-----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, K5FXJBpC90XtMmrRdXKUMUbke8ekMab1Q6WqdmdCjXyDC7ovMXOQ7uxzYbZ9eaHv N0L0fx8VU9SAua3MbvaQzg== 0000950134-03-003947.txt : 20030314 0000950134-03-003947.hdr.sgml : 20030314 20030314131734 ACCESSION NUMBER: 0000950134-03-003947 CONFORMED SUBMISSION TYPE: 10-K PUBLIC DOCUMENT COUNT: 7 CONFORMED PERIOD OF REPORT: 20021231 FILED AS OF DATE: 20030314 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-K SEC ACT: 1934 Act SEC FILE NUMBER: 001-09733 FILM NUMBER: 03603702 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-K 1 d03820e10vk.txt FORM 10-K - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- UNITED STATES 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 FOR THE FISCAL YEAR ENDED DECEMBER 31, 2002 OR [ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
COMMISSION FILE NUMBER 1-9733 --------------------- CASH AMERICA INTERNATIONAL, INC. (Exact name of registrant as specified in its charter) TEXAS 75-2018239 (State or other jurisdiction (I.R.S. Employer of incorporation or organization) Identification No.) 1600 WEST 7TH STREET 76102-2599 FORT WORTH, TEXAS (Zip Code) (Address of principal executive offices)
REGISTRANT'S TELEPHONE NUMBER, INCLUDING AREA CODE: (817) 335-1100 --------------------- SECURITIES REGISTERED PURSUANT TO SECTION 12(B) OF THE ACT:
TITLE OF EACH CLASS NAME OF EACH EXCHANGE 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 whether the registrant is an accelerated filer (as defined in Rule 12b-2 of the Act). 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. [ ] The aggregate market value of 21,951,743 shares of the registrant's common stock held by nonaffiliates on June 28, 2002 was approximately $201,956,036. At March 5, 2003 there were 24,275,409 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, 2002 and definitive Proxy Statement pertaining to the 2003 Annual Meeting of Shareholders are incorporated herein by reference into Parts II and IV, and Part III, respectively. - -------------------------------------------------------------------------------- - -------------------------------------------------------------------------------- CASH AMERICA INTERNATIONAL, INC. YEAR ENDED DECEMBER 31, 2002 INDEX TO FORM 10-K PART I ................................................................................................................1 Item 1. Business......................................................................................1 Item 2. Properties...................................................................................15 Item 3. Legal Proceedings............................................................................18 Item 4. Submission of Matters to a Vote of Security Holders..........................................18 PART II ...............................................................................................................18 Item 5. Market for Registrant's Common Equity and Related Stockholder Matters........................18 Item 6. Selected Financial Data......................................................................18 Item 7. Management's Discussion and Analysis of Results of Operations and Financial Condition........18 Item 7A. Quantitative and Qualitative Disclosures About Market Risk...................................18 Item 8. Financial Statements and Supplementary Data..................................................19 Item 9. Changes in and Disagreements with Accountants on Accounting and Financial Disclosure.........19 PART III ...............................................................................................................19 Item 10. Directors and Executive Officers of the Registrant...................................................19 Item 11. Executive Compensation...............................................................................19 Item 12. Security Ownership of Certain Beneficial Owners and Management.......................................19 Item 13. Certain Relationships and Related Transactions.......................................................19 Item 14. Controls and Procedures . . . . . . . . . . . .......................................................20 PART IV ...............................................................................................................20 Item 15. Exhibits, Financial Statement Schedules, and Reports on Form 8-K.....................................20 SIGNATURES..............................................................................................................22
i 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, 2002, the Company owns pawnshops through wholly- owned subsidiaries in sixteen states and the United Kingdom and Sweden. The Company also provides check cashing services in twenty-one 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 2000, 2001, and 2002, loans repaid or renewed as a percentage of loans made were 67.5%, 65.6% , and 66.6% 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 over the years 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. The Company also intends to offer new products and services in its 1 pawnshops in order to meet the growing financial services needs of its customers. 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 - 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. The Company added five lending locations in 2002 and 10 locations were either combined or closed. As of December 31, 2002, the Company owned 396 domestic and 59 foreign operating locations. The Company plans 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 in the United States. The Company did not sell or terminate any franchises in 2002. As of December 31, 2002, there were 13 franchised lending locations in operation. The Company plans to expand its franchise locations through new franchise sales. Check Cashing. While the Company's primary business involves the acquisition, establishment and operation of pawnshops, it also provides check cashing services through its subsidiary, Mr. Payroll Corporation ("Mr. Payroll"). As of December 31, 2002, Mr. Payroll operated 129 franchised and 6 company- owned manned check cashing centers in 21 states. Website Access to Reports. Through our home page at www.cashamerica.com, we provide free access to our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports as soon as reasonably practicable after such reports are electronically filed with or furnished to the SEC. 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. Pawn lending finance and service charges contributed approximately 59% of the Company's net revenue (total revenue less costs of revenue) in 2000, 56% in 2001 and 52% in 2002. 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. In the United States, 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 2 valuation system as well as catalogues, "blue books," newspapers and previous disposition experience with similar items. 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. Instead, 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. Similar to domestic operations, fluctuations in gold and silver prices historically have affected the amount that the pawnshop is willing to lend against an item. A sustained increase or decrease in the market price of gold or silver can cause a related increase or decrease in 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 2002 of 54.2%. 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 through merchandise disposition activities in the pawnshops. For domestic and foreign operations, 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 2000, 2001 and 2002, the Company experienced gross profit margins on dispositions of merchandise of 33%, 35%, and 35%, respectively. At December 31, 2002, the Company had approximately 1,186,000 outstanding loans totaling $127,388,000, with an average balance of approximately $107 per loan. 3 Presented below is information with respect to pawn loans made, acquired, repaid and forfeited for the years ended December 31, 2000, 2001, and 2002:
2000 2001 2002 ------------ ------------ ------------ ($ in thousands) Loans made ................................................................ $ 408,091 $ 403,724 $ 408,467 Loans acquired ............................................................ -- 388 896 Loans repaid .............................................................. (238,937) (227,981) (235,533) Loans renewed ............................................................. (36,629) (36,880) (36,387) Loans forfeited: Available for disposition ............................................ (122,832) (128,397) (122,295) Disposed at auction .................................................. (12,693) (9,858) (10,295) Effect of exchange rate translation ....................................... (4,367) (2,388) 5,945 ------------ ------------ ------------ Net increase (decrease) in pawn loans outstanding at end of period ... $ (7,367) $ (1,392) $ 10,798 ============ ============ ============ Loans repaid or renewed as a percent of loans made ........................ 67.5% 65.6% 66.6% ============ ============ ============
In addition, the Company offers a small consumer cash advance product through many of its existing stores. The Company introduced the small consumer cash advance product to its broad group of locations in 2000. The product was available in 391 domestic lending units at December 31, 2002, including 309 units that offer the product on behalf of a third-party financial institution (the "Bank") that underwrites the advance to the customer and pays the Company a fee for its administrative services. The product offered by the Company in 82 locations provides customers with cash in exchange for a promissory note or other repayment agreement supported by that customer's personal check for the aggregate amount of the cash advanced plus a service fee. The Company holds the check for the predetermined period of the cash advance, 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 presented 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 "cash advances" for convenience.) As of December 31, 2002, $12,139,000 of gross cash advances were outstanding, including $8,181,000 extended to customers by the Bank that is not included in the Company's consolidated balance sheet. An allowance for losses of $1,748,000 has been provided in the consolidated financial statements. Cash advance fees earned by the Company contributed approximately 1% of the Company's net revenue (total revenue less costs of revenue) in 2000, 3% in 2001 and 8% in 2002. 4 Under the terms of the August 2001 amendment to the Company's agreement with the Bank, the Bank assigns each cash advance that remains unpaid after its maturity date to the Company at a discount from the amount owed by the borrower, and the Company undertakes the collection activity on the account. One of the reasons for this practice is to benefit from the use of the Company's collections resources and proficiency. As a result, losses on cash advances assigned to the Company that prove uncollectible are the sole responsibility of the Company. Therefore, when evaluating the Company's overall allowance for losses, management includes estimates for these cash advance losses, while active in the Bank's portfolio, at a level projected to be adequate to absorb credit losses inherent in the outstanding portfolio. For additional information, see Note 5 of "Notes to Consolidated Financial Statements" in the Company's 2002 Annual Report to Stockholders, which is incorporated herein by reference. Presented below is information with respect to the cash advance product for the years ended December 31, 2000, 2001 and 2002:
2000 2001 2002 ------------ ------------ ------------ Locations offering cash advances at end of year ....... 330 386 391 On behalf of the Company ......................... 143 71 82 On behalf of the Bank ............................ 187 315 309 Amount of cash advances written (in thousands) ........ $ 10,066 $ 49,003 $ 123,705 On behalf of the Company ......................... $ 8,620 $ 11,563 $ 17,561 On behalf of the Bank ............................ $ 1,446 $ 37,440 $ 106,144 Amount of cash advances assigned ...................... $ -- $ 5,520 $ 23,806 by the Bank (in thousands) Average cash advance amount written ................... $ 187 $ 261 $ 284
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, 2002, $151,350,000 of merchandise was added to merchandise held for disposition, of which $122,295,000 was from loans not repaid, and $29,055,000 was purchased from customers and vendors and through acquisitions of pawnshops. 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 portion of the disposition price and making additional, non-interest bearing payments on 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, 2002, the Company held approximately $4,050,000 in customer layaway deposits. The Company provides an allowance for valuation and shrinkage of its merchandise based on management's evaluation. Management's evaluation takes into consideration historical shrinkage, the 5 quantity and age of slow-moving merchandise on hand and markdowns necessary to liquidate slow-moving merchandise. At December 31, 2002, total lending operations merchandise on hand was $54,444,000, after deducting an allowance for valuation and shrinkage of merchandise of $1,445,000. FINANCIAL INFORMATION ON SEGMENTS AND AREAS Additional financial information regarding the Company's revenues and assets by each of its three operational segments and by geographic area is provided in Note 16 of "Notes to Consolidated Financial Statements" in the Company's 2002 Annual Report to Stockholders, which is incorporated herein by reference. 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, 2002, the Company has one operating division in the United States, which is managed by an Executive Vice President. This operating division consists of four 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. Personnel At December 31, 2002, the Company employed 3,096 persons in its operations in 16 states, the United Kingdom and Sweden. Of the total employees, approximately 246 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. 6 FUTURE EXPANSION The Company's objective is to continue to expand the number of pawnshops and cash advance locations 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 $181,000 to $201,000, with an average estimated cost per location of approximately $192,000 in 2002. 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." 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. At present, this requirement does not limit the Company's growth in Texas. 7 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 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 (such as certain commercial banks and consumer finance companies) 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, 2001, 2002 and 2003 are as follows: 8
Year Ended June 30, 2001 Year Ended June 30, 2002 Year Ended June 30, 2003 - -------------------------------- -------------------------------- --------------------------------- 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 $ 144..... 240% $ 1 to $ 150..... 240% $ 1 to $ 150..... 240% 145 to 480..... 180 151 to 1,000..... 180 151 to 1,000..... 180 481 to 1,440..... 30 1,001 to 1,500..... 30 1,001 to 1,500..... 30 1,441 to 12,000..... 12 1,501 to 12,500..... 12 1,501 to 12,500..... 12
These rates are reviewed and established annually by the Texas Consumer Credit Commissioner. 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. In 2001, the Texas legislature amended the Texas Pawnshop Act to establish the ceiling amounts reflected above for the year ended June 30, 2002. The Texas Pawnshop Act also prescribes the maximum allowable pawn loan. Under current Texas law, a pawn loan may not exceed $12,500. 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 9 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. 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 10 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 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 Allowable Range of Annual Amount Percentage Financed Rate Per Pawn within Loan Range - ------------------ ---------- $ 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 11 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 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 current pawnbroking 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 customer is entitled to any excess disposition proceeds after deduction for principal, interest and other fees and charges. Swedish law provides for licensing and supervision of pawnshops by the local County Administrative Boards. The law does not specify a maximum allowable interest rate for pawn loans, and 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 3.25% and 3.75% per month. Also, the act grants Swedish pawnbrokers the authority to purchase unredeemed merchandise at the public auction and then dispose of the merchandise to the public from the pawnshop premises. Small Consumer Cash Advances. The Company offers a small consumer cash advance product referred to as "cash advances" 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 cash 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 Federal Reserve Regulation Z promulgated under that Act) in connection with these cash advance transactions. As noted above, these cash advances are offered by a third-party Bank in 309 of the Company's units (at December 31, 2002). The federal banking regulators who supervise the Bank's activities closely scrutinize all aspects of the Bank's cash advance program. Further, certain state regulators have asserted that the Company must have a license under state law in order to perform the administrative services that it performs for the Bank. In addition to some of these federal and state regulators, a number of consumer advocacy groups and federal and state legislators have asserted that laws and regulations should be tightened 12 so as to severely limit, if not eliminate, the availability of this cash advance product to consumers, despite the significant demand for it. Along with the leadership of the short-term cash advance industry, the Company opposes such overly restrictive regulation and legislation. Nevertheless, the possibility exists that some combination of federal and state regulation and legislation could come to pass, which could restrict, or even eliminate, the availability of this cash advance product at some or all of the Company's stores. During January 2003, the Company announced its intent to change third-party providers of these cash advances, and the Bank announced that it would be exiting the cash advance business. The new third-party providers will be state-chartered financial institutions supervised by the Federal Deposit Insurance Corporation ("FDIC"). The transition will occur over the first four months of 2003. The FDIC has recently developed draft guidelines for cash advance programs that would apply to all financial institutions under the FDIC's supervision that offer these programs. The guidelines describe the FDIC's expectations for prudent risk management practices for cash advance activities, particularly with regard to capital, allowance for loan losses, and loan classifications. The draft also addresses guidelines for recovery practices, income recognition, and managing risks associated with third-party relationships, as well as compliance with consumer protection laws. The Company anticipates that the FDIC will issue final guidelines on or about March 31, 2003 and that the guidelines should form the basis for sound and appropriate regulation of cash advance programs conducted by FDIC-supervised financial institutions. 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. Under the federal Gramm-Leach-Bliley Act that took effect in 2001 and the federal regulations adopted to implement it, the Company is required to disclose to its customers its privacy policy and practices, including those relating to the sharing of customers' nonpublic personal information with third parties. The disclosure must be made to customers at the time that the customer relationship is established and at least annually thereafter. Under these regulations, the Company is also required to ensure that its systems are designed to protect the confidentiality of customers' nonpublic personal information. Under the USA PATRIOT Act passed by Congress in 2001, the Company will be required to maintain an anti-money laundering compliance program. The program must include (1) the development of internal policies, procedures, and controls; (2) the designation of a compliance officer; (3) an ongoing employee training program; and (4) an independent audit function to test the program. The United States Department of Treasury is expected to issue regulations specifying the appropriate features and elements of anti-money laundering compliance programs for the pawnbroking and short-term cash advance industries. In addition to the federal and 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 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. 13 A copy of the transaction ticket is provided to local law enforcement agencies for processing 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. The Company's franchising activities may be subject to various state regulations that, among other things, mandate disclosures to prospective franchisees and other requirements. EXECUTIVE OFFICERS The following sets forth, as of March 5, 2003, 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 52 Chief Executive Officer and President Thomas A. Bessant, Jr. 44 Executive Vice President - Chief Financial Officer Robert D. Brockman 48 Executive Vice President - Administration Jerry D. Finn 56 Executive Vice President - Domestic Pawn Operations Michael D. Gaston 58 Executive Vice President - Business Development William R. Horne 59 Executive Vice President - Information Technology James H. Kauffman 58 Executive Vice President - International Operations Hugh A. Simpson 43 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. 14 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 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 served as Chief Executive Officer of Rent-A-Tire, Inc. from July 1998 until August 2002. He has also served as Executive Vice President-International 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 5, 2003, the Company owns the real estate and building for six of its domestic pawnshop locations and four of its pawnshop locations in the United Kingdom. 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 were relocated to temporary facilities. The Company's operating locations were not affected. Restoration of the building began in the fourth quarter of 2000 and was completed in the fourth quarter of 2001. The Company's insurance coverage provided 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. 15 The following table sets forth, as of March 5, 2003, the geographic markets served by the Company and the number of owned lending locations in such markets in which it presently operates.
Number of Locations in Area --------- TEXAS: Houston........................................................................ 43 Central/South Texas............................................................ 54 Dallas/Fort Worth.............................................................. 34 West Texas..................................................................... 22 Rio Grande Valley.............................................................. 9 --- Total Texas................................................................ 162 --- FLORIDA: Tampa/St. Petersburg........................................................... 15 Orlando........................................................................ 14 Jacksonville................................................................... 10 Other ......................................................................... 23 --- Total Florida.............................................................. 62 --- TENNESSEE: Memphis........................................................................ 20 Nashville...................................................................... 5 --- Total Tennessee............................................................ 25 --- GEORGIA: Atlanta........................................................................ 12 Savannah....................................................................... 5 Other ......................................................................... 2 --- Total Georgia.............................................................. 19 --- LOUISIANA: New Orleans.................................................................... 9 Baton Rouge.................................................................... 3 Other ......................................................................... 8 --- Total Louisiana............................................................ 20 --- OKLAHOMA: Oklahoma City.................................................................. 11 Tulsa ......................................................................... 4 --- Total Oklahoma............................................................. 15 --- MISSOURI: Kansas City.................................................................... 11 St. Louis...................................................................... 5 --- Total Missouri............................................................. 16 --- INDIANA: Indianapolis................................................................... 9 Fort Wayne..................................................................... 3 Other ......................................................................... 1 --- Total Indiana.............................................................. 13 ---
16 NORTH CAROLINA: Charlotte...................................................................... 6 Greensboro/Winston Salem....................................................... 3 Other.......................................................................... 1 --- Total North Carolina....................................................... 10 --- ALABAMA: Mobile......................................................................... 4 Birmingham..................................................................... 4 Other ......................................................................... 1 --- Total Alabama.............................................................. 9 --- KENTUCKY: Louisville..................................................................... 9 --- ILLINOIS: Chicago........................................................................ 9 Other.......................................................................... 1 --- Total Illinois ............................................................ 10 --- SOUTH CAROLINA: Charleston..................................................................... 3 Greenville..................................................................... 3 --- Total South Carolina....................................................... 6 --- UTAH: Salt Lake City................................................................. 6 --- OHIO: Cincinnati..................................................................... 6 --- COLORADO: Colorado Springs............................................................... 3 Denver......................................................................... 1 Other ......................................................................... 1 --- Total Colorado............................................................. 5 --- Total United States........................................................ 393 --- UNITED KINGDOM: London......................................................................... 30 Other ......................................................................... 21 --- Total United Kingdom....................................................... 51 --- SWEDEN: Stockholm...................................................................... 4 Other.......................................................................... 7 --- Total Sweden............................................................... 11 --- GRAND TOTAL...................................................................... 455 ===
17 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 19 of Notes to Consolidated Financial Statements in the Company's 2002 Annual Report to Stockholders ("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. 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, 2002. 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 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Information contained under the caption "Quantitative and Qualitative Disclosures About Market Risk" in the Annual Report is incorporated herein by reference in response to this Item 7A. 18 ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA Information contained under the captions "Consolidated Financial Statements," "Notes to Consolidated Financial Statements," and "Quarterly Financial 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 None. PART III ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT Information contained under the caption "Election of Directors" in the Company's Notice of Annual Meeting and Proxy Statement for the Company's 2003 Annual Meeting of Shareholders (the "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 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 Proxy Statement is incorporated herein by reference in response to this Item 12. Information regarding the Company's equity compensation plans is set forth in the section entitled "Executive Compensation-Equity Compensation Plan Information" in the Proxy Statement, which information is incorporated herein by reference. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS Information contained under the caption "Executive Compensation" in the Proxy Statement is incorporated herein by reference in response to this Item 13. 19 ITEM 14. CONTROLS AND PROCEDURES (a) Under the supervision and with the participation of the Company's Chief Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the design and operation of the Company's disclosure controls and procedures (as defined in Rule 13a-14(c) under the Securities Exchange Act of 1934) as of a date (the "Evaluation Date") within 90 days prior to the filing date of this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company's disclosure controls and procedures are effective in timely alerting them to the material information relating to the Company required to be included in its periodic filings with the Securities and Exchange Commission. (b) There were no significant changes in the Company's internal controls or in other factors that could significantly affect these controls subsequent to the Evaluation Date. No significant deficiencies or material weaknesses in the Company's internal controls were identified. Therefore, no corrective actions were taken. PART IV ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K (a)(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, 2002 and 2001. Consolidated Statements of Operations for the years ended December 31, 2002, 2001 and 2000. Consolidated Statements of Cash Flows for the years ended December 31, 2002, 2001 and 2000. Consolidated Statements of Stockholders' Equity for the years ended December 31, 2002, 2001 and 2000. NOTES TO CONSOLIDATED FINANCIAL STATEMENTS REPORT OF INDEPENDENT ACCOUNTANTS (2) The following financial statement schedule of the Company is included herein. Schedule II -- Valuation Accounts. Report of Independent Accountants on Financial Statement Schedule. 20 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. (3) The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index on pages 28 through 31. (b) During the fourth quarter ended December 31, 2002, the Company did not file any reports on Form 8-K. 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 14, 2003. 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 14, 2003 on behalf of the registrant and in the capacities indicated.
Signature Title Date --------- ----- ---- /s/ JACK R. DAUGHERTY Chairman of the Board March 14, 2003 - ----------------------------------------- of Directors Jack R. Daugherty /s/ DANIEL R. FEEHAN Chief Executive Officer, March 14, 2003 - ----------------------------------------- President and Director Daniel R. Feehan (Principal Executive Officer) /s/ THOMAS A. BESSANT, JR. Executive Vice President - March 14, 2003 - ----------------------------------------- Chief Financial Officer Thomas A. Bessant, Jr. (Principal Financial and Accounting Officer) /s/ A. R. DIKE Director March 14, 2003 - ----------------------------------------- A. R. Dike /s/ JAMES H. GRAVES Director March 14, 2003 - ----------------------------------------- James H. Graves
22 /s/ B. D. HUNTER Director March 14, 2003 - ----------------------------------------- B. D. Hunter /s/ TIMOTHY J. McKIBBEN Director March 14, 2003 - ----------------------------------------- Timothy J. McKibben /s/ ALFRED M. MICALLEF Director March 14, 2003 - ----------------------------------------- Alfred M. Micallef /s/ CLIFTON H. MORRIS, JR. Director March 14, 2003 - ----------------------------------------- Clifton H. Morris, Jr.
23 CERTIFICATION I, Daniel R. Feehan, Chief Executive Officer and President, certify that: 1. I have reviewed this annual report on Form 10-K of Cash America International, Inc. ("registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 14, 2003 /s/ Daniel R. Feehan - -------------------------------------- Daniel R. Feehan Chief Executive Officer and President 24 CERTIFICATION I, Thomas A Bessant, Jr., Executive Vice President and Chief Financial Officer, certify that: 1. I have reviewed this annual report on Form 10-K of Cash America International, Inc. ("registrant"); 2. Based on my knowledge, this annual report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this annual report; 3. Based on my knowledge, the financial statements, and other financial information included in this annual report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this annual report; 4. The registrant's other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and have: a) designed such disclosure controls and procedures to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this annual report is being prepared; b) evaluated the effectiveness of the registrant's disclosure controls and procedures as of a date within 90 days prior to the filing date of this annual report (the "Evaluation Date"); and c) presented in this annual report our conclusions about the effectiveness of the disclosure controls and procedures based on our evaluation as of the Evaluation Date; 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation, to the registrant's auditors and the audit committee of registrant's board of directors (or persons performing the equivalent function): a) all significant deficiencies in the design or operation of internal controls which could adversely affect the registrant's ability to record, process, summarize and report financial data and have identified for the registrant's auditors any material weaknesses in internal controls; and b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal controls; and 6. The registrant's other certifying officer and I have indicated in this annual report whether or not there were significant changes in internal controls or in other factors that could significantly affect internal controls subsequent to the date of our most recent evaluation, including any corrective actions with regard to significant deficiencies and material weaknesses. Date: March 14, 2003 /s/ Thomas A. Bessant, Jr. - ------------------------------- Thomas A. Bessant, Jr. Executive Vice President and Chief Financial Officer 25 CASH AMERICA INTERNATIONAL, INC. SCHEDULE II- VALUATION ACCOUNTS For the Three Years Ended December 31, 2002 (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, 2002 ....................................... $ 1,589 $ 904 $ -0- $ 1,048 $ 1,445 ========== ========== ========== ========== ========== December 31, 2001 ....................................... $ 2,012 $ 745 $ -0- $ 1,168(a) $ 1,589 ========== ========== ========== ========== ========== December 31, 2000 ....................................... $ 2,008 $ 1,060 $ -0- $ 1,056(a) $ 2,012 ========== ========== ========== ========== ========== Allowance for losses on small consumer cash advances: Year Ended: December 31, 2002 ....................................... $ 711 $ 6,676 $ 2,052(b) $ 7,691 $ 1,748 ========== ========== ========== ========== ========== December 31, 2001 ....................................... $ 243 $ 2,301 $ 302(b) $ 2,135 $ 711 ========== ========== ========== ========== ========== December 31, 2000 ....................................... $ 15 $ 477 $ 3(b) $ 252 $ 243 ========== ========== ========== ========== ========== Allowance for valuation of discontinued operations: Year Ended: December 31, 2002 ....................................... $ 8,093 $ (1,214) $ -0- $ 6,256 $ 623 ========== ========== ========== ========== ========== December 31, 2001 ....................................... $ -0- $ 10,961 $ -0- $ 2,868 $ 8,093 ========== ========== ========== ========== ========== Allowance for valuation of deferred tax assets: Year Ended: December 31, 2002 ....................................... $ 7,628 $ 63 $ -0- $ -0- $ 7,691 ========== ========== ========== ========== ========== December 31, 2001 ....................................... $ 7,919 $ -0- $ -0- $ 291 $ 7,628 ========== ========== ========== ========== ========== December 31, 2000 ....................................... $ 2,604 $ 5,457 $ -0- $ 142 $ 7,919 ========== ========== ========== ========== ==========
- ---------- (a) Deducted from allowance for write-off or other disposition of merchandise. (b) Recoveries. 26 REPORT OF INDEPENDENT ACCOUNTANTS ON 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 January 23, 2003, appearing in the 2002 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 15(a)(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 January 23, 2003 27 EXHIBIT INDEX The following documents are filed as a part of this report. Those exhibits previously filed and incorporated herein by reference are identified by reference to the list of prior filings after the list of exhibits. Exhibits not required for this report have been omitted.
EXHIBIT NUMBER 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)
28 10.7 --Amendment to 1994 Long-Term Incentive Plan dated April 20, 1999. (r) (Exhibit 10.1) 10.8 --Amendment to 1994 Long-Term Incentive Plan dated May 16, 2001. 10.9 --Amended and Restated Executive Employment Agreement between the Company and Mr. Feehan dated as of April 29, 2001. (t) (Exhibit 10.1) 10.10 --Consultation Agreements between the Company and Messrs. Dike, Hunter, Motheral, and Rizzo, each dated April 25, 1990. (k) (Exhibit 10.49) 10.11 --Note Agreement between the Company and Teachers Insurance and Annuity Association of America dated as of May 6, 1993. (l) (Exhibit 10.1) 10.12 --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) 10.13 --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) 10.14 --Fifth Supplement (December 30, 1996) to 1993 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (h) (Exhibit 10.13) 10.15 --Sixth Supplement (December 30, 1997) to 1993 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (n) (Exhibit 10.16) 10.16 --Seventh Supplement (December 31, 1998) to 1993 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (o) (Exhibit 10.18) 10.17 --Eighth Supplement (September 29, 1999) to 1993 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (p) (Exhibit 10.3) 10.18 --Ninth Supplement (June 30, 2000) to 1993 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (s) (Exhibit 10.3) 10.19 --Tenth Supplement (September 30, 2001) to 1993 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (u) (Exhibit 10.18) 10.20 --Note Agreement between the Company and Teachers Insurance and Annuity Association of America dated as of July 7, 1995. (q) (Exhibit 10.1) 10.21 --First Supplement (November 10, 1995) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (m) (Exhibit 10.2) 10.22 --Second Supplement (December 30, 1996) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (h) (Exhibit 10.16) 10.23 --Third Supplement (December 30, 1997) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (n) (Exhibit 10.20) 10.24 --Fourth Supplement (December 31, 1998) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (o) (Exhibit 10.23) 10.25 --Fifth Supplement (September 29, 1999) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (p) (Exhibit 10.2)
29 10.26 --Sixth Supplement (June 30, 2000) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (s) (Exhibit 10.2) 10.27 --Seventh Supplement (September 30, 2001) to 1995 Note Agreement between the Company and Teachers Insurance and Annuity Association of America. (u) (Exhibit 10.26) 10.28 --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) 10.29 --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) 10.30 --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) 10.31 --Third Supplement (June 30, 2000) to Note Agreement dated as of December 1, 1997 among the Company and the Purchasers named therein. (s) (Exhibit 10.1) 10.32 --Fourth Supplement (September 30, 2001) to Note Agreement dated as of December 1, 1997 among the Company and the Purchasers named therein. (u) (Exhibit 10.38) 10.33 --Note Agreement dated as of August 12, 2002 among the Company and the Purchasers named therein for the issuance of the Company's 7.20% Senior Notes due August 12, 2009 in the aggregate principal amount of $42,500,000. (v) (Exhibit 10.1) 10.34 --Credit Agreement among the Company, certain lenders named therein, and Wells Fargo Bank Texas, National Association, as Administrative Agent dated as of August 14, 2002. (v) (Exhibit 10.2) 13 --Portions of the 2002 Annual Report to Stockholders of the Company specifically incorporated by reference herein. 21 --Subsidiaries of Cash America International, Inc. 23 --Consent of PricewaterhouseCoopers LLP. 99.1 --Certification of Chief Executive Officer pursuant to 18 U.S.C. Section 1350. 99.2 --Certification of Chief Financial Officer pursuant to 18 U.S.C. Section 1350.
- ---------- 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. 30 (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, 1999. (s) Quarterly Report on Form 10-Q for the quarter ended September 30, 2000. (t) Quarterly Report on Form 10-Q for the quarter ended June 30, 2001. (u) Annual Report on Form 10-K for the year ended December 31, 2001. (v) Current Report on Form 8-K dated August 15, 2002. 31 EX-10.8 3 d03820exv10w8.txt AMENDMENT TO 1994 LONG-TERM INCENTIVE PLAN EXHIBIT 10.8 AMENDMENT THREE TO THE CASH AMERICA INTERNATIONAL, INC. 1994 LONG-TERM INCENTIVE PLAN By action of the Shareholders of Cash America International, Inc. this day, the Cash America International, Inc. 1994 Long-Term Incentive Plan (the "Plan") is hereby amended as follows: Section 5 of Plan is amended by revising the first sentence of paragraph (a) to read as follows: The maximum number of shares of Stock in respect of which Awards may be made under the Plan shall be a total of 3,800,000 shares of Common Stock. CASH AMERICA INTERNATIONAL, INC. By: /s/ Hugh A. Simpson ----------------------------------- Hugh A. Simpson, Executive Vice President, General Counsel and Secretary May 16, 2001 EX-13 4 d03820exv13.txt PORTIONS OF THE 2002 ANNUAL REPORT TO STOCKHOLDERS EXHIBIT 13 Management's Discussion and Analysis of Results of Operations and Financial Condition - -------------------------------------------------------------------------------- GENERAL - -------------------------------------------------------------------------------- The Company is a 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. As an alternative to a pawn loan, the Company offers small consumer cash advances in selected lending locations and on behalf of a third-party financial institution in other locations. A related activity of the lending operations is the disposition of merchandise, primarily collateral from unredeemed pawn loans. The Company also provides check cashing services through its franchised and company-owned Mr. Payroll(R) check cashing centers. As of December 31, 2002, the Company's lending operations consisted of 468 lending units, including 396 owned units and 13 franchised units in 18 states in the United States, 48 units in the United Kingdom and 11 units in Sweden. The foreign operations consist primarily of jewelry-only lending units. The number of owned lending units declined by 11 during the three years ended December 31, 2002, as the Company acquired 9 operating units, established 4 locations and combined or closed 24 locations. In addition, 6 franchise units were opened and 4 were closed. As of December 31, 2002, Mr. Payroll operated 129 franchised and 6 company-owned check cashing centers in 21 states. In September 2001, the Company announced plans to exit the rent-to-own business in order to focus on its core business of lending activities. In June 2002, the Company sold the remaining assets of its "Rent-A-Tire" rent-to-own business. Accordingly, the net operating results, net assets and net cash flows of this business segment have been reported as "Discontinued Operations" in the consolidated Balance Sheets, Consolidated Statements of Operations and Consolidated Statements of Cash Flows. See Note 3 of Notes to Consolidated Financial Statements. CRITICAL ACCOUNTING POLICIES AND ESTIMATES - -------------------------------------------------------------------------------- Management's Discussion and Analysis of Results of Operations and Financial Condition is based upon the Company's consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements 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. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, merchandise held for disposition, allowance for losses on advances, long-lived and intangible assets, income taxes, contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements. FINANCE AND SERVICE CHARGES REVENUE RECOGNITION. The Company accrues finance and service charges revenue on all pawn loans that the Company deems collectible based on historical loan redemption statistics. Pawn loans written during each calendar month are aggregated and tracked for performance. Loan transactions terminate upon redemption, renewal or forfeiture of the loan collateral. The gathering of this data allows the Company to analyze the characteristics of its outstanding pawn loan portfolio and estimate the probability of collection of finance and service charges. In the event the future performance of the loan portfolio differs significantly (positively or negatively) from expectations, revenue for the next reporting period would be likewise affected. Due to the short-term nature of pawn loans, the Company is able to quickly identify performance trends. For 2002, $117.3 million, or 99.2%, of recorded finance and service charges represented cash collected from customers and the remaining $0.9 million, or 0.8%, represented an increase in the finance and service charges receivable during the year. Assuming a 10% decline in expected performance rates and collection of finance and service charges, the receivable and revenue would decrease by $2.1 million. Some or all of this amount would be recovered through the disposition of the related forfeited loan collateral. MERCHANDISE HELD FOR DISPOSITION. Merchandise held for disposition consists primarily of forfeited collateral from pawn loans not repaid. The carrying value of the forfeited collateral is stated at the lower of cost (cash amount loaned) or market. Management provides an allowance for valuation and shrinkage based on its evaluation of the merchandise. Because pawn loans are made without the borrower's personal liability, the Company does not investigate the creditworthiness of the borrower, but evaluates the pledged personal property as a basis for its lending decision. The amount 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 disposition experience with similar items. The Company performs a physical count of its merchandise in each location on a cyclical basis and reviews the composition of inventory by category and age in order to assess the adequacy of the allowance, which was $1.4 million at December 31, 2002. Adverse changes in the disposition value of the Company's merchandise may result in the need to increase the valuation allowance. ALLOWANCE FOR LOSSES ON SMALL CONSUMER CASH ADVANCES. The Company maintains an allowance for losses on cash advances (including fees and interest) at a level estimated to be adequate to absorb credit losses inherent in the outstanding combined cash advance portfolio. The Company's cash advance product primarily services a customer base of non-prime borrowers. These advances are typically offered for a term of 7 to 45 days. Cash advances written during each calendar month are aggregated and tracked to develop a performance history. The Company stratifies the outstanding portfolio by age, delinquency and stage of collection when assessing the adequacy of the allowance for losses. Collection history is utilized to develop expected loss rates which are used for the establishment of the allowance. Increased defaults and credit losses may occur during a national or regional economic downturn, or could occur for other reasons, resulting in the need to increase the allowance. Unlike pawn loans, cash advances are unsecured, and the performance of the portfolio depends on the Company's ability to manage the default rate and collect on defaulted loans. The Company believes it effectively manages the risks inherent in this product by using a credit scoring system and by closely monitoring the performance of the portfolio. Any remaining unpaid balance of a cash advance is charged off once it becomes 60 days past due, or sooner if deemed uncollectible. VALUATION OF LONG-LIVED AND INTANGIBLE ASSETS. The Company assesses the impairment of long-lived and intangible assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Factors considered important which could trigger an impairment review include significant underperformance relative to expected historical or projected future cash flows, significant changes in the manner of use of the acquired assets or the strategy for the overall business, and significant negative industry trends. When management determines that the carrying value of long-lived and intangible assets may not be recoverable, an impairment is measured based on the excess of the assets' carrying value over the estimated fair value. INCOME TAXES. As part of the process of preparing the consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax exposure together with assessing temporary differences in recognition of income for tax and accounting purposes. These differences result in deferred tax assets and liabilities, which are included within the Company's consolidated balance Management's Discussion and Analysis of Results of Operations and Financial Condition -- Continued - -------------------------------------------------------------------------------- sheets. Management must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is not likely, it must establish a valuation allowance. An expense, or benefit, must be included within the tax provision in the statement of operations for any increase, or decrease, in the valuation allowance for a given period. Management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against net deferred tax assets. The Company has recorded a valuation allowance of $7.7 million as of December 31, 2002, due to uncertainties related to the ability to utilize a portion of the deferred tax assets resulting from capital losses. The valuation allowance is based on Company estimates of capital gains expected to be recognized during the period over which the capital losses may be used to offset such gains. In the event that the Company determined that it would not be able to realize all or part of its net deferred tax assets in the future, an adjustment to the deferred tax assets would be charged to income in the period that such determination was made. Likewise, should the Company determine that it would be able to realize its deferred tax assets in the future in excess of its net recorded amount, an adjustment to the deferred tax assets would increase, or decrease, income in the period that such determination was made. RESULTS OF OPERATIONS - -------------------------------------------------------------------------------- YEAR ENDED 2002 COMPARED TO YEAR ENDED 2001 CONSOLIDATED NET REVENUE. Consolidated net revenue increased $22.2 million, or 10.8%, to $227.1 million during 2002 from $204.9 million during 2001. The following table sets forth 2002 and 2001 net revenue by operating segment ($ in millions):
2002 2001 Increase (decrease) -------- -------- -------- ---------- Domestic lending $ 194.9 $ 177.0 $ 17.9 10.1% Foreign lending 28.7 24.5 4.2 17.1% -------- -------- -------- -------- Total lending 223.6 201.5 22.1 11.0% Check cashing 3.5 3.4 0.1 2.9% -------- -------- -------- -------- Consolidated $ 227.1 $ 204.9 $ 22.2 10.8% -------- -------- -------- --------
The components of net revenue are finance and service charges from pawn loans, which increased $4.4 million; net revenue from the disposition of merchandise, which increased $4.3 million; cash advance fees, which increased $13.1 million; and check cashing royalties and fees, which increased $0.4 million. Management believes that the trend of higher cash advance fees will continue during 2003 as a result of the expected continuation of high demand for the product and due to the significantly higher balance of cash advances at year end 2002 compared to the prior year. Management expects the continuation of moderate growth in domestic lending finance and service charges in 2003 as customers use both the cash advance and pawn loan to satisfy their capital needs. FINANCE AND SERVICE CHARGES. The following is a summary of finance and service charges related to pawn loans by operating segment for 2002 and 2001 ($ in millions):
2002 2001 Increase (decrease) -------- -------- -------- ---------- Domestic lending $ 94.5 $ 92.7 $ 1.8 1.9% Foreign lending 23.8 21.2 2.6 12.3% -------- -------- -------- -------- Total $ 118.3 $ 113.9 $ 4.4 3.9% -------- -------- -------- --------
Variations in finance and service charges on pawn loans are caused by changes in the average balance of pawn loans outstanding, the annualized yield of the pawn loan portfolio and the effects of translation of foreign currency amounts into United States dollars. The following table identifies the impact of underlying factors on the total change in finance and service charges on pawn loans ($ in millions):
Average Total Before Balance Loan Foreign Foreign Outstanding Yield Translation Translation Total ------------ ------------ ------------ ------------ ------------ Domestic lending $ (1.4) $ 3.2 $ 1.8 $ -- $ 1.8 Foreign lending 0.9 0.6 1.5 1.1 2.6 ------------ ------------ ------------ ------------ ------------ Total $ (0.5) $ 3.8 $ 3.3 $ 1.1 $ 4.4 ------------ ------------ ------------ ------------ ------------
Excluding the favorable impact of foreign currency translation, the consolidated average balance of pawn loans outstanding was 0.2% higher during 2002 than 2001. On a segment basis, the average balances of pawn loans were 1.5% lower and 3.5% higher for the domestic and foreign lending operations, respectively. The decrease in the average balance of domestic pawn loans outstanding was driven by a 2.9% decline in the average number of pawn loans outstanding during 2002, which was partially offset by a 1.4% increase in the average amount per loan. The lower average domestic loan balance outstanding is a reflection of the lower balances early in the year due to larger than usual per capita tax refunds believed to have been received by pawn customers during the first quarter of 2002. Management believes that this was also partly attributable to some customers choosing to satisfy their short-term borrowing needs through a cash advance instead of through a pawn loan. Strong pawn loan demand during the last two quarters of 2002 and the non-recurrence of the Internal Revenue Service's advance tax refunds distributed in August and September of 2001 have contributed to reversing the trend of lower year-over-year loan balances. Domestic pawn loan balances at December 31, 2002, were $1.9 million, or 2.4% higher than at December 31, 2001. The average balance of pawn loans outstanding denominated in local currencies increased 7.6% and decreased 2.7% in the United Kingdom and Sweden, respectively. Foreign loan demand was mixed as the average number of pawn loans outstanding in the United Kingdom and Sweden increased 5.0% and decreased 6.6%, respectively. Average amounts per loan were higher for both the United Kingdom and Sweden by 2.5% and 4.2%, respectively. The consolidated annualized loan yield, which represents the blended result derived from the distinctive loan yields realized from operations in the three countries, excluding the favorable impact of foreign currency translation was 100.4% in 2002, compared to 97.9% in 2001. There was an increase in the domestic annualized loan yield to 126.0% for 2002, compared to 121.8% for 2001. Improved performance of the pawn loan portfolio, including higher redemption rates and a slightly higher concentration of extended or renewed loans in the portfolio, contributed to the higher domestic yield. The blended yield on average foreign pawn loans outstanding increased to 54.3% in 2002, compared to 52.6% in 2001. The increase in the blended foreign yield was caused by a combination of higher loan redemption rates and higher yield on the disposition of unredeemed collateral at auction. Favorable currency translation adjustments contributed $1.1 million to the increase in foreign source finance and service charges in 2002 as compared to 2001, as the British pound and Swedish kronor were stronger relative to the United States dollar. The weighted average exchange rates used for translating earnings into dollars for the pound and kronor were 5.1% and 6.3% higher, respectively, during 2002 as compared to 2001. NET REVENUE FROM THE DISPOSITION OF MERCHANDISE. Net revenue from the disposition of merchandise represents the proceeds received from the disposition of merchandise in excess of the cost of merchandise sold. The following table summarizes, by operating segment, the change in the proceeds from the disposition of merchandise and the related net margin for 2002 as compared to 2001 ($ in millions):
Increase (decrease) ----------------------------------------------------------------- Proceeds from % Net % Disposition Change Margin Change ------------- ------------ ------------ ------------ Domestic lending $ 11.4 5.1% $ 3.0 3.8% Foreign lending 2.7 27.2% 1.3 52.7% ------------ ------------ ------------ ------------ Total $ 14.1 6.1% $ 4.3 5.4% ------------ ------------ ------------ ------------
Management's Discussion and Analysis of Results of Operations and Financial Condition -- Continued - -------------------------------------------------------------------------------- Proceeds from the disposition of merchandise increased $14.1 million, or 6.1%, in 2002, largely due to an increase in the disposition of scrap gold jewelry. In addition, disposition of merchandise at the Company's United Kingdom locations continues to grow as customers are introduced to this method of disposition. The consolidated merchandise turnover rate increased to 2.9 times during 2002 from 2.6 times during 2001. The margin on disposition of merchandise decreased slightly to 34.7% in 2002 from 34.9% in 2001. Excluding the effect of the disposition of scrap jewelry, the margin on disposition of merchandise increased to 37.0% in 2002 from 36.5% in 2001 due to a lower average cost of merchandise sold. The margin on disposition of scrap jewelry was 16.9% in 2002 compared to 11.7% in 2001, due to the prevailing higher market price of gold. CASH ADVANCE FEES. Cash advance fees increased $13.1 million to $19.1 million in 2002 as compared to $6.0 million in 2001. The increase resulted from higher demand for the small consumer cash advance product, which generated higher outstanding balances. The Company introduced the small consumer cash advance product to its broad group of locations in 2000. The product was available in 391 domestic lending units at December 31, 2002, including 309 units that offered the product on behalf of a third-party financial institution (the "Bank") that underwrites the advance to the customer and pays the Company a fee for its administrative services. Cash advance fees include revenue from the cash advance portfolio owned by the Company and fees for administrative services performed for the Bank. (Although small consumer cash advance transactions may take the form of loans or deferred check deposit transactions, the transactions are referred to throughout this discussion as "cash advances" for convenience.) The amount of cash advances written increased $74.7 million to $123.7 million in 2002 from $49.0 million in 2001. Included in the amount of cash advances written in 2002 and 2001 were $106.1 million and $37.4 million, respectively, extended to customers by the Bank. The average amount per cash advance increased to $284 from $261. The combined Company and Bank portfolio of small consumer cash advances generated $21.7 million in revenue during 2002, compared to $7.9 million in 2001. The outstanding combined portfolio of cash advances increased $5.3 million to $12.1 million at December 31, 2002, from $6.8 million at December 31, 2001. Included in these amounts are $4.0 million and $2.4 million for 2002 and 2001, respectively, that are included in the Company's consolidated balance sheets. An allowance for losses of $1.7 million and $0.7 million has been provided in the consolidated financial statements as of December 31, 2002 and 2001, respectively, which offsets the outstanding cash advance amounts. The net balance is recorded in "Other receivables and prepaid expenses" on the consolidated balance sheets. During January of 2003, the Company announced its intent to change third-party providers of this product, and the Bank announced that it would be exiting the small consumer cash advance business. The new third-party providers will be state-chartered financial institutions. The transition will occur over the first four months of 2003. Management does not anticipate that the change in providers of the cash advance product will have a material adverse impact on consumers' demand for the product, the Company's ability to offer the product through its lending locations, or on the Company's financial condition. See further discussion at Note 5 of Notes to Consolidated Financial Statements. CHECK CASHING ROYALTIES AND FEES. Check cashing revenue for Mr. Payroll increased $0.1 million, or 2.9%, in 2002, while check cashing fees for the United Kingdom increased $0.3 million, or 25.8%, for the same period. OPERATIONS AND ADMINISTRATION EXPENSES. Consolidated operations and administration expenses as a percentage of net revenue were 73.7% in 2002 compared to 75.8% in 2001. These expenses increased $12.0 million, or 7.8%, in 2002 compared to 2001. Domestic lending expenses increased $9.7 million, largely as a result of higher health insurance costs and higher incentive expenses associated with the improvement in operating results. Foreign lending operations expenses increased $2.3 million, primarily due to an increase in the number of locations and the increased focus on merchandise disposition in the United Kingdom. Mr. Payroll's expenses remained unchanged. CASH ADVANCE LOSS PROVISION. The Company maintains an allowance for losses on cash advances at a level projected to be adequate to absorb credit losses inherent in the outstanding combined cash advance portfolio. The cash advance loss provision is utilized to increase the allowance carried against the outstanding cash advance portfolio. The cash advance loss provision for domestic lending operations increased $4.4 million to $6.7 million in 2002, as compared to $2.3 million in 2001 due to the significant increase in the size of the portfolio. The loss provision as a percentage of cash advance fees decreased to 35.0% in the current year from 38.4% in the prior year. See Note 5 of Notes to Consolidated Financial Statements. DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense as a percentage of net revenue was 6.6% in 2002 compared to 8.1% in 2001. Total depreciation and amortization expense decreased $1.7 million, or 10.0%. Effective January 1, 2002, the Company adopted Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") . Under SFAS 142, the Company ceased amortizing all goodwill and other intangible assets that have indefinite useful lives. See Note 7 of Notes to Consolidated Financial Statements. A $3.1 million decline in amortization due to the adoption of SFAS 142 was partially offset by a $0.8 million increase in depreciation expense associated with the completion of the reconstruction of the Company's corporate headquarters late in 2001, after it was severely damaged by a tornado in March 2000, and a $0.6 million increase in depreciation from other additions. INTEREST EXPENSE. Net interest expense as a percentage of net revenue declined to 3.9% in 2002 from 4.7% in 2001. The amount decreased a net $0.7 million, or 6.8%, due to the effects of a 7.1% reduction in the Company's average debt balance. The average amount of debt outstanding during 2002 was $164.0 million, as compared to $176.4 million during 2001. The effective blended net borrowing cost was 5.5% in 2002 and 2001. Improved operating performance in the United States and United Kingdom and the sale of Rent-A-Tire were factors contributing to the reduction in average debt balance. LOSS FROM DERIVATIVE VALUATION FLUCTUATIONS. The adjustments to the estimated fair value of interest rate cap agreements during 2002 resulted in a loss of $0.2 million, as compared to a loss of $0.6 million in 2001. See Note 6 of Notes to Consolidated Financial Statements. INCOME TAXES. The Company's effective tax rate for 2002 was 36.0% as compared to 37.7% for 2001. Excluding goodwill amortization and the related tax effects, the Company's comparable consolidated effective tax rate was 34.7% for 2001. The Company's consolidated effective tax rate for 2002 was affected by an increase in the effective foreign tax rate and by a higher proportionate increase in domestic income, which is subject to a higher marginal tax rate. INCOME FROM CONTINUING OPERATIONS. Income from continuing operations was $18.5 million and $12.7 million for 2002 and 2001, respectively. Diluted income from continuing operations per share was $0.75 for 2002, as compared to $0.51 for 2001. YEAR ENDED 2001 COMPARED TO YEAR ENDED 2000 CONSOLIDATED NET REVENUE. Consolidated net revenue increased $10.0 million, or 5.1%, to $204.9 million during 2001 from $194.9 million during 2000. The following table sets forth 2001 and 2000 net revenue by operating segment ($ in millions):
2001 2000 Increase (decrease) ------------ ------------ ------------ ------------ Domestic lending $ 177.0 $ 167.5 $ 9.5 5.7% Foreign lending 24.5 24.2 0.3 1.2% ------------ ------------ ------------ ------------ Total lending 201.5 191.7 9.8 5.1% Check cashing 3.4 3.2 0.2 6.3% ------------ ------------ ------------ ------------ Consolidated $ 204.9 $ 194.9 $ 10.0 5.1% ------------ ------------ ------------ ------------
Management's Discussion and Analysis of Results of Operations and Financial Condition -- Continued - -------------------------------------------------------------------------------- The Company's domestic lending operations generated the majority of the increase in consolidated net revenue. Higher disposition of merchandise combined with the continued improvement in the margin on disposition of merchandise and the expansion of the Company's small consumer cash advance product accounted for the higher net revenue. Finance and service charges from pawn loans decreased $0.9 million; net revenue from the disposition of merchandise increased $5.8 million; cash advance fees increased $4.8 million; and check cashing royalties and fees increased $0.3 million. FINANCE AND SERVICE CHARGES. The following is a summary of finance and service charges related to pawn loans by operating segment for 2001 and 2000 ($ in millions):
2001 2000 Increase (decrease) ------------ ------------ ------------ ------------ Domestic lending $ 92.7 $ 92.0 $ 0.7 0.8% Foreign lending 21.2 22.8 (1.6) (7.0)% ------------ ------------ ------------ ------------ Total $ 113.9 $ 114.8 $ (0.9) (0.8)% ------------ ------------ ------------ ------------
The following table identifies the impact of underlying factors on the total change in finance and service charges ($ in millions):
Average Total Before Balance Loan Foreign Foreign Outstanding Yield Translation Translation Total ------------ ------------ ------------ ------------ ------------ Domestic lending $ 1.9 $ (1.2) $ 0.7 $ -- $ 0.7 Foreign lending (1.4) 1.5 0.1 (1.7) (1.6) ------------ ------------ ------------ ------------ ------------ Total $ 0.5 $ 0.3 $ 0.8 $ (1.7) $ (0.9) ------------ ------------ ------------ ------------ ------------
Excluding the negative impact of foreign currency translation, the consolidated average balance of pawn loans outstanding was 1.1% lower during 2001 than 2000. On a segment basis, the average balances of pawn loans were 2.0% higher and 6.1% lower for the domestic and foreign lending operations, respectively. The increase in the average balance of domestic pawn loans outstanding was driven by a 1.4% growth in the average number of pawn loans outstanding during 2001 coupled with a 0.7% increase in the average amount per loan. Management believes that the increase in the number of domestic pawn loans was partly attributed to adverse changes in the U.S. economy that were conducive to an increase in loan demand. Denominated in local currencies, the average balance of pawn loans outstanding decreased 7.6% and 3.8% in the United Kingdom and Sweden, respectively. Foreign loan demand continued to be weaker as the average number of pawn loans outstanding in both the United Kingdom and Sweden declined 5.3% and 6.6%, respectively. Average amounts per loan were 2.4% lower in the United Kingdom and 3.1% higher in Sweden. Excluding the negative effects of foreign currency translation, the consolidated annualized loan yield was 96.5% in 2001, compared to 94.8% in 2000. Although there was a slight decrease in the domestic annualized loan yield to 121.8% for 2001, compared to 123.3% for 2000, the blended yield on average foreign pawn loans outstanding increased to 52.4% in 2001 compared to 49.0% in 2000. All of the increase in the blended yield occurred in the United Kingdom and was caused by a combination of higher loan redemption rates and higher yield on the disposition of unredeemed collateral at auction. Finance and service charges declined $1.7 million in 2001 due to negative foreign currency translation adjustments resulting from the continued strengthening of the United States dollar against both foreign currencies. The weighted average exchange rates used for translating earnings into dollars for the British pound and Swedish kronor were 4.8% and 13.0% lower, respectively, during 2001 compared to 2000. NET REVENUE FROM THE DISPOSITION OF MERCHANDISE. The combination of increased proceeds and higher margins resulted in a $5.8 million, or 7.7%, increase in net revenue from the disposition of merchandise. The following table summarizes, by operating segment, the change in the proceeds from the disposition of merchandise and the related net margin for 2001 as compared to 2000 ($ in millions):
Increase (decrease) ---------------------------------------------------------------- Proceeds from % Net % Disposition Change Margin Change ------------ ------------ ------------ ------------ Domestic lending $ 4.3 2.0% $ 4.0 5.3% Foreign lending 1.0 11.6% 1.8 250.5% ------------ ------------ ------------ ------------ Total $ 5.3 2.4% $ 5.8 7.7% ------------ ------------ ------------ ------------
Proceeds from the disposition of merchandise increased $5.3 million, or 2.4%, in 2001, largely due to a slight increase in the volume of items sold in the domestic lending locations and an increase in the disposition of scrap gold jewelry. In addition, the United Kingdom continued to emphasize the disposition of merchandise in their locations. The consolidated merchandise turnover rate increased to 2.6 times during 2001 from 2.5 times during 2000, and the margin on disposition of merchandise increased to 34.8% in 2001 from 33.2% in 2000. Excluding the effect of the disposition of scrap jewelry, the margin on disposition of merchandise increased to 36.5% in 2001 from 35.3% in 2000 due to a lower average cost of merchandise sold. The margin on disposition of scrap jewelry was 11.7% in 2001 compared to 2.6% in 2000, due to a lower average cost per ounce for domestic dispositions. CASH ADVANCE FEES. Cash advance fees increased $4.8 million to $6.0 million in 2001 as compared to $1.2 million in 2000. The increase resulted from higher demand for the small consumer cash advance product, which generated higher outstanding balances. The Company introduced the small consumer cash advance product to its broad group of locations in 2000. The product was available in 386 domestic lending units at the end of 2001, including 315 units that offered the product on behalf of the Bank. The amount of cash advances written increased $38.9 million to $49.0 million in 2001 from $10.1 million in 2000. Included in the amount of cash advances written in 2001 and 2000 were $37.4 million and $1.4 million, respectively, extended to customers by the Bank. The average amount per cash advance increased to $261 from $187. The combined Company and Bank portfolio of small consumer cash advances generated $7.9 million in revenue during 2001 compared to $1.3 million in 2000. The outstanding combined portfolio of cash advances increased $5.2 million to $6.8 million at December 31, 2001, from $1.6 million at December 31, 2000. Included in these amounts are $2.4 million and $1.0 million for 2001 and 2000, respectively, that are included in the Company's consolidated balance sheets. An allowance for losses of $0.7 million and $0.2 million has been provided in the consolidated financial statements as of December 31, 2001 and 2000, respectively, which offsets the outstanding cash advance amounts. The net balance is recorded in "Other receivables and prepaid expenses" on the consolidated balance sheets. CHECK CASHING ROYALTIES AND FEES. Check cashing revenue for Mr. Payroll increased $0.2 million, or 7.0%, in 2001, while check cashing fees for the United Kingdom increased $0.1 million, or 13.5%, for the same period. OPERATIONS AND ADMINISTRATION EXPENSES. Consolidated operations and administration expenses as a percentage of net revenue were 75.8% in 2001 compared to 76.1% in 2000. These expenses increased $7.0 million, or 4.7%, in 2001 as compared to 2000. Domestic lending expenses increased $7.0 million, largely as a result of higher personnel costs and expenses associated with the advertising and promotion of the cash advance product. Foreign lending operations expenses increased $0.1 million primarily due to an increase in the number of locations in the United Kingdom. Mr. Payroll's expenses decreased $0.1 million in 2001 compared to 2000, primarily as a result of lower losses on returned checks. CASH ADVANCE LOSS PROVISION. The cash advance loss provision for domestic lending operations increased $1.8 million to $2.3 million in 2001 as compared to $0.5 million in 2000 due to the increase in the size of the portfolio. Loss provision as a percentage of cash advance fees decreased slightly to 38.4% in 2001 from 38.8% in 2000. Management's Discussion and Analysis of Results of Operations and Financial Condition -- Continued - -------------------------------------------------------------------------------- DEPRECIATION AND AMORTIZATION. Depreciation and amortization expense as a percentage of net revenue was 8.1% in 2001 compared to 8.4% in 2000. Total depreciation and amortization expense increased $0.3 million, or 1.7%. Depreciation of additional equipment and kiosks for Mr. Payroll and depreciation for additions to computer systems in the United Kingdom accounted for the increase. INTEREST EXPENSE. Net interest expense as a percentage of net revenue declined to 4.7% in 2001 from 6.7% in 2000. The amount decreased a net $3.5 million, or 26.5%, due to the effect of lower blended borrowing costs and a 7.1% reduction in the Company's average debt balance. The effective blended borrowing cost decreased to 5.5% in 2001 from 6.9% in 2000. The average amount of debt outstanding decreased during 2001 to $176.4 million from $189.9 million during 2000. A lower average pawn loan balance during the year, improved operating performance in the United Kingdom and the receipt of insurance proceeds in late 2000 from claims resulting from tornado damage to the corporate headquarters in March 2000 were factors contributing to the lower debt balance. LOSS FROM DERIVATIVE VALUATION FLUCTUATIONS. Effective January 1, 2001, the Company implemented Statement of Financial Accounting Standards No. 133, "Accounting for Derivative Instruments and Hedging Activities" and its corresponding amendments under Statement of Financial Accounting Standards No. 138, "Accounting for Certain Derivative Instruments and Certain Hedging Activities--An Amendment of FASB Statement No. 133." The adjustments to the estimated fair value of interest rate cap agreements during 2001 resulted in a loss of $0.6 million. In 2000, the amortization of the cost of interest rate cap agreements was included in interest expense. OTHER ITEMS. During 2000, the Company recorded a $9.7 million gain from the settlement of the insurance claim resulting from the severe damage to its corporate headquarters in Fort Worth, Texas, by a tornado in March 2000. Income tax expense of $3.4 million related to the gain is included in the provision for income taxes. In 2000, the Company's share of the net losses of innoVentry Corp. was $15.6 million, and the Company's gain resulting from innoVentry's issuance of its own stock was $0.1 million. No additional gains or losses have been recorded since June 30, 2000. The Company has accounted for its 19.3% voting interest in innoVentry, that has a carrying value of zero, by the cost method since February 2001. innoVentry ceased business operations in September 2001 due to its inability to raise additional financing. Since the Company's investment in and advances to innoVentry were written down to zero in 2000, innoVentry's decision to cease operations had no effect on the Company's consolidated financial position or results of operations. See Note 4 of Notes to Consolidated Financial Statements. INCOME TAXES. The Company's effective tax rate for 2001 was 37.7%. The Company's consolidated effective tax rate was affected in 2000 by 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. Excluding the items related to the Company's investment in innoVentry and their related tax effects, the Company's consolidated effective tax rate was 38.3% for 2000. Excluding goodwill amortization and the related tax effects, the Company's comparable consolidated effective tax rates were 34.7% and 37.0% for 2001 and 2000, respectively. INCOME FROM CONTINUING OPERATIONS. Income from continuing operations was $12.7 million and $0.7 million for 2001 and 2000, respectively. Diluted income from continuing operations per share was $0.51 for 2001, compared to $0.03 for 2000. Excluding various non-operating unusual items, adjusted diluted income from continuing operations per share increased to $0.51 for 2001 from $0.38 for 2000. Supplemental information regarding the effects of the unusual items is as follows (in millions, except per share amounts):
2001 2000 ------------ ------------ Income from continuing operations before income taxes $ 20.4 $ 10.8 Less unusual items -- Gain from disposal of assets -- (9.7) Equity in loss of unconsolidated subsidiary -- 15.6 Gain from issuance of subsidiary's stock -- (0.1) ------------ ------------ Income from continuing operations before unusual items and income taxes $ 20.4 $ 16.6 ------------ ------------ Income from continuing operations after tax excluding unusual items $ 12.7 $ 9.9 ------------ ------------ Income from continuing operations after tax excluding unusual items per share - Diluted $ 0.51 $ 0.38 ------------ ------------
LIQUIDITY AND CAPITAL RESOURCES - -------------------------------------------------------------------------------- The Company's cash flows and other key indicators of liquidity are summarized as follows ($ in millions):
Years Ended December 31, ------------------------------------------------ 2002 2001 2000 ------------ ------------ ------------ Operating activities cash flows $ 47.1 $ 39.2 $ 33.4 Investing activities cash flows: Pawn loans and cash advances (10.0) (3.2) 2.1 Other investing activities (15.0) (32.3) 4.5 Financing activities cash flows (28.2) 1.0 (32.6) ------------ ------------ ------------ Working capital $ 179.5 $ 174.6 $ 190.3 Current ratio 5.1x 4.5x 6.9x Debt/EBITDA(1) 2.8x 3.6x 3.7x Merchandise turnover 2.9x 2.6x 2.5x ------------ ------------ ------------
(1) EBITDA is defined as income from operations before depreciation and amortization. CASH FLOWS FROM OPERATING ACTIVITIES. Net cash provided by operating activities of continuing operations was $47.1 million for 2002. CASH FLOWS FROM INVESTING ACTIVITIES. An increase in the Company's investment in pawn loans and cash advances during 2002 required $10.0 million of cash. Additionally, the Company invested $11.3 million in purchases of property and equipment in 2002 for property improvements, the remodeling of selected operating units and additions to computer systems for lending operations. Approximately $1.1 million of this amount was related to the reconstruction of the Company's corporate headquarters. During 2002, the Company acquired four lending locations for $3.7 million. Management anticipates that capital expenditures for 2003 will be approximately $14 to 18 million. These expenditures will relate to the establishment of new lending locations, remodeling of selected operating units and enhancements to information systems. In addition, the Company may add 20 to 30 new lending locations, through the acquisition of existing pawnshop locations and the establishment of both new pawnshop and new cash advance locations. CASH FLOWS FROM FINANCING ACTIVITIES. The Company received proceeds of $42.5 million from the issuance of long-term note obligations and used cash to make payments of $67.5 million on bank lines of credit and other debt obligations, $1.2 million for dividends and $2.4 million for the purchase of treasury shares. On July 25, 2002, 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 2000. During 2002, the Company purchased 109,000 shares for an aggregate amount of $0.9 million under the 2002 authorization and 176,700 shares for an aggregate amount of $1.3 million under the 2000 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. Management's Discussion and Analysis of Results of Operations and Financial Condition -- Continued - -------------------------------------------------------------------------------- In 2002, the Company issued $42.5 million of 7.20% senior unsecured notes, due August 2009. The notes are payable in five equal annual payments beginning August 2005. The Company also refinanced its U.S. line of credit with a $90 million senior unsecured revolving line of credit maturing August 2005. Interest on the line of credit is charged, at the Company's option, at either LIBOR (1.4375% at December 31, 2002) plus a margin or at the Agent's base rate. The margin on the line of credit varies from 1.25% to 2.50%, depending on the Company's ratio of indebtedness to cash flow as defined in the agreement. The Company pays a fee of .375% per annum on the unused portion. Net proceeds received under these agreements were used to reduce existing indebtedness and will be utilized for general corporate purposes. The weighted average interest rate (including margin) on the U.S. line of credit at December 31, 2002 was 4.19%. The Company had an interest rate cap agreement, totaling $20 million, that expired in January 2003 that limited the maximum LIBOR rate to 7%, and has an interest rate cap agreement totaling $30 million that expires in February 2004 that limits the maximum LIBOR rate to 5.5%. At December 31, 2002, $44.5 million was outstanding on the Company's $90 million U.S. line of credit. The Company extended its multi-currency line of credit for one year to April 30, 2004, and reduced the maximum amount to L 15 million (approximately $24.1 million at December 31, 2002) from L 20 million (approximately $32.2 million at December 31, 2002). The Company's foreign subsidiaries are co-borrowers on this multi-currency line of credit. Funds may be drawn in British pounds, bearing interest at the Bank's cost of funds plus a margin of 60 basis points. Funds up to the equivalent of L 15 million may be drawn in Swedish kronor, bearing interest at the Bank's cost of funds plus a margin of 65 basis points. In the aggregate, the British pound and Swedish kronor drawings may not exceed the equivalent of L 15 million. The Company pays a fee of 0.25% per annum on the unused portion of this line of credit. As of December 31, 2002, amounts outstanding under this line of credit were L 4.6 million (approximately $7.3 million) and SEK 38 million (approximately $4.4 million). The Company extended its SEK 30 million line of credit (approximately $3.5 million as of December 31, 2002) with a commercial bank to mature on May 30, 2003. Interest on this line of credit is charged at the Bank's base funding rate plus 1%. The Company pays a commitment fee of 0.25% per annum on the total amount of this line of credit. There were no amounts outstanding on this line of credit as of December 31, 2002. The Company has an interest rate cap agreement for SEK 100 million (approximately $11.5 million as of December 31, 2002) that expires in August 2003 and limits the Stockholm Interbank Offering Rate to 5.5%. The weighted average interest rates on the British pound and Swedish kronor borrowings at December 31, 2002, were 5.19% and 4.77%, respectively. The credit agreements and the senior unsecured notes require the Company to maintain certain financial ratios. The Company is in compliance with all covenants and other requirements set forth in its debt agreements. A significant decline in demand for the Company's services may cause the Company to reduce its planned level of capital expenditures and lower its working capital needs in order to maintain compliance with the financial ratios in those agreements. A violation of the credit agreements could increase the Company's borrowing costs and could even adversely affect the Company's ability to renew existing credit facilities or obtain access to new credit facilities in the future. The Company does not anticipate a significant decline in demand for its services and has historically been successful in maintaining compliance with and renewing its debt agreements. The following table summarizes the Company's contractual obligations at December 31, 2002, and the effect such obligations are expected to have on its liquidity and cash flow in future periods, assuming that the company's lines of credit are not renewed or extended in future periods (in millions):
Other Non-cancelable Lines long-term leases for of credit debt continuing operations Total ------------ ------------ --------------------- ------------ 2003 $ -- $ 12.6 $ 19.3 $ 31.9 2004 11.7 8.3 15.2 35.2 2005 44.5 16.8 10.2 71.5 2006 -- 16.8 7.4 24.2 2007 -- 16.8 4.7 21.5 Thereafter -- 21.2 15.0 36.2 ------------ ------------ -------------------- ------------ Total $ 56.2 $ 92.5 $ 71.8 $ 220.5
Management believes that borrowings available under the credit facilities, cash generated from operations and current working capital of $179.5 million should be sufficient to meet the Company's anticipated future capital requirements. 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 appropriate 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 effectiveness, if any, of the interest rate cap agreements, the Company had net variable rate borrowings outstanding of $56.2 million and $112.6 million at December 31, 2002 and 2001, respectively. If prevailing interest rates were to increase 100 basis points over the rates at December 31, 2002 and 2001, respectively, and the variable rate borrowings outstanding remained constant, the Company's interest expense would increase by $0.6 million and $1.1 million, and net income after taxes would decrease by $0.4 million and $0.7 million in 2002 and 2001, respectively. If prevailing interest rates were to decrease 100 basis points from the rates at December 31, 2002 and 2001, respectively, the combined fair values of the Company's outstanding fixed rate plus capped rate debt ($96.5 million and $62.3 million, respectively) would increase by $3.1 million and $1.8 million as of December 31, 2002 and 2001, 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 $2.7 million and $10.8 million at December 31, 2002 and 2001, respectively. A hypothetical 10% decline in the exchange rates of the British pound and the Swedish kronor at December 31, 2002 and 2001, would have resulted in additional other comprehensive losses of $7.2 million and $5.7 million, respectively. Net income from foreign operations during 2002, 2001 and 2000 translated to $6.6 million, $5.4 million and $4.9 million, respectively. A hypothetical 10% decline in the weighted average exchange rates for each of the foreign currencies during the years ended December 31, 2002, 2001 and 2000, would have decreased net income after taxes by $0.7 million, $0.5 million and $0.5 million, 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. In the event the Company was to temporarily transfer funds between currencies, it would concurrently enter into short-term currency swaps to eliminate the risk of currency fluctuations. No foreign currency swaps were outstanding at December 31, 2002 or 2001. Management's Discussion and Analysis of Results of Operations and Financial Condition -- Continued - -------------------------------------------------------------------------------- GOLD PRICE RISK. The Company periodically uses forward sale contracts with a major bullion bank to sell a portion of the expected amount of fine gold produced in the normal course of business from its liquidation of forfeited gold merchandise. A significant decrease in the price of gold would result in a reduction of proceeds from the disposition of scrap jewelry to the extent that amounts sold were in excess of the amount of contracted forward sales. In addition, a significant and sustained decline in the price of gold would negatively impact the value of goods pledged as collateral by customers and identified as scrap jewelry by the Company. In this instance, most customers would be willing to add additional items of value to their pledge in order to obtain the desired loan amount. However, those customers unable or unwilling to provide additional collateral would receive lower loan amounts, possibly resulting in a lower balance of pawn loans outstanding for the Company. RECENT ACCOUNTING PRONOUNCEMENTS - -------------------------------------------------------------------------------- See discussion in Note 2 of Notes to Consolidated Financial Statements. 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 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 that could cause results or events to differ from current expectations are described below. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the operations, performance, development and results of the Company's business. RISK FACTORS - -------------------------------------------------------------------------------- o CHANGES IN CUSTOMER DEMAND FOR THE COMPANY'S PRODUCTS AND SPECIALTY FINANCIAL SERVICES. Although the Company's products and services are a staple of its customer base, a significant change in the needs or wants of customers and the Company's failure to adapt to those needs or wants could result in a significant decrease in the revenues of the Company. o THE ACTIONS OF THIRD PARTIES WHO OFFER PRODUCTS AND SERVICES AT THE COMPANY'S LOCATIONS. The Company offers products and services to its customers made available by various third parties. A failure of a third-party provider to provide its product or service or to maintain the quality and consistency of its product or service could result in a loss of customers and a related loss in revenue from those products or services. o THE ABILITY OF THE COMPANY TO OPEN AND ACQUIRE NEW OPERATING UNITS IN ACCORDANCE WITH ITS PLANS. The Company's expansion program is subject to numerous factors which cannot be predicted or controlled, such as the availability of attractive acquisition candidates or sites with suitable terms and general economic conditions. o CHANGES IN COMPETITION FROM VARIOUS SOURCES SUCH AS BANKS, SAVINGS AND LOANS, SHORT-TERM CONSUMER LENDERS AND OTHER SIMILAR FINANCIAL SERVICES ENTITIES, AS WELL AS RETAIL BUSINESSES THAT OFFER PRODUCTS AND SERVICES OFFERED BY THE COMPANY. The Company encounters significant competition in connection with its lending and merchandise disposition operations from other pawnshops and other forms of financial institutions such as consumer finance companies. Significant increases in these competitive influences could adversely affect the Company's operations through a decrease in the number of cash advances and pawn loans originated, resulting in lower levels of earning assets in these categories. o CHANGES IN ECONOMIC CONDITIONS. While the credit risk for most of the Company's consumer lending is mitigated by the collateralized nature of pawn lending, a protracted deterioration in the economic environment could adversely affect the Company's operations through a deterioration in performance of its pawn loan or cash advance portfolios, or by reducing consumer demand for the purchase of pre-owned merchandise. o REAL ESTATE MARKET FLUCTUATIONS. A significant rise in real estate prices could result in an increase in the cost of store leases as the Company opens new locations and renews leases for existing locations. o INTEREST RATE FLUCTUATIONS. Interest rates offered by lending institutions could rise, which would, in turn, increase the cost of borrowing. o CHANGES IN THE CAPITAL MARKETS. The Company regularly accesses the debt capital markets to refinance existing debt obligations and to obtain capital to finance growth. Efficient access to these markets is critical to the Company's ongoing financial success; however, the Company's future access to the debt capital markets could become restricted should the Company experience deterioration of its cash flows, balance sheet quality or overall business or industry prospects. o CHANGES IN TAX AND OTHER LAWS AND GOVERNMENTAL RULES AND REGULATIONS APPLICABLE TO THE SPECIALTY FINANCIAL SERVICES INDUSTRY. The Company's lending activities are subject to extensive regulation and supervision under various federal, state and local laws, ordinances and regulations. The Company faces a risk that new laws and regulations could be enacted that could have a negative impact on the Company's domestic or international lending activities. o OTHER RISKS INDICATED IN THE COMPANY'S FILINGS WITH THE SECURITIES AND EXCHANGE COMMISSION. o OTHER FACTORS DISCUSSED UNDER QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK. Management's Discussion and Analysis of Results of Operations and Financial Condition -- Continued - -------------------------------------------------------------------------------- (Dollars in thousands-December 31) SUMMARY The Company acquired 9 operating units, established 4 locations and combined or closed 24 locations, for a net decline of 11 company-owned locations for the three years ended December 31, 2002. In addition, 6 franchise units were opened and 4 units were closed for a net increase of 2 franchise locations. In September 2001, the Company announced plans to exit the rent-to-own business. Therefore, the net operating results, net assets and net cash flows of Rent-A-Tire, Inc. have been reported as "Discontinued Operations" in the accompanying financial statements. See Note 3 of Notes to Consolidated Financial Statements. Selected consolidated and operations data for continuing operations for the three years ended December 31, 2002, are presented below:
2002 2001 2000 ---------- ---------- ---------- REVENUE Finance and service charges $ 118,248 $ 113,863 $ 114,711 Proceeds from disposition of merchandise 245,943 231,879 226,538 Cash advance fees 19,084 5,993 1,230 Check cashing royalties and fees 4,568 4,194 3,881 ---------- ---------- ---------- TOTAL REVENUE 387,843 355,929 346,360 ---------- ---------- ---------- COSTS OF REVENUE Disposed merchandise 160,711 150,991 151,407 ---------- ---------- ---------- NET REVENUE $ 227,132 $ 204,938 $ 194,953 ---------- ---------- ---------- OTHER DATA CONSOLIDATED OPERATIONS: Net revenue contribution by source -- Finance and service charges 52.1% 55.6% 58.8% Margin on disposition of merchandise 37.5% 39.5% 38.6% Cash advance fees 8.4% 2.9% 0.6% Check cashing royalties and fees 2.0% 2.0% 2.0% Expenses as a percentage of net revenue -- Operations and administration 73.7% 75.8% 76.1% Cash advance loss provision 2.9% 1.1% 0.2% Depreciation and amortization 6.6% 8.1% 8.4% Interest, net 3.9% 4.7% 6.7% Income from operations as a percentage of total revenue 9.8% 8.6% 8.6% ---------- ---------- ---------- LENDING OPERATIONS: PAWN LOANS Annualized yield on pawn loans 99.5% 97.9% 94.8% Total amount of pawn loans written $ 408,467 $ 403,724 $ 408,091 Average pawn loan balance outstanding $ 118,871 $ 116,368 $ 121,045 Average pawn loan balance per average location in operation $ 260 $ 253 $ 261 Average pawn loan amount at year-end (not in thousands) $ 107 $ 99 $ 101 Margin on disposition of merchandise as a percentage of proceeds from disposition of merchandise 34.7% 34.9% 33.2% Average annualized merchandise turnover 2.9x 2.6x 2.5x Average merchandise held for disposition per average location $ 123 $ 128 $ 128 SMALL CONSUMER CASH ADVANCES Total amount of cash advances written (a) $ 123,705 $ 49,003 $ 10,066 Number of cash advances written (not in thousands) (a) 435,160 188,102 53,686 Average amount per cash advance (not in thousands) (a) $ 284 $ 261 $ 187 Average number of locations offering cash advances (not in thousands) (a) 390 356 123 Combined advances outstanding (a) $ 12,139 $ 6,763 $ 1,636 Cash advances outstanding per location at year-end (a) $ 31 $ 18 $ 5 Cash advances outstanding before allowance for losses (b) $ 3,958 $ 2,406 $ 1,054 Owned locations in operation at end of year 455 460 463 Additional franchise locations at end of year 13 13 16 Total locations at end of year 468 473 479 Average number of owned locations in operation 457 460 464 ---------- ---------- ---------- CHECK CASHING OPERATIONS (c): Check cashing royalties and fees $ 3,563 $ 3,395 $ 3,177 Franchised and owned check cashing centers -- Face amount of checks cashed $1,041,434 $ 976,132 $ 910,239 Gross fees collected $ 14,708 $ 13,528 $ 12,400 Fees as percentage of checks cashed 1.4% 1.4% 1.4% Average check cashed (not in thousands) $ 349 $ 337 $ 327 Centers in operation at end of year 135 134 132 Average centers in operation for the year 135 135 136 ---------- ---------- ----------
(a) Includes advances made by the Company and advances made by a third-party financial institution. (b) Amounts recorded in the Company's consolidated financial statements. (c) Information presented in this section relates to Mr. Payroll. "Check cashing royalties and fees" on the consolidated statements of operations also includes United Kingdom check cashing fees. Management's Discussion and Analysis of Results of Operations and Financial Condition -- Continued - -------------------------------------------------------------------------------- DOMESTIC LENDING OPERATIONS (Dollars in thousands) The following table sets forth selected financial data for the Company's domestic lending operations for the three years ended December 31, 2002:
2002 2001 2000 ---------- ---------- ---------- REVENUE Finance and service charges $ 94,458 $ 92,687 $ 91,950 Proceeds from disposition of merchandise 233,396 222,013 217,701 Cash advance fees 19,084 5,993 1,230 ---------- ---------- ---------- TOTAL REVENUE 346,938 320,693 310,881 ---------- ---------- ---------- COSTS OF REVENUE Disposed merchandise 152,071 143,684 143,300 ---------- ---------- ---------- NET REVENUE $ 194,867 $ 177,009 $ 167,581 ---------- ---------- ---------- OTHER DATA Net revenue contribution by source -- Finance and service charges 48.5% 52.4% 54.9% Margin on disposition of merchandise 41.7% 44.3% 44.4% Cash advance fees 9.8% 3.3% 0.7% Expenses as a percentage of net revenue -- Operations and administration 76.6% 78.9% 79.2% Cash advance loss provision 3.4% 1.3% 0.3% Depreciation and amortization 6.1% 7.7% 8.2% Interest, net 2.6% 2.5% 3.7% Income from operations as a percentage of total revenue 7.8% 6.7% 6.7% Annualized yield on pawn loans 126.0% 121.8% 123.3% Total amount of pawn loans written $ 302,911 $ 308,365 $ 301,058 Average pawn loan balance outstanding $ 74,969 $ 76,102 $ 74,579 Average pawn loan balance per average location in operation $ 187 $ 187 $ 181 Average pawn loan amount at year-end (not in thousands) $ 84 $ 82 $ 83 Margin on disposition of merchandise as a percentage of proceeds from disposition of merchandise 34.8% 35.3% 34.2% Average annualized merchandise turnover 2.9x 2.6x 2.5x Average merchandise held for disposition per average location $ 130 $ 138 $ 137 Owned locations in operation -- Beginning of year 404 410 413 Acquired 2 2 -- Start-ups -- 2 1 Combined or closed (10) (10) (4) End of year 396 404 410 Additional franchise locations at end of year 13 13 16 Total locations at end of year 409 417 426 Average number of owned locations in operation 400 406 411 ---------- ---------- ----------
Management's Discussion and Analysis of Results of Operations and Financial Condition -- Continued - -------------------------------------------------------------------------------- FOREIGN LENDING OPERATIONS (Dollars in thousands) The following table sets forth selected combined financial data in U.S. dollars for Harvey & Thompson, Ltd. and Svensk Pantbelaning for the three years ended December 31, 2002, using the following currency exchange rates:
2002 2001 2000 ---------- ---------- ---------- Harvey & Thompson, Ltd. (British pound per U.S. dollar) -- Balance sheet data - end of period rate 0.6212 0.6868 0.6697 Statements of operations data - weighted average rate for the period 0.6608 0.6948 0.6613 Svensk Pantbelaning (Swedish kronor per U.S. dollar) -- Balance sheet data - end of period rate 8.6806 10.4425 9.4068 Statements of operations data - weighted average rate for the period 9.6963 10.3427 9.1493 ---------- ---------- ---------- REVENUE Finance and service charges $ 23,790 $ 21,176 $ 22,761 Proceeds from disposition of merchandise 12,547 9,866 8,837 Check cashing fees 1,005 799 704 ---------- ---------- ---------- TOTAL REVENUE 37,342 31,841 32,302 ---------- ---------- ---------- COSTS OF REVENUE Disposed merchandise 8,640 7,307 8,107 ---------- ---------- ---------- NET REVENUE $ 28,702 $ 24,534 $ 24,195 ---------- ---------- ---------- OTHER DATA Net revenue contribution by source -- Finance and service charges 82.9% 86.3% 94.1% Margin on disposition of merchandise 13.6% 10.4% 3.0% Check cashing fees 3.5% 3.3% 2.9% Expenses as a percentage of net revenue -- Operations and administration 56.0% 56.1% 56.3% Depreciation and amortization 8.6% 8.6% 8.1% Interest, net 1.9% 2.9% 5.7 Income from operations as a percentage of total revenue 27.2% 27.2% 26.7% Annualized yield on pawn loans 54.2% 52.6% 49.0% Total amount of pawn loans written $ 105,556 $ 95,359 $ 107,033 Average pawn loan balance outstanding $ 43,902 $ 40,266 $ 46,466 Average pawn loan balance per average location in operation $ 770 $ 746 $ 877 Average pawn loan amount at year-end (not in thousands) $ 191 $ 161 $ 168 Margin on disposition of merchandise as a percentage of proceeds from disposition of merchandise 31.1% 25.9% 8.3% Average annualized merchandise turnover 2.2x 2.5x 2.5x Average merchandise held for disposition per average location $ 69 $ 54 $ 62 Owned locations in operation -- Beginning of year 56 53 53 Acquired 2 3 -- Start-ups 1 -- -- End of year 59 56 53 Average number of owned locations in operation 57 54 53 ---------- ---------- ----------
Consolidated Balance Sheets -- December 31 - -------------------------------------------------------------------------------- (In thousands, except share data)
2002 2001 ------------ ------------ ASSETS Current assets: Cash and cash equivalents $ 3,951 $ 6,394 Pawn loans 127,388 116,590 Merchandise held for disposition, net 54,444 63,392 Finance and service charges receivable 21,096 19,396 Other receivables and prepaid expenses 10,881 7,992 Deferred tax assets 5,392 7,795 Net current assets of discontinued operations -- 3,008 ------------ ------------ Total current assets 223,152 224,567 Property and equipment, net 67,254 68,450 Goodwill 79,833 76,686 Other assets 6,239 5,743 Deferred tax assets -- 1,846 Net non-current assets of discontinued operations -- 5,598 ------------ ------------ Total assets $ 376,478 $ 382,890 ------------ ------------ LIABILITIES AND STOCKHOLDERS' EQUITY Current liabilities: Accounts payable and accrued expenses $ 24,297 $ 27,939 Customer deposits 4,050 3,961 Reserve for disposal of discontinued operations 623 7,953 Income taxes currently payable 2,086 1,123 Current portion of long-term debt 12,571 9,020 ------------ ------------ Total current liabilities 43,627 49,996 Deferred tax liabilities 4,385 1,701 Long-term debt 136,131 162,762 ------------ ------------ Commitments and contingencies (Note 19) Stockholders' equity: Common stock, $0.10 par value per share, 80,000,000 shares authorized; 30,235,164 shares issued in 2002 and 2001 3,024 3,024 Paid in surplus 127,819 127,821 Retained earnings 113,278 95,192 Accumulated other comprehensive loss (2,718) (10,820) Notes receivable - stockholders (5,864) (5,890) ------------ ------------ 235,539 209,327 Less - shares held in treasury, at cost (5,939,794 in 2002 and 5,643,318 in 2001) (43,204) (40,896) ------------ ------------ Total stockholders' equity 192,335 168,431 ------------ ------------ Total liabilities and stockholders' equity $ 376,478 $ 382,890 ------------ ------------
See notes to consolidated financial statements. Consolidated Statements of Operations -- Years Ended December 31 - -------------------------------------------------------------------------------- (In thousands, except per share data)
2002 2001 2000 ------------ ------------ ------------ REVENUE Finance and service charges $ 118,248 $ 113,863 $ 114,711 Proceeds from disposition of merchandise 245,943 231,879 226,538 Cash advance fees 19,084 5,993 1,230 Check cashing royalties and fees 4,568 4,194 3,881 ------------ ------------ ------------ TOTAL REVENUE 387,843 355,929 346,360 ------------ ------------ ------------ COSTS OF REVENUE Disposed merchandise 160,711 150,991 151,407 ------------ ------------ ------------ NET REVENUE 227,132 204,938 194,953 ------------ ------------ ------------ OPERATING EXPENSES Lending operations 136,458 128,346 123,233 Cash advance loss provision 6,676 2,301 477 Check cashing operations 1,440 1,335 1,258 Administration 29,559 25,722 23,912 Depreciation and amortization 14,959 16,629 16,358 ------------ ------------ ------------ Total operating expenses 189,092 174,333 165,238 ------------ ------------ ------------ INCOME FROM OPERATIONS 38,040 30,605 29,715 Interest expense, net 8,961 9,619 13,095 Loss from derivative valuation fluctuations 177 557 -- Gain from disposal of assets -- -- (9,729) Equity in loss of unconsolidated subsidiary -- -- 15,653 Gain from issuance of subsidiary's stock -- -- (136) ------------ ------------ ------------ INCOME FROM CONTINUING OPERATIONS BEFORE INCOME TAXES 28,902 20,429 10,832 Provision for income taxes 10,393 7,704 10,131 ------------ ------------ ------------ INCOME FROM CONTINUING OPERATIONS 18,509 12,725 701 Gain (loss) from discontinued operations, net of taxes 800 (18,631) (2,431) ------------ ------------ ------------ NET INCOME (LOSS) $ 19,309 $ (5,906) $ (1,730) ------------ ------------ ------------ Net income (loss) per share: Basic -- Income from continuing operations $ 0.76 $ 0.52 $ 0.03 Gain (loss) from discontinued operations $ 0.03 $ (0.76) $ (0.10) Net income (loss) $ 0.79 $ (0.24) $ (0.07) Diluted -- Income from continuing operations $ 0.75 $ 0.51 $ 0.03 Gain (loss) from discontinued operations $ 0.03 $ (0.75) $ (0.09) Net income (loss) $ 0.78 $ (0.24) $ (0.07) ------------ ------------ ------------ Weighted average shares: Basic 24,424 24,643 25,461 Diluted 24,841 24,963 25,817 ------------ ------------ ------------
See notes to consolidated financial statements. Consolidated Statements of Cash Flows -- Years Ended December 31 - -------------------------------------------------------------------------------- (In thousands)
2002 2001 2000 ---------- ---------- ---------- CASH FLOWS FROM OPERATING ACTIVITIES Net income (loss) $ 19,309 $ (5,906) $ (1,730) Less: Gain(loss) from discontinued operations 800 (18,631) (2,431) ---------- ---------- ---------- Income from continuing operations 18,509 12,725 701 Adjustments to reconcile income from continuing operations to net cash provided by continuing operating activities: Depreciation and amortization 14,959 16,629 16,358 Cash advance loss provision 6,676 2,301 477 Loss from derivative valuation fluctuations 177 557 -- Gain from disposal of assets -- -- (9,729) Equity in loss of unconsolidated subsidiary -- -- 15,653 Gain from issuance of subsidiary's stock -- -- (136) Changes in operating assets and liabilities -- Merchandise held for disposition 9,713 (4,437) 5,323 Finance and service charges receivable (890) 277 513 Other receivables and prepaid expenses (4,427) (1,205) 458 Accounts payable and accrued expenses (5,252) 13,975 (5,178) Customer deposits, net 89 23 (200) Current income taxes 923 3,752 5,993 Deferred taxes, net 6,632 (5,374) 3,163 ---------- ---------- ---------- Net cash provided by operating activities of continuing operations 47,109 39,223 33,396 ---------- ---------- ---------- CASH FLOWS FROM INVESTING ACTIVITIES Pawn loans forfeited and transferred to merchandise held for disposition 132,590 138,255 135,525 Pawn loans and cash advances repaid or renewed 307,219 279,343 283,314 Pawn loans made, including loans renewed, and cash advances made or purchased (449,834) (420,807) (416,711) ---------- ---------- ---------- Net (increase) decrease in pawn loans and cash advances (10,025) (3,209) 2,128 ---------- ---------- ---------- Acquisitions, net of cash acquired (3,713) (1,279) -- Purchases of property and equipment (11,327) (31,829) (16,219) Proceeds from property insurance claims -- 790 20,685 ---------- ---------- ---------- Net cash (used) provided by investing activities of continuing operations (25,065) (35,527) 6,594 ---------- ---------- ---------- CASH FLOWS FROM FINANCING ACTIVITIES Net (payments) borrowings under bank lines of credit (58,261) 12,289 (25,912) Proceeds from issuance of long-term notes payable 42,500 -- -- Proceeds from capital lease obligations -- -- 2,115 Payments on notes payable, capital leases and other obligations (9,220) (9,817) (5,571) Decrease in notes receivable - stockholders 288 240 845 Net proceeds from reissuance of treasury shares 42 120 3,419 Treasury shares purchased (2,362) (581) (6,170) Dividends paid (1,223) (1,228) (1,275) ---------- ---------- ---------- Net cash (used) provided by financing activities of continuing operations (28,236) 1,023 (32,549) ---------- ---------- ---------- EFFECT OF EXCHANGE RATE CHANGES ON CASH 604 (18) (100) ---------- ---------- ---------- CASH (USED) PROVIDED BY CONTINUING OPERATIONS (5,588) 4,701 7,341 CASH PROVIDED (USED) BY DISCONTINUED OPERATIONS 3,145 (2,933) (8,901) CASH AND CASH EQUIVALENTS AT BEGINNING OF YEAR 6,394 4,626 6,186 ---------- ---------- ---------- CASH AND CASH EQUIVALENTS AT END OF YEAR $ 3,951 $ 6,394 $ 4,626 ---------- ---------- ---------- SUPPLEMENTAL DISCLOSURES NONCASH INVESTING AND FINANCING ACTIVITIES: Loans to stockholders for exercise of stock options $ 1 $ 24 $ 481 ---------- ---------- ----------
See notes to consolidated financial statements. 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, 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 -- $0.05 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) Comprehensive loss: Net loss (5,906) $ (5,906) Other comprehensive loss -- Foreign currency translation adjustments (2,333) (2,333) ------------ Comprehensive loss $ (8,239) ------------ Dividends declared -- $0.05 per share (1,228) Treasury shares purchased Treasury shares reissued (7) Tax benefit from exercise of option shares 8 Change in notes receivable -- stockholders Balance at ------------ ------------ ------------ ------------ ------------ ------------ December 31, 2001 30,235,164 3,024 127,821 95,192 (10,820) Comprehensive income: Net income 19,309 $ 19,309 Other comprehensive income -- Foreign currency translation adjustments 8,102 8,102 ------------ Comprehensive income $ 27,411 ------------ Dividends declared -- $0.05 per share (1,223) Treasury shares purchased Treasury shares reissued (11) Tax benefit from exercise of option shares 9 Change in notes receivable -- stockholders ------------ ------------ ------------ ------------ ------------ ------------ Balance at December 31, 2002 30,235,164 $ 3,024 $ 127,819 $ 113,278 $ (2,718) ------------ ------------ ------------ ------------ ------------ ------------ Notes Receivable- Treasury Stock Stock- --------------------------- holders Shares Amount ------------ ------------ ------------ 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 -- $0.05 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) Comprehensive loss: Net loss Other comprehensive loss -- Foreign currency translation adjustments Comprehensive loss Dividends declared -- $0.05 per share Treasury shares purchased 87,500 (581) Treasury shares reissued (21,500) 155 Tax benefit from exercise of option shares Change in notes receivable -- stockholders (135) ------------ ------------ ------------ Balance at December 31, 2001 (5,890) 5,643,318 (40,896) Comprehensive income: Net income Other comprehensive income -- Foreign currency translation adjustments Comprehensive income Dividends declared -- $0.05 per share Treasury shares purchased 303,851 (2,362) Treasury shares reissued (7,375) 54 Tax benefit from exercise of option shares Change in notes receivable -- stockholders 26 ------------ ------------ ------------ Balance at December 31, 2002 $ (5,864) 5,939,794 $ (43,204) ------------ ------------ ------------
See notes to consolidated financial statements. Notes to Consolidated Financial Statements - -------------------------------------------------------------------------------- 1. NATURE OF THE COMPANY Cash America International, Inc. ("the Company") is a 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. As an alternative to a pawn loan, the Company offers small consumer cash advances in selected lending locations and on behalf of a third-party financial institution in other locations. A related activity of the lending operations is the disposition of merchandise, primarily collateral from unredeemed pawn loans. As of December 31, 2002, the Company's lending operations consisted of 468 lending units, including 396 owned units and 13 franchised units in the United States, and 59 owned units in Europe. The Company also provides check cashing services through its franchised and company-owned Mr. Payroll(R) check cashing centers. As of December 31, 2002, Mr. Payroll operated 129 franchised and 6 company-owned check cashing centers in 21 states. 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. In September 2001, the Company announced plans to exit the rent-to-own business in order to focus on its core business of lending activities. In June 2002, the Company sold the remaining assets of its rent-to-own business. The consolidated financial statements of the Company have been reclassified to reflect the disposition of the rental business segment. See Note 3. In March 1999, the Company disposed of a majority interest in innoVentry Corp. ("innoVentry"), its automated check cashing machine business. The Company deconsolidated innoVentry and began using the equity method of accounting for its investment in and its share of the results of innoVentry's operations. In February 2001, innoVentry sold additional voting preferred stock, reducing the Company's ownership and voting interest to 19.3%. Thereafter, the Company began using the cost method of accounting for its investment in innoVentry. innoVentry ceased business operations in September 2001 due to its inability to raise additional financing. Since the Company's investment in and advances to innoVentry were written down to zero in 2000, innoVentry's decision to cease operations had no effect on the Company's consolidated financial position or results of operations. See Note 4. 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. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, merchandise held for disposition, allowance for losses on advances, long-lived and intangible assets, income taxes, contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. 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 operating locations, 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 that merchandise is sold. Interim customer payments for layaway sales are recorded as customer deposits and subsequently recognized as revenue during the period in which final payment is received. Small consumer cash advances ("cash advances") provide customers with cash in exchange for a promissory note or other repayment agreement supported by that customer's personal check for the aggregate amount of the cash advanced plus a service fee. The Company holds the check for the predetermined period of the cash advance, typically less than 17 days. To repay the cash advance, customers may redeem their check by paying cash or they may allow the check to be presented for collection. The Company accrues fees and interest on cash advances on a constant yield basis ratably over their terms. For those locations that offer small consumer cash advances from a third-party financial institution (the "Bank"), the Company receives an administrative service fee for services provided on the Bank's behalf. These fees are recorded in revenue when earned. 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. ALLOWANCE FOR LOSSES ON SMALL CONSUMER CASH ADVANCES o In order to manage its portfolio of small consumer cash advances effectively, the Company utilizes a credit scoring system, monitors the performance of the portfolio and maintains an allowance for losses. The Company maintains an allowance for losses on cash advances (including fees and interest) at a level estimated to be adequate to absorb credit losses inherent in the outstanding combined cash advance portfolio. The allowance offsets the outstanding cash advance amounts in the consolidated balance sheets. Cash advances written during each calendar month are aggregated and tracked to develop a performance history. The Company stratifies the outstanding combined portfolio by age, delinquency and stage of collection when assessing the adequacy of the allowance for losses. Recent collection history is utilized to develop expected loss rates, which are used for the establishment of the allowance. Increases in the allowance are created by recording a cash advance allowance loss provision in the consolidated statements of operations. The Company charges off all cash advances once they are 60 days past due, or sooner if deemed uncollectible. Recoveries on losses previously charged to the allowance are credited to the allowance when collected. See Note 5. 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 valuation and shrinkage based on management's evaluation of the merchandise. The allowance deducted from the carrying value of merchandise held for disposition amounted to $1,445,000 and $1,589,000 at December 31, 2002 and 2001, respectively. Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- 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 sale. PROPERTY AND EQUIPMENT o Property and equipment is recorded at cost. Depreciation expense is generally provided on a straight-line basis, using estimated useful lives of 10 to 40 years for buildings and 2 to 15 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 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. GOODWILL AND OTHER INTANGIBLE ASSETS o Statement of Financial Accounting Standards ("SFAS") No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142") was effective as of January 1, 2002, and, as a result, the Company discontinued the amortization of goodwill as of that date. In lieu of amortization, the Company is required to perform an annual impairment review of goodwill. The Company completed its initial and annual reviews during 2002. Based on the results of these tests, management determined there was no impairment as of January 1, 2002, and as of June 30, 2002. See Note 7. The Company amortizes intangible assets with an estimable life on a straight-line basis over the expected periods of benefit, generally 5 to 10 years. Accumulated amortization of these intangible assets was $1,416,000 and $3,633,000 at December 31, 2002 and 2001, respectively. The costs of start-up activities and organization costs are charged to expense as incurred. IMPAIRMENT OF LONG-LIVED ASSETS o An evaluation of the recoverability of property and equipment and intangible assets subject to amortization 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 are less than 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 in order 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. On January 1, 2001, the Company adopted SFAS No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), and its corresponding amendments under SFAS 138, and began presenting its interest rate cap agreements at fair value on the balance sheet. Changes in their fair value are recognized in earnings unless they qualify as a hedge. Prior to 2001, the costs of the agreements were recognized as adjustments to interest expense during the terms of the agreements and any benefits received under the terms of the agreements were 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. These contracts are not accounted for as derivatives because they meet the criteria for the normal purchases and normal sales scope exception in SFAS 133. In addition, the Company may periodically transfer funds between currencies and may concurrently enter into short-term currency swaps to eliminate the risk of currency fluctuations. The Company did not enter into any short-term currency swaps during 2002 or 2001. ADVERTISING COSTS o Costs of advertising are expensed at the time of first occurrence. Advertising expense for continuing operations was $4,399,000, $4,104,000 and $4,202,000 for the years ended December 31, 2002, 2001 and 2000, respectively. STOCK-BASED COMPENSATION o The Company accounts for its stock-based employee compensation plans in accordance with Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued to Employees" ("APB 25"), often referred to as the "intrinsic value" based method. In October 1995, the Financial Accounting Standards Board ("FASB") issued SFAS No. 123, "Accounting for Stock-Based Compensation" ("SFAS 123"). SFAS 123 encourages expensing the fair value of employee stock options, but allows an entity to continue to account for stock-based compensation under APB 25 with disclosures of the pro forma effect on net income had the fair value accounting provisions of SFAS 123 been adopted. In December 2002, SFAS 123 was amended by SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--amendment of FASB Statement No. 123". The Company has calculated the fair value of options granted using the Black-Scholes option-pricing model and has determined the pro forma impact on net income. See Note 15. NET INCOME (LOSS) PER SHARE o Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of shares outstanding during the year. Diluted net income (loss) 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, 2002, follows (in thousands):
2002 2001 2000 ------------ ------------ ------------ Weighted average shares - Basic 24,424 24,643 25,461 Effect of shares applicable to stock option plans 350 255 307 Effect of shares applicable to nonqualified savings plan 67 65 49 ------------ ------------ ------------ Weighted average shares - Diluted 24,841 24,963 25,817 ------------ ------------ ------------
Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- RECENT ACCOUNTING PRONOUNCEMENTS o The FASB recently issued the following pronouncements that may affect the accounting and financial reporting of the Company: o SFAS No. 146, "Accounting for Costs Associated with Exit or Disposal Activities" ("SFAS 146"); o SFAS No. 148, "Accounting for Stock-Based Compensation--Transition and Disclosure--an amendment of FASB Statement No. 123" ("SFAS 148"); and o FASB Interpretation No. 45, "Guarantor's Accounting and Disclosure Requirements for Guarantees, Including Indirect Guarantees of Indebtedness of Others" ("FIN 45"). SFAS 146 was issued in June 2002 and addresses accounting for costs associated with exit or disposal activities and nullifies Emerging Issues Task Force No. 94-3, "Liability Recognition for Certain Employee Termination Benefits and Other Costs to Exit an Activity" ("EITF 94-3"). Generally, SFAS 146 requires that a liability for costs associated with an exit or disposal activity, including contract termination costs, employee termination benefits and other associated costs, be recognized when the liability is incurred. Under EITF 94-3, a liability was recognized at the date of an entity's commitment to exit the plan. SFAS 146 is effective for disposal activities initiated after December 31, 2002, and is not expected to have a material effect on the Company's consolidated financial position or results of operations. SFAS 148 was issued in December 2002. This Statement amends SFAS 123 to provide alternative methods of transition for an entity that voluntarily changes to the fair value based method of accounting for stock-based employee compensation. It also amends the disclosure provisions of that Statement to require prominent disclosure about the effects on reported net income of an entity's accounting policy decisions with respect to stock-based employee compensation. Finally, this Statement amends APB Opinion No. 28, "Interim Financial Reporting," ("APB 28") to require disclosure about those effects in interim financial reports. The Company currently accounts for its stock-based employee compensation plans in accordance with APB 25, "Accounting for Stock Issued to Employees" and has adopted the amended disclosure requirements of SFAS 123 for the year ended December 31, 2002, (see Note 15) and will adopt the amended disclosure requirements of APB 28 for the first quarter of 2003. FIN 45 was issued in November 2002 and serves as an interpretation of FASB Statements No. 5, 57 and 107 and a rescission of FASB Interpretation No. 34. This interpretation significantly changes current practice in the accounting for, and disclosure of, guarantees. Most guarantees are to be recognized and initially measured at fair value, which is a change from current practice. In addition, guarantors will be required to make significant new disclosures, even when the likelihood of the guarantor making payments under the guarantee is remote. In general, FIN 45 applies to contracts or indemnification agreements that contingently require the guarantor to make payments to the guaranteed party based on changes in an underlying condition that is related to an asset, liability or an equity security of the guaranteed party. The Interpretation's disclosure requirements are effective for financial statements of interim or annual periods ending after December 15, 2002, while the initial recognition and initial measurement provisions are applicable on a prospective basis to guarantees issued or modified after December 31, 2002. The Company adopted the disclosure requirements in 2002 (see Note 19) and does not currently anticipate a material impact from the recognition and initial measurement provisions of this pronouncement. RECLASSIFICATIONS o Certain amounts in the consolidated financial statements for 2001 and 2000 have been reclassified to conform to the presentation format adopted in 2002. These reclassifications have no effect on net income or stockholders' equity previously reported. 3. DISCONTINUED OPERATIONS In September 2001, the Company adopted a formal plan to exit the rent-to-own business (the "Plan") in order to focus on its core business of lending activities. The Company's subsidiary, Rent-A-Tire, Inc. ("Rent-A-Tire"), offered new tires and wheels under a rent-to-own format to customers seeking an alternative to a direct purchase. The Company closed 21 Rent-A-Tire operating locations and held the remaining 22 locations for sale. In conjunction with the Plan, a pre-tax charge of $10,961,000 ($7,553,000 after income tax benefit) was recorded in the quarter ended September 30, 2001, to establish a reserve for the estimated loss on disposal of the rental business segment. This charge included a provision of $4,472,000 for operating losses subsequent to September 1, 2001, the effective date of the Plan, and a provision of $6,489,000 for the estimated loss on the sale of remaining assets. On June 14, 2002, the Company sold the assets of 22 Rent-A-Tire stores for proceeds of approximately $3,000,000 in cash. During 2002, the Company recorded a $1,214,000 ($800,000 after income tax) reduction of the original provision for estimated loss, primarily due to a decrease in the Company's expected future operating lease obligations (net of sublease income) for closed stores and proceeds from the sale of assets in excess of the original estimate. Activity in the reserve for disposal of discontinued operations and the related reserve for inventory valuation since inception and the remaining balance as of December 31, 2002, is presented below (in thousands):
RESERVE FOR DISPOSAL OF DISCONTINUED OPERATIONS -------------------------------------------------------------------- Phase-out RESERVE FOR Long-Lived Facility Period INVENTORY Asset Obligation Workforce Operating VALUATION Write-Down Costs Reduction Losses (Income) -------------- -------------- -------------- -------------- -------------- Reserve at inception $ 712 $ 1,590 $ 2,194 $ 134 $ (158) Cash expenditures, net -- -- (150) (109) (196) Non-cash write-offs/reductions (572) (1,590) -- -- (201) -------------- -------------- -------------- -------------- -------------- Reserve at December 31, 2001 140 -- 2,044 25 (555) Cash proceeds (expenditures), net -- -- (406) (51) (43) Non-cash write-offs/reductions (140) -- -- -- (188) Adjustments -- -- (1,015) 26 786 -------------- -------------- -------------- -------------- -------------- Balance at December 31, 2002 $ -- $ -- $ 623 $ -- $ -- -------------- -------------- -------------- -------------- -------------- RESERVE FOR DISPOSAL OF DISCONTINUED OPERATIONS -------------------------------- Loss on Sale of Assets Total -------------- -------------- Reserve at inception $ 6,489 $ 10,249 Cash expenditures, net (50) (505) Non-cash write-offs/reductions -- (1,791) -------------- -------------- Reserve at December 31, 2001 6,439 7,953 Cash proceeds (expenditures), net 2,786 2,286 Non-cash write-offs/reductions (8,214) (8,402) Adjustments (1,011) (1,214) -------------- -------------- Balance at December 31, 2002 $ -- $ 623 -------------- --------------
Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- The Company guaranteed obligations under certain operating leases for the premises related to the 22 Rent-A-Tire stores included in the asset sale agreement. In the event the buyer is unable to perform under the operating leases, the Company's maximum aggregate contingent obligation under these guarantees was approximately $1,328,000 at December 31, 2002. This amount will be reduced dollar-for-dollar by future amounts paid on these operating leases by the buyer. In the event that the buyer fails to perform and the Company is required to make payments under these leases, the Company will seek to mitigate its losses by subleasing the properties. Pursuant to APB Opinion No. 30 "Reporting the Results of Operations-- Reporting the Effects of Disposal of a Segment of a Business, and Extraordinary, Unusual and Infrequently Occurring Events and Transactions," the consolidated financial statements of the Company have been reclassified to reflect the disposal of the rental business segment. Accordingly, the revenues, costs and expenses, assets and cash flows of Rent-A-Tire have been segregated in the consolidated balance sheets, consolidated statements of operations and consolidated statements of cash flows. The net operating results, net assets and net cash flows of this business segment have been reported as "discontinued operations" in the accompanying consolidated financial statements. The loss from discontinued operations does not include interest expense since debt was not assumed by the buyer. Operating results for the discontinued rental business for the years ended December 31 are summarized below (dollars in thousands):
2002 2001 2000 ------------ ------------ ------------ Revenue $ -- $ 19,102 $ 17,354 Loss before income taxes -- (16,651) (3,708) Income tax benefit -- (5,573) (1,277) ------------ ------------ ------------ Loss from discontinued operations -- (11,078) (2,431) Gain (loss) on disposal of rental business (net of income tax) 800 (7,553) -- ------------ ------------ ------------ Gain (loss) from discontinued operations, net of tax $ 800 $ (18,631) $ (2,431) ------------ ------------ ------------ Gain (loss) from discontinued operations per share--Diluted $ 0.03 $ (0.75) $ (0.09) ------------ ------------ ------------
Continuing losses associated with the rental business segment triggered an evaluation of Rent-A-Tire's long-lived asset recoverability during the third quarter of 2001. As a result, a non-cash charge of $13,716,000 ($9,153,000 after income tax benefit) to write down the carrying value of a portion of Rent-A-Tire's property and equipment and goodwill to estimated fair value, based upon discounted future cash flows, was included in loss before income taxes reflected in the table above for the year ended December 31, 2001. Net current assets of discontinued operations, consisting primarily of merchandise on rent and on hand, was $3,008,000 at December 31, 2001. Net non-current assets of discontinued operations, consisting primarily of property and equipment and goodwill, was $5,598,000 at December 31, 2001. In a series of transactions effective February 1, 1998, the Company increased its ownership interest in Rent-A-Tire from 49% to 99.9% and began consolidating Rent-A-Tire's assets and results of operations in the Company's financial statements. At that time, the sellers were granted an option, exercisable upon sixty days written notice, to repurchase 9.9% of Rent-A-Tire for a nominal amount. In October 2001, the sellers exercised their options. 4. 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 check cashing machines. 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 deconsolidated 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%. 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 a pre-tax gain of $136,000 during 2000, as a result of issuances of innoVentry preferred and common stock. Summarized financial information for innoVentry at December 31, 2000, and for the year then ended follows (in thousands):
2000 ------------ Total current assets $ 19,810 Property, equipment, computer software and leasehold improvements, net 67,140 Non-current assets 4,484 ------------ Total assets $ 91,434 ------------ Total current liabilities $ 145,066 Non-current liabilities 31,365 Total stockholders' deficit (84,997) ------------ Total liabilities and deficit $ 91,434 ------------ Total net revenue $ 16,574 Expenses including net interest expense (140,364) Income tax expense (21) ------------ Net loss $ (123,811) ------------
innoVentry sold $115.7 million of newly issued shares of senior convertible Series C voting preferred stock in a private placement completed as of February 2, 2001. The Company participated in the placement by canceling its $2.9 million note receivable from innoVentry plus accrued interest of $0.4 million in exchange for 2,269,066 shares of the Series C preferred stock. Upon completion of the transactions, the Company owned 19.3% of the ownership and voting interest in innoVentry and began using the cost method of accounting for its investment. In September 2001, innoVentry announced a plan to cease business operations, sell all of its assets and pay the proceeds received to innoVentry's creditors. To the Company's knowledge, no proceeds were available for payment to innoVentry's shareholders. The Company's investment in and advances to innoVentry were written down to zero during fiscal 2000. innoVentry's decision to cease operations had no effect on the Company's consolidated financial position or results of operations. Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- 5. SMALL CONSUMER CASH ADVANCES AND ALLOWANCE FOR LOSSES Cash advances are generally offered for a term of 7 to 45 days, depending on the customer's next payday. In addition to the cash advances originated by the Company in some of its locations, cash advances are offered in other locations by a third-party financial institution (the "Bank"). Balances associated with the Company's small consumer cash advance portfolio are included in "Other receivables and prepaid expenses" in the accompanying consolidated balance sheets. The balances outstanding at December 31, 2002 and 2001, were as follows (in thousands):
2002 2001 ------------ ------------ Originated by the Company Active cash advances and fees outstanding $ 1,311 $ 777 Cash advances and fees in collection 346 252 ------------ ------------ Total originated by the Company 1,657 1,029 ------------ ------------ Originated by Bank Active cash advances and fees outstanding 7,754 4,109 Cash advances and fees in collection 2,728 1,625 ------------ ------------ Total originated by the Bank 10,482 5,734 ------------ ------------ Combined gross portfolio 12,139 6,763 Less: Elimination of cash advances and fees owned by Bank 7,754 4,109 Less: Discount on cash advances and fees assigned by Bank 427 248 ------------ ------------ Company cash advances and fees outstanding 3,958 2,406 Less: Allowances for losses 1,748 711 ------------ ------------ Net cash advances and fees outstanding $ 2,210 $ 1,695 ------------ ------------
Under the terms of the August 2001 amendment to the Company's agreement with the Bank, the Bank assigns each cash advance that remains unpaid after its maturity date to the Company at a discount from the amount owed by the borrower, and the Company undertakes the collection activity on the account. One of the reasons for this practice is to benefit from the use of the Company's collections resources and proficiency. As a result, losses on cash advances assigned to the Company that prove uncollectible are the sole responsibility of the Company. Therefore, when evaluating the Company's overall allowance for losses, management includes estimates for these cash advance losses, while active in the Bank's portfolio, at a level projected to be adequate to absorb credit losses inherent in the outstanding portfolio. Cash advances assigned to the Company by the Bank were $23,806,000 and $5,520,000 for the years ended December 31, 2002 and 2001, respectively. During January of 2003, the Company announced its intent to change third-party providers of this product, and the Bank announced that it would be exiting the small consumer cash advance business. The new third-party providers will be state-chartered financial institutions. The transition will occur over the first four months of 2003. Management does not anticipate that the change in providers of the small consumer cash advance product will have a material adverse impact on consumers' demand for the product, the Company's ability to offer the product through its lending locations, or on the Company's financial condition. Changes in the allowance for losses on cash advances and fees for the years ended December 31, follow (in thousands):
2002 2001 ------------ ------------ Balance at beginning of year $ 711 $ 243 Provision for loan losses 6,676 2,301 Charge-offs (7,691) (2,135) Recoveries 2,052 302 ------------ ------------ Balance at end of year $ 1,748 $ 711 ------------ ------------ Provision for losses as a % of combined advances written (a) 5.4% 4.7% Charge-offs (net of recoveries) as a % of combined advances written (a) 4.6% 3.7% ------------ ------------
(a) In August 2001, the Bank began assigning past due cash advance accounts, at a discount, to the Company for collection. As a result, the Company became responsible for charge-offs of assigned accounts. Additionally, the Company began providing a provision for estimated losses of cash advances originated by the Bank, while still active in the Bank's portfolio. Prior to August 2001, the Company's cash advance charge-offs and the provision for losses related to advances originated by the Company. Comparable figures for all combined cash advances written in 2001 would be a combined 7.5% loss provision as a percent of advances written and a combined 6.3% net charge-offs as a percent of combined advances written. 6. DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES The Company adopted SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133"), and its corresponding amendments under SFAS 138, on January 1, 2001. SFAS 133 requires an entity to recognize each derivative instrument as either an asset or liability on the balance sheet, measure it at fair value and recognize the changes in its fair value immediately in earnings unless it qualifies as a hedge. The Company's only derivative instruments are interest rate cap agreements that it designates and uses as cash flow hedges to protect against the risks associated with market fluctuations in interest rates on a portion of its variable interest rate borrowings. The Company performs prospective assessments of each agreement's hedge effectiveness, as defined by SFAS 133, at the beginning of each quarter. The final determination of hedge effectiveness is completed following the end of each quarter. The accompanying consolidated statements of operations include losses from derivative valuation fluctuations of $177,000 and $557,000 during the years ended December 31, 2002 and 2001. The loss during 2002 was a result of adjustments to the estimated fair value of interest rate cap agreements. The loss during 2001 resulted from two adjustments. As of January 1, 2001, the Company adjusted the carrying value of each of its interest rate cap agreements to fair value and recorded a loss of $259,000 (before applicable income tax benefit of $87,000), which represented the cumulative effect of adopting the new standard. The Company also recorded an additional loss of $298,000 during 2001 due to the determination that the interest rate cap agreements were ineffective as hedges (as defined by SFAS 133) during 2001, and due to the decreases in the fair values of the agreements resulting from the prevailing interest rate environment. Prior to 2001, the cost of these caps was amortized on a straight line basis over the life of the cap, and the amortization was included in interest expense. The fair values of the interest rate cap agreements as of December 31, 2002 and 2001 total zero and $173,000, respectively, and are included in "Other receivables and prepaid expenses" in the accompanying consolidated balance sheets. 7. GOODWILL AND OTHER INTANGIBLE ASSETS-- ADOPTION OF SFAS 142 In June 2001, the FASB issued SFAS No. 142, "Goodwill and Other Intangible Assets" ("SFAS 142"). Goodwill and other intangible assets having an indefinite Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- useful life acquired in business combinations completed after June 30, 2001, are no longer subject to amortization to earnings. Effective January 1, 2002, all goodwill and other intangible assets having an indefinite useful life are no longer amortized to earnings. The useful lives of other intangible assets must be reassessed and the remaining amortization periods adjusted accordingly. Goodwill and other intangible assets having an indefinite useful life must be tested for impairment annually, or more frequently if events or changes in circumstances indicate that the assets might be impaired, using a two-step impairment assessment. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The Company adopted the provisions of SFAS 142 on January 1, 2002. Based on the results of the required initial and annual impairment test, management determined there was no impairment as of January 1, 2002, and June 30, 2002. GOODWILL o The changes in the carrying value of goodwill for the year ended December 31, 2002, follows (in thousands):
Goodwill -------------------------------------------------------------------------------- Lending ---------------------------------------------- United States Foreign Total Check Cashing Consolidated ------------ ------------ ------------ ------------ ------------ Balance as of January 1, 2002, net of amortization of $24,224 $ 59,050 $ 12,453 $ 71,503 $ 5,183 $ 76,686 Acquired goodwill 541 1,006 1,547 -- 1,547 Foreign translation impact -- 1,600 1,600 -- 1,600 ------------ ------------ ------------ ------------ ------------ Balance as of December 31, 2002 $ 59,591 $ 15,059 $ 74,650 $ 5,183 $ 79,833 ------------ ------------ ------------ ------------ ------------
TRANSITIONAL DISCLOSURES o Net income and net income per share, excluding amortization expense related to goodwill, net of applicable income tax benefits, for the years ended December 31, were as follows (in thousands, except per share amounts; due to rounding, per share amounts may not total):
2002 2001 2000 ------------ ------------ ------------ Reported net income (loss) $ 19,309 $ (5,906) $ (1,730) Add back: Goodwill amortization, net of income tax benefit -- 2,557 2,287 ------------ ------------ ------------ Adjusted net income (loss) 19,309 (3,349) 557 ------------ ------------ ------------ Basic net income (loss) per share: Reported net income (loss) 0.79 (0.24) (0.07) Add back: Goodwill amortization, net of income tax benefit -- 0.10 0.09 ------------ ------------ ------------ Adjusted net income (loss) 0.79 (0.14) 0.02 ------------ ------------ ------------ Diluted net income (loss) per share: Reported net income (loss) 0.78 (0.24) (0.07) Add back: Goodwill amortization, net of income tax benefit -- 0.10 0.09 ------------ ------------ ------------ Adjusted net income (loss) $ 0.78 $ (0.13) $ 0.02 ------------ ------------ ------------
ACQUIRED INTANGIBLE ASSETS o Acquired intangible assets that are subject to amortization as of December 31, 2002, are as follows (in thousands):
Gross Accumulated Amount Amortization Net ------------ ------------ ------------ Noncompetition agreements $ 1,832 $ (1,345) $ 487 Other 130 (71) 59 ------------ ------------ ------------ Total $ 1,962 $ (1,416) $ 546 ------------ ------------ ------------
Noncompetition agreements are amortized over the applicable period of the contract. Net acquired intangible assets are included in "Other assets" in the accompanying consolidated balance sheets. AMORTIZATION o Amortization expense for the acquired intangible assets is as follows (in thousands): Actual amortization expense For the year ended December 31, 2002 $ 478 ------------ Estimated amortization expense For the years ended December 31: 2003 $ 188 2004 84 2005 81 2006 76 2007 65
8. PROPERTY AND EQUIPMENT Major classifications of property and equipment at December 31, 2002 and 2001, were as follows (in thousands):
2002 2001 ------------ ------------ Land $ 2,244 $ 2,611 Buildings and leasehold improvements 88,145 83,497 Furniture, fixtures and equipment 51,962 47,633 Computer software 19,131 18,493 ------------ ------------ Total 161,482 152,234 Less - accumulated depreciation 94,228 83,784 ------------ ------------ Property and equipment - net $ 67,254 $ 68,450 ------------ ------------
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 its headquarters facility, and restoration of the building began in Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- the fourth quarter of 2000 and was completed in the fourth quarter of 2001. The Company's insurance coverage provided 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. In 2000, the Company recognized a gain of $9,729,000 from the settlement of insurance claims and related income tax expense of $3,405,000. 9. ACCOUNTS PAYABLE AND ACCRUED EXPENSES Accounts payable and accrued expenses at December 31, 2002 and 2001, were as follows (in thousands):
2002 2001 ------------ ------------ Trade accounts payable $ 6,332 $ 12,512 Accrued taxes, other than income taxes 2,467 4,471 Accrued payroll and fringe benefits 9,636 7,248 Accrued interest payable 3,027 2,096 Other accrued liabilities 2,835 1,612 ------------ ------------ Total $ 24,297 $ 27,939 ------------ ------------
10. LONG-TERM DEBT The Company's long-term debt instruments and balances outstanding at December 31, 2002 and 2001, were as follows (in thousands):
2002 2001 ------------ ------------ U.S. line of credit up to $90,000 due August 14, 2005 $ 44,500 $ -- U.S. line of credit up to $150,000 due June 30, 2003 -- 100,000 Multi-currency line of credit up to L 15,000 due April 30, 2004 11,702 -- Multi-currency line of credit up to L 20,000 due April 30, 2003 -- 12,562 Swedish line of credit up to SEK 30,000 due May 30, 2003 -- -- 8.33% senior unsecured notes due 2003 4,286 8,571 8.14% senior unsecured notes due 2007 20,000 20,000 7.10% senior unsecured notes due 2008 25,714 30,000 7.20% senior unsecured notes due 2009 42,500 -- Capital leases and other obligations payable -- 649 ------------ ------------ 148,702 171,782 Less current portion 12,571 9,020 ------------ ------------ Total long-term debt $ 136,131 $ 162,762 ------------ ------------
In 2002, the Company issued $42,500,000 of 7.20% senior unsecured notes, due in August 2009. The notes are payable in five equal annual payments beginning in August 2005. The Company also refinanced its U.S. line of credit with a $90,000,000 senior unsecured revolving line of credit maturing in August 2005. Interest on the line of credit is charged, at the Company's option, at either LIBOR (1.4375% at December 31, 2002) plus a margin or at the Agent's base rate. The margin on the line of credit varies from 1.25% to 2.50%, depending on the Company's ratio of indebtedness to cash flow as defined in the agreement. The Company pays a fee of .375% per annum on the unused portion. Net proceeds received under these agreements were used to reduce existing indebtedness, and will be utilized for general corporate purposes. The weighted average interest rate (including margin) on the U.S. line of credit at December 31, 2002, was 4.19%. The Company had an interest rate cap agreement, totaling $20,000,000, that expired in January 2003 that limited the maximum LIBOR rate to 7%, and has an interest rate cap agreement totaling $30,000,000 that expires in February 2004 that limits the maximum LIBOR rate to 5.5%. At December 31, 2002, $44,500,000 was outstanding on the Company's $90,000,000 line of credit. The Company extended its multi-currency line of credit for one year to April 30, 2004, and reduced the maximum amount to L 15,000,000 (approximately $24,146,000 at December 31, 2002) from L 20,000,000 (approximately $32,194,000 at December 31, 2002). The Company's foreign subsidiaries are co-borrowers on this multi-currency line of credit. Funds may be drawn in British pounds, bearing interest at the Bank's cost of funds plus a margin of 60 basis points. Funds up to the equivalent of L 15,000,000 may be drawn in Swedish kronor, bearing interest at the Bank's cost of funds plus a margin of 65 basis points. In the aggregate, the British pound and Swedish kronor drawings may not exceed the equivalent of L 15,000,000. The Company pays a fee of .25% per annum on the unused portion of this line of credit. As of December 31, 2002, amounts outstanding under this line of credit were L 4,550,000 (approximately $7,324,000) and SEK 38,000,000 (approximately $4,378,000). The company extended its SEK 30,000,000 line of credit (approximately $3,456,000 as of December 31, 2002) with a commercial bank to mature on May 30, 2003. Interest on this line of credit is charged at the Bank's base funding rate plus 1%. The Company pays a commitment fee of 0.25% per annum on the total amount of this line of credit. There were no amounts outstanding on this line of credit at December 31, 2002. The Company has an interest rate cap agreement for SEK 100,000,000 (approximately $11,520,000 as of December 31, 2002) that expires in August 2003 and limits the Stockholm Interbank Offering rate to 5.5%. The weighted average interest rates on the British pound and Swedish kronor borrowings at December 31, 2002, were 5.19% and 4.77%, respectively. The credit agreements and the senior unsecured notes require the Company to maintain certain financial ratios. The Company is in compliance with all covenants or other requirements set forth in its debt agreements. Annual maturities of long-term debt through 2007 are: 2003 - $12,571,000; 2004 - $19,987,000; 2005 - $61,286,000; 2006 - $16,786,000; and 2007 - $16,786,000. Cash payments for interest on long-term debt were $8,381,000, $10,393,000 and $14,402,000 in 2002, 2001 and 2000, respectively. Net interest expense in the statement of operations includes interest income of $562,000, $1,083,000 and $1,338,000 in 2002, 2001, and 2000, respectively. Interest capitalized in connection with the restoration of the Company's corporate headquarters was $423,000 in 2001. Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- 11. INCOME TAXES The components of the Company's deferred tax assets and liabilities as of December 31, 2002 and 2001, were as follows (in thousands):
2002 2001 ------------ ------------ Deferred tax assets: Provision for valuation of merchandise held for disposition $ 275 $ 327 Tax over book accrual of finance and service charges 3,531 3,863 Cash advance loss provision 612 249 Reserve for loss from disposal of discontinued operations 218 2,429 Property and equipment -- 1,131 Deferred compensation 955 784 Net capital losses 8,200 8,842 Other 1,237 1,109 ------------ ------------ Total deferred tax assets 15,028 18,734 Valuation allowance for deferred tax assets (7,691) (7,628) ------------ ------------ Deferred tax assets, net $ 7,337 $ 11,106 ------------ ------------ Deferred tax liabilities: Amortization of acquired intangibles $ 3,243 $ 933 Deferred installment gain 493 504 Foreign tax reserves 1,506 1,149 Property and equipment 372 -- Other 716 580 ------------ ------------ Total deferred tax liabilities 6,330 3,166 ------------ ------------ Net deferred tax assets $ 1,007 $ 7,940 ------------ ------------ Balance sheet classification: Current deferred tax assets $ 5,392 $ 7,795 Non-current deferred tax assets -- 1,846 Non-current deferred tax liabilities (4,385) (1,701) ------------ ------------ Net deferred tax assets $ 1,007 $ 7,940 ------------ ------------
The components of the provision for income taxes and the income to which it relates for the years ended December 31 were as follows (in thousands):
2002 2001 2000 ------------ ------------ ------------ Income from continuing operations before income taxes: United States entities $ 19,313 $ 12,506 $ 3,606 Foreign entities 9,589 7,923 7,226 ------------ ------------ ------------ $ 28,902 $ 20,429 $ 10,832 ------------ ------------ ------------ Current provision: Federal $ 5,052 $ 4,350 $ 4,597 Foreign 2,897 2,417 2,028 State and local 568 399 347 ------------ ------------ ------------ $ 8,517 $ 7,166 $ 6,972 ------------ ------------ ------------ Deferred provision (benefit): Federal $ 1,739 $ 515 $ 2,949 Foreign 100 62 265 State and local 37 (39) (55) ------------ ------------ ------------ $ 1,876 $ 538 $ 3,159 ------------ ------------ ------------ Total provision $ 10,393 $ 7,704 $ 10,131 ------------ ------------ ------------
The effective tax rate on income from continuing operations differs from the federal statutory rate of 35% for the following reasons (in thousands):
2002 2001 2000 ------------ ------------ ------------ Tax provision computed at the statutory federal income tax rate $ 10,116 $ 7,150 $ 3,791 Non-deductible amortization of intangible assets -- 597 642 Foreign tax rate difference (547) (463) (439) State and local income taxes, net of federal tax benefit 394 234 190 Valuation allowance -- (1) 5,457 Other 430 187 490 ------------ ------------ ------------ Total provision $ 10,393 $ 7,704 $ 10,131 ------------ ------------ ------------ Effective tax rate 36.0% 37.7% 93.5% ------------ ------------ ------------
As of December 31, 2002, the Company has net capital loss carryovers of $23,429,000, principally related to its investment in innoVentry stock (see Note 4). These losses may only be used to offset net capital gains. Any unused losses expire in 2006 through 2007. The deferred tax valuation allowances at December 31, 2002 and 2001, have been provided to reduce deferred tax benefits of capital losses that the Company does not expect to realize. During 2001, the Company re-evaluated the potential for realization of the Company's deferred tax assets related to the 1998 acquisition of Doc Holliday's Pawnbrokers and Jewellers, Inc. ("Doc Holliday's"). As a result, the $290,000 valuation allowance related to the Doc Holliday's pre-acquisition deductible temporary differences was eliminated and the resulting tax benefit was applied to reduce goodwill attributable to the Doc Holliday's acquisition. A similar reduction of goodwill of $83,000 occurred in 2000. Upon adoption of SFAS 142 (see Note 7) $406,000 of deferred tax assets were eliminated through a corresponding increase in goodwill. 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. As of December 31, 2002, the Company estimates that it would be subject to U.S. income taxes (net of foreign tax credits) of approximately $2,800,000 upon distribution of accumulated earnings of all foreign subsidiaries. Net cash payments for income taxes were $3,277,000 and $162,000 in 2002 and 2001, respectively, while net cash income tax refunds of $390,000 were received in 2000. 12. EMPLOYEE BENEFIT PLANS The Cash America International, Inc. 401(k) Savings Plan is open to substantially all domestic employees who 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 50% of their earnings to these plans. The Company makes matching cash 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 employee benefit plans were $743,000, $732,000 and $674,000 in 2002, 2001 and 2000, respectively. Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- 13. STOCKHOLDERS' EQUITY On July 25, 2002, the Company's 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 2000. Under the 2002 authorization, the Company purchased 109,000 shares for an aggregate amount of $893,000. Under the 2000 authorization, the Company purchased 176,700 shares for an aggregate amount of $1,327,000 during 2002, 61,200 shares for an aggregate amount of $451,000 during 2001 and 700,900 shares for an aggregate amount of $3,254,000 during 2000. Under prior authorizations, the Company purchased 415,100 shares for an aggregate amount of $2,841,000 during 2000. Additional purchases may be made from time to time in the open market. Transactions related to the Nonqualified Savings Plan consisted of net distributions of 3,649 shares for $58,000 during 2002 and net purchases of 10,858 shares for $36,000 and 13,223 shares for $75,000 during 2001 and 2000, respectively. The Company received 21,800 shares of its common stock valued at $200,000 and 15,442 shares of its common stock valued at $94,000 during 2002 and 2001, respectively, 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, 2001 and 2002. The amendment in 2002 provided that no further advances would be made to existing participants and closed the plan to new participants. Prior to the 2002 amendment, Program participants utilized 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 is pledged to the Company in support of the obligation. Interest accrues at 6% per annum. The entire unpaid balance of principal and interest on these loans is due and payable on July 24, 2007. Amounts due under the Program are reflected as a reduction of stockholders' equity in the accompanying consolidated balance sheets. 14. STOCK PURCHASE RIGHTS In August 1997, the Board of Directors declared a dividend distribution of one Common Stock Purchase Right (the "Rights") 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. 15. STOCK OPTIONS Under various plans (the "Plans") it sponsors, the Company is authorized to issue 8,300,000 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 5 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 4-year and 5-year vesting periods accelerate if specified share price appreciation criteria are met. No such accelerated vesting of stock options occurred in 2002, 2001 or 2000. A summary of the Company's stock option activity for the three years ending December 31, 2002, is as follows (shares in thousands):
2002 2001 2000 ------------------------ ------------------------ ------------------------ Weighted Weighted Weighted Average Average Average Exercise Exercise Exercise Shares Prices Shares Prices Shares Prices ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at beginning of year 3,997 $ 8.16 3,994 $ 8.32 3,729 $ 7.59 Granted 428 7.99 155 6.18 977 10.11 Exercised 7 5.70 7 9.03 607 6.42 Forfeited 44 9.44 145 10.45 103 10.23 Expired -- -- -- -- 2 7.13 ---------- ---------- ---------- ---------- ---------- ---------- Outstanding at end of year 4,374 $ 8.13 3,997 $ 8.16 3,994 $ 8.32 ---------- ---------- ---------- ---------- ---------- ---------- Exercisable at end of year 2,898 $ 7.54 2,814 $ 7.36 2,618 $ 7.13 ---------- ---------- ---------- ---------- ---------- ---------- Weighted average fair value of options granted $6.22 $4.88 $6.32 ------------------------ ------------------------ ------------------------
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:
2002 2001 2000 ------------ ------------ ------------ Expected term (years) 8.2 8.0 7.3 Risk-free interest rate 5.23% 5.12% 6.70% Expected dividend yield 0.63% 0.81% 0.42% Expected volatility 56.7% 58.0% 49.2%
Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- Stock options outstanding and exercisable as of December 31, 2002, are summarized below (shares in thousands):
Options Outstanding Options Exercisable Weighted Weighted Weighted Average Years Average Range of Number Average of Remaining Number Exercise Exercise Prices Outstanding Exercise Price Contractual Life Exercisable Price - ---------------- --------------- --------------- ---------------- --------------- --------------- $ 5.63 to $ 7.00 2,107 $ 6.30 2.2 1,987 $ 6.33 $ 7.01 to $10.81 2,091 9.49 6.0 735 9.28 $10.82 to $16.69 176 13.91 5.8 176 13.91 - ---------------- --------------- --------------- --------------- --------------- --------------- $ 5.63 to $16.69 4,374 $ 8.13 4.1 2,898 $ 7.54 - ---------------- --------------- --------------- --------------- --------------- ---------------
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 using the Black-Scholes option-pricing model, the Company's net income (loss) and related amounts 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):
2002 2001 2000 ------------ ------------ ------------ Net income (loss)--as reported $ 19,309 $ (5,906) $ (1,730) Deduct: Total stock-based employee compensation expense determined under fair value based method for all awards(1), net of related tax effects 1,379 1,037 1,800 ------------ ------------ ------------ Net income (loss)--pro forma $ 17,930 $ (6,943) $ (3,530) ------------ ------------ ------------ Net income (loss) per share Basic: As reported $ 0.79 $ (0.24) $ (0.07) Pro forma 0.73 (0.28) (0.14) Diluted: As reported 0.78 (0.24) (0.07) Pro forma 0.72 (0.28) (0.14) ------------ ------------ ------------
(1) All awards refers to awards granted, modified, or settled in fiscal periods beginning after December 15, 1994 - that is, awards for which the fair value was required to be measured under SFAS 123. 16. OPERATING SEGMENT INFORMATION The Company has two reportable operating segments in the lending industry and one in the check cashing industry. The United States and foreign lending segments offer secured non-recourse pawn loans and small consumer cash advances to individuals. In the United States segment, pawn 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 180 days or less, the loan amounts are generally larger and the collateral is predominately jewelry. In the United States and foreign lending segment, small consumer cash advances have terms of 45 days or less and average approximately 17 days in length. The check cashing segment provides check cashing services to individuals through franchised and company-owned Mr. Payroll check cashing centers. The accounting policies of the segments are the same as those described in Note 2. Management of the Company evaluates performance based on income from operations before net interest expense, other miscellaneous items of income or expense and the provision for income taxes. There are no sales between operating segments. While the United States and foreign lending segments offer the same services, each is managed separately due to the different operational strategies required. The check cashing operation offers different services and products, thus requiring its own technical, marketing and operational strategy. As described in Note 3, the Company reclassified the results of operations of Rent-A-Tire as discontinued operations. This business was previously reported as a separate operating segment. The segment data included below has been restated to exclude amounts related to Rent-A-Tire. Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- Information concerning the segments is set forth below (in thousands):
LENDING ------------------------------------------ UNITED STATES FOREIGN TOTAL CHECK CASHING CONSOLIDATED ------------- ------------ ------------ ------------- ------------ 2002 TOTAL REVENUE $ 346,938 $ 37,342 $ 384,280 $ 3,563 $ 387,843 DEPRECIATION AND AMORTIZATION 11,794 2,472 14,266 693 14,959 INCOME FROM OPERATIONS 27,052 10,168 37,220 820 38,040 TOTAL ASSETS AT DECEMBER 31 279,208 89,532 368,740 7,738 376,478 EXPENDITURES FOR PROPERTY AND EQUIPMENT 8,740 2,224 10,964 363 11,327 ------------ ------------ ------------ ------------ ------------ 2001 ------------ ------------ ------------ ------------ ------------ Total revenue $ 320,693 $ 31,841 $ 352,534 $ 3,395 $ 355,929 Depreciation and amortization 13,644 2,105 15,749 880 16,629 Income from operations 21,384 8,675 30,059 546 30,605 Total assets at December 31 292,426 74,784 367,210 7,074 374,284 Expenditures for property and equipment 29,786 1,947 31,733 96 31,829 ------------ ------------ ------------ ------------ ------------ 2000 ------------ ------------ ------------ ------------ ------------ Total revenue $ 310,881 $ 32,302 $ 343,183 $ 3,177 $ 346,360 Depreciation and amortization 13,701 1,949 15,650 708 16,358 Income from operations 20,733 8,615 29,348 367 29,715 Equity in loss of unconsolidated subsidiary -- -- -- (15,653) (15,653) Total assets at December 31 265,423 76,251 341,674 12,255 353,929 Expenditures for property and equipment 13,895 1,762 15,657 562 16,219 ------------ ------------ ------------ ------------ ------------
Total assets of discontinued operations were $8,606,000, and $24,304,000 at December 31, 2001 and 2000, respectively. The geographic distribution of property and equipment at December 31, follows (in thousands):
UNITED STATES FOREIGN CONSOLIDATED -------------- -------------- --------------- 2002 $ 57,799 $ 9,455 $ 67,254 2001 60,366 8,084 68,450 2000 41,528 8,069 49,597
17. RELATED PARTY TRANSACTIONS In December 1999, the Company sold three 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 Board of Directors of the Company. A gain of $2,224,000 was recognized on the transaction. The Company received promissory notes from Ace that were collateralized by all of its assets. In addition, J.D. Credit pledged the common stock of Ace and the Chairman of the Board provided a personal guaranty for repayment of the notes. The notes accrued interest at 10% per annum and required quarterly principal and interest payments with a final balloon payment due in December 2002. Ace paid off the notes in full on January 13, 2003. The Company has the right of first refusal in the event of a proposed resale of the lending units. Amounts due on the notes were $2,587,000 and $3,097,000 as of December 31, 2002 and 2001, respectively, and are included in "Other assets" in the accompanying balance sheet. The Company recorded interest income from the notes of $285,000, $313,000 and $378,000 in 2002, 2001 and 2000, respectively. The three 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. Royalties recorded by the Company for these units were $83,000, $79,000 and $79,000 for 2002, 2001 and 2000, respectively. The Company recorded management fee income of $60,000 for 2000. 18. 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. Small consumer cash advances have maturity periods of 45 days or less. 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. Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- 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, 2002 and 2001, were as follows (in thousands):
2002 2001 ----------------------------- ----------------------------- CARRYING ESTIMATED Carrying Estimated VALUE FAIR VALUE Value Fair Value ------------ ------------ ------------ ------------ Financial assets: Cash and cash equivalents $ 3,951 $ 3,951 $ 6,394 $ 6,394 Pawn loans 127,388 127,388 116,590 116,590 Small consumer cash advances, net 2,210 2,210 1,695 1,695 Notes receivable 2,587 2,587 3,097 3,912 Interest rate caps -- -- 173 173 Financial liabilities: Bank lines of credit 56,202 56,202 112,562 112,562 Senior unsecured notes 92,500 96,518 58,571 61,703 Capital lease obligations and other notes -- -- 649 646 ------------ ------------ ------------ ------------
19. 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 for continuing operations are as follows for each of the years ending December 31 (in thousands): 2003 $ 19,329 2004 15,190 2005 10,183 2006 7,367 2007 4,672 Thereafter 15,059 ------------ Total $ 71,800 ------------
Rent expense for continuing operations was $23,067,000, $22,188,000 and $21,836,000 for 2002, 2001 and 2000, respectively. GUARANTEES o The Company guaranteed obligations under certain operating leases for the premises related to the 22 Rent-A-Tire stores included in the asset sale agreement. In the event the buyer is unable to perform under the operating leases, the Company's maximum aggregate contingent obligation under these guarantees was approximately $1,328,000 at December 31, 2002. This amount will be reduced dollar-for-dollar by future amounts paid on these operating leases by the buyer. In the event that the buyer fails to perform and the Company is required to make payments under these leases, the Company will seek to mitigate its losses by subleasing the properties. See Note 3. LITIGATION o The Company is party to a number of lawsuits arising in the normal course of business. 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. Notes to Consolidated Financial Statements -- Continued - -------------------------------------------------------------------------------- 20. QUARTERLY FINANCIAL DATA (UNAUDITED) (In thousands, except per share data) The Company's operations are subject to seasonal fluctuations. Revenue tends to be highest during the first and fourth calendar quarters.
FIRST SECOND THIRD FOURTH 2002 QUARTER QUARTER QUARTER QUARTER ------------ ------------ ------------ ------------ Total revenue $ 100,720 $ 90,987 $ 89,956 $ 106,180 Costs of revenue 43,881 39,185 34,556 43,089 Income from continuing operations 5,203 2,682 3,182 7,442 Gain from discontinued operations -- 800 -- -- Net income 5,203 3,482 3,182 7,442 Diluted income from continuing operations per share 0.21 0.11 0.13 0.30 Diluted gain from discontinued operations per share -- 0.03 -- -- Diluted net income per share 0.21 0.14 0.13 0.30 Diluted weighted average shares 24,862 24,916 24,773 24,818 2001 ------------ ------------ ------------ ------------ Total revenue $ 93,556 $ 80,426 $ 82,604 $ 99,343 Costs of revenue 41,428 33,274 33,392 42,897 Income from continuing operations 3,233 1,568 1,975 5,949 Loss from discontinued operations (a) (558) (680) (17,393) -- Net income (loss) 2,675 888 (15,418) 5,949 Diluted income from continuing operations per share 0.13 0.06 0.08 0.24 Diluted loss from discontinued operations per share (0.02) (0.03) (0.69) -- Diluted net income (loss) per share 0.11 0.04 (0.61) 0.24 Diluted weighted average shares 24,719 24,944 25,152 25,044
(a) In the 2001 Third Quarter, the Company announced plans to exit the rent-to-own business and presented that business as a discontinued operation. All prior periods presented have been restated. 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, cash flows and stockholders' equity present fairly, in all material respects, the financial position of Cash America International, Inc. and its subsidiaries at December 31, 2002, and December 31, 2001, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2002, 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 for the year then ended, the investment and loss in which is reflected in the accompanying financial statements using the equity method of accounting (see Note 4). The Company's proportionate share of innoVentry Corp.'s net assets and advances from the Company was zero dollars as of December 31, 2000, and reflects total operating losses of $15,653,000 for the year 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. As discussed in Note 7 to the financial statements, the Company adopted SFAS No. 142 and changed its method of accounting for Goodwill and Other Intangible Assets during 2002. PRICEWATERHOUSECOOPERS LLP Fort Worth, Texas January 23, 2003 Five-Year Summary of Selected Financial Data (Unaudited) - -------------------------------------------------------------------------------- (Dollars in thousands, except per share data)
2002 2001 2000 1999 1998 -------- -------- -------- -------- -------- OPERATIONS -- years ended December 31 (a) Total revenue $387,843 $355,929 $346,360 $362,895 $337,635 Income from operations 38,040 30,605 29,715 34,746 34,574 -------- -------- -------- -------- -------- Income from continuing operations before income taxes (b) 28,902 20,429 10,832 13,264 20,937 -------- -------- -------- -------- -------- Income from continuing operations (b) $ 18,509 $ 12,725 $ 701 $ 3,947 $ 13,004 -------- -------- -------- -------- -------- Income from continuing operations per share: Basic $ 0.76 $ 0.52 $ 0.03 $ 0.16 $ 0.52 Diluted $ 0.75 $ 0.51 $ 0.03 $ 0.15 $ 0.50 -------- -------- -------- -------- -------- Dividends per share $ 0.05 $ 0.05 $ 0.05 $ 0.05 $ 0.05 -------- -------- -------- -------- -------- Weighted average shares: Basic 24,424 24,643 25,461 25,346 24,829 Diluted 24,841 24,963 25,817 26,229 26,226 -------- -------- -------- -------- -------- -------- -------- -------- -------- -------- FINANCIAL POSITION -- at December 31(a) Pawn loans $127,388 $116,590 $117,982 $125,349 $128,637 Merchandise held for disposition, net 54,444 63,392 58,817 64,419 65,417 Working capital 179,525 174,571 190,311 208,419 213,612 Total assets 376,478 382,890 378,233 417,623 410,823 Total debt 148,702 171,782 170,464 202,366 193,974 Stockholders' equity 192,335 168,431 178,458 186,940 187,444 Current ratio 5.1x 4.5x 6.9x 7.5x 7.9x Debt to equity ratio 77.3% 102.0% 95.5% 108.3% 103.5% -------- -------- -------- -------- -------- OWNED AND FRANCHISED LOCATIONS -- at December 31 Lending operations 468 473 479 477 469 Check cashing operations 135 134 132 137 137 -------- -------- -------- -------- --------
(a) In September 2001, the Company announced plans to exit the rent-to-own business. The amounts for the years 1998 through 2001 have been restated to reflect the rent-to-own business as discontinued operations. (b) See "Management's Discussion and Analysis of Results of Operations and Financial Condition" for amounts related to gains from disposals of assets, equity in losses of unconsolidated subsidiaries and other items for 2000. COMMON STOCK DATA - -------------------------------------------------------------------------------- The New York Stock Exchange is the principal exchange on which Cash America International, Inc. common stock is traded. There were 664 stockholders of record (not including individual participants in security listings) as of February 5, 2003. 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 2002 and 2001 were as follows:
First Second Third Fourth 2002 Quarter Quarter Quarter Quarter ---------- ---------- ---------- ---------- High $ 9.05 $ 10.33 $ 9.15 $ 9.87 Low 6.92 7.55 6.50 7.32 Close 8.80 9.20 8.19 9.52 Cash dividend per share .01 1/4 .01 1/4 .01 1/4 .01 1/4 2001 ---------- ---------- ---------- ---------- High $ 7.13 $ 8.66 $ 10.50 $ 9.66 Low 4.31 5.85 7.27 7.00 Close 6.10 8.50 9.09 8.50 Cash dividend per share .01 1/4 .01 1/4 .01 1/4 .01 1/4
EX-21 5 d03820exv21.txt SUBSIDIARIES . . . EXHIBIT 21
Jurisdiction of Name Incorporation ---- --------------- Cash America International, Inc. Texas Cash America, Inc. Delaware Cash America, Inc. of Louisiana Delaware RATI Holding, 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 AB Svensk Pantbelaning Sweden Svensk Pantbelaning Service 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 6 d03820exv23.txt CONSENT OF PRICEWATERHOUSECOOPERS LLP EXHIBIT 23 CONSENT OF INDEPENDENT ACCOUNTANTS We hereby consent to the incorporation by reference in the Registration Statements on Form S-8 (Filings No. 33-29658, 33-36430, 33-59733, 333-95827 and 333-97273) of Cash America International, Inc. of our report dated January 23, 2003 relating to the financial statements of Cash America International, Inc., which appears in this Form 10-K. We also consent to the incorporation by reference of our report dated January 23, 2003 relating to the financial statement schedule, which appears in this Form 10-K. PricewaterhouseCoopers LLP Fort Worth, Texas March 14, 2003 EX-99.1 7 d03820exv99w1.txt CERTIFICATION OF CHIEF EXECUTIVE OFFICER EXHIBIT 99.1 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Cash America International, Inc. (the "Company") on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Daniel R. Feehan, Chief Executive Officer and President of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Daniel R. Feehan - ------------------------------------------------- Daniel R. Feehan Chief Executive Officer and President Date: March 14, 2003 EX-99.2 8 d03820exv99w2.txt CERTIFICATION OF CHIEF FINANCIAL OFFICER EXHIBIT 99.2 CERTIFICATION PURSUANT TO 18 U.S.C. SECTION 1350, AS ADOPTED PURSUANT TO SECTION 906 OF THE SARBANES-OXLEY ACT OF 2002 In connection with the Annual Report of Cash America International, Inc. (the "Company") on Form 10-K for the year ended December 31, 2002, as filed with the Securities and Exchange Commission on the date hereof (the "Report"), I, Thomas A. Bessant, Jr., Executive Vice President - Chief Financial Officer of the Company, certify, pursuant to 18 U.S.C. Section 1350, as adopted pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, that to my knowledge: (1) The Report fully complies with the requirements of Section 13(a) or 15(d) of the Securities Exchange Act of 1934, as amended; and (2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company. /s/ Thomas A. Bessant, Jr. - ----------------------------------------------------------- Thomas A. Bessant, Jr. Executive Vice President - Chief Financial Officer Date: March 14, 2003 -----END PRIVACY-ENHANCED MESSAGE-----