the Series C and D Preferred Stock shareholders in proportion to their respective preferential amounts. Similarly, if the remaining distributable assets are insufficient to permit payment to the Series A and B Preferred Stock shareholders of their preferential amount, then the entire amount of distributable assets, shall be distributed pro rata among the Series A and B Preferred Stock shareholders in proportion to their respective preferential amounts. Following the payment of such liquidation preferences, the remaining assets, if any, will be available for distribution to the holders of innoVentry's common stock and preferred stock pro rata based on the number of shares of common stock held by each shareholder determined on as as-if-converted basis. 42 45 innoVentry Corp. Notes to Financial Statements (continued) 6. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) Each share of Series A, Series B and Series C Preferred Stock is convertible at the option of the shareholder at any time after the date of issuance into common stock of innoVentry on a one-for-one basis subject to adjustment for subsequent common stock splits, dividends, distributions, or subdivisions. The Series D Preferred Stock is not convertible at the option of the holder. Each share of Preferred Stock, including the Series D Preferred Stock, will automatically convert into common stock, on the same basis as a voluntary conversion, upon the occurrence of the earlier of an initial public offering of at least 15% of the outstanding shares of common stock on a fully diluted, as-converted basis, that will yield proceeds (net of any underwriter discounts, concessions or commissions) to innoVentry in excess of $71,000,000, a sale of all or substantially all of innoVentry's assets, or the acquisition by another entity, that results in proceeds of $476,000,000 or more, or the date specified by agreement of the holders of at least 66 2/3% of voting power of the then-outstanding shares of Preferred Stock, with each series voting as a separate class. Each holder of Series A, Series B and Series C Preferred Stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of preferred stock held by such holder could then be converted. The Series A, Series B and Series C Preferred Stock and common stock shall vote together and not as separate classes. The Series D Preferred Stock is non-voting. Holders of the Series C and Series D Preferred Stock are entitled to receive cumulative cash dividends at an annual rate of $0.1128 per share accruing from the date of issuance. Such dividends will be due and payable when and if declared by the Board of Directors and at any time two years after the date of first issuance upon a redemption request of the holders of at least 60% of the shares of Series C and Series D Preferred Stock then outstanding, and immediately prior to the payment of any dividend on shares of common stock or Series A, or Series B Preferred Stock, or certain other events. Holders of the Series A and Series B Preferred Stock and Common Stock are entitled to receive dividends as and when declared by the Board of Directors to the extent permitted by law. 43 46 innoVentry Corp. Notes to Financial Statements (continued) 6. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED) During 1999, innoVentry sold 8,200,000 shares of common stock to certain members of management and advisors to innoVentry at prices ranging from $0.20 to $1.82 per share. Of these 8,200,000 shares, 6,600,000 shares were financed using notes receivable from stockholders. These full recourse notes receivable bear interest at a range from 4.83% to 5.22% and are due the earlier of five years after grant, voluntary resignation, sale or liquidation of holder, or one year after an initial public offering. As of December 31, 2000, and 1999, the balance of this account is $965,000 and $1,432,000, respectively, and is classified as "Notes receivable from stockholders" in the accompanying Balance Sheets. Also included in the 8,200,000 shares sold during the year ended December 31,1999 are 7,200,000 shares which are subject to innoVentry's right to repurchase at the original issuance price. During the year ended December 31, 2000, innoVentry sold an additional 200,000 shares to a service provider for a purchase price of $1.82 per share. Those shares of common stock are subject to innoVentry's right to repurchase at the original issuance price. innoVentry's repurchase rights lapse over a four-year period subject to the purchaser's continued status as a service provider. During 2000, innoVentry exercised its right to repurchase 478,125 shares by canceling the related note receivable from an employee who left innoVentry. At December 31, 2000 and 1999, 1,387,500 shares and 4,558,333 shares, respectively, remain subject to repurchase. 7. STOCK-BASED COMPENSATION Under the 1999 Stock Plan (the "Plan"), innoVentry grants restricted common stock purchase rights and options to purchase shares of its common stock to employees, officers, and directors of innoVentry. At December 31, 2000 innoVentry has reserved 19,450,000 shares of common stock for issuance through the Plan. At December 31, 2000, 10,328,000 shares were available for future grants under the Plan. The Board of Directors administers the Plan and may award a number of forms of stock-based compensation to eligible participants including incentive and nonqualified stock options that vest over a four-year period and have a ten-year contractual life. Restricted stock purchase rights may also be granted under the Plan, and these rights vest over a three year period. 44 47 innoVentry Corp. Notes to Financial Statements (continued) 7. STOCK-BASED COMPENSATION (CONTINUED) The following summarizes stock option activity and related information during the period from Plan inception to December 31, 2000:
WEIGHTED AVERAGE SHARES EXERCISE PRICE -------------- -------------- Outstanding at March 9, 1999 (Plan inception) -- $ -- Granted 8,271,000 0.51 Forfeited (433,000) 0.21 -------------- Outstanding at December 31, 1999 7,838,000 0.53 Granted 8,038,000 1.49 Forfeited (5,980,000) 1.05 Exercised (774,000) 0.22 -------------- -------------- Outstanding at December 31,2000 9,122,000 $ 0.99 ============== ==============
A summary of stock options outstanding and exercisable under the Plan at December 31, 2000 follows:
WEIGHTED AVERAGE SHARES REMAINING SHARES EXERCISE PRICES OUTSTANDING CONTRACTUAL LIFE EXERCISABLE - ----------------- ----------- ---------------- ------------ $0.20 3,170,000 8.36 years 1,308,100 $1.06 3,263,000 9.82 years -- $1.82 2,689,000 9.31 years 114,000 ----------- ----------- 9,122,000 1,422,100 =========== ===========
As discussed in Note 2, innoVentry has elected to follow APB Opinion No. 25 and related interpretations in accounting for its employee and director stock-based awards. Under APB Opinion No. 25, innoVentry does not recognize compensation expense with respect to such awards if the exercise price equals or exceeds the fair value of the underlying security on the date of grant and other terms are fixed. 45 48 innoVentry Corp. Notes to Financial Statements (continued) 7. STOCK-BASED COMPENSATION (CONTINUED) The fair value of options awarded for the purpose of the alternative fair value disclosures required by SFAS No. 123 was estimated as of the dates of grant and was determined using the Black-Scholes model with risk-free interest rates ranging from 6.00% to 6.38% and from 5.28% to 6.38% during 2000 and 1999, respectively, and with expected lives of 7 years, expected volatility of 60%, and a dividend yield of zero. The weighted average fair value of the options granted was $0.99 and $0.75 during 2000, and 1999, respectively. The estimated fair value of the options is amortized to expense over the options' vesting periods. For the years ended December 31, 2000 and 1999, pro forma net loss would have increased to $125,601,150 and $41,442,000, respectively, if compensation cost associated with innoVentry's stock-based compensation plans had been determined using the Black-Scholes model described above. In connection with stock option grants to employees and restricted stock granted to directors during the year ended December 31, 1999, innoVentry recorded deferred stock compensation of $5,591,000, representing the difference between the exercise price and the deemed fair value of innoVentry common stock on the date such stock options and restricted stock were granted. No deferred stock compensation was recorded during the year ended December 31, 2000. Such amounts are included as a reduction of stockholders' equity and are being amortized to operations on a graded vesting method over the related vesting period of each respective option or purchase right. During the years ended December 31, 2000 and 1999, innoVentry recorded amortization of deferred stock compensation expense of $2,462,000 and $1,270,000, respectively. At December 31, 2000 and 1999, $1,121,000 and $4,321,000, respectively, of deferred stock compensation remained unamortized. During 1999, innoVentry also issued non-employee stock purchase rights totaling 1,100,000 shares of common stock outside of the Plan at $0.20 per share. During the year ended December 31, 1999 innoVentry recorded stock compensation in the amount of $98,000, based upon the estimated fair value at the date of issuance calculated in accordance with EITF Issue No. 96-18. At December 31, 1999, $876,000 of deferred stock compensation remained unamortized. In conjunction with the Series C Financing and the technology and knowledge-sharing agreement entered into with Capital One, innoVentry issued Capital One warrants to purchase 84,404,884 shares of common stock at prices ranging from $0.01 per share to $2.8826 per share. The warrants were fully vested, non-forfeitable and exercisable at the date of grant, and expire between the years 2006 and 2011. 46 49 innoVentry Corp. Notes to Financial Statements (continued) 8. INCOME TAXES The significant components of the benefit for income taxes are as follows (in thousands):
YEAR ENDED DECEMBER 31, 2000 1999 ---------- ---------- Current: Federal $ -- $ 321 State 21 143 ---------- ---------- 21 464 Deferred: Federal -- (3,251) State -- -- ---------- ---------- -- (3,251) ---------- ---------- Total income tax provision (benefit) $ 21 $ (2,787) ========== ==========
The 1999 benefit for income taxes results in an effective tax rate that differs from the federal statutory rate primarily due to nondeductible goodwill amortization, non-deductible deferred stock compensation expense, and an increase in the valuation allowance amortization for deferred tax assets. The deferred tax benefit results from a reduction in beginning of the year net deferred tax liability balances. The 2000 provision for income taxes results in an effective tax rate that differs from the federal statutory rate primarily due to state taxes, non-deductible deferred stock compensation, non-deductible interest expense, and an increase in the valuation allowance. 47 50 innoVentry Corp. Notes to Financial Statements (continued) 8. INCOME TAXES (CONTINUED) At December 31, the significant components of the deferred tax liabilities and assets were as follows (in thousands):
DECEMBER 31, 2000 1999 ---------- ---------- Deferred tax assets: Net operating loss carry forwards $ 57,697 $ 15,126 Reserves and allowances 961 1,378 Intangible assets 120 129 Other, net 161 245 ---------- ---------- Total deferred tax assets 58,939 16,878 Deferred tax liabilities: Property and equipment $ 600 $ 474 Software development costs 2,547 4,300 ---------- ---------- Total deferred tax liabilities 3,147 4,774 Valuation allowance (55,792) (12,104) ---------- ---------- Net deferred tax assets $ -- $ -- ========== ==========
Deferred tax assets are recognized to the extent management believes, based on available evidence, that it is more likely than not that they will be realized. Due to the uncertainty surrounding innoVentry's ability to realize benefits associated with its net operating losses, a valuation allowance was established against its net deferred tax assets. During the year ended December 31, 2000, the valuation allowance increased by $43,688,000. At December 31, 2000, innoVentry had federal net operating loss carryforwards of approximately $153,000,000, which expire in the years 2009 to 2020. innoVentry has state net loss carryforwards of lesser amounts that expire in the years 2004 to 2020. Due to ownership changes, these carry forwards are subject to substantial annual limitations as provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation could result in the expiration of a significant portion of the net operating losses before full utilization. 48 51 innoVentry Corp. Notes to Financial Statements (continued) 9. RETIREMENT SAVINGS PLAN innoVentry maintains an employee savings and retirement plan that is intended to be qualified under Section 401(k) of the Internal Revenue Code and is available to substantially all full-time employees of innoVentry. The plan provides for tax-deferred salary deductions and after-tax employee contributions. Contributions include employee salary deferral contributions and discretionary employer contributions. For the years ended December 31, 2000 and 1999, employer discretionary contributions totaled $283,000 and $104,000, respectively, and are included in "General and Administrative" expenses in the accompanying Statement of Operations. 10. FAIR VALUE OF FINANCIAL INSTRUMENTS At December 31, 2000 and 1999, the carrying value of innoVentry's financial instruments approximated their fair values. These financial instruments include cash and cash equivalents, short-term investments in marketable securities, accounts receivable, accounts payable and accrued expenses, accounts payable to stockholder and affiliate, borrowings under the line of credit with affiliate, amounts due to affiliate under contract cash arrangement, and certain other assets and liabilities that are considered financial instruments. Carrying values were estimated to approximate fair values for these financial instruments, as they are short-term in nature and are receivable or payable on demand. The fair value of innoVentry's note and interest payable to stockholder and capital lease obligations with affiliate were estimated using a discounted cash flow model and a discount rate based on yields appropriate for the risks related to the financial instruments. The fair values of the line of credit and capital lease obligations with affiliate approximate their carrying values. 49 52 Report of Independent Auditors The Board of Directors innoVentry Corp. We have audited the accompanying balance sheets of innoVentry Corp. as of December 31, 2000 and 1999, and the related statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes 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 financial statements referred to above present fairly, in all material respects, the financial position of innoVentry Corp. at December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States. /s/ Ernst & Young LLP San Francisco, California March 9, 2001 50 53 MR. PAYROLL CORPORATION CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998 (In thousands, except share data) ASSETS Current assets: Cash and cash equivalents $ 4,303 Accounts receivable 869 Inventories 2,588 Prepaid expenses 98 Advances to parent 1,787 -------- Total current assets 9,645 -------- Property and equipment, net 13,510 Intangible assets, net 4,258 Other assets 266 -------- Total assets $ 27,679 ======== LIABILITIES AND SHAREHOLDER'S EQUITY Current liabilities: Accounts payable and accrued expenses $ 3,375 Deferred revenue 575 Current portion of capital lease obligations payable 79 -------- Total current liabilities 4,029 -------- Capital lease obligations payable, net of current portion 7 Deferred income tax liability 3,251 Commitments and contingencies (Note 9) Shareholder's equity: Preferred stock - Series A, $1 par value per share; 1,500 shares authorized, issued and outstanding 2 Series B, $1 par value per share; 48,500 shares authorized, 8,500 shares issued and outstanding 8 Common stock, no par value per share; 100,000,000 shares authorized, 10,000,000 shares issued and outstanding 2,000 Additional paid-in capital 34,165 Accumulated deficit (9,146) Due from parent company (6,637) -------- Total shareholder's equity 20,392 -------- Total liabilities and shareholder's equity $ 27,679 ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 51 54 MR. PAYROLL CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 (In thousands) Revenue Royalties and check cashing fees $ 3,186 Check cashing machine sales 2,044 Franchise sales 47 -------- Total Revenue 5,277 Operating expenses and costs: Cost of machines sold 1,885 Operations 4,904 Selling and administration 6,978 Depreciation and amortization 911 -------- Total operating expenses and costs 14,678 -------- Loss from operations (9,401) Interest expense, net 25 Other expense 72 -------- Loss before income taxes (9,498) Income tax benefit (3,126) -------- Net loss $ (6,372) ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 52 55 MR. PAYROLL CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (DEFICIT) YEAR ENDED DECEMBER 31, 1998 (In thousands, except share data)
Preferred Stock ----------------------------------------- Series A Series B Common Stock Additional Due From ------------------ ----------------- ---------------------- Paid-in Accumulated Parent Shares Amount Shares Amount Shares Amount Capital Deficit Company ----- ------- ------ ------ ---------- ------- ---------- ----------- --------- Balance, December 31, 1997 1,500 $ 2 8,500 $ 8 10,000,000 $ 2,000 $10,620 $(2,774) $(1,822) Preferred stock issued -- -- 23,545 Net loss (6,372) Due from parent company (4,815) ----- ------- ----- ----- ---------- ------- ------- ------- ------- Balance, December 31, 1998 1,500 $ 2 8,500 $ 8 10,000,000 $ 2,000 $34,165 $(9,146) $(6,637) ===== ======= ===== ===== ========== ======= ======= ======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 53 56 MR. PAYROLL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1998 (In thousands) Cash flows from operating activities: Reconciliation of net loss to net cash used by operating activities-- Net loss $ (6,372) Adjustments to reconcile net loss to net cash used in operating activities: Depreciation and amortization 911 Loss on disposal of property and equipment 89 Changes in assets and liabilities-- Accounts receivable (414) Inventories (458) Prepaid expenses and other (262) Accounts payable and accrued expenses 1,070 Deferred revenue (391) Deferred income taxes, net 1,689 -------- Net cash used by operating activities (4,138) -------- Cash flows from investing activities: Acquisitions (1,400) Purchases of property and equipment (7,454) Proceeds from disposal of property and equipment 30 Increase in intangible assets (86) -------- Net cash used by investing activities (8,910) -------- Cash flows from financing activities: Sale of preferred stock 23,545 Payments on capital lease obligations and other long-term liabilities (96) Advances to parent (1,787) Due from parent company (4,815) -------- Net cash provided by financing activities 16,847 -------- Net change in cash and cash equivalents 3,799 Cash and cash equivalents at beginning of year 504 -------- Cash and cash equivalents at end of year $ 4,303 ======== Cash paid during the period for interest $ 26 ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS. 54 57 MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS 1. SUMMARY OF BUSINESS ACTIVITY Mr. Payroll Corporation, now known as innoVentry Corp., (the "Company") was incorporated in the State of Texas in August 1990, and began operations as a check cashing service. In 1994, Cash America International, Inc. ("Cash America") paid $2,000,000 for a 49% interest in the Company. Effective at the close of business on December 31, 1996, Cash America acquired, in a purchase transaction, the remaining 51% interest in the Company. The aggregate purchase price of the additional 51% interest was to be paid in 3 annual installments in an amount equal to .9775 times the defined after-tax net income of the Company for the 1996, 1997 and 1998 fiscal years, respectively. Cash America paid no additional consideration based on the Company's results of operations in 1996, 1997 and 1998, respectively. The purchase transaction established a new basis of accounting for purchased assets and liabilities, that has been reflected in these financial statements. At December 31, 1998, the Company operated 127 franchised and 10 company owned check cashing centers. The Company collects an initial franchise fee, as well as a royalty based on a percentage of the check cashing fees earned by franchised centers and check cashing fees earned by its company owned centers. The Company provides training to franchisees and their employees and support services ranging from computer equipment problem resolution, marketing techniques and construction of equipment, to current issues affecting the industry. During 1997, the Company developed an automated check cashing machine ("CCM") that combines facial biometrics imaging, for customer identification purposes, with proprietary check cashing technology and a cash-dispensing machine. The Company receives check cashing fees from its company owned CCMs. The Company also sells CCMs to third parties and receives fees for providing initial customer identification, as well as subsequent check cashing verification and guarantee services from a central service center. At December 31, 1998, the Company operated 84 CCMs, including 38 that were company owned. In May, 1998, the Company and Wells Fargo Bank, N.A. ("Wells Fargo") entered into a joint venture, named innoVisions, LLC ("innoVisions"), to develop and distribute a new generation of financial services vending machines targeting the gaming industry. The machines would combine ATM functions with automated check cashing, credit card cash advances, debit withdrawals, multimedia advertising and distribution of event tickets. Wells Fargo contributed the gaming-related assets of its wholly owned subsidiary, Wells Fargo Cash Centers, Inc. ("Cash Centers"), including approximately 200 ATMs operating in gaming establishments; an initial $1,000,000 working capital line of credit, and cash for use in its ATMs in specified markets at negotiated rates. The Company agreed to contribute transaction services and technology support, including a royalty-free license of its intellectual property rights in the technology to operate the machines. The Company also agreed to provide CCMs to innoVisions at cost. In order to test the viability of the new machines, the agreement called for a pilot placement of 10 CCMs at two casinos in Las Vegas and Reno, Nevada. 55 58 MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED In order to fund ongoing operations, the Company is dependent on a significant increase in revenue from some combination of sales of CCMs, verification fees, check cashing fees, franchise royalties and sales of franchises. Should those revenues not increase as anticipated, the Company would require additional sources of capital. The Company received additional equity contributions in March 1999. See Note 10. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION The consolidated financial statements include the accounts of the Company's wholly owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. The Company uses the equity method of accounting for its investment in innoVisions. innoVisions is in the development stage and has incurred losses since its inception. The Company has not recorded its equity in the losses of innoVisions since the carrying value of its investment is zero and the Company has neither guaranteed obligations of innoVisions nor does it have any obligation to provide financial support to innoVisions. CASH AND CASH EQUIVALENTS Cash and cash equivalents consist primarily of cash on hand and cash on deposit. ACCOUNTS RECEIVABLE The Company considers accounts receivable to be fully collectible. No allowance for doubtful accounts is maintained nor is a credit evaluation performed on customers. Amounts deemed uncollectible are immediately charged to operations. INVENTORIES Inventories, which consist of sub-assembly components for CCMs and of CCMs available for sale, are stated at the lower of cost (specific identification) or market. PROPERTY AND EQUIPMENT AND DEPRECIATION Property and equipment are recorded at cost less accumulated depreciation. Equipment held under capital leases is recorded at the lower of the net present value of the minimum lease payments or its fair value at the inception of the lease. The cost of assets sold or retired, as well as any accumulated depreciation, is removed from the accounts at the time of disposal, with recognition of any resulting gain or loss. Depreciation expense is provided on a straight-line basis using estimated useful lives of 5 to 7 years for furniture and equipment, 7 years for check cashing machines, 25 years for store booths and 3 to 5 years for software. Amortization of capital leases is included in depreciation expense. 56 59 MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED SOFTWARE DEVELOPMENT COSTS The Company develops computer software for internal use. Internal and external costs incurred for the development of computer applications, as well as for upgrades and enhancements that result in additional functionality of the applications, are capitalized. Internal and external training and maintenance costs are charged to expense as incurred. When an application is placed in service, the Company begins amortizing the related capitalized software costs using the straight-line method over 3 years. INTANGIBLE ASSETS Intangible assets, consisting principally of excess purchase price over net assets acquired, are being amortized on a straight-line basis over their expected periods of benefit, generally 28.5 years. Management assesses the recoverability of intangible assets by comparing the intangible assets to the undiscounted cash flows expected to be generated by the acquired operations during the anticipated period of benefit. Accumulated amortization of intangible assets was $449,000 at December 31, 1998. INCOME TAXES The Company is included in the 1998 consolidated federal income tax return of Cash America. Pursuant to the terms of the Company's tax matters agreement (the "Tax Matters Agreement") with Cash America, any reduction of consolidated federal income tax liability that Cash America may realize as a result of the Company's net operating losses will not be treated as a benefit payable from Cash America to the Company. Accordingly, such benefits are recorded as a reduction of stockholder's equity. The Company utilizes the liability method to account for income taxes. This method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of existing temporary differences between the financial reporting and tax reporting basis of assets and liabilities and operating loss and tax credit carryforwards for tax purposes. REVENUE RECOGNITION The Company collects a royalty based on a percentage of check cashing fees earned by the franchisee. The Company recognizes franchise sales when the Company has substantially performed all of its material obligations under the franchise agreement. Under the terms of a typical franchise agreement, the Company is under no obligation to refund franchise fees once a location has opened for business. The Company sells CCMs and recognizes sales revenue when a CCM is delivered to a purchaser, installed, and title is transferred. Thereafter, the Company records check cashing verification fee revenue in the period in which the service is provided. 57 60 MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The Company also owns and operates CCMs which generate check cashing fee revenue that is recorded in the period in which the service is provided. ADVERTISING COSTS Costs of advertising are expensed at the time of first occurrence. Advertising expenses were $617,000 for the year ended December 31, 1998. YEAR 2000 EXPENSES Costs of identifying, correcting, reprogramming and testing computer systems for Year 2000 compliance are charged to expense when incurred. USE OF ESTIMATES The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates. NEW ACCOUNTING STANDARDS In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") that, as amended, is required to be adopted in years beginning after June 15, 2000. The future adoption of SFAS 133 is not expected to have a material effect on the Company's consolidated financial position or results of operations. 3. ACQUISITIONS Effective June 1, 1998, the Company repurchased 10 check cashing franchises and terminated options for the franchisee to open 10 additional franchises for an aggregate cash consideration of $1,400,000. The transaction has been accounted for as a purchase. The acquired goodwill of $1,390,000 is being amortized on a straight-line basis utilizing a period of 28.5 years. The assets acquired and the results of operations have been included in the financial statements since the date of acquisition. 58 61 MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 4. PROPERTY AND EQUIPMENT, NET Major classifications of property and equipment at December 31, 1998 were as follows (in thousands): Furniture and equipment $ 3,528 Check cashing machines 2,011 Store booths 1,973 Software 799 Software systems in process 7,097 ---------- 15,408 Less accumulated depreciation 1,898 ---------- Property and equipment, net $ 13,510 ==========
Furniture and equipment includes $312,000 of cost and accumulated depreciation of $251,000 at December 31, 1998 relating to assets held under capital leases. 5. CAPITAL LEASE OBLIGATIONS PAYABLE The Company leases computer equipment under capital leases. The typical lease has an original maturity of 5 years and contains options to extend the lease or purchase the assets at market or a predetermined value. The Company's capital lease obligations payable at December 31, 1998 consisted of (in thousands): Interest from 16.01% to 19.34%, due in monthly installments through January 2000 $ 86 Less current portion of capital lease obligations (79) ----- Long-term liabilities $ 7 =====
59 62 MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The net present values of minimum lease payments on capital leases are determined using appropriate interest rates at the inception of each lease. Future minimum lease payments for capitalized lease obligations at December 31, 1998 are as follows (in thousands): 1999 $ 86 2000 7 ------ Total minimum lease payments 93 Less amount representing interest (7) ------ Present value of minimum lease payments $ 86 ======
6. INCOME TAXES Income tax benefit for the year ended December 31, 1998 is as follows (in thousands): Current $(4,815) Deferred federal 1,689 ------- Income tax benefit $(3,126) =======
The effective income tax rate differs from the federal statutory income tax rate for the following reasons (in thousands): Tax benefit computed at the statutory federal income tax rate $ (3,324) Benefits realized at a rate less than the statutory federal income tax rate 142 Non-deductible amortization of intangible assets 42 Other 14 -------- Total income tax benefit $ (3,126) ========
60 63 MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED The significant components of deferred tax assets and liabilities as of December 31, 1998 are as follows (in thousands): Deferred income tax liabilities: Property and equipment $ 3,258 ========= Deferred income tax assets: Net operating loss carryforward $ 1,110 Other, net 7 --------- Total deferred income tax assets 1,117 Valuation allowance for deferred tax assets (1,110) --------- Net deferred income tax assets $ 7 --------- Net deferred income tax liabilities $ 3,251 =========
The Company annually re-evaluates the potential for realization of its deferred income tax assets. As of December 31, 1998, the Company has net operating loss carryforwards of $3,170,000 for federal income tax purposes. These carryforwards may only be used to reduce future taxable income of the Company and expire from 2009 through 2011. 7. SHAREHOLDER'S EQUITY On July 21, 1998, the Company's sole shareholder approved an increase in the number of authorized common shares from 1,000,000 to 100,000,000, approved an increase in the number of authorized preferred shares from 10,000 to 35,000,000, reserved 1,000,000 common shares for issuance of stock options, and declared an 8,000-for-one stock split effective July 23, 1998. Shares outstanding have been restated to reflect the conversion. On July 21, 1998, the Board of Directors authorized an increase in the number of authorized Series B preferred shares from 8,500 to 48,500. 8. RELATED PARTY TRANSACTIONS The Company paid $72,000 to Cash America for legal services in 1998. (See Note 9.) Pursuant to terms of the Tax Matters Agreement with Cash America, the Company recorded a $6,637,000 reduction to stockholder's equity in 1998, for the cumulative current federal income tax benefits of the Company's net operating losses. Such amounts will not be paid to the Company by Cash America. 61 64 MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 9. COMMITMENTS AND CONTINGENCIES LEASE COMMITMENTS The Company leases its primary office space from Cash America pursuant to an operating lease expiring in December 2000. Minimum annual rental commitments under non-cancelable leases including leases with initial or remaining terms of one year or more as of December 31, 1998, are as follows (in thousands):
NON-RELATED RELATED PARTIES PARTIES TOTAL ----------- ------- ----- 1999 $ 54 $161 $215 2000 36 161 197 ---- ---- ---- Total $ 90 $322 $412 ==== ==== ====
Rent expense for operating leases was $180,000 during 1998, including $139,000 to related parties. The Company leases many of the spaces that franchisees occupy in various retail outlets. Monthly lease rentals are typically based on a percentage of the gross fees collected by the franchisee each month. The Company pays all lease rentals accruing under such leases. LITIGATION The Company is involved in certain legal actions and claims arising in the ordinary course of business from time to time. It is the opinion of management, based upon the advice of legal counsel, that such litigation and claims will be resolved without a material effect on the Company's financial position and results of operations. 10. SUBSEQUENT EVENTS - 1999 DISTRIBUTION OF MANNED CHECK CASHING BUSINESS On January 1, 1999, the Company distributed the net assets of its manned check cashing business, valued at its historical cost of $7,733,000, to Cash America. CONTRIBUTION OF PREFERRED STOCK On January 1, 1999, Cash America contributed 1,500 shares of Series A, $1 par value per share preferred stock, and 8,500 shares of Series B, $1 par value per share preferred stock, representing all of the issued and outstanding preferred stock of the Company, as additional capital paid on the common stock held by Cash America. No additional shares of common stock were issued. 62 65 MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED CHANGES TO PREFERRED STOCK On March 9, 1999, the Board of Directors eliminated the existing designations of Series A and Series B preferred stock, and the Company's sole shareholder approved an increase from 35,000,000 to 54,000,000 in the authorized shares of $1 par value per share preferred stock and the designation of a new Series A Preferred Stock. Each share of the new Series A Preferred Stock is convertible at the option of its holder immediately after its date of issuance into common stock of the Company on a one-for-one basis subject to adjustment for subsequent common stock splits, dividends, distributions or subdivisions. The new Series A Preferred Stock will automatically convert into common stock, on the same basis as a voluntary conversion, upon the occurrence of the earlier of an initial public offering yielding gross proceeds to the Company in excess of $25,000,000; the liquidation, winding up or dissolution of the Company whereby the proceeds are $75,000,000 or more; or the date specified by agreement of the holders of at least 60% of the voting power of the then outstanding shares of the new Series A Preferred Stock. The holders of the new Series A Preferred Stock shall be entitled to the number of votes equal to the number of shares of common stock into which such shares of new Series A Preferred Stock could then be converted and may vote along with the holders of common stock as a single class on all matters on which the common stockholders shall be entitled to vote. DISSOLUTION OF INNOVISIONS On March 9, 1999, pursuant to the terms of the operating agreement, the Company, Cash Centers and the Board of Directors of innoVisions dissolved and terminated the joint venture. The business activities formerly conducted by innoVisions will be integrated into the operations of the Company. ADDITIONAL COMMON AND PREFERRED STOCK TRANSACTIONS On March 9, 1999, the Company issued 27,000,000 shares of new Series A Preferred Stock in exchange for 10 million shares of no par value common stock, representing all of the then currently issued and outstanding common stock of the Company. On the same date, Cash Centers purchased 27,000,000 shares of new Series A Preferred Stock for cash consideration of $20,975,000 and certain net assets having a value of approximately $6,025,000. Additionally on March 9, 1999, the Company received subscriptions from certain members of management of the Company to purchase 6,000,000 shares of common stock. In October 1999, the Company sold 8,241,759 shares of new Series B convertible preferred stock for cash consideration of $30,000,000. The Series A and Series B convertible preferred stockholders are entitled to the same voting and conversion rights. REINCORPORATION AND NAME CHANGE On July 19, 1999, the Company was reorganized and reincorporated in the State of Delaware. The name of the Company was changed to innoVentry Corp. 63 66 MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED 11. SUBSEQUENT EVENTS - 2001 (UNAUDITED) CHANGES TO COMMON AND PREFERRED STOCK In February 2001, the Board of Directors approved an increase in the number of common shares authorized from 100,000,000 to 400,000,000 and an increase in the number of preferred shares from 62,241,759 to 291,241,759. Of the additional preferred shares, 175,000,000 were designated as Series C Preferred and 54,000,000 were designated as Series D Preferred. Terms of the Series C and Series D Preferred, including voting rights, are substantially the same as the Series A and Series B Preferred except that the holders of Series C and Series D Preferred have a liquidation preference over the holders of Series A and Series B Preferred. In addition, the holders of Series C and D Preferred shall be entitled to receive, in certain circumstances, cumulative annual cash dividends of $.1128 per share accruing from the date of issue on each outstanding share of Series C and D Preferred. ADDITIONAL PREFERRED STOCK TRANSACTIONS On February 2, 2001, the Company sold, in a private placement, 80,298,510 newly issued shares of Series C Preferred for $115,734,000 consisting of $77,464,000 of cash and the cancellation of $38,270,000 of the Company's indebtedness. 64 67 REPORT OF INDEPENDENT ACCOUNTANTS To the Shareholders of Mr. Payroll Corporation (innoVentry Corp.) and Board of Directors of Cash America International, Inc. In our opinion, the consolidated balance sheet as of December 31, 1998 and the related consolidated statements of operations, shareholder's equity (deficit) and cash flows, for the year December 31, 1998, present fairly, in all material respects, the financial position, results of operations and cash flows of Mr. Payroll Corporation (innoVentry Corp.) at December 31, 1998 and for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Mr. Payroll Corporation (innoVentry Corp.) for any period subsequent to December 31, 1998. PricewaterhouseCoopers LLP Fort Worth, Texas April 22, 1999, except as to the information presented in Note 10, for which the dates are July 19, 1999 and October 29, 1999 65 68 EXHIBIT INDEX The following documents are filed as a part of this report. Those exhibits previously filed and incorporated herein by reference are identified below. Exhibits not required for this report have been omitted.
EXHIBIT DESCRIPTION - ------- ----------- 3.1 -- Articles of Incorporation of Cash America Investments, Inc. filed in the office of the Secretary of State of Texas on October 4, 1984. (a) (Exhibit 3.1) 3.2 -- Articles of Amendment to the Articles of Incorporation of Cash America Investments, Inc. filed in the office of the Secretary of State of Texas on October 26, 1984. (a) (Exhibits 3.2) 3.3 -- Articles of Amendment to the Articles of Incorporation of Cash America Investments, Inc. filed in the office of the Secretary of State of Texas on September 24, 1986. (a) (Exhibit 3.3) 3.4 -- Articles of Amendment to the Articles of Incorporation of Cash America Investments, Inc. filed in the office of the Secretary of State of Texas on September 30, 1987. (b) (Exhibit 3.4) 3.5 -- Articles of Amendment to the Articles of Incorporation of Cash America Investments, Inc. filed in the office of the Secretary of State of Texas on April 23, 1992 to change the Company's name to "Cash America International, Inc." (c) (Exhibit 3.5) 3.6 -- Articles of Amendment to the Articles of Incorporation of Cash America International, Inc. filed in Office of the Secretary of State of Texas on May 21, 1993. (d) (Exhibit 3.6) 3.7 -- Bylaws of Cash America International, Inc. (e) (Exhibit 3.5) 3.8 -- Amendment to Bylaws of Cash America International, Inc. dated effective September 26, 1990. (f) (Exhibit 3.6) 3.9 -- Amendment to Bylaws of Cash America International, Inc. dated effective April 22, 1992. (c) (Exhibit 3.8) 4.1 -- Form of Stock Certificate. (c) (Exhibit 4.1) 10.1 -- 1989 Non-Employee Director Stock Option Plan. (g) (Exhibit 10.47) 10.2 -- Amendment to 1989 Non-Employee Director Stock Option Plan dated April 24, 1996. (h) (Exhibit 10.4) 10.3 -- 1989 Key Employee Stock Option Plan. (g) (Exhibit 10.48) 10.4 -- Amendment to 1989 Key Employee Stock Option Plan dated January 21, 1997. (h) (Exhibit 10.6) 10.5 -- 1994 Long-Term Incentive Plan. (i) (Exhibit 10.5) 10.6 -- Amendment to 1994 Long-Term Incentive Plan dated July 22, 1997. (j) (Exhibit 10.1)
66 69 10.7 -- Amendment to 1994 Long-Term Incentive Plan dated April 20, 1999. (t) (Exhibit 10.1) 10.8 -- Amended and Restated Executive Employment Agreement between the Company and Mr. Feehan dated as of August 1, 1997. (j) (Exhibit 10.2) 10.9 -- Consultation Agreements between the Company and Messrs. Dike, Hunter, Motheral, and Rizzo, each dated April 25, 1990. (k) (Exhibit 10.49) 10.10 -- Note Agreement between the Company and Teachers Insurance and Annuity Association of America dated as of May 6, 1993. (l) (Exhibit 10.1) 10.11 -- First Supplement to Note Agreement between the Company and Teachers Insurance and Annuity Association of America dated as of September 20, 1994. (i) (Exhibit 10.11) 10.12 -- Second Supplement (May 12, 1995), Third Supplement (July 7, 1995), and Fourth Supplement (November 10, 1995) to 1993 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (m) (Exhibit 10.1) 10.13 -- Fifth Supplement (December 30, 1996) to 1993 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (h) (Exhibit 10.13) 10.14 -- Sixth Supplement (December 30, 1997) to 1993 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (n) (Exhibit 10.16) 10.15 -- Seventh Supplement (December 31, 1998) to 1993 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (o) (Exhibit 10.18) 10.16 -- Eighth Supplement (September 29, 1999) to 1993 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (p) (Exhibit 10.3) 10.17 -- Ninth Supplement (June 30, 2000) to 1993 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (u) (Exhibit 10.3) 10.18 -- Note Agreement between the Company and Teachers Insurance and Annuity Association of America dated as of July 7, 1995. (q) (Exhibit 10.1) 10.19 -- First Supplement (November 10, 1995) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (m) (Exhibit 10.2) 10.20 -- Second Supplement (December 30, 1996) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (h) (Exhibit 10.16) 10.21 -- Third Supplement (December 30, 1997) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (n) (Exhibit 10.20) 10.22 -- Fourth Supplement (December 31, 1998) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (o) (Exhibit 10.23) 10.23 -- Fifth Supplement (September 29, 1999) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America.. (p) (Exhibit 10.2) 10.24 -- Sixth Supplement (June 30, 2000) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (u) (Exhibit 10.2)
67 70 10.25 -- Amended and Restated Senior Revolving Credit Facility Agreement among the Company, certain lenders named therein, and NationsBank of Texas, N.A., as Administrative Agent dated as of June 19, 1996. (r) (Exhibit 10.1) 10.26 -- First Amendment (December 11, 1997) to Amended and Restated Senior Revolving Credit Facility Agreement dated as of June 19, 1996. (n) (Exhibit 10.22) 10.27 -- Second Amendment (June 24, 1998) to Amended and Restated Senior Revolving Credit Facility Agreement dated as of June 19, 1996. (s) (Exhibit 10.1) 10.28 -- Third Amendment (December 11, 1998) and Fourth Amendment (December 31, 1998) to Amended and Restated Senior Revolving Credit Facility Agreement dated as of June 19, 1996. (o) (Exhibit 10.27) 10.29 -- Fifth Amendment (September 29, 1999) to Amended and Restated Senior Revolving Credit Facility Agreement dated as of June 19, 1996. (p) (Exhibit 10.4) 10.30 -- Sixth Amendment (June 30, 2000) to Amended and Restated Senior Revolving Credit Facility Agreement among the Company and the various Banks named therein dated as of June 19, 1996. (u) (Exhibit 10.4) 10.31 -- Note Agreement dated as of December 1, 1997 among the Company and the Purchasers named therein for the issuance of the Company's 7.10% Senior Notes due January 2, 2008 in the aggregate principal amount of $30,000,000. (n) (Exhibit 10.23) 10.32 -- First Supplement (December 31, 1998) to Note Agreement dated as of December 1, 1997 among the Company and the Purchasers named therein. (o) (Exhibit 10.29) 10.33 -- Second Supplement (September 29, 1999) to Note Agreement dated as of December 1, 1997 among the Company and the Purchasers named therein. (p) (Exhibit 10.1) 10.34 -- Third Supplement (June 30, 2000) to Note Agreement dated as of December 1, 1997 among the Company and the Purchasers named therein. (u) (Exhibit 10.1) 13 -- Portions of the 2000 Annual Report to Stockholders of the Company specifically incorporated by reference herein. 21 -- Subsidiaries of Cash America International, Inc. 23 -- Consent of PricewaterhouseCoopers LLP.
- ---------- Certain Exhibits are incorporated by reference to the Exhibits shown in parenthesis contained in the Company's following filings with the Securities and Exchange Commission: (a) Registration Statement Form S-1, File No. 33-10752. (b) Amendment No. 1 to its Registration Statement on Form S-4, File No. 33-17275. (c) Annual Report on Form 10-K for the year ended December 31, 1992. (d) Annual Report on Form 10-K for the year ended December 31, 1993. (e) Post-Effective Amendment No. 1 to its Registration Statement on Form S-4, File No. 33-17275. 68 71 (f) Annual Report on Form 10-K for the year ended December 31, 1990. (g) Annual Report on Form 10-K for the year ended December 31, 1989. (h) Annual Report on Form 10-K for the year ended December 31, 1996. (i) Annual Report on Form 10-K for the year ended December 31, 1994. (j) Quarterly Report on Form 10-Q for the quarter ended September 30, 1997. (k) Post-Effective Amendment No. 4 to its Registration Statement on Form S-4, File No. 33-17275. (l) Quarterly Report on Form 10-Q for the quarter ended March 31, 1993. (m) Quarterly Report on Form 10-Q for the quarter ended September 30,1995. (n) Annual Report on Form 10-K for the year ended December 31, 1997. (o) Annual Report on Form 10-K for the year ended December 31, 1998. (p) Quarterly Report on Form 10-Q for the quarter ended September 30, 1999. (q) Quarterly Report on Form 10-Q for the quarter ended June 30, 1995. (r) Quarterly Report on Form 10-Q for the quarter ended June 30, 1996. (s) Quarterly Report on Form 10-Q for the quarter ended June 30, 1998. (t) Quarterly Report on Form 10-Q for the quarter ended June 30, 1999. (u) Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. 69 EX-13 2 d85451ex13.txt PORTIONS OF THE 2000 ANNUAL REPORT TO STOCKHOLDERS 1 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION - -------------------------------------------------------------------------------- GENERAL The Company is a diversified provider of specialty financial services to individuals in the United States, United Kingdom and Sweden. The Company offers secured non-recourse loans, commonly referred to as pawn loans, to individuals through its lending operations. The pawn loan portfolio generates finance and service charges revenue. A related but secondary source of revenue is the disposition of merchandise, primarily collateral from unredeemed pawn loans. The Company also provides rental of tires and wheels through its subsidiary, Rent-A-Tire, Inc. ("Rent-A-Tire") and check cashing services through its franchised and company owned Mr. Payroll(R) manned check cashing centers. The Company expanded its lending operations during the three years ended December 31, 2000, by adding a net 77 locations. It acquired 66 operating units, established 12 locations, and combined or closed 13 locations. In addition, 15 franchise units were opened, including 3 company owned locations that were sold to a franchisee. As of December 31, 2000, the Company's lending operations consisted of 479 lending units -- 410 owned units and 16 franchised units in 18 states in the United States, 42 jewelry-only units in the United Kingdom, and 11 loan-only and primarily jewelry-only units in Sweden. Through January 31, 1998, the Company had a 49% ownership interest in Express Rent A Tire, Ltd. ("Express") and used the equity method of accounting whereby the Company recorded its proportionate share of Express' earnings or losses in its consolidated financial statements. Effective February 1, 1998, the Company increased its ownership interest to 99.9% and reorganized the operations of Express into Rent-A-Tire. The acquisition of additional interests was accounted for as a purchase and, accordingly, the assets and liabilities of Rent-A-Tire and the results of its operations have been included in the consolidated financial statements since February 1, 1998. As of December 31, 2000, Rent-A-Tire owned and operated 34 tire and wheel rental stores, including 19 that were previously managed and were purchased in 2000 and 1999, and 12 that were established in 2000 and 1999. Rent-A-Tire also manages 9 additional tire and wheel rental stores under its name for a third party. During 1999, the Company restructured its check cashing operations. In January 1999, the Company transferred its manned check cashing operations into a new wholly owned consolidated subsidiary ("Mr. Payroll"). As of December 31, 2000, Mr. Payroll operated 125 franchised and 7 company owned manned check cashing centers in 20 states. On March 9, 1999, Wells Fargo Cash Centers, Inc. ("Cash Centers"), a wholly owned subsidiary of Wells Fargo Bank, N.A. ("Wells Fargo"), contributed $27.0 million of cash and assets to the Company's automated check cashing machine subsidiary (now known as "innoVentry") and received newly issued shares of innoVentry's convertible Series A voting preferred stock (the "Series A preferred stock") representing 45% of innoVentry's voting interest. The Company exchanged all of innoVentry's then outstanding common stock for newly issued shares of Series A preferred stock representing 45% of innoVentry's voting interest and immediately assigned 10% of its shares to the former owners of innoVentry's predecessor in consideration for the termination of certain option rights. Concurrently, certain members of innoVentry's new management subscribed for newly issued shares of common stock of innoVentry, representing 10% of its voting interest. Upon completion of the transactions, the Company's residual ownership interest in innoVentry was 40.5%. The Company de-consolidated innoVentry and began using the equity method of accounting for its investment and its share of the results of innoVentry's operations after March 9, 1999. In October 1999, the Company, Cash Centers, and a third party each purchased $10.0 million of innoVentry's newly issued convertible Series B voting preferred stock. During 1999 and 2000, innoVentry also issued additional shares of common stock. As of December 31, 2000, the Company's voting interest was 37.9%. See Notes 3 and 17 of Notes to Consolidated Financial Statements. RESULTS OF OPERATIONS YEAR ENDED 2000 COMPARED TO YEAR ENDED 1999 NET REVENUE: CONSOLIDATED. Consolidated net revenue decreased 2.1%, or $4.4 million, to $206.4 million during 2000 from $210.8 million during 1999. Net revenue from lending activities and check cashing operations declined $7.8 million and $.5 million, respectively, while rental operations net revenue increased $3.9 million. NET REVENUE: LENDING ACTIVITIES. Lending operations net revenue decreased $7.8 million to $191.8 million during 2000 from $199.6 million during 1999. The principal components of lending operations net revenue are finance and service charges, which decreased $8.4 million; net revenue from the disposition of merchandise, which declined $.5 million; other domestic lending fees and franchise royalties, which increased $1.1 million; and foreign check cashing operations, which was the same in both years. Finance and service charges variations are caused by changes in the average balance of pawn loans outstanding, the annualized yield of the pawn loan portfolio, and the effects on translation of foreign currency amounts into United States dollars. During 2000, the company-wide average balance of pawn loans outstanding was 5.9% lower than during 1999. Lower average balances outstanding tend to result in lower amounts of finance and service charges. Excluding the effects on translation of exchange rate declines in both the foreign currencies in 2000 relative to 1999, the company-wide average balance of pawn loans outstanding was 3.0% lower than during 1999. Of the $8.4 million decline in finance and service charges, $5.5 million resulted from the lower average pawn loan balances, and a reduction in the annualized loan yield during 2000 accounted for $1.0 million. The remaining $1.9 million decrease was due to negative foreign currency translation adjustments resulting from the continued strengthening of the United States dollar against both foreign currencies. Same units (those in operation for more than one year during 2000) accounted for $7.4 million of the $8.4 million decrease in finance and service charges, including the $1.9 million resulting from the translation effects discussed above. Management anticipates continued unfavorable currency translation adjustments, particularly in the first half of fiscal 2001. A 6.4% decline in the average balance of domestic pawn loans outstanding caused a $6.3 million decrease in domestic finance and service charges that was offset by an $.8 million increase in combined foreign finance and service charges. The domestic decline was driven by a 5.6% reduction in the average number of pawn loans outstanding during 2000, coupled with a .9% decline in the average amount per loan. Management believes the weakened demand for pawn loans, that became evident during the second quarter of 1999, may have been partly attributable to the sustained strength in the United States economy that continued throughout most of 2000. However, the average number of domestic pawn loans outstanding during the fourth quarter of 2000 was only down 2.9% compared to the fourth quarter of 1999, leading management to believe that the weakness in pawn loan demand may be dissipating. Excluding the negative effects of foreign currency translation adjustments, a 5.7% increase in the average balance of pawn loans outstanding in the United Kingdom resulted in a $.9 million increase in finance and service charges. The United Kingdom increase was slightly offset by a $.1 million reduction in Sweden caused by a 1.6% decline in the average balance of pawn loans outstanding. Excluding the negative effects of foreign currency translation adjustments, the consolidated annualized loan yield, which represents the blended result derived from the distinctive loan yields realized from operations in the three countries, was 93.4% in 2000, compared to 95.7% in 1999. The decline resulted in a $1.0 million decrease in finance and service charges. Although a slight 1 2 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- Continued - -------------------------------------------------------------------------------- increase in the domestic annualized loan yield to 123.3% for 2000, compared to 122.3% for 1999, contributed an additional $.8 million of finance and service charges, a decline in the blended yield on foreign loans caused an offsetting $1.8 million decrease. The blended yield on average foreign pawn loans outstanding declined to 49.1% for 2000, compared to 52.4% for 1999. Virtually all of the reduction of the blended yield occurred in the United Kingdom and was caused by a combination of lower loan redemption rates and lower returns on the disposition of unredeemed collateral at auction. Net revenue from the disposition of merchandise represents the proceeds received from the disposition of merchandise in excess of the cost of merchandise disposed. Proceeds from the disposition of merchandise were 3.7%, or $8.7 million, lower than in 1999 primarily due to lower average merchandise levels and lower sales prices in the domestic lending operations. Same unit proceeds declined $7.6 million, including approximately $.5 million resulting from declines in foreign currency exchange rates compared to 1999 rates. The margin on disposition of merchandise increased to 33.2% in 2000 from 32.2% in 1999. Excluding the effect of the disposition of scrap jewelry, the margin on disposition of merchandise increased to 35.3% in 2000 from 34.1% in 1999 due to a lower average cost of merchandise disposed. The margin on disposition of scrap jewelry was 2.6% in 2000 compared to 1.8% in 1999. The combination of reduced proceeds and higher margin caused a $.5 million, or .7%, decrease in net revenue from the disposition of merchandise. The merchandise turnover rate increased to 2.5 times during 2000 from 2.4 times during 1999. Since the end of the second quarter of 1999, management has concentrated on discounting prices, lowering the average cost of merchandise held for disposition, and reducing aggregate merchandise levels. As a result, management believes that the margin on disposition should trend slightly higher in 2001. Other domestic lending fees and franchising royalties increased a combined amount of $1.1 million in 2000 as compared to 1999. Of the increase, $1.0 million resulted from the initiation of a small consumer cash advance product that was introduced into 330 of the domestic lending units by the end of 2000, including 187 units that offer the product on behalf of a third party financial institution (the "Bank"), which pays the Company a fee for its administrative services. The product that is offered by the Company in 143 locations provides customers with cash in exchange for a promissory note or other repayment agreement supported by that customer's check for the amount of the cash advanced plus a service fee. The Company holds the check for a short period, typically less than 17 days. To repay the advance, customers may redeem their checks by paying cash or they may allow the checks to be processed for collection. (Although these cash advance transactions may take the form of loans or deferred check deposit transactions, the transactions are referred to throughout this discussion as "payday loans" for convenience.) During 2000, $10.1 million of payday loans were written, including $1.4 million extended to customers by the Bank, for an average of $187 per loan. As of December 31, 2000, $1.6 million of gross payday loans were outstanding, including $.6 million extended to customers by the Bank that is not included in the Company's consolidated balance sheet. A loan loss reserve of $243 thousand, representing 23.1% of the Company's gross payday loans outstanding of $1.0 million, has been provided in the consolidated financial statements. The Company plans to offer payday loans in approximately 110 more domestic lending and Rent-A-Tire locations during 2001. NET REVENUE: OTHER ACTIVITIES. Net revenue of Rent-A-Tire increased $3.9 million to $11.4 million in 2000 from $7.5 million in 1999. Tire and wheel rentals and sales net revenue increased $5.1 million as a result of an average of 19 more stores in operation in 2000 as compared to 1999. Management fee revenue and other related revenue decreased $1.2 million due to a reduction of an average of 3 managed stores in 2000 as compared to 1999. The 1999 restructuring of the Company's check cashing operations and de-consolidation of innoVentry resulted in a $.5 million decrease in other net revenue in 2000 as compared to 1999. Following de-consolidation, the Company began using the equity method of accounting for its investment in innoVentry and, accordingly, the Company's share of the results of operations of innoVentry is recorded in "Equity in loss of unconsolidated subsidiary." See "Other Items" below. OPERATIONS AND ADMINISTRATION EXPENSES. Due in part to the 2.1% decrease in consolidated net revenue, consolidated operations and administration expenses as a percentage of net revenue were 78.6% in 2000 compared to 74.3% in 1999. Combined operations and administration expenses increased $5.6 million, or 3.6%, in 2000 as compared to 1999. Domestic lending expenses increased $2.5 million primarily as a result of rollout costs and continuing expenses associated with the introduction of payday loans into 330 lending units. Also contributing to the increase were higher personnel benefits, occupancy, and travel expenses. Foreign lending operations contributed $.2 million of the increase and Rent-A-Tire accounted for $6.7 million of the increase due to an average of 19 more stores in operation during 2000. Check cashing operations expenses decreased $3.8 million as a result of the de-consolidation of innoVentry in March 1999 and losses from fraudulently cashed income tax checks included in 1999 that did not recur in 2000. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses as a percentage of net revenue were 8.8% in 2000 compared to 9.2% in 1999. Total depreciation and amortization expenses decreased $1.4 million, or 7.0%. The decreased expense resulted primarily from a moderation in the unit expansion of lending operations and retirements of property that occurred because of severe tornado damage to the Company's corporate headquarters in March 2000. The reduction was partially offset by an increase in Rent-A-Tire depreciation expense resulting from the increase in the number of tire rental stores in operation. INTEREST EXPENSE. Net interest expense as a percentage of net revenue declined to 6.3% in 2000 from 6.5% in 1999. The amount decreased a net $.6 million, or 4.3%, due to the effect of a 7.2% reduction in the Company's average debt balance that was partially offset by higher blended borrowing costs. The average amount of debt outstanding decreased during 2000 to $189.9 million from $204.6 million during 1999. Factors contributing to the reduction were lower pawn loan and merchandise balances, and the receipt of insurance proceeds in 2000 from claims resulting from the tornado damage to the corporate headquarters. The effective blended borrowing cost increased slightly to 6.9% in 2000 from 6.7% in 1999. OTHER ITEMS. A $9.7 million gain (before income tax expense of $3.4 million) from the settlement of the insurance claims related to the tornado damage to the corporate headquarters was recorded in 2000. See Note 5 of Notes to Consolidated Financial Statements. In 1999, the Company recorded a $2.2 million gain (before income tax expense of $.8 million) from the sale of 3 lending units. Equity in loss of unconsolidated subsidiary was $15.7 million in 2000 compared to $15.2 million in 1999. The Company recorded a pre-tax gain of $.1 million from the issuance of innoVentry's common stock in 2000 compared to a pre-tax gain of $5.2 million from the issuance of innoVentry's Series A and B voting preferred stock and common stock in 1999. As of June 30, 2000, the Company's proportionate share of innoVentry's losses exceeded the carrying amount of its investment in and advances to innoVentry. Since the Company has no obligation to provide financial support to innoVentry, as of June 30, 2000 it 2 3 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- Continued - -------------------------------------------------------------------------------- suspended the recording of its equity in innoVentry's losses as well as gains or losses resulting from the issuance of innoVentry's common stock. The Company expects innoVentry's losses to continue as its operations continue to expand. See Notes 3 and 17 of Notes to Consolidated Financial Statements. INCOME TAXES. The Company's consolidated effective tax rate is impacted in 2000 by the effect of the valuation allowance provided for the deferred tax assets arising from the Company's equity in the losses of innoVentry. Including the effect of the valuation allowance provided, the Company recognized no net deferred tax benefits in 2000 from its equity in the losses of innoVentry. In 1999, the effect of income taxes provided upon the de-consolidation of innoVentry was the major item influencing the consolidated effective tax rate. Excluding the effects of all items related to the Company's investment in innoVentry after de-consolidation and their related tax effects, the Company's consolidated effective tax rate varied slightly as it was 39.0% for 2000 and 38.3% for 1999. In the event the Company is required to resume the recording of equity in innoVentry's losses, the tax benefit from such losses will be recognized when it is more likely than not that such benefits will be realized. As a result, management believes that the Company's consolidated effective tax rate will continue to vary from the statutory tax rate when any such losses as well as gains or losses resulting from the issuance of innoVentry's preferred stock or common stock are recorded in the Company's consolidated statement of income. NET INCOME (LOSS). Consolidated net income (loss) as a percentage of net revenue was (0.8)% for 2000, compared to 1.8% for 1999. Diluted net income (loss) per share was $(.07) for 2000, compared to $.15 for 1999. YEAR ENDED 1999 COMPARED TO YEAR ENDED 1998 NET REVENUE: CONSOLIDATED. Consolidated net revenue increased 5.1%, or $10.2 million, to $210.8 million during 1999 from $200.6 million during 1998. Lending activities, rental operations, and check cashing operations contributed $4.9 million, $5.0 million, and $.3 million, respectively, of the $10.2 million increase. NET REVENUE: LENDING ACTIVITIES. Lending operations net revenue increased $4.9 million to $199.6 million during 1999 from $194.7 million during 1998. The new lending units in operation for less than one year during 1999 accounted for a $6.4 million increase that was partially offset by a $1.5 million decrease from same units. Finance and service charges increased $6.0 million; net revenue from the disposition of merchandise declined $1.1 million; and foreign check cashing operations was the same in both years. New lending units generated $3.4 million of the total finance and service charges increase of $6.0 million. A 5.7% increase in the company-wide average balance of pawn loans outstanding resulted in $6.2 million of additional finance and service charges. However, a fractional decline in the loan yield offset this amount by $.2 million. The growth in the average balance of pawn loans occurred domestically and in the United Kingdom, while the average balance in Sweden declined slightly. An increase in the United States average balance of pawn loans outstanding caused 48% of the consolidated growth and resulted principally from the new unit additions. The average number of domestic pawn loans outstanding during 1999 increased 2.7% and the average amount per loan during 1999 increased 1.5%. Growth in the United Kingdom caused 63% of the consolidated increase in the average balance of pawn loans outstanding as a result of an 18.5% increase in the average number of pawn loans outstanding and a 10.3% increase in the average amount per loan. The increase in the average investment in pawn loans from same units in the United Kingdom was strong with new units contributing to a lesser degree. Although the average balance of pawn loans outstanding during 1999 was higher than during 1998, loan balances at December 31, 1999 were $3.3 million, or 2.6%, lower than at December 31, 1998. This decline is primarily attributable to a decrease in loan demand beginning in the second quarter of 1999 which led to a 5% reduction in the number of pawn loans outstanding at December 31, 1999, that was slightly offset by a 2.6% increase in the average amount per loan. The consolidated annualized loan yield was 95.7% in 1999 compared to 96.2% in 1998, resulting in a $.2 million decrease in finance and service charges. The domestic annualized loan yield was slightly higher at 122.3% for 1999 compared to 121.8% for 1998. The blended yield on average foreign pawn loans outstanding declined slightly to 52.4% in 1999 compared to 52.9% in 1998. Slightly higher loan yields on redeemed loans in Sweden were offset by a slightly lower loan yield on redeemed loans in the United Kingdom and marginally lower returns on the disposition of unredeemed collateral at auction in both countries. Proceeds from the disposition of merchandise were 8.8%, or $19.0 million, higher than in 1998. Same unit increases accounted for $8.1 million of the $19.0 million increase. The margin on disposition of merchandise declined to 32.2% in 1999 from 35.5% in 1998. Excluding the effect of the disposition of scrap jewelry, the margin on disposition of merchandise fell to 34.1% for 1999 from 36.9% in 1998 primarily due to price discounting (especially in several electronics categories) to accelerate the disposition of merchandise and a higher average cost of items disposed. The margin on disposition of scrap jewelry was negligible and contributed to the lower overall margin on all merchandise disposed in 1999. The net result of the increased proceeds and reduced margin was a $1.1 million, or 1.5%, decrease in net revenue from the disposition of merchandise. The merchandise turnover rate was 2.4 times during both 1999 and 1998. NET REVENUE: OTHER ACTIVITIES. Net revenue of Rent-A-Tire increased to $7.5 million in 1999 from $2.5 million in 1998. The addition of 20 stores during 1999 resulted in an increase in tire and wheel rentals and sales net revenue of $2.1 million. An increase in the average number of managed stores to 15 during 1999 compared to eight during 1998 resulted in increased management fees and related revenue of $2.9 million. The restructuring of the Company's check cashing operations and de-consolidation of innoVentry resulted in a $.3 million increase in other net revenue in 1999 over 1998. Following de-consolidation, the Company began using the equity method of accounting for its investment in innoVentry. See the "Other Items" discussion below. OPERATIONS AND ADMINISTRATION EXPENSES. Consolidated operations and administration expenses as a percentage of net revenue remained constant at 74% in 1999 and 1998. Total operations and administration expenses increased $8.2 million, or 5.5%, during 1999 compared to 1998. Total operations and administration expense ratios to net revenue and year-to-year comparative amounts were impacted by the effect of a decrease in innoVentry's operations and administration expenses of $7.1 million during 1999 compared to 1998. The reduction resulted from innoVentry's de-consolidation in March 1999. Excluding the effects of innoVentry's expenses and net revenue, operations and administration expenses as a percentage of net revenue were 73% in 1999 compared to 69% in 1998 and total operations and administration expenses increased $15.3 million, or 11.0%, during 1999 compared to 1998. These expenses were primarily greater due to higher operations expenses in the domestic lending and rental segments and higher administration expenses in the domestic lending operations. Domestic lending operations contributed $8.4 million of the total increase as a result of higher personnel and occupancy expenses primarily attributable to new unit operations expenses that accounted for $5.3 million of the domestic increase. 3 4 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- Continued - -------------------------------------------------------------------------------- Same units accounted for an additional $1.4 million of the $8.4 million increase and administration expenses increased $1.7 million, primarily due to higher marketing, Year 2000 software remediation and other administration expenses. Foreign lending operations contributed $1.4 million of the increase. Rent-A-Tire accounted for $4.0 million of the increase as a result of the expansion of its operations from 4 rental stores at the beginning of 1998 to 39 owned and managed stores at the end of 1999. Domestic manned check cashing operations accounted for the remaining $1.5 million increase including $.3 million of losses from fraudulently cashed income tax refund checks. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expenses as a percentage of net revenue were 9% in both 1999 and 1998. Total depreciation and amortization expenses increased $1.3 million, primarily due to the increase in the number of tire rental stores in operation and the effects of a full year of depreciation and amortization on the new lending units added in 1998. INTEREST EXPENSE. Net interest expense as a percentage of net revenue declined to 6.5% in 1999 from 6.8% in 1998. The amount decreased a net $.1 million, or 1.0%, due to the effect of a 10.1% reduction in the Company's blended borrowing costs that was partially offset by a higher average amount of debt outstanding. The effective blended borrowing cost decreased to 6.7% in 1999 from 7.4% in 1998. The average amount of debt outstanding increased 12.9% to $204.6 million during 1999 from $181.2 million during 1998 due to the Company's additional investments in innoVentry and the acquisition of 13 tire rental stores by Rent-A-Tire during 1999. OTHER ITEMS. Equity in loss of unconsolidated subsidiary of $15.2 million represents the Company's share of innoVentry's net losses following de-consolidation in March 1999. The Company recorded gains of $5.2 million (before income tax expense of $3.6 million) from the issuance of innoVentry's Series A and B preferred stock and common stock from March 9, 1999, through December 31, 1999. The Company recorded a $2.2 million gain during 1999 from the sale of 3 lending units. See Note 14 of Notes to Consolidated Financial Statements. INCOME TAXES. The Company's consolidated effective tax rate is impacted in 1999 by income taxes provided upon the de-consolidation of innoVentry in March 1999 and the effect of the valuation allowance provided for a portion of the deferred tax assets arising from the Company's equity in the losses of innoVentry. Including the effect of the valuation allowance provided, the Company recognized $3.1 million of deferred tax benefits in 1999 from its equity in the losses of innoVentry. Excluding the effects of all items related to the Company's investment in innoVentry after de-consolidation and their related tax effects, the Company's consolidated effective tax rate for 1999 was 38.3% compared to 38.0% for 1998. NET INCOME. Consolidated net income as a percentage of net revenue was 1.8% for 1999, compared to 6.3% for 1998. Diluted net income per share was $.15 for 1999 compared to $.48 for 1998. LIQUIDITY AND CAPITAL RESOURCES Net cash provided by operating activities was $31.1 million in 2000, $34.7 million in 1999, and $20.6 million in 1998. During 2000, investing activities provided an additional $20.7 million from insurance claims resulting from tornado damage to the corporate headquarters and $3.0 million from a reduction of the Company's investment in pawn loans. Financing activities also provided combined proceeds of $4.2 million from the issuance of common shares pursuant to the Company's stock option plans and the collection of notes receivable from stockholders, and proceeds of $2.1 million from the issuance of capital lease obligations. The Company invested $21.0 million in purchases of property and equipment during 2000, including $12.8 million for property improvements, the remodeling of selected operating units and additions to computer systems of the lending operations, and $2.8 million for the reconstruction of property and replacement of furniture and equipment destroyed by the tornado. Rent-A-Tire invested $4.8 million for the purchase of equipment and the completion of a point-of-sale software system, and the check cashing operation invested $.6 million in various fixtures and additions to its point-of-sale software system. Rent-A-Tire also invested $2.6 million to acquire 6 tire rental stores that it previously managed. During 2000, the Company also utilized cash in financing activities to make net payments of $25.9 million on its bank lines of credit, a scheduled payment of $4.3 million on its 8.33% senior unsecured notes, and scheduled payments of $1.3 million on debt obligations in connection with capital leases and other unsecured notes. In addition, the Company purchased $6.1 million of treasury shares under open market purchase authorizations, purchased $.1 million of treasury shares for the Company's Nonqualified Savings Plan, and paid $1.3 million in dividends. The effect of exchange rate declines further reduced cash by $.1 million. The Company plans to add approximately 10 to 20 new lending locations during 2001. These additions will likely occur through a combination of the opening of new locations, that will require an approximate investment of $265 thousand per location, and the acquisition of existing locations. The Company also plans to complete the repairs to its corporate headquarters during 2001. In January 2001, Rent-A-Tire invested $3.9 million in cash for the purchase of 9 tire rental stores that it previously managed. Rent-A-Tire does not plan to add any additional locations during the remainder of 2001. As of December 31, 2000, the Company's voting interest in innoVentry was 37.9%. Management believes that innoVentry intends to continue to develop and market its RPM(TM) Cash Management Machine. The Company anticipates that innoVentry will incur future losses and require additional capital until sufficient revenues are generated from its sales and operations. See Notes 3 and 17 of Notes to Consolidated Financial Statements. On October 26, 2000, the Company announced that its Board of Directors authorized management to purchase up to one million shares of its common stock in the open market and terminated the open market purchase authorization established in 1999. During 2000, the Company purchased 700,900 shares for an aggregate amount of $3.3 million under the 2000 authorization and 415,100 shares for an aggregate amount of $2.8 million under the 1999 authorization. Additional purchases may be made from time to time in the open market and it is expected that funding will come from operating cash flow and existing credit facilities. At December 31, 2000, $84.0 million was outstanding on the Company's $150 million U. S. revolving line of credit. In addition, the Company's L15 million (approximately $22.4 million) line of credit in the United Kingdom had a balance outstanding of L5.3 million (approximately $7.9 million) and the Company's Swedish lines of credit totaling SEK 215 million (approximately $22.9 million) had a combined balance outstanding of SEK 89.8 million (approximately $9.6 million). Management believes that borrowings available under these revolving credit facilities, cash generated from operations and current working capital of $190.3 million should be sufficient to meet the Company's anticipated future capital requirements. 4 5 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- Continued - -------------------------------------------------------------------------------- QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risks relating to the Company's operations result primarily from changes in interest rates, foreign exchange rates, and gold prices. The Company does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes. INTEREST RATE RISK. Management's objective is to minimize the cost of borrowing through an optimal mix of fixed and floating rate debt. Derivative financial instruments, such as interest rate cap agreements, are used for the purpose of managing fluctuating interest rate exposures that exist from ongoing business operations. After considering the effect of the interest rate cap agreements, the Company had net variable rate borrowings outstanding of $71.4 million and $79.9 million at December 31, 2000 and 1999, respectively. If LIBOR were to increase 100 basis points over the rates at December 31, 2000 and 1999, respectively, and the variable rate borrowings outstanding remained constant, the Company's interest expense would increase by $.9 million and $.8 million, and net income after taxes would decrease by $.6 million and $.5 million in 2000 and 1999, respectively. If LIBOR were to decrease 100 basis points from the rates at December 31, 2000 and 1999, respectively, the combined fair values of the Company's outstanding fixed rate plus capped rate debt ($99.2 million and $119.6 million, respectively) would increase by $2.1 million and $2.6 million as of December 31, 2000 and 1999, respectively. FOREIGN EXCHANGE RISK. The Company is subject to the risk of unexpected changes in foreign currency exchange rates by virtue of its operations in the United Kingdom and Sweden. Foreign assets, liabilities, and earnings are translated into U.S. dollars for consolidation into the Company's financial statements. As a result of fluctuations in foreign currency exchange rates, the Company has recorded cumulative other comprehensive losses of $8.5 million and $4.0 million at December 31, 2000 and 1999, respectively. A hypothetical 10% decline in the exchange rates of the British pound sterling and the Swedish kronor at December 31, 2000 and 1999, would have resulted in additional other comprehensive losses of $5.5 million in each year. Net income from foreign operations during 2000, 1999 and 1998 translated to $4.9 million, $7.5 million and $6.7 million, respectively. A hypothetical 10% decline in the weighted average exchange rates for each of the foreign currencies during the years ended December 31, 2000 and 1999, would have decreased net income after taxes by $.5 million and $.7 million in 2000 and 1999, respectively. At this time, the Company does not use derivative instruments to manage exchange rate risk of net investments in or earnings of its foreign operations. From time-to-time the Company transfers funds between currencies and may concurrently enter into short-term currency swaps to eliminate the risk of currency fluctuations. No foreign currency swaps were outstanding at December 31, 2000 or 1999. GOLD PRICE RISK. The Company periodically uses forward sale contracts with a major bullion bank to sell the fine gold produced in the normal course of business from its liquidation of forfeited gold merchandise. The Company has no significant gold price risk exposure at December 31, 2000 or 1999. CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS This Annual Report to Shareholders, including management's discussion and analysis, contains statements that are forward-looking, as that term is defined by the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in its rules. The Company intends that all forward-looking statements be subject to the safe harbors created by these laws and rules. When used in this Annual Report to Shareholders, the words "believes," "estimates," "plans," "expects," "anticipates" and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors. These risks and uncertainties are beyond the ability of the Company to control, and, in many cases, the Company cannot predict all of the risks and uncertainties that could cause its actual results to differ materially from those expressed in the forward-looking statements. Accordingly, actual results may differ materially from those expressed in the forward-looking statements, and the making of such statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved. Important risk factors include, but are not limited to, the following: changes in demand for the Company's services, changes in competition, the ability of the Company to open new operating units in accordance with its plans, economic conditions, real estate market fluctuations, interest rate fluctuations, changes in the capital markets, changes in tax and other laws and governmental rules and regulations applicable to the Company's business, and other risks indicated in the Company's filings with the Securities and Exchange Commission. 5 6 MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION -- Continued - -------------------------------------------------------------------------------- (Dollars in thousands-December 31) SUMMARY The Company has expanded its lending operations over the past three years by increasing from 402 operating locations at December 31, 1997, to 463 owned and 16 franchised operating locations at December 31, 2000. The growth in lending locations is attributable to acquisitions, the start-up of new Company units and the sale of new franchises. Rent-A-Tire, Inc. has expanded its operations by increasing the number of tire and wheel rental stores it owns or manages under its name from 8 to 43 at December 31, 2000. Effective January 1, 1999, the Company restructured its check cashing operations. Thereafter, the manned check cashing operations have been conducted by Mr. Payroll Corporation, a wholly owned consolidated subsidiary, and the automated check cashing operations have been conducted by innoVentry Corp. Since March 9, 1999, the Company has used the equity method of accounting for its investment in, and its share of the results of operations of innoVentry. See Note 3 of Notes to Consolidated Financial Statements. At December 31, 2000, the company owned 37.9% of innoVentry. Selected consolidated and operations data for the three years ended December 31, 2000, are presented below.
2000 1999 1998 --------- --------- --------- REVENUE Finance and service charges $ 114,711 $ 123,111 $ 117,078 Proceeds from disposition of merchandise 226,535 235,245 216,380 Other lending fees and royalties 1,233 129 42 Rental operations 17,354 10,253 3,346 Check cashing operations 3,881 4,410 4,135 --------- --------- --------- TOTAL REVENUE 363,714 373,148 340,981 --------- --------- --------- COSTS OF REVENUE Disposed merchandise 151,407 159,602 139,502 --------- --------- --------- Rental operations 5,910 2,732 832 --------- --------- --------- NET REVENUE $ 206,397 $ 210,814 $ 200,647 ========= ========= ========= OTHER DATA Consolidated Operations: Net revenue contribution by source -- Finance and service charges 56.2% 58.4% 58.3% Margin on disposition of merchandise 36.4% 35.9% 38.3% Rental operations 5.5% 3.6% 1.3% Check cashing operations 1.9% 2.1% 2.1% Expenses as a percentage of net revenue -- Operations and administration 78.6% 74.3% 74.0% Depreciation and amortization 8.8% 9.2% 9.0% Interest, net 6.3% 6.5% 6.8% Income from operations as a percentage of total revenue 7.2% 9.3% 10.0% ========= ========= ========= LENDING OPERATIONS: Annualized yield on pawn loans 94.8% 95.7% 96.2% Average pawn loan balance per average location in operation $ 261 $ 277 $ 276 Average pawn loan amount at year-end (not in thousands) $ 101 $ 105 $ 102 Margin on disposition of merchandise as a percentage of proceeds from disposition of merchandise 33.2% 32.2% 35.5% Average annualized merchandise turnover 2.5x 2.4x 2.4x Average merchandise held for disposition per average location $ 128 $ 145 $ 133 Owned locations in operation -- Beginning of year 466 464 401 Acquired -- 5 61 Start-ups 1 4 7 Combined, closed or sold (4) (7) (5) End of year 463 466 464 Additional franchise locations at end of year 16 11 5 Total locations at end of year 479 477 469 Average number of owned locations in operation 464 465 441 ========= ========= ========= RENTAL OPERATIONS: Owned rental locations -- Rental agreements outstanding at end of year $ 10,059 $ 5,938 $ 1,231 Average balance per rental agreement at end of year (not in thousands) 964 1,036 834 Locations in operation at end of year 34 24 4 Average locations in operation for the year 30 11 4 Managed rental locations -- Locations in operation at end of year 9 15 14 Average locations in operation for the year 12 15 8 ========= ========= ========= CHECK CASHING OPERATIONS: Franchised and owned check cashing centers -- Centers in operation at end of year 132 137 137 Average centers in operation for the year 136 139 143 ========= ========= =========
6 7 FIVE YEAR SUMMARY OF SELECTED FINANCIAL DATA - -------------------------------------------------------------------------------- (Dollars in thousands, except per share data)
2000 1999 1998 1997 1996 --------- --------- --------- --------- --------- OPERATIONS -- YEARS ENDED DECEMBER 31 TOTAL REVENUE $ 363,714 $ 373,148 $ 340,981 $ 302,698 $ 280,968 Income from operations 26,007 34,666 34,001 38,335 35,536 --------- --------- --------- --------- --------- Income before income taxes 7,124 13,184 20,364 26,157 25,108 --------- --------- --------- --------- --------- Net income (loss) $ (1,730) $ 3,876 $ 12,624 $ 16,579 $ 15,684 ========= ========= ========= ========= ========= Net income (loss) per share: Basic $ (.07) $ .15 $ .51 $ .68 $ .55 Diluted $ (.07) $ .15 $ .48 $ .66 $ .54 --------- --------- --------- --------- --------- Dividends per share $ .05 $ .05 $ .05 $ .05 $ .05 --------- --------- --------- --------- --------- Weighted average shares: Basic 25,461 25,346 24,829 24,281 28,703 Diluted 25,461 26,229 26,226 25,158 28,806 ========= ========= ========= ========= ========= FINANCIAL POSITION -- at December 31 Loans $ 117,982 $ 125,349 $ 128,637 $ 112,240 $ 107,679 Merchandise held for disposition, net 58,817 64,419 65,417 53,468 48,777 Working capital 190,311 208,419 213,612 176,582 163,948 Total assets 378,233 417,623 410,823 340,254 324,032 Total debt 170,464 202,366 193,974 150,428 150,365 Stockholders' equity 178,458 186,940 187,444 167,296 152,977 Current ratio 6.9x 7.5x 7.9x 7.6x 7.6x Debt to equity ratio 95.5% 108.3% 103.5% 89.9% 98.3% ========= ========= ========= ========= ========= OWNED AND FRANCHISED LOCATIONS -- at December 31 Lending operations 479 477 469 402 382 Rental operations 34 24 4 -- -- Manned check cashing operations 132 137 137 145 152 ========= ========= ========= ========= =========
7 8 CONSOLIDATED BALANCE SHEETS - December 31 - -------------------------------------------------------------------------------- (In thousands, except share data)
2000 1999 --------- --------- ASSETS Current assets: Cash and cash equivalents $ 4,626 $ 6,186 Loans 117,982 125,349 Merchandise held for disposition, net 58,817 64,419 Inventory 4,419 2,801 Finance and service charges receivable 19,918 21,052 Other receivables and prepaid expenses 8,239 6,279 Income taxes recoverable 2,992 8,824 Deferred tax assets 5,455 5,548 --------- --------- Total current assets 222,448 240,458 Property and equipment, net 61,898 60,961 Intangible assets, net 87,504 90,901 Other assets 6,383 9,911 Investments in and advances to unconsolidated subsidiary -- 15,392 --------- --------- Total assets $ 378,233 $ 417,623 ========= ========= LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 21,974 $ 20,931 Customer deposits 3,931 4,131 Income taxes currently payable 379 1,587 Current portion of long-term debt 5,853 5,390 --------- --------- Total current liabilities 32,137 32,039 Deferred tax liabilities 3,027 1,668 Long-term debt 164,611 196,976 --------- --------- Commitments and contingencies (Note 16) Stockholders' equity: Common stock, $.10 par value per share, 80,000,000 shares authorized; 30,235,164 shares issued in 2000 and 1999 3,024 3,024 Paid in surplus 127,820 127,350 Retained earnings 102,326 105,331 Accumulated other comprehensive loss (8,487) (3,989) Notes receivable -- stockholders (5,755) (5,820) --------- --------- Less -- shares held in treasury, at cost (5,577,318 in 2000 218,928 225,896 and 5,055,170 in 1999) (40,470) (38,956) --------- --------- Total stockholders' equity 178,458 186,940 --------- --------- Total liabilities and stockholders' equity $ 378,233 $ 417,623 ========= =========
See notes to consolidated financial statements 8 9 CONSOLIDATED STATEMENTS OF OPERATIONS - Years Ended December 31 - -------------------------------------------------------------------------------- (In thousands, except per share data)
2000 1999 1998 --------- --------- --------- REVENUE Finance and service charges $ 114,711 $ 123,111 $ 117,078 Proceeds from disposition of merchandise 226,535 235,245 216,380 Other lending fees and royalties 1,233 129 42 Rental operations 17,354 10,253 3,346 Check cashing operations 3,881 4,410 4,135 --------- --------- --------- TOTAL REVENUE 363,714 373,148 340,981 --------- --------- --------- COSTS OF REVENUE Disposed merchandise 151,407 159,602 139,502 Rental operations 5,910 2,732 832 --------- --------- --------- NET REVENUE 206,397 210,814 200,647 --------- --------- --------- OPERATING EXPENSES Lending operations 123,710 121,242 113,696 Rental operations 10,954 4,952 1,389 Check cashing operations 1,258 3,510 7,182 Administration 26,397 27,019 26,270 Depreciation 13,713 14,810 13,935 Amortization 4,358 4,615 4,174 --------- --------- --------- Total operating expenses 180,390 176,148 166,646 --------- --------- --------- INCOME FROM OPERATIONS 26,007 34,666 34,001 Interest expense, net 13,095 13,690 13,557 Loss (gain) from disposal of assets (9,729) (2,224) -- Equity in loss of unconsolidated subsidiary 15,653 15,238 80 Loss (gain) from issuance of subsidiary's stock (136) (5,222) -- --------- --------- --------- Income before income taxes 7,124 13,184 20,364 Provision for income taxes 8,854 9,308 7,740 --------- --------- --------- NET INCOME (LOSS) $ (1,730) $ 3,876 $ 12,624 --------- --------- --------- Net income (loss) per share: Basic $ (.07) $ .15 $ .51 Diluted $ (.07) $ .15 $ .48 --------- --------- --------- Weighted average shares: Basic 25,461 25,346 24,829 Diluted 25,461 26,229 26,226 --------- --------- ---------
See notes to consolidated financial statements. 9 10 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY - Years Ended December 31 - -------------------------------------------------------------------------------- (In thousands, except share data)
Accumulated Common Stock Other ---------------------- Paid in Retained Comprehensive Comprehensive Shares Amount Surplus Earnings Income (Loss) Income (Loss) ----------- -------- --------- --------- ------------- -------------- Balance at December 31, 1997 30,235,164 $ 3,024 $ 122,155 $ 91,337 $ (2,458) Comprehensive income: Net income 12,624 $ 12,624 Other comprehensive income -- Foreign currency translation adjustments 44 44 --------- Comprehensive income $ 12,668 --------- Dividends declared -- $.05 per share (1,239) Treasury shares purchased Treasury shares reissued 3,864 Tax benefit from exercise of option shares 596 Change in notes receivable -- stockholders ----------- -------- --------- --------- --------- --------- Balance at December 31, 1998 30,235,164 3,024 126,615 102,722 (2,414) Comprehensive income: Net income 3,876 $ 3,876 Other comprehensive loss -- Foreign currency translation adjustments (1,575) (1,575) --------- Comprehensive income $ 2,301 --------- Dividends declared -- $.05 per share (1,267) Treasury shares purchased Treasury shares reissued (218) Tax benefit from exercise of option shares 953 Change in notes receivable -- stockholders ----------- -------- --------- --------- --------- --------- Balance at December 31, 1999 30,235,164 3,024 127,350 105,331 (3,989) Comprehensive loss: Net loss (1,730) $ (1,730) Other comprehensive loss -- Foreign currency translation adjustments (4,498) (4,498) --------- Comprehensive loss $ (6,228) --------- Dividends declared -- $.05 per share (1,275) Treasury shares purchased Treasury shares reissued (756) Tax benefit from exercise of option shares 1,226 Change in notes receivable -- stockholders ----------- -------- --------- --------- --------- --------- BALANCE AT DECEMBER 31, 2000 30,235,164 $ 3,024 $ 127,820 $ 102,326 $ (8,487) ----------- -------- --------- --------- --------- --------- Notes Receivable- Treasury Stock Stock- --------------------- holders Shares Amount ----------- --------- ---------- Balance at December 31, 1997 $ (2,362) 5,812,519 $ (44,400) Comprehensive income: Net income Other comprehensive income -- Foreign currency translation adjustments Comprehensive income Dividends declared -- $.05 per share Treasury shares purchased 27,475 (380) Treasury shares reissued (725,776) 5,540 Tax benefit from exercise of option shares Change in notes receivable -- stockholders (901) -------- --------- ---------- Balance at December 31, 1998 (3,263) 5,114,218 (39,240) Comprehensive income: Net income Other comprehensive loss -- Foreign currency translation adjustments Comprehensive income Dividends declared -- $.05 per share Treasury shares purchased 485,759 (3,876) Treasury shares reissued (544,807) 4,160 Tax benefit from exercise of option shares Change in notes receivable -- stockholders (2,557) -------- --------- ---------- Balance at December 31, 1999 (5,820) 5,055,170 (38,956) Comprehensive loss: Net loss Other comprehensive loss -- Foreign currency translation adjustments Comprehensive loss Dividends declared -- $.05 per share Treasury shares purchased 1,129,223 (6,170) Treasury shares reissued (607,075) 4,656 Tax benefit from exercise of option shares Change in notes receivable -- stockholders 65 -------- --------- ---------- BALANCE AT DECEMBER 31, 2000 $ (5,755) 5,577,318 $ (40,470) -------- --------- ----------
See notes to consolidated financial statements. 10 11 CONSOLIDATED STATEMENTS OF CASH FLOWS - Years Ended December 31 - -------------------------------------------------------------------------------- (In thousands)
2000 1999 1998 --------- --------- --------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ (1,730) $ 3,876 $ 12,624 Adjustments to reconcile net income (loss) to net cash provided by operating activities: Depreciation 13,713 14,810 13,935 Amortization 4,358 4,615 4,174 Loss (gain) from disposal of assets (9,729) (2,224) -- Equity in loss of unconsolidated subsidiary 15,653 15,238 80 Loss (gain) from issuance of subsidiary's stock (136) (5,222) -- Changes in operating assets and liabilities -- Merchandise held for disposition and inventory 4,477 254 (7,829) Finance and service charges receivable 513 (1,792) (1,572) Other receivables and prepaid expenses 174 (1,541) (4,386) Accounts payable and accrued expenses (5,178) 3,230 3,348 Customer deposits, net (200) 29 45 Current income taxes 5,993 (2,125) (5,748) Deferred taxes, net 3,163 5,540 5,885 --------- --------- --------- Net cash provided by operating activities 31,071 34,688 20,556 --------- --------- --------- CASH FLOWS FROM INVESTING ACTIVITIES Loans forfeited and transferred to merchandise held for disposition 135,525 145,664 134,414 Loans repaid or renewed 275,566 296,492 291,371 Loans made, including loans renewed (408,091) (439,970) (435,341) --------- --------- --------- Net decrease (increase) in loans 3,000 2,186 (9,556) --------- --------- --------- Acquisitions, net of cash acquired (2,608) (9,989) (23,090) Purchases of property and equipment (21,059) (21,067) (22,412) Proceeds from sales of property and equipment -- 5,831 1,142 Proceeds from property insurance claims 20,685 -- -- Cash of subsidiary at date of de-consolidation -- (4,795) -- Investment in and advances to unconsolidated subsidiary -- (10,654) (120) --------- --------- --------- Net cash provided (used) by investing activities 18 (38,488) (54,036) --------- --------- --------- CASH FLOWS FROM FINANCING ACTIVITIES Net (payments) borrowings under bank lines of credit (25,912) 10,868 45,670 Proceeds from capital lease obligations 2,115 3,257 2,183 Payments on notes payable, capital leases and other obligations (5,571) (4,755) (10,978) Change in notes receivable -- stockholders 845 (80) (46) Net proceeds from reissuance of treasury shares 3,419 1,465 1,512 Treasury shares purchased (6,170) (3,876) (349) Dividends paid (1,275) (1,267) (1,239) --------- --------- --------- Net cash (used) provided by financing activities (32,549) 5,612 36,753 --------- --------- --------- EFFECT OF EXCHANGE RATE CHANGES ON CASH (100) (43) 25 --------- --------- --------- CHANGE IN CASH AND CASH EQUIVALENTS (1,560) 1,769 3,298 CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,186 4,417 1,119 --------- --------- --------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 4,626 $ 6,186 $ 4,417 --------- --------- --------- SUPPLEMENTAL DISCLOSURES NONCASH INVESTING AND FINANCING ACTIVITIES: Loans to stockholders for exercise of stock options $ 481 $ 2,336 $ 730 Purchase transactions -- Liabilities assumed and notes payable issued -- 12 8,815 Treasury shares reissued -- -- 7,131 ========= ========= =========
See notes to consolidated financial statements. 11 12 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - -------------------------------------------------------------------------------- 1. Nature of the Company HISTORY AND OPERATIONS o Cash America International, Inc. ("the Company") is a diversified provider of specialty financial services to individuals in the United States, United Kingdom, and Sweden. The Company offers secured non-recourse loans, commonly referred to as pawn loans, to individuals through its lending operations. A related but secondary activity of the lending operations is the disposition of merchandise, primarily collateral from unredeemed pawn loans. As of December 31, 2000, the Company's lending operations consisted of 479 lending units, including 410 owned units and 16 franchised units in the United States, and 53 owned units in Europe. The Company also provides rental of tires and wheels through its consolidated subsidiary, Rent-A-Tire, Inc. ("Rent-A-Tire"). At December 31, 2000, Rent-A-Tire owned and operated 34 tire rental stores and managed 9 additional stores under the Rent-A-Tire name. During 1999, the Company restructured its check cashing operations. As a result of the restructuring and a change in corporate name, the automated check cashing machine operations are conducted in innoVentry Corp. ("innoVentry"). The machine functions have been enhanced and it is now branded as the RPM(TM) Cash Management Machine ("RPM"). The Company's voting interest in innoVentry was 37.9% at December 31, 2000. The Company retained its manned check cashing operations in a new wholly owned, consolidated subsidiary, Mr. Payroll Corporation ("Mr. Payroll"). At December 31, 2000, Mr. Payroll had 125 franchised and 7 owned check cashing centers in operation. 2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES BASIS OF PRESENTATION o The consolidated financial statements include the accounts of the Company's majority owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation. Through March 9, 1999, innoVentry was wholly owned and its assets and liabilities and the results of its operations were included in the consolidated financial statements. Effective as of the close of business on March 9, 1999, innoVentry sold, in a private placement, newly issued shares of its convertible Series A voting preferred stock (the "Series A preferred stock") and common stock and the Company began using the equity method of accounting for its investment and its share of the results of innoVentry's operations after March 9, 1999 (see Note 3). Through January 31, 1998, the Company had a 49% ownership interest in Express Rent A Tire, Ltd. ("Express") and used the equity method of accounting. Effective February 1, 1998, the Company increased its ownership interest in Express to 99.9% and reorganized it into Rent-A-Tire, a new corporation (see Note 4). The acquisition of additional interests was accounted for as a purchase and, accordingly, the assets and liabilities of Rent-A-Tire and the results of its operations have been included in the consolidated financial statements since February 1, 1998. USE OF ESTIMATES o The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions which affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the dates of the financial statements and the reported amounts of revenue and expenses during the reporting periods. Actual results could differ from those estimates. FOREIGN CURRENCY TRANSLATION o The functional currencies for the Company's foreign subsidiaries are the local currencies. The assets and liabilities of those subsidiaries are translated into U.S. dollars at the exchange rates in effect at each balance sheet date, and resulting adjustments are accumulated in other comprehensive income (loss) as a separate component of stockholders' equity. Revenue and expenses are translated at the monthly average exchange rates occurring during each year. CASH AND CASH EQUIVALENTS o The Company considers cash on hand in units, deposits in banks and short-term marketable securities with original maturities of 90 days or less as cash and cash equivalents. REVENUE RECOGNITION o Pawn loans ("loans") are made on the pledge of tangible personal property. The Company accrues finance and service charges revenue on all loans that the Company deems collectible based on historical loan redemption statistics. For loans not repaid, the carrying value of the forfeited collateral ("merchandise held for disposition") is stated at the lower of cost (cash amount loaned) or market. Revenue is recognized at the time of disposition of merchandise. Interim customer payments for layaway sales are recorded as deferred revenue and subsequently recognized as revenue during the period in which final payment is received. Tire and wheel rentals are paid on a weekly basis in advance and revenue is recognized in the period earned. Rental payments received prior to the period due are recorded as deferred revenue. Customers may return the rented tires and wheels at any time and have no obligation to complete the rental agreement. Rent-A-Tire has also entered into agreements to operate and manage stores for unrelated investors. The investors own the stores and incur all non-personnel costs to operate them. Management fees earned by Rent-A-Tire are recorded in revenue over the life of the agreement. In addition, Rent-A-Tire receives compensation for its efforts in constructing and opening each store that it manages for a third party. The Company records fees derived from its owned check cashing locations in the period in which the service is provided. Royalties derived from franchise locations are recorded on the accrual basis. MERCHANDISE HELD FOR DISPOSITION AND COST OF DISPOSED MERCHANDISE o Merchandise held for disposition includes merchandise acquired from unredeemed loans, merchandise purchased directly from the public and merchandise purchased from vendors. Merchandise held for disposition is stated at the lower of cost (specific identification) or market. The Company provides an allowance for shrinkage and valuation based on management's evaluation of the merchandise. The allowance deducted from the carrying value of merchandise held for disposition amounted to $2,012,000 and $2,008,000 at December 31, 2000 and 1999, respectively. The cost of merchandise, computed on the specific identification basis, is removed from merchandise held for disposition and recorded as a cost of revenue at the time of disposition. PROPERTY AND EQUIPMENT o Property and equipment are recorded at cost. Depreciation expense is generally provided on a straight-line basis, using estimated useful lives of 10 to 30 years for buildings and 2 to 10 years for equipment and leasehold improvements. The cost of property retired or sold and the related accumulated depreciation is removed from the accounts, and any resulting gain or loss is recognized in the statement of operations. SOFTWARE DEVELOPMENT COSTS o The Company develops computer software for internal use. Internal and external costs incurred for the development of computer applications, as well as for upgrades and enhancements that result in additional functionality of the applications, are capitalized. Internal and external training and maintenance costs are charged to expense as incurred. When an 12 13 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- application is placed in service, the Company begins amortizing the related capitalized software costs using the straight-line method and an estimated useful life varying from 3 to 5 years. INTANGIBLE ASSETS o Approximately 94% of net intangible assets consists of excess purchase price over net assets acquired. Amortization is recorded on a straight-line basis over the expected periods of benefit, generally 15 to 40 years. Accumulated amortization of intangible assets was $26,650,000 and $24,364,000 at December 31, 2000 and 1999, respectively. The costs of start-up activities and organization costs are charged to expense as incurred. LONG-LIVED ASSETS o An evaluation of property and equipment and intangible assets recoverability is performed whenever the facts and circumstances indicate that the carrying value may be impaired. An impairment loss is recognized if the future undiscounted cash flows associated with the asset exceed the asset's corresponding carrying value. The amount of the impairment loss, if any, is the excess of the asset's carrying value over its estimated fair value. INCOME TAXES o The provision for income taxes is based on income before income taxes as reported for financial statement purposes. Deferred income taxes are provided in accordance with the assets and liability method of accounting for income taxes to recognize the tax effects of temporary differences between financial statement and income tax accounting. Deferred federal income taxes are not provided on the undistributed earnings of foreign subsidiaries to the extent the Company intends to indefinitely reinvest such earnings. HEDGING AND DERIVATIVES ACTIVITY o As a policy, the Company does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes. The Company does use derivative financial instruments, such as interest rate cap agreements, for the purpose of managing interest rate exposures that exist from ongoing business operations. The costs of the agreements are recognized as adjustments to interest expense during the terms of the agreements and any benefits received under the terms of the agreements are recognized in the periods of the benefits. The Company may also periodically enter into forward sale contracts with a major bullion bank to sell fine gold that is produced in the normal course of business from the Company's liquidation of forfeited gold merchandise. In addition, the Company transfers funds between currencies from time-to-time and may concurrently enter into short-term currency swaps to eliminate the risk of currency fluctuations. ADVERTISING COSTS o Costs of advertising are expensed at the time of first occurrence. Advertising expense was, $5,321,000, $3,671,000 and $3,685,000 for the years ended December 31, 2000, 1999 and 1998, respectively. YEAR 2000 EXPENSES o The costs of identifying, correcting, reprogramming and testing of computer systems for Year 2000 compliance were recorded as expenses when incurred. STOCK-BASED COMPENSATION o The Company applies the intrinsic value based method of accounting for the costs of its stock-based employee compensation plans and, accordingly, discloses the pro forma effect on net income and net income per share as if the fair value based method of accounting for the cost of such plans had been applied. ISSUANCE OF INVESTEE STOCK o In accordance with SEC Staff Accounting Bulletin Topic 5H, the Company has elected to record, in income, non-operating gains or losses arising from subsidiary or investee issuances of its own stock. When an investee sells additional shares to parties other than the Company, the Company's percentage ownership in the investee decreases. In the event the selling price per share is more or less than the Company's average carrying amount per share, the Company records a gain or loss in income. When an investee sells additional shares to the Company and third parties, the Company's percentage ownership may change. In comparing the Company's new carrying amount to its resulting proportionate share of the investee's equity, the Company records a gain or loss in income. Applicable deferred income tax expenses or benefits are recognized on such gains or losses. The Company adopted this accounting method for the March 1999 transaction that resulted in innoVentry's de-consolidation (see Note 3). NET INCOME PER SHARE o Basic net income per share is computed by dividing net income by the weighted average number of shares outstanding during the year. Diluted net income per share is calculated by giving effect to the potential dilution that could occur if securities or other contracts to issue common shares were exercised and converted into common shares during the year. The reconciliation of basic and diluted weighted average common shares outstanding for the three years ended December 31, 2000, follows (in thousands):
2000 1999 1998 ------ ------ ------ Weighted average shares -- Basic 25,461 25,346 24,829 Effect of shares applicable to stock option plans 307 843 1,368 Effect of shares applicable to nonqualified savings plan 49 40 29 Antidilutive effect resulting from net loss (356) -- -- ------ ------ ------ Weighted average shares -- Diluted 25,461 26,229 26,226 ====== ====== ======
NEW ACCOUNTING STANDARDS o In June 1998, the Financial Accounting Standards Board ("FASB") issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") that, as amended, is required to be adopted by the Company for the year ended December 31, 2001. SFAS 133, as amended, establishes new accounting and reporting standards for derivative instruments and hedging activities. It requires that an entity recognize all derivative instruments as either assets or liabilities on the balance sheet and measure them at fair value. The accounting for the gains or losses resulting from changes in the values of the derivatives will depend on the intended use of the derivatives and whether they qualify for hedge accounting treatment. The transition adjustments resulting from adopting SFAS 133 will be reported in net income or in accumulated other comprehensive income (loss) in stockholders' equity, as appropriate, as the effect of a change in accounting principle and presented in a manner similar to the cumulative effect of a change in accounting principle. The Company currently believes its only derivative instruments are interest rate caps. The Company does not expect that the transition effects from the adoption of SFAS 133 will have a material effect on its financial position and results of operations. RECLASSIFICATIONS o Certain amounts in the consolidated financial statements for 1999 and 1998 have been reclassified to conform to the presentation format adopted in 2000. These reclassifications have no effect on the net income previously reported. 13 14 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- 3. INVESTMENT IN INNOVENTRY In March 1999, Wells Fargo Cash Centers, Inc. ("Cash Centers"), a wholly owned subsidiary of Wells Fargo Bank, N.A. ("Wells Fargo"), contributed $20,975,000 of cash and operating assets valued at $6,025,000 to innoVentry and received newly issued shares of innoVentry's Series A preferred stock representing 45% of innoVentry's voting interest. Wells Fargo also agreed to provide innoVentry a revolving credit facility, equipment lease financing, and cash for use in its RPMs. The Company exchanged all of innoVentry's then outstanding common stock for newly issued shares of Series A preferred stock representing 45% of innoVentry's voting interest and immediately assigned 10% of its shares to the former owners of innoVentry's predecessor in consideration for the termination of certain option rights. Additionally, certain members of innoVentry's newly constituted management subscribed for newly issued shares of common stock of innoVentry, representing the remaining 10% of its voting interest. Following the transactions, innoVentry was de-consolidated and the Company began using the equity method of accounting for its investment and its share of the results of innoVentry's operations after March 9, 1999. In conjunction with these transactions, innoVentry issued a $2,900,000 note payable to the Company bearing interest at 7%. The principal and accrued interest of $357,000 is outstanding as of December 31, 2000. In October 1999, the Company, Cash Centers, and a third party each purchased $10,000,000 of innoVentry's newly issued convertible Series B voting preferred stock. After the issuance of Series A and B preferred stock and other common stock sold by innoVentry in 1999 and 2000, the Company's voting interest at December 31, 2000, was 37.9%. The Company recognized pre-tax gains of $136,000 and $5,222,000 for the years ended December 31, 2000, and 1999, respectively, as a result of issuances of innoVentry preferred and common stock. Summarized financial information for innoVentry at December 31, 2000, and 1999, and for the years ended December 31, 2000, and 1999 follows (in thousands):
2000 1999 ---------- ---------- Total current assets $ 19,810 $ 32,837 Property, equipment, computer software and leasehold improvements, net 67,140 35,867 Non-current assets 4,484 3,035 ---------- ---------- Total assets $ 91,434 $ 71,739 ========== ========== Total current liabilities $ 145,066 $ 34,140 Non-current liabilities 31,365 8,540 Total stockholders' (deficit) equity (84,997) 29,059 ---------- ---------- Total liabilities and equity $ 91,434 $ 71,739 ========== ========== Total net revenue $ 16,574 $ 9,117 Expenses including net interest expense (140,364) (52,946) Income tax (expense) benefit (21) 2,787 ---------- ---------- Net loss $ (123,811) $ (41,042) ========== ==========
Results for 1999 include $2,515,000 of net loss recorded in the Company's consolidated statement of income prior to de-consolidation on March 9, 1999. No dividends were received from innoVentry during the period from March 10, 1999 through December 31, 2000. As of June 30, 2000, the Company's proportionate share of innoVentry's losses exceeded the carrying amount of its investment and advances. The Company has no obligation to provide financial support to innoVentry. Accordingly, it suspended the recording of its equity in the losses and the net carrying value of its investment and advances is zero at December 31, 2000. In February 2001, innoVentry completed a private placement of newly issued senior convertible Series C voting preferred stock (the "Series C preferred stock") and re-negotiated its financing arrangements with Wells Fargo (see Note 17). 4. ACQUISITIONS During 2000, Rent-A-Tire acquired 6 tire rental stores that it previously managed, in purchase transactions for $2,608,000 of cash. During 1999, the Company acquired 5 pawnshops in purchase transactions for an aggregate cash consideration of $4,322,000, and Rent-A-Tire acquired 13 tire rental stores, that it previously managed, in purchase transactions for $5,667,000 of cash. The excess of the aggregate purchase price over the aggregate fair market value of net assets acquired of approximately $1,836,000 and $6,092,000 during 2000 and 1999, respectively, is being amortized over periods ranging from 15 to 40 years. The related assets and liabilities and results of operations have been included in the Company's financial statements from the dates of acquisition. In September 1995, the Company acquired a 49% interest in Express and also acquired an option for $1,000,000 to purchase an additional 41% interest. Effective February 1, 1998, in a series of transactions accounted for as a purchase, the Company exercised its option and increased its ownership interest in Express from 49% to 90%. In conjunction with the reorganization of Express into Rent-A-Tire, the Company also acquired an additional 9.9% ownership interest. The aggregate purchase price of the additional 41% interest was to be paid in four annual installments in an amount equal to .5835 times the defined after-tax net income of Express for the 1997 fiscal year and Rent-A-Tire for the 1998, 1999 and 2000 fiscal years, respectively. No consideration was payable based on Express' results of operations in 1997 and Rent-A-Tire's results of operations in 1998, 1999 and 2000. The sellers have an option to repurchase 9.9% of Rent-A-Tire for a nominal amount. The option is exercisable upon sixty days written notice. 5. PROPERTY AND EQUIPMENT Major classifications of property and equipment at December 31, 2000 and 1999 were as follows (in thousands):
2000 1999 ---------- ---------- Land $ 2,605 $ 1,838 Buildings and leasehold improvements 68,146 69,190 Furniture, fixtures and equipment 47,771 46,691 Computer software 22,082 17,739 ---------- ---------- Total 140,604 135,458 Less -- accumulated depreciation 78,706 74,497 ---------- ---------- Property and equipment -- net $ 61,898 $ 60,961 ========== ==========
On March 28, 2000, a tornado severely damaged the Company's corporate headquarters in Fort Worth, Texas. Headquarters operations were relocated to temporary facilities. The Company's operating locations were not affected. The Company owns the building and restoration began in the fourth quarter of 2000. The Company's insurance coverage provides proceeds for repairs to the building; replacement of furniture, improvements, and equipment; recovery of losses resulting from business interruption; and recovery of other general expenses. The Company recognized a gain of $9,729,000 from the settlement of the insurance claims. Income tax expense of $3,405,000 related to the gain is included in the provision for income taxes. At December 31, 2000, $790,000 of insurance claim proceeds receivable is included in other receivables and prepaid expenses in the accompanying consolidated balance sheet. During 1999, under sale-leaseback agreements, the Company sold certain buildings and improvements utilized in lending operations with a net book value of $4,201,000 for $5,831,000 of cash. Annual payments under the operating 14 15 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- lease agreements are $687,000. The gain of $1,630,000 is being amortized over the 15-year basic lease term. At December 31, 2000, property and equipment included $7,556,000 of cost and $1,613,000 of accumulated depreciation relating to assets held under capital leases. 6. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31, 2000 and 1999 were as follows (in thousands):
2000 1999 ---------- --------- Trade accounts payable $ 7,435 $ 5,382 Accrued taxes, other than income taxes 3,988 4,291 Accrued payroll and fringe benefits 6,901 5,594 Accrued interest payable 1,517 2,010 Other accrued liabilities 2,133 3,654 ---------- --------- Total $ 21,974 $ 20,931 ========== =========
7. LONG-TERM DEBT The Company's long-term debt instruments and balances outstanding at December 31, 2000 and 1999 were as follows (in thousands):
2000 1999 ---------- ---------- U.S. Line of Credit up to $150,000 due June 30, 2003 $ 84,000 $ 101,000 U.K. Line of Credit up to L15,000 due April 30, 2002 7,876 15,346 Swedish Lines of Credit up to SEK 215,000 9,551 13,528 8.33% senior unsecured notes due 2003 12,857 17,143 8.14% senior unsecured notes due 2007 20,000 20,000 7.10% senior unsecured notes due 2008 30,000 30,000 Capital lease obligations payable 5,780 4,849 6.25% subordinated unsecured notes due 2004 400 500 ---------- ---------- 170,464 202,366 Less current portion 5,853 5,390 ---------- ---------- Total long-term debt $ 164,611 $ 196,976 ========== ==========
Interest on the U.S. Line of Credit is charged, at the Company's option, at either a margin over LIBOR (1.25% at December 31, 2000) or at the Agent's base rate. The Company pays a fee of .25% per annum on the unused portion. The Company has an interest rate cap agreement totaling $20,000,000 that expires in January 2003 and limits the maximum LIBOR rate to 7% and an interest rate cap agreement totaling $30,000,000 that expires in February 2004 and limits the maximum LIBOR rate to 5.5%. The interest rate on the line of credit at December 31, 2000, is 7.72% after taking into account the effects of the interest rate cap agreements. The L15,000,000 U.K. Line of Credit (approximately $22,397,000 as of December 31, 2000) bears interest at the Bank's cost of funds plus a margin of 60 basis points for borrowings less than 14 days, and a margin of 55 basis points for borrowings of 14 days or more. The Company pays a fee of .25% per annum on the unused portion. The interest rate at December 31, 2000, is 6.37%. The Company has an SEK 185,000,000 (approximately $19,667,000 as of December 31, 2000) line of credit maturing September 30, 2002. Interest is charged at a margin over the Stockholm InterBank Offered Rate ("STIBOR") (.75% at December 31, 2000). The Company pays a fee of .25% per annum on the unused portion. The interest rate at December 31, 2000, is 5.15%. The Company also has an SEK 30,000,000 (approximately $3,189,000 as of December 31, 2000) line of credit with a commercial bank maturing June 30, 2002. Interest is charged at the Bank's base funding rate plus 1.0%. The Company pays a fee of .375% per annum on the unused portion. The interest rate at December 31, 2000, is 7.30%. As of December 31, 2000, amounts outstanding under the lines of credit were SEK 86,000,000 (approximately $9,142,000), and SEK 3,847,000 (approximately $409,000), respectively. The Company has an interest rate cap agreement for SEK 100,000,000 (approximately $10,631,000 as of December 31, 2000) that expires in August 2003 and limits the maximum STIBOR rate to 5.5%. All debt instruments are unsecured and governed by agreements that have provisions that require the Company to maintain certain financial ratios and limit specific payments and equity distributions. Annual maturities of long-term debt (including capital lease obligations) through 2005 are: 2001 - $5,853,000; 2002 - $18,412,000; 2003 - $98,439,000; 2004 - $18,618,000; and 2005 - $8,286,000. Cash payments for interest on long-term debt were $14,402,000, $13,991,000 and $12,576,000 in 2000, 1999 and 1998, respectively. 8. INCOME TAXES The components of the Company's deferred tax assets and liabilities as of December 31, 2000 and 1999 are as follows (in thousands):
2000 1999 ---------- ---------- Deferred tax assets: Provision for valuation of merchandise held for disposition $ 421 $ 473 Tax over book accrual of finance and service charges 4,249 4,655 Property and equipment -- 2,461 Deferred compensation 585 475 Investment in unconsolidated subsidiary 8,229 2,727 Net operating loss carryforwards -- 16 Other 1,279 1,227 ---------- ---------- Total deferred tax assets 14,763 12,034 Valuation allowance for deferred tax assets (7,919) (2,604) ---------- ---------- Deferred tax assets, net $ 6,844 $ 9,430 ========== ========== Deferred tax liabilities: Amortization of acquired intangibles $ 1,670 $ 1,338 Deferred installment gain 514 777 Foreign tax reserves 1,170 1,066 Property and equipment 453 -- Other 609 799 ---------- ---------- Total deferred tax liabilities 4,416 3,980 ---------- ---------- Net deferred tax assets $ 2,428 $ 5,450 ========== ========== Balance sheet classification: Current deferred tax assets $ 5,455 $ 5,548 Non-current deferred tax liabilities (3,027) (1,668) Included in non-current other assets -- 1,570 ---------- ---------- Net deferred tax assets $ 2,428 $ 5,450 ========== ==========
15 16 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- The components of the provision for income taxes and the income to which it relates for the years ended December 31 are shown below (in thousands):
2000 1999 1998 ------- -------- -------- Income (loss) before income taxes: United States entities $ (102) $ 2,405 $ 10,531 Foreign entities 7,226 10,779 9,833 ------- ------- -------- $ 7,124 $13,184 $ 20,364 ======= ======= ======== Current provision (benefit): Federal $ 3,218 $ 1,006 $ (2,658) Foreign 2,028 2,899 2,797 State and local 347 197 447 ------- -------- -------- $ 5,593 $ 4,102 $ 586 ======= ======== ======== Deferred provision (benefit): Federal $ 3,051 $ 4,654 $ 6,929 Foreign 265 430 221 State and local (55) 122 4 ------- -------- -------- $ 3,261 $ 5,206 $ 7,154 ------- -------- -------- Total provision $ 8,854 $ 9,308 $ 7,740 ======= ======== ========
The effective tax rate differs from the federal statutory rate for the following reasons (in thousands):
2000 1999 1998 --------- --------- --------- Tax provision computed at the statutory federal income tax rate $ 2,493 $ 4,614 $ 7,127 Non-deductible amortization of intangible assets 654 663 617 Taxes provided upon de-consolidation of subsidiary -- 1,763 -- Foreign tax rate difference (439) (620) (621) Valuation allowance 5,457 2,172 -- Other 689 716 617 --------- --------- --------- Total provision $ 8,854 $ 9,308 $ 7,740 --------- --------- --------- Effective tax rate 124.3% 70.6% 38.0% ========== ========= =========
As of December 31, 2000, $290,000 of the valuation allowance for deferred tax assets relates to preacquisition deductible temporary differences from the 1998 acquisition of Doc Holliday's Pawnbrokers and Jewellers, Inc. ("Doc Holliday's"). The tax benefits realized from these differences will be utilized to reduce goodwill from the Doc Holliday's acquisition. Such reductions of goodwill were $83,000 and $520,000 in 2000 and 1999, respectively. Domestic income taxes have not been provided on undistributed earnings of foreign subsidiaries to the extent that it is the Company's intent to reinvest these earnings overseas indefinitely. Upon distribution of accumulated earnings of all foreign subsidiaries, the Company would be subject to U.S. income taxes (net of foreign tax credits) of approximately $1,000,000. Net cash income tax refunds received in 2000 were $390,000. Cash payments for income taxes were $6,628,000 and $7,599,000 in 1999 and 1998, respectively. 9. EMPLOYEE BENEFIT PLANS The Cash America International, Inc. 401(k) Savings Plan is open to substantially all domestic employees that meet specific length of employment and age requirements. The Cash America International, Inc. Nonqualified Savings Plan is available to certain members of management. Participants may contribute up to 22% of their earnings to these plans. The Company makes matching contributions of 50% of each participant's contributions, based on participant contributions of up to 5% of compensation. Company contributions vest at the rate of 20% each year after one year of service; thus a participant is 100% vested after five years of service. The Company provides benefits under separate retirement plans for eligible employees in foreign countries. Total Company contributions to retirement plans were $674,000, $700,000 and $681,000 in 2000, 1999 and 1998, respectively. 10. STOCKHOLDERS' EQUITY In October 2000, the Board of Directors authorized the purchase of up to 1,000,000 shares of the Company's common stock and terminated an open market purchase authorization established in 1999. During 2000, the Company purchased 700,900 shares for an aggregate amount of $3,254,000 under the 2000 authorization and 415,100 shares for an aggregate amount of $2,841,000 under the 1999 authorization. In 1999, the Company purchased 158,300 shares for an aggregate amount of $1,339,000 under the 1999 authorization and 320,000 shares for an aggregate amount of $2,470,000 authorized in 1997. The Company also purchased 13,223 shares of the Company's common stock for $75,000, 7,459 shares for $67,000 and 25,693 shares for $349,000 during 2000, 1999 and 1998, respectively, for the Nonqualified Savings Plan. The Company received 1,782 shares of its common stock valued at $31,000 during 1998 as partial payment for shares issued under stock option plans. The Board of Directors adopted an officer stock loan program (the "Program") in 1994 and modified it in 1996 and 1999. Program participants may utilize loan proceeds to acquire and hold the Company's and affiliates' common stock by means of stock option exercises or otherwise. Common stock held as a result of the loan must be pledged to the Company in support of the obligation. Interest accrues at the "applicable Federal rate" as published periodically by the Internal Revenue Service, is payable annually and may be paid with additional loan proceeds. Each loan has a one-year maturity and is renewable for successive one-year terms subject to the discretion of the Executive Compensation Committee of the Board of Directors. Amounts due from officers under the Program are reflected as a reduction of stockholders' equity in the accompanying consolidated balance sheets. 11. STOCK PURCHASE RIGHTS In August 1997, the Board of Directors declared a dividend distribution of one Common Stock Purchase Right (the "Right") for each outstanding share of its common stock. The Rights become exercisable in the event a person or group acquires 15% or more of the Company's common stock or announces a tender offer, the consummation of which would result in ownership by a person or group of 15% or more of the common stock. If any person becomes a 15% or more shareholder of the Company, each Right (subject to certain limits) will entitle its holder (other than such person or members of such group) to purchase, for $37.00, the number of shares of the Company's common stock determined by dividing $74.00 by the then current market price of the common stock. The rights will expire on August 5, 2007. 12. STOCK OPTIONS Under various plans (the "Plans") it sponsors, the Company is authorized to issue 7,100,000 shares of Common Stock pursuant to "Awards" granted as incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended) and nonqualified stock options. Stock options granted under the plans have contractual terms of five to 15 years and have an exercise price equal to or greater than the fair market value of the stock at grant date. Stock options granted vest over periods ranging from 1 to 7 years. However, the 7-year vesting periods and certain of the 5-year vesting periods accelerate if specified share price appreciation criteria are met. 16 17 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- A summary of the Company's stock option activity for the three years ending December 31, 2000 is as follows (shares in thousands):
2000 1999 1998 --------------------- ---------------------- ------------------- WEIGHTED WEIGHTED WEIGHTED AVERAGE AVERAGE AVERAGE EXERCISE EXERCISE EXERCISE SHARES PRICES SHARES PRICES SHARES PRICES ------ -------- ------ --------- ------ --------- Outstanding at beginning of year 3,729 $ 7.59 4,228 $ 7.41 4,434 $ 7.40 Granted 977 10.11 137 13.78 87 13.80 Exercised 607 6.42 545 7.23 250 9.07 Forfeited 103 10.23 84 10.98 43 8.94 Expired 2 7.13 7 7.75 -- -- ------ ------ ------ ------ ------ ------ Outstanding at end of year 3,994 $ 8.32 3,729 $ 7.59 4,228 $ 7.41 ------ ------ ------ ------ ------ ------ Exercisable at end of year 2,618 $ 7.13 2,947 $ 6.83 3,427 $ 6.85 ------ ------ ------ ------ ------ ------ Weighted average fair value of options granted $ 6.32 $ 7.36 $ 5.61 ====== ====== ======
The fair value of each stock option granted is estimated on the date of grant using the Black-Scholes option-pricing model using the following weighted average assumptions:
2000 1999 1998 ---- ---- ---- Expected term (years) 7.3 8.8 8.0 Risk-free interest rate 6.70% 5.29% 5.50% Expected dividend yield 0.42% 0.50% 0.61% Expected volatility 49.2% 36.8% 27.3%
Stock options outstanding and exercisable as of December 31, 2000 are summarized below (shares in thousands):
OPTIONS OUTSTANDING OPTIONS EXERCISABLE ------------------------------------------------------------------------ --------------------------------- WEIGHTED WEIGHTED AVERAGE YEARS WEIGHTED RANGE OF NUMBER AVERAGE OF REMAINING NUMBER AVERAGE EXERCISE EXERCISE PRICES OUTSTANDING EXERCISE PRICE CONTRACTUAL LIFE EXERCISABLE PRICE ---------------- ----------- -------------- ---------------- ----------- ---------------- $ 5.63 to $ 7.00 1,994 $ 6.33 3.8 1,994 $ 6.33 $ 7.01 to $10.81 1,807 9.92 7.1 576 9.24 $10.82 to $16.69 193 13.87 7.8 48 15.38 ----- ------- --- ----- -------- $ 5.63 to $16.69 3,994 $ 8.32 5.5 2,618 $ 7.13 ===== ======= === ===== ========
The Company applies the intrinsic value based method of accounting for the Plans and, accordingly, no compensation cost has been recognized. If compensation costs for the Company's stock options had been determined on the fair value based method of accounting, the Company's net income (loss) and net income (loss) per share basic and diluted for each of the years ended December 31 would have been reported as follows (in thousands except per share amounts):
2000 1999 1998 --------- --------- ---------- Net income (loss) As reported $ (1,730) $ 3,876 $ 12,624 Pro forma (3,530) 3,076 11,989 --------- --------- ---------- Net income (loss) per share Basic: As reported $ (.07) $ .15 $ .51 Pro forma (.14) .12 .48 Diluted: As reported (.07) .15 .48 Pro forma (.14) .12 .46 --------- --------- ----------
The effects of applying the fair value based method of accounting in the pro forma amounts above are not indicative of future effects and its application does not apply to awards granted prior to 1995. 17 18 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- 13. OPERATING SEGMENT INFORMATION The Company has two reportable operating segments in the lending industry and one each in the check cashing and rental industries. The United States and foreign lending segments offer secured non-recourse pawn loans to individuals. In the United States segment, loan terms are generally for one month with provisions for renewals and extensions and the loans average approximately 50 days in length. The loan collateral includes a wide variety of personal property items. However, in the foreign segment, loan terms are 6 months, the loan amounts are generally larger, and the collateral is predominately jewelry. The rental segment rents vehicle tires and wheels to individuals. The check cashing segment provides check cashing services to individuals through franchised and company owned Mr. Payroll service centers and through automated service centers operated by innoVentry. The accounting policies of the segments are the same as those described in Note 2. Management of the Company evaluates performance based on income or loss from operations before net interest expense, other miscellaneous items of income or expense, and the provision for income taxes. There are no intersegmental sales. While the United States and foreign lending segments offer the same services, each is managed separately due to the different operational strategies required. The rental operation offers different services and products thus requiring its own technical, marketing and operational strategy. The same is true with respect to the check cashing operations. However, the Company has not controlled the operations of innoVentry since March 9, 1999 (see Note 3). Information concerning the segments is set forth below (in thousands):
LENDING ------------------------------------ UNITED STATES FOREIGN TOTAL RENTAL CHECK CASHING CONSOLIDATED ------------- ------- ----- ------ ------------- ------------ 2000 Total revenue $ 310,881 $ 32,302 $ 343,183 $ 17,354 $ 3,177 $ 363,714 Depreciation and amortization 13,701 1,949 15,650 1,713 708 18,071 Income (loss) from operations 20,733 8,615 29,348 (3,708) 367 26,007 Equity in loss of unconsolidated subsidiary -- -- -- -- (15,653) (15,653) Total assets at December 31 262,461 76,251 338,712 27,266 12,255 378,233 Expenditures for property and equipment 13,895 1,762 15,657 4,840 562 21,059 1999 Total revenue 327,117 32,118 359,235 10,253 3,660 373,148 Depreciation and amortization 15,864 1,885 17,749 848 828 19,425 Income (loss) from operations 25,721 12,134 37,855 (80) (3,109) 34,666 Equity in loss of unconsolidated subsidiary -- -- -- -- (15,238) (15,238) Total assets at December 31 285,594 89,031 374,625 18,187 24,811 417,623 Investment in and advances to unconsolidated subsidiary at December 31 -- -- -- -- 15,392 15,392 Expenditures for property and equipment 5,669 4,656 10,325 6,588 4,154 21,067 1998 Total revenue 305,981 28,294 334,275 3,346 3,360 340,981 Depreciation and amortization 15,420 1,427 16,847 368 894 18,109 Income (loss) from operations 31,781 11,893 43,674 (573) (9,100) 34,001 Total assets at December 31 294,717 78,122 372,839 5,885 32,099 410,823 Expenditures for property and equipment 11,624 1,413 13,037 2,486 6,889 22,412
The geographic distribution of property and equipment at December 31, follows (in thousands):
UNITED STATES FOREIGN CONSOLIDATED ------------- ------- ------------ 2000 $ 53,829 $ 8,069 $ 61,898 1999 52,546 8,415 60,961 1998 68,056 5,291 73,347
14. RELATED PARTY TRANSACTIONS In December 1999, the Company sold 3 lending units, including certain real estate, for $4,520,000 to Ace Pawn, Inc. ("Ace") whose sole stockholder, J.D. Credit, Inc. ("J.D. Credit"), is controlled by the Chairman of the Board of Directors of the Company. The price was determined by independent appraisal and approved by the 18 19 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- Board of Directors of the Company. The Company received promissory notes from Ace that are collateralized by all of its assets. In addition, J.D. Credit has pledged the common stock of Ace and the Chairman of the Board has provided a personal guaranty for repayment of the notes. The notes bear interest at 10% per annum and require quarterly principal and interest payments and a final balloon payment in December 2002. The Company has the right of first refusal in the event of a proposed resale of the lending units. A gain of $2,224,000 was recognized on the transactions. Amounts due on the notes were $3,156,000 and $4,520,000 as of December 31, 2000 and 1999, respectively, and are included in other assets in the accompanying balance sheet. The Company recorded interest income from the notes of $378,000 and $21,000 in 2000 and 1999, respectively. The 3 lending units were converted to Company franchise units, and the Company continued to manage the units pursuant to a management agreement for a brief interim period immediately following the closing of the transaction. During 2000, the Company recorded royalties of $79,000 and management fee income of $60,000. The Company recorded franchise fee revenue of $30,000, management fee income of $35,000 and royalties of $7,000 in December 1999. 15. FAIR VALUES OF FINANCIAL INSTRUMENTS Cash and cash equivalents bear interest at market rates and have maturities less than 90 days. Pawn loans have relatively short maturity periods depending on local regulations, generally 90 days or less in the United States and 180 days or less in the United Kingdom and Sweden. Finance and service charge rates are determined by regulations and bear no valuation relationship to capital markets' interest rate movements. Generally, pawn loans may only be resold to a licensed pawnbroker. The Company's interest rate cap agreements are evaluated pursuant to the terms of the agreements and settled in specific three-month intervals. The fair values of the interest rate caps are based on quoted market prices for interest rate caps currently available with similar terms. The Company's bank credit facilities bear interest at rates that are frequently adjusted on the basis of market rate changes. The fair values of the remaining long-term debt instruments are estimated based on market values for debt issues with similar characteristics or rates currently available for debt with similar terms. The carrying amounts and estimated fair values of financial instruments at December 31, 2000 and 1999 were as follows (in thousands):
2000 1999 -------------------------- ------------------------- CARRYING ESTIMATED Carrying Estimated VALUE FAIR VALUE Value Fair Value --------- ---------- --------- ---------- Financial assets: Cash and cash equivalents $ 4,626 $ 4,626 $ 6,186 $ 6,186 Pawn loans 117,982 117,982 125,349 125,349 Notes receivable 3,156 3,363 4,520 4,432 Interest rate caps 734 625 783 2,036 Financial liabilities: Bank lines of credit 101,427 101,427 129,874 129,874 Senior unsecured notes 62,857 63,165 67,143 64,363 Capital lease obligations and other notes 6,180 6,075 5,349 5,272
19 20 NOTES TO CONSOLIDATED FINANCIAL STATEMENTS - Continued - -------------------------------------------------------------------------------- 16. COMMITMENTS AND CONTINGENCIES LEASES o The Company leases certain of its facilities under operating leases with terms ranging from 3 to 15 years, with certain rights to extend for additional periods. Future minimum rentals due under non-cancelable leases are as follows for each of the years ending December 31 (in thousands): 2001 $ 21,903 2002 19,403 2003 14,899 2004 10,570 2005 5,791 Thereafter 14,526 -------- Total $ 87,092 ========
Rent expense was $22,736,000, $21,042,000 and $18,567,000 for 2000, 1999 and 1998, respectively. LITIGATION o The Alabama Supreme Court recently upheld a trial court verdict awarding $300,000 in damages plus interest to a former employee who claimed that the Company did not pay him certain incentive compensation he believed he had earned. Of the total award, $225,000 consisted of punitive damages. The Company has petitioned the United States Supreme Court to hear the case and rule on the propriety of awarding punitive damages in this particular case. Although management is optimistic that it will achieve a favorable outcome in this case, there can be no assurance that the United States Supreme Court will grant its petition to hear the case or that it will rule in the Company's favor. The Company is also party to a number of other lawsuits arising in the normal course of business. In the opinion of management, the resolution of the above matters, individually and in the aggregate, will not have a material adverse effect on the Company's financial position, results of operations or liquidity. 17. SUBSEQUENT EVENT innoVentry sold $115,734,000 of newly issued shares of Series C preferred stock in a private placement completed as of February 2, 2001. The Company participated in the transaction by canceling its $2,900,000 note receivable from innoVentry plus accrued interest of $370,000 in exchange for newly issued shares of Series C preferred stock. In conjunction with the preferred stock sale, Wells Fargo amended its financing agreements to provide a $55,000,000 revolving secured credit agreement, up to $85,050,000 of equipment lease financing, and a restructured RPM funding arrangement. Upon completion of the transactions, the Company owned 19.3% of the voting interest in innoVentry. 20 21 REPORT OF INDEPENDENT ACCOUNTANTS - -------------------------------------------------------------------------------- TO THE BOARD OF DIRECTORS AND STOCKHOLDERS CASH AMERICA INTERNATIONAL, INC. In our opinion, based on our audits and the report of other auditors, the accompanying consolidated balance sheets and the related consolidated statements of operations, stockholders' equity and cash flows present fairly, in all material respects, the financial position of Cash America International, Inc. and its subsidiaries at December 31, 2000 and 1999, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2000 in conformity with accounting principles generally accepted in the United States of America. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We did not audit the financial statements of innoVentry Corp. as of December 31, 2000 and 1999 and for the years then ended, the investment and loss in which is reflected in the accompanying financial statements using the equity method of accounting (see Notes 2 and 3). The Company's proportionate share of innoVentry Corp.'s net assets and advances from the Company reflects $15.4 million as of December 31, 1999 and total operating losses of $15.7 and $15.2 million for each of the two years in the period ended December 31, 2000. Those statements were audited by other auditors whose report thereon has been furnished to us, and our opinion expressed herein, insofar as it relates to the amounts included for innoVentry Corp., is based solely on the report of the other auditors. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States of America, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits and the report of other auditors provide a reasonable basis for our opinion. PRICEWATERHOUSECOOPERS LLP Fort Worth, Texas March 28, 2001 INCOME STATEMENT QUARTERLY DATA (Unaudited) - -------------------------------------------------------------------------------- (In thousands, except per share data)
FIRST SECOND THIRD FOURTH 2000 QUARTER QUARTER QUARTER QUARTER - ---- ------- ------- ------- ------- Total revenue $96,996 $82,761 $84,847 $99,110 Costs of revenue 43,658 34,851 34,591 44,217 Net income (loss) (4,637) (7,542) 7,191 3,258 Net income (loss) per share-Diluted (0.18) (0.29) 0.28 0.13 Weighted average shares-Diluted 25,282 25,759 25,929 25,147 1999 - ---- Total revenue $95,648 $86,335 $85,568 $105,597 Costs of revenue 40,739 35,641 35,653 50,301 Net income (loss) 4,800 1,924 422 (3,270) Net income (loss) per share -- Diluted 0.18 0.07 0.02 (0.13) Weighted average shares -- Diluted 26,419 26,552 26,021 25,315
COMMON STOCK DATA - ----------------------------------------------------------- The New York Stock Exchange is the principal exchange on which Cash America International, Inc. common stock is traded. There were 808 stockholders of record (not including individual participants in security listings) as of February 7, 2001. The high and low sales prices of common stock as quoted on the composite tape of the New York Stock Exchange and cash dividends per share during 2000 and 1999 were as follows:
FIRST SECOND THIRD FOURTH 2000 QUARTER QUARTER QUARTER QUARTER - ---- ------- ------- ------- ------- HIGH $13.00 $12.81 $8.25 $7.31 LOW 9.00 6.81 6.19 3.63 CLOSE 12.44 7.38 7.31 4.38 CASH DIVIDEND PER SHARE .01 1/4 .01 1/4 .01 1/4 .01 1/4 1999 - ---- High $15.94 $15.50 $13.13 $11.44 Low 10.38 11.50 6.75 7.50 Close 12.88 12.88 9.44 9.75 Cash dividend per share .01 1/4 .01 1/4 .01 1/4 .01 1/4
21 EX-21 3 d85451ex21.txt SUBSIDIARIES OF THE REGISTRANT 1 EXHIBIT 21
Jurisdiction of Name Incorporation ---- ------------- Cash America International, Inc. Texas Cash America, Inc. Delaware Cash America, Inc. of Louisiana Delaware Rent-A-Tire, Inc. Texas Cash America, Inc. of Tennessee Tennessee Cash America, Inc. of Oklahoma Oklahoma Cash America, Inc. of Kentucky Kentucky Cash America, Inc. of South Carolina South Carolina Florida Cash America, Inc. Florida Georgia Cash America, Inc. Georgia Cash America, Inc. of North Carolina North Carolina Cash America Pawn, Inc. of Ohio Ohio Cash America, Inc. of Alabama Alabama Cash America, Inc. of Colorado Colorado Cash America, Inc. of Indiana Indiana Cash America Pawn L.P. Delaware Cash America Management L.P. Delaware Cash America Holding, Inc. Delaware Harvey & Thompson Limited England Express Cash International Corporation Delaware CAII Pantbelaning AB Sweden Cash America of Missouri, Inc. Missouri Vincent's Jewelers and Loan, Inc. Missouri Mr. Payroll Corporation Delaware Cash America, Inc. of Utah Utah Cash America Franchising, Inc. Delaware Cash America Financial Services, Inc. Delaware Cash America, Inc. of Illinois Illinois Uptown City Pawners, Inc. Illinois Doc Holliday's Pawnbrokers & Jewelers, Inc. Delaware Longhorn Pawn & Gun, Inc. Texas Bronco Pawn & Gun, Inc. Oklahoma Gamecock Pawn & Gun, Inc. South Carolina Hornet Pawn & Gun, Inc. North Carolina Tiger Pawn & Gun, Inc. Tennessee
EX-23 4 d85451ex23.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP 1 EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statement on Form S-8 (Filings No 33-29658, 33-36430, 33-59733 and 33-95827) of Cash America International, Inc. of our report dated March 28, 2001 relating to the consolidated financial statements of Cash America International, Inc., which appears in the Annual Report to Shareholders, (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K). We also consent to the incorporation by reference of our report dated March 28, 2001 relating to the financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Fort Worth, Texas March 28, 2001 -----END PRIVACY-ENHANCED MESSAGE-----