ITEM 1. BUSINESS
GENERAL
The Company is a specialty financial services enterprise principally engaged in acquiring, establishing and operating pawnshops which advance money on the security of pledged tangible personal property. Pawnshops function as convenient sources of consumer loans and as sellers primarily of previously-owned merchandise acquired when customers do not redeem their pawned goods. One convenient aspect of a pawn transaction is that the customer has no legal obligation to repay the amount advanced. Instead, the Company relies on the value of the pawned property as security. As a result, the creditworthiness of the customer is not a factor, and a decision not to redeem pawned property has no effect on the customer's personal credit status. (Although pawn transactions can take the form of an advance of funds secured by the pledge of property or a "buy-sell agreement" involving the actual sale of the property with an option to repurchase it, the transactions are referred to throughout this report as "loans" for convenience.)
The Company contracts for a finance and service charge to compensate it for the use of the funds advanced. The finance and service charge is typically calculated as a percentage of the loan amount based on the size and duration of the transaction, in a manner similar to which interest is charged on a loan, and has generally ranged from 12% to 300% annually, as permitted by applicable state pawnshop laws. The pledged property is held through the term of the transaction, which, in the Company's domestic operations, is generally one month with an automatic sixty day redemption period unless otherwise earlier repaid, renewed or extended. (For finance and service charges and transaction periods applicable to the Company's foreign operations, see "Business--Regulation." ). A majority of the amounts advanced by the Company are paid in full, together with accrued finance and service charges, or are renewed or extended through payment of accrued finance and service charges. For the years 1998, 1999, and 2000, loans repaid or renewed as a percentage of loans made were 66.9%, 67.4%, and 67.5% respectively. In the event that the borrower does not redeem his pawned goods, the unredeemed collateral is forfeited and becomes merchandise available for disposition by the Company.
The Company's growth has been the result of its business strategy of acquiring existing pawnshops and establishing new pawnshops that can benefit from the Company's centralized management and standardized operations. The Company intends to continue its business strategy of acquiring and establishing pawnshops, increasing its share of consumer loan business, and concentrating multiple pawnshops in regional and local markets in order to expand market penetration, enhance name recognition and reinforce marketing programs. Studies indicate to the Company that a large portion of its customers consists of individuals who do not regularly transact loan business with banks. (See, for example, John P. Caskey, Fringe Banking -
Check Cashing Outlets, Pawnshops and the Poor, 1994.) These generally are persons who may not have checking accounts and conduct as many of their transactions as possible on a cash basis.
Pursuant to the Company's business expansion strategy, the Company added a net 63 lending locations in 1998, a net 2 lending locations in 1999, and closed a net 3 lending locations in 2000. Of these net 62 lending locations added, 66 were acquisitions in individual purchase transactions and 12 were start-ups, while 16 locations were either combined, closed or sold. As of December 31, 2000, the Company had 410 domestic and 53 foreign operating locations. The Company plans to continue to expand its operating locations through new start-ups and acquisitions.
Franchising. The Company offers and sells franchises to third parties for their independent ownership and operation of "Cash America" pawnshops. The Company added four franchise lending locations in 1998, six franchise lending locations in 1999, and five franchise lending locations in 2000. Three of the six franchises added in 1999 were previously company-owned locations. As of December 31, 2000, there were 16 franchised lending locations in operation. The Company plans to continue to expand its franchise locations through new franchise sales.
While the Company's primary business involves the acquisition, establishment and operation of pawnshops, it also provides tire and wheel rental services through its subsidiary, Rent-A-Tire, Inc. ("Rent-A- Tire") and manned check cashing services through its subsidiary, Mr. Payroll Corporation ("Mr. Payroll").
At December 31, 2000, Rent-A-Tire owned and operated 34 tire and wheel rental stores and managed an additional 9 tire and wheel rental stores, which are located in Texas, Arizona, Oklahoma and Louisiana. Rent-A-Tire leases all of its rental stores and its corporate headquarters. At December 31, 2000, Rent-A-Tire had 266 employees. For additional information concerning Rent-A-Tire and the relation of its financial condition and results of operations to that of the Company, see Note 4 and Note 13 of Notes to Consolidated Financial Statements in the portion of the Annual Report that is incorporated herein by reference.
During 1999, the Company restructured its check cashing operations. In January 1999, the Company transferred its manned check cashing operations into Mr. Payroll. Mr. Payroll earns franchise fees from the sale of manned check cashing franchises, royalties from franchisees based on a percentage of the gross revenue from a franchisee's manned check cashing business, and check cashing fees from its owned manned centers. As of December 31, 2000, Mr. Payroll operated 125 franchised and 7 company owned manned check cashing centers in 20 states with 18 employees.
In March 1999, Wells Fargo Cash Centers, Inc. ("Cash Centers"), a wholly owned subsidiary of Wells Fargo Bank, N.A., contributed cash and assets to the Company's check cashing machine subsidiary (now known as "innoVentry") and received newly issued convertible Series A voting preferred stock of innoVentry. In addition, certain members of the newly constituted management of innoVentry subscribed for newly issued shares of common stock of innoVentry. The Company assigned 10% of its voting interest in innoVentry, represented by its shares of newly issued convertible Series A voting preferred stock, to the former owners of innoVentry's predecessor in consideration for the termination of an option issued in conjunction with the Company's original acquisition of innoVentry's predecessor. Concurrently, certain members of innoVentry's new management subscribed for newly issued shares of common stock of innoVentry, representing 10% of its voting interest. Upon completion of the transactions, the Company's residual ownership interest in innoVentry was 40.5%. The Company de-consolidated innoVentry and began using the equity method of accounting for its investment and its share of the results of innoVentry's operations after March 9, 1999. In October 1999, the Company, Cash Centers, and a third party each purchased $10.0 million of innoVentry's newly issued convertible Series B voting preferred stock. During 1999 and 2000, innoVentry also issued additional shares of common stock. As of December 31, 2000, the Company's voting interest was 37.9%. See Note 3 of Notes to Consolidated Financial Statements in the portion of the Annual Report that is incorporated herein by reference.
LENDING FUNCTION
The Company is engaged primarily in the business of lending money on the security of pledged goods. The pledged goods in the Company's domestic operations are generally tangible personal property other than securities or printed evidences of indebtedness and generally consist of jewelry, tools, televisions and stereos, musical instruments, firearms, and other miscellaneous items. In the Company's foreign operations, the pledged goods predominately consist of jewelry. Pawn loans are made without personal liability to the borrower. Because the loan is made without the borrower's personal liability, the Company does not investigate the creditworthiness of the borrower, but relies on the pledged personal property, and the possibility of its forfeiture, as a basis for its lending decision. The pledged tangible personal property is intended to provide security to the Company for the repayment of the amount advanced. The Company contracts for a finance and service charge as compensation for the use of the funds advanced. Finance and service charges contributed approximately 58% of the Company's net revenue (total revenue less costs of revenue) in 1998, 58% in 1999, and 56% in 2000.
At the time a pawn transaction is entered into, a pawn transaction agreement, commonly referred to as a pawn ticket, is delivered to the borrower (pledgor) that sets forth, among other items, the name and address of the pawnshop and the pledgor, the pledgor's identification number from his or her driver's license or other approved identification, the date, the identification and description of the pledged goods, including applicable serial numbers, the amount financed, the finance and service charge, the maturity date, the total amount that must be paid to redeem the pledged goods on the maturity date and the annual percentage rate.
With regard to domestic operations, the amount that the Company is willing to finance is typically based on a percentage of the pledged personal property's estimated disposition value. The sources for the Company's determination of the estimated disposition value are numerous and include the Company's automated product valuation system as well as catalogues, blue books, newspapers and previous similar pawn loan transactions. These sources, together with the employees' experience in disposing of similar items of merchandise in particular pawnshops, influence the determination of the estimated disposition value of such items. The Company does not utilize a standard or mandated percentage of estimated disposition value in determining the amount to be financed. Rather, the employees have the authority to set the percentage for a particular item and determine the ratio of loan amount to estimated disposition value with the expectation that, if the item is forfeited to the pawnshop, its subsequent disposition would yield a gross profit margin consistent with the Company's historical experience. The pledged property is held through the term of the transaction, which generally is one month with an automatic sixty day redemption period (see "Regulation" for exceptions in certain states), unless earlier repaid, renewed or extended. A majority of the amounts advanced by the Company are paid in full with accrued finance and service charges or are renewed or extended through payment of accrued finance and service charges. In the event the pledgor does not repay, renew or extend his loan, the unredeemed collateral is forfeited to the Company and then becomes merchandise available for disposition. The Company does not record loan losses or charge-offs inasmuch as, if the pledged goods are not redeemed, the amount advanced becomes the carrying cost of the forfeited collateral that is to be recovered through the merchandise disposition function described below.
With regard to the Company's foreign operations, the amount that the pawnshop is willing to finance in a pledge of jewelry is typically based on a fixed amount per gram of the gold or silver content of the pledged property plus additional amounts for diamonds and other features which, in the unit management's assessment, enhance the market value of the pledged property. Declines in gold and silver prices historically have resulted in a reduction of the amount that the pawnshop is willing to lend against an item, which reduces the amount of the pawnshop's loan portfolio and related finance and service charge revenue. The pawn loans are made for a term of six months with an approximate annual blended yield on average foreign pawn loans outstanding in 2000 of 49%. The collateral is held through the term of the loan, and, in the event that the loan is not repaid or renewed on or before maturity, the unredeemed collateral is disposed of at auction or privately (or in some cases at the pawnshop premises).
The recovery of the amount advanced, as well as realization of a profit on disposition of merchandise, is dependent on the Company's initial assessment of the property's estimated disposition value. Improper assessment of the disposition value of the collateral in the lending function could result in the disposition of the merchandise for an amount less than the amount advanced. However, the Company historically has experienced profits from the disposition of such merchandise. Declines in gold and silver prices generally will also reduce the disposition value of jewelry items acquired in pawn transactions and could adversely affect the Company's ability to recover the carrying cost of the acquired collateral. For 1998, 1999 and 2000, the Company experienced gross profit margins on dispositions of merchandise of 36%, 32%, and 33%, respectively.
At December 31, 2000, the Company had approximately 1,165,000 outstanding loans totaling $117,982,000, for an average of $101 per loan.
Presented below is information with respect to pawn loans made, acquired, repaid and forfeited for the years ended December 31, 1998, 1999 and 2000:
In addition, the Company recently began offering a small consumer cash advance product through many of its existing stores. The product was introduced into 330 of the domestic lending units by the end of 2000, including 187 units that offer the product on behalf of a third party financial institution (the "Bank"), which pays the Company a fee for its administrative services. The product that is offered by the Company in 143 locations provides customers with cash in exchange for a promissory note or other repayment agreement supported by that customer's check for the amount of the cash advanced plus a service fee. The Company holds the check for a short period, typically less than 17 days. To repay the advance, customers may redeem their checks by paying cash or they may allow the checks to be processed for collection. (Although these cash advance transactions may take the form of loans or deferred check deposit transactions, the transactions are referred to throughout this report as "payday loans" for convenience.) During 2000, $10,066,000 of payday loans were written, including $1,446,000 extended to customers by the Bank, for an average of $187 per loan. As of December 31, 2000, $1,636,000 of gross payday loans were outstanding, including $581,000 extended to customers by the Bank that is not included in the Company's
consolidated balance sheet. A loan loss reserve of $243,000, representing 23.1% of the Company's gross payday loans outstanding of $1,055,000, has been provided in the consolidated financial statements.
MERCHANDISE DISPOSITION FUNCTION
The Company engages in the disposition of merchandise acquired when a pawn loan is not repaid, when used goods are purchased from the general public and when new merchandise is acquired from vendors. New goods consist primarily of accessory merchandise which enhances the marketability of existing merchandise, such as tools, consumer electronics and jewelry. For the year ended December 31, 2000, $145,805,000 of merchandise was added to merchandise held for disposition, of which $122,832,000 was from loans not repaid and $22,973,000 was purchased from customers and vendors.
The Company does not provide its customers with warranties on used merchandise purchased from the Company. The Company permits its customers to purchase merchandise on a layaway plan whereby the customer agrees to purchase an item by making an initial cash deposit representing a small part of the disposition price and making additional, non-interest bearing payments of the balance of the disposition price in accordance with a specified schedule. The Company then segregates the item and holds it until the disposition price is paid in full. Should the customer fail to make a required payment, the item is placed with the other merchandise held for disposition. At December 31, 2000, the Company held approximately $3,931,000 in customer layaway deposits.
The Company provides an allowance for shrinkage and valuation of its merchandise based on management's evaluation. Management's evaluation takes into consideration historical shrinkage, the quantity and age of slow-moving merchandise on hand and markdowns necessary to liquidate slow-moving merchandise. At December 31, 2000, total lending operations merchandise on hand was $58,817,000, after deducting an allowance for shrinkage and valuation of merchandise of $2,012,000.
OPERATIONS
Unit Management
Each location has a unit manager who is responsible for supervising its personnel and assuring that it is managed in accordance with Company guidelines and established policies and procedures. Each unit manager reports to a Market Manager who typically oversees approximately ten unit managers. As of December 31, 2000, the Company has two operating divisions in the United States, each of which is managed by a Division Executive Vice President. Each operating division has three geographic operating regions, each of which is managed by a Region Vice President. Each Market Manager reports to a Region Vice President. The Harvey & Thompson and Svensk Pantbelaning chains follow a similar management organization, with a Managing Director overseeing each of these operations.
Trade Name
The Company operates its pawnshops under the trade name "Cash America Pawn" in the U.S., "Harvey & Thompson Pawnbrokers" in the U.K., and "Svensk Pantbelaning" in Sweden. The Company has registered the "Cash America" mark and descriptive logos and phrases with the United States Patent and Trademark Office.
Personnel
At December 31, 2000, the Company employed 3,035 persons in its lending operations in 16 states, the United Kingdom and Sweden. Of the total employees, approximately 222 were in executive and administrative functions.
The Company has an established training program that provides a combination of classroom instruction, video presentation and on-the-job loan and merchandise disposition experience. The new employee is introduced to the business through an orientation program and through a three-month training program that includes classroom and on-the-job training in loans, layaways, merchandise and general administration of unit operations.
The experienced employee receives training and an introduction to the fundamentals of management to acquire the skills necessary to move into management positions within the organization. Manager training involves a twelve month program and includes additional management principles and more extensive training in income maximization, recruitment, merchandise control and cost efficiency.
FUTURE EXPANSION
The Company's objective is to continue to expand the number of pawnshops it owns and operates through acquisitions and by establishing new units. Management believes that such anticipated expansion will continue to provide economies of scale in supervision, purchasing, administration and marketing by decreasing the overall average cost of such functions per unit owned. The primary pawnshop acquisition criteria include evaluation of the volume of annual loan transactions, outstanding loan balances, merchandise on hand, disposition history, and location and condition of the facility, including lease terms or fair market value of the facility if it is to be purchased. The primary pawnshop start-up criteria include the facility-related items noted above and conditions in the surrounding community indicating a sufficient level of potential customers.
The Company's business strategy is to continue expanding its pawnshop business within its existing geographic markets and into other markets which meet the risk/reward considerations of the Company.
The Company's expansion has not only been in acquiring previously owned pawnshops, but also in establishing new locations. After a suitable location has been found and a lease and license are obtained, the new location can be ready for business within four to six weeks, with completion of counters, vaults and security system and transfer of merchandise from other locations. The approximate start-up costs, defined as the investment in property and equipment, for recently established pawnshops have ranged from $132,000 to $194,000, with an average cost per location of approximately $163,000 in 2000. This amount does not include merchandise transferred from other locations, funds to advance on pawn loans and operating expenses.
The Company's expansion program is subject to numerous factors which cannot be predicted, such as the availability of attractive acquisition candidates or sites on suitable terms and general economic conditions. Further, there can be no assurance that future expansion can be continued on a profitable basis. Among other factors, the following factors will impact the Company's future planned expansion.
Statutory Requirements. The Company's ability to add newly-established locations in Texas counties having a population of more than 250,000 is limited by a law that became effective September 1, 1999, which restricts the establishment of new pawnshops within a certain distance of existing pawnshops. In addition, the present statutory and regulatory environment of some states renders expansion into those states impractical. See "Business -- Regulation."
Competition. The Company faces competition in its expansion program. Several competing pawnshop companies have implemented expansion and acquisition programs. A number of smaller companies have also entered the market. While the Company believes that it is the largest pawnshop operator in the United States, there can be no assurance that the Company will be more successful than its competitors in pursuing acquisition opportunities and leases for attractive start-up locations. Increased competition could also increase prices for attractive acquisition candidates.
Capital Requirements. In some states, the Company is required by law to maintain a minimum amount of certain unencumbered net assets (currently $150,000 in Texas) for each pawnshop location. The Company's expansion plans will therefore be limited in these states to the extent the Company is unable to maintain these required levels of unencumbered net assets.
Availability of Qualified Unit Management Personnel. The Company's ability to expand may also be limited by the availability of qualified unit management personnel. While the Company seeks to train its existing personnel to enable those capable of doing so to assume management positions and to create attractive compensation packages to retain existing management personnel, there can be no assurance that sufficient qualified personnel will be available to satisfy the Company's needs with respect to its planned expansion.
COMPETITION
The Company encounters significant competition in connection with its lending and merchandise disposition operations. Some competitors may have greater financial resources than the Company. Several competing pawnshop companies have implemented expansion and acquisition programs. See "Business -- Future Expansion." These competitive conditions may adversely affect the Company's revenues and profitability.
The Company, in connection with the lending of money, competes with other pawnshops and other forms of financial institutions such as consumer finance companies, which generally lend on an unsecured as well as a secured basis. Other lenders may lend money on terms more favorable than the Company. The pawnshop industry is characterized by a large number of independent owner-operators, some of whom own and operate multiple pawnshops.
REGULATION
The Company's pawnshop operations are subject to extensive regulation, supervision and licensing under various federal, state and local statutes, ordinances and regulations in the sixteen states and two foreign countries in which it operates. (For a geographic breakdown of operating locations, see "Properties.") Set forth below is a summary of the state pawnshop regulations in those states containing a preponderance of the Company's domestic operating locations.
Texas Pawnshop Regulations. Pursuant to the terms of the Texas Pawnshop Act, the Texas Consumer Credit Commissioner has primary responsibility for the regulation of pawnshops and enforcement of laws relating to pawnshops in Texas. The Company is required to furnish the Texas Consumer Credit Commissioner with copies of information, documents and reports which are required to be filed by it with the Securities and Exchange Commission.
The Texas Pawnshop Act prescribes the stratified loan amounts and the maximum allowable rates of pawn service charge that pawnbrokers in Texas may charge for the lending of money within each stratified range of loan amounts. That is, the Texas law establishes the maximum allowable pawn service charge rates based on the amount financed per pawn loan. The maximum allowable rates under the Texas Pawnshop Act for the various stratified loan amounts for the fiscal years ended June 30, 1999, 2000 and 2001 are as follows:
These rates are reviewed and established annually. The maximum allowable service charge rates were established and have not been revised since 1971 when the Texas Pawnshop Act was enacted. Since 1981, the ceiling amounts for stratification of the loan amounts to which these rates apply have been revised each July 1 in relation to the Consumer Price Index. The Texas Pawnshop Act also prescribes the maximum allowable pawn loan. Under current Texas law, a pawn loan may not exceed $12,000. In addition to establishing maximum allowable service charge rates and loan ceilings, the Texas Pawnshop Act also provides for the licensing of pawnshops and pawnshop employees. To be eligible for a pawnshop license in Texas, an applicant must (i) be of good moral character, (ii) have net assets of at least $150,000 readily available for use in conducting the business of each licensed pawnshop, (iii) show that the pawnshop will be operated lawfully and fairly in accordance with the Texas Pawnshop Act, (iv) show that the applicant has the financial responsibility, experience, character, and general fitness to command the confidence of the public in its operations, and (v) in the case of a business entity, the good moral character requirement shall apply to each officer, director and holder of 5% or more of the entity's outstanding shares.
As part of the license application process, any existing pawnshop licensee who would be affected by the granting of the proposed application may request a public hearing at which to appear and present evidence for or against the application. For an application for a new license in a county with a population of 250,000 or more, the proposed facility must not be located within two miles of an existing licensed pawnshop.
The Texas Consumer Credit Commissioner may, after notice and hearing, suspend or revoke any license for a Texas pawnshop upon finding, among other things, that (i) any fees or charges have not been paid; (ii) the licensee violates (whether knowingly or unknowingly without due care) any provisions of the Texas Pawnshop Act or any regulation or order thereunder; or (iii) any fact or condition exists which, if it had existed at the time the original application was filed for a license, would have justified the Commissioner in refusing such license.
Under the Texas Pawnshop Act, a pawnbroker may not accept a pledge from a person under the age of 18 years; make any agreement requiring the personal liability of the borrower; accept any waiver of any right or protection accorded to a pledgor under the Texas Pawnshop Act; fail to exercise reasonable care to protect pledged goods from loss or damage; fail to return pledged goods to a pledgor upon payment of the full amount due; make any charge for insurance in connection with a pawn transaction; enter into any pawn transaction that has a maturity date of more than one month; display for disposition in storefront windows or sidewalk display cases, pistols, swords, canes, blackjacks and similar weapons; operate a pawnshop between the hours of 9:00 p.m. and 7:00 a.m.; or purchase used or secondhand personal property or certain building construction materials unless a record is established containing the name, address and identification of the seller, a complete description of the property, including serial number, and a signed statement that the seller has the right to sell the property.
Florida Pawnshop Regulations. The Florida Pawnbroking Act, adopted in 1996, provides for the licensing and bonding of pawnbrokers in Florida and for the Department of Agriculture and Consumer Services' Division of Consumer Services to investigate the general fitness of applicants and generally to regulate pawnshops in the state. The statute limits the pawn service charge that a pawnbroker may collect to a maximum of 25% of the amount advanced in the pawn for each 30 day period of the transaction. The law also requires pawnbrokers to maintain detailed records of all transactions and to deliver such records to the appropriate local law enforcement officials. Among other things, the statute prohibits pawnbrokers from falsifying or failing to make entries in pawn transaction forms, refusing to allow appropriate law enforcement officials to inspect their records, failing to maintain records of pawn transactions for at least two years, making any agreement requiring the personal liability of a pledgor, failing to return pledged goods upon payment in full of the amount due (unless the pledged goods had been taken into custody by a court or law enforcement officer or otherwise lost or damaged), or engaging in title loan transactions at licensed pawnshop locations. It also prohibits pawnbrokers from entering into pawn transactions with a person who is under the influence of alcohol or controlled substances, a person who is under the age of eighteen, or a person using a name other than his own name or the registered name of his business.
Tennessee Pawnshop Regulations. Tennessee state law provides for the licensing of pawnbrokers in that state. It also (i) requires that pawn transactions be reported to local law enforcement agencies, (ii) requires pawnbrokers to maintain insurance coverage on the property held on pledge for the benefit of the pledgor, (iii) establishes certain hours during which pawnshops may be open for business and (iv) requires that certain bookkeeping records be maintained. Tennessee law prohibits pawnbrokers from selling, redeeming or disposing of any goods pledged or pawned to or with them within 48 hours after making their report to local law enforcement agencies. The Tennessee statute establishes a maximum allowable interest rate of 24% per annum; however, the pawnshop operator may charge an additional fee of up to one-fifth of the amount of the loan per month for investigating the title, storing and insuring the security and various other expenses.
Georgia Pawnshop Regulations. Georgia state law requires pawnbrokers to maintain detailed permanent records concerning pawn transactions and to keep them available for inspection by duly authorized law enforcement authorities. The Georgia statute prohibits pawnbrokers from failing to make entries of material matters in their permanent records; making false entries in their records; falsifying, obliterating, destroying, or removing permanent records from their places of business; refusing to allow duly authorized law enforcement officers to inspect their records; failing to maintain records of each pawn transaction for at least four years; accepting a pledge or purchase from a person under the age of eighteen or who the pawnbroker knows is not the true owner of the property; making any agreement requiring the personal liability of the pledgor or seller or waiving any of the provisions of the Georgia statute; or failing to return or replace pledged goods upon payment of the full amount due (unless the pledged goods have been taken into custody by a court or a law enforcement officer). In the event pledged goods are lost or damaged while in the possession of the pawnbroker, the pawnbroker must replace the lost or damaged goods with like kinds of merchandise. Under Georgia law, total interest and service charges may not, during each thirty-day period of the loan, exceed 25% of the principal amount advanced in the pawn transaction (except that after ninety days from the original date of the loan, the maximum rate declines to 12.5% for each subsequent thirty-day period). The statute provides that municipal authorities may license pawnbrokers, define their powers and privileges by ordinance, impose taxes upon them, revoke their licenses, and exercise such general supervision as will ensure fair dealing between the pawnbroker and his customers.
Oklahoma Pawnshop Regulations. The Company's Oklahoma operations are subject to the Oklahoma Pawnshop Act. Following substantially the same statutory scheme as the Texas Pawnshop Act, the Oklahoma Pawnshop Act provides for the licensing and bonding of pawnbrokers in Oklahoma and
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:
A pawn loan in Oklahoma may not exceed $25,000.
Louisiana Pawnshop Regulations. Louisiana law provides for the licensing and bonding of pawnbrokers in that state. In addition, the act requires that pawn transactions be reported to local law enforcement agencies, establishes hours during which pawnbrokers may be open for business and requires certain bookkeeping practices. Under the Louisiana statute, no pawnbroker may sell any jewelry pledged as collateral until the lapse of six months from the time the loan was made or extended by payment of accrued interest. All other unredeemed collateral from loans can be sold after the lapse of three months. Louisiana state law establishes maximum allowable rates of interest on pawn loans of 10% per month. In addition, Louisiana law provides that the pawnbroker may also charge a one-time fee not to exceed 10% for all other services. Various municipalities and parishes in the state of Louisiana have promulgated additional ordinances and regulations pertaining to pawnshops.
Although pawnshop regulations vary from state to state to a considerable degree, the regulations summarized above are representative of the regulatory frameworks affecting the Company in the various states in which its operating units are located.
United Kingdom Regulations. Pawnshops in the United Kingdom conduct pawn operations in a manner that is similar to the Company's domestic operations, except that pawnshops generally lend money only on the security of jewelry and gold and silver items. The Consumer Credit Act 1974 in the United Kingdom requires that the pawnbroker notify the customer following the expiration of the six month loan term and before the pledged items are sold by the pawnbroker. Unredeemed items are generally sold at auction. For loans exceeding 75 pounds sterling, any amounts received on the auction sale in excess of the principal amount of the loan, accrued finance and service charge and disposition expenses must be held by the pawnbroker to be reclaimed by the customer. If the pawnbroker is the highest bidder at the auction, it reclaims the merchandise for later disposition from its pawnshop premises and may realize gross profit on resale. For loans of 75 pounds sterling or less, unredeemed merchandise is automatically forfeited to the
pawnbroker, and the pawnbroker may dispose of such merchandise to the public from the pawnshop premises and retain any excess sales proceeds.
Pawnbrokers in the United Kingdom are licensed and regulated by the Office of Fair Trading (the "OFT") pursuant to the Consumer Credit Act 1974. Licenses are valid for five years, subject to possible revocation, suspension, or variance by the OFT. Unlike most state statutes in the United States governing pawnbrokers, the Consumer Credit Act 1974 and the regulations promulgated thereunder do not specify a maximum allowable interest rate chargeable by pawnbrokers in the United Kingdom. Rather, the statute prohibits pawnbrokers from entering into "extortionate credit bargains" with customers. Currently, the Company typically charges a rate of six percent (6%) per month.
Sweden Regulations. The regulatory environment for pawnshops in Sweden is very similar to that in the United Kingdom. Sweden's 1949 statute governing pawnbroking was repealed and replaced with a new pawnbroking act effective January 1, 1996. The new act provides that the loan term may not exceed one year, that the pawnbroker is entitled to default interest on arrears for a maximum of four months from the due date, and that the pawnbroker may not dispose of unredeemed merchandise less than two months after the due date. The disposition must take place at a public auction, and the original customer is entitled to any excess disposition proceeds.
Like Sweden's previous pawnbroking statute, the new act provides for licensing and supervision of pawnshops by the local County Administrative Boards. The act does not specify a maximum allowable interest rate for pawn loans, and, unlike the previous statute, it does not authorize the local County Administrative Boards to regulate the rates that pawnbrokers may charge. Currently, the Company typically charges a rate of between 2.75% and 3.75% per month. Also, the act grants Swedish pawnbrokers the new authority to purchase unredeemed merchandise at the public auction and then dispose of the merchandise to the public from the pawnshop premises.
Payday Loans. The Company recently began offering a small consumer cash advance product referred to as "payday loans" through many of its existing stores. (See "Lending Function.") Each state in which the Company offers the product has specific laws dealing with the conduct of this business. Typically, the applicable regulations restrict the amount of finance and service charges that may be assessed and limit customers' ability to renew these transactions. In many instances, the regulations also limit the aggregate amount that a provider may advance (and, in some cases, the number of advances the provider may make) to any one customer at one time. Providers typically must obtain a separate license from the state licensing authority in order to offer this product. The Company must also comply with the various disclosure requirements under the federal Truth in Lending Act (and "Regulation Z" promulgated under that Act) in connection with "payday loan" transactions.
Other Regulatory Matters, Etc. With respect to firearm sales, each of the pawnshops must comply with the Brady Handgun Violence Prevention Act (the "Brady Act"), which took effect on February 28, 1994. The Brady Act imposes a background check requirement in connection with the disposition of firearms by federally licensed firearms dealers. In addition, the Company must continue to comply with the longstanding regulations promulgated by the Department of the Treasury, Bureau of Alcohol, Tobacco and Firearms which require each pawnshop dealing in guns to maintain a permanent written record of all receipts and dispositions of firearms.
In addition to the state statutes and regulations described above, many of the Company's pawnshops are subject to municipal ordinances, which may require, for example, local licenses or permits and specified recordkeeping procedures, among other things. Each of the Company's pawnshops voluntarily or pursuant to municipal ordinance provides to the police department having jurisdiction copies of all daily transactions involving pawn loans and over-the-counter purchases. These daily transaction reports are designed to provide
the local police with a detailed description of the goods involved including serial numbers, if any, and the name and address of the owner obtained from a valid identification card.
A copy of the transaction ticket is provided to local law enforcement agencies for processing by the National Crime Investigative Computer to determine conflicting claims of rightful ownership. Goods held to secure pawn loans or goods purchased which are determined to belong to an owner other than the borrower or seller are subject to recovery by the rightful owner. However, the Company historically has not experienced a material number of claims of this sort, and the claims experienced have not had a material adverse effect on the Company's results of operations.
Casualty insurance, including burglary coverage, is maintained for each of the Company's pawnshops, and fidelity coverage is maintained on each of the Company's employees.
Management of the Company believes its operations are conducted in material compliance with all federal, state and local laws and ordinances applicable to its business.
EXECUTIVE OFFICERS
The following sets forth, as of March 12, 2001, certain data concerning the executive officers of the Company, all of whom are elected on an annual basis. There is no family relationship between any of the executive officers.
Daniel R. Feehan has been Chief Executive Officer and President since February 2000. He has served as President and Chief Operating Officer since January 1990. He served as Chairman and Co-Chief Executive Officer of Mr. Payroll Corporation from February 1998 to February 1999 before returning to the position of President and Chief Operating Officer of the Company.
Thomas A. Bessant, Jr. joined the Company in May 1993 as Vice President - Finance and Treasurer. He was elected Senior Vice President - Chief Financial Officer in July 1997 and has served as Executive Vice President - Chief Financial Officer since July 1998. Prior to joining the Company, Mr. Bessant was a Senior Manager in the Corporate Finance Consulting Services Group of Arthur Andersen & Co., S. C. in Dallas, Texas from June 1989. Prior to that time, Mr. Bessant was Vice President in the Corporate Banking Division of NCNB Texas, N.A., and its predecessor banking corporations, beginning in 1981.
Robert D. Brockman joined the Company in July 1995 as Executive Vice President-Administration. Prior to that, he served as Vice President - Human Resources of THORN Americas, Inc., the operator of the Rent-A-Center chain of rent-to-own stores, from December 1986 to June 1995.
Jerry D. Finn joined the Company in August 1994 and has served in various operations management positions since then, including Division Vice President from January 1995 to July 1997, Division Senior Vice
President from July 1997 to April 1998, and Executive Vice President since April 1998. Prior to joining the Company, he served as District Supervisor for Kelly-Moore Paint Co. from March 1981 to August 1994.
Michael D. Gaston joined the Company in April 1997 as Executive Vice President - Business Development. Prior to joining the Company, Mr. Gaston served as President of the Gaston Corporation, a private consulting firm, from 1984 to April 1997, and Executive Vice President of Barkley & Evergreen, an advertising and consulting agency, from 1991 to April 1997.
William R. Horne joined the Company in February 1991 as Vice President-MIS. He was elected Senior Vice President-Information Technology in July 1997 and has served as Executive Vice President-Information Technology since October 1999.
James H. Kauffman joined the Company in July 1996 as Executive Vice President - Chief Financial Officer. He served as President - Cash America Pawn from July 1997 to July 1998, and since then has served as Chief Executive Officer of Rent-A-Tire, Inc. He has also served as Executive Vice President-Foreign Operations since October 1999. Prior to joining the Company, Mr. Kauffman served as President of Keystone Steel & Wire Company, a wire products manufacturer, from July 1991 to June 1996.
Hugh A. Simpson joined the Company in December 1990 as Vice President and General Counsel and was elected Vice President - General Counsel and Secretary in April 1991. He was elected Senior Vice President - General Counsel and Secretary in July 1997 and has served as Executive Vice President - General Counsel and Secretary since July 1998.
ITEM 2.
ITEM 2. PROPERTIES
As of March 12, 2001, the Company owns the real estate and building for one of its domestic pawnshop locations and four of its pawnshop locations in the United Kingdom. During 1999, the Company sold to an unaffiliated party and leased back the real estate and buildings for 11 of its pawnshop locations under non-cancelable operating leases with terms of 15 years. The Company also sold the real estate and building for one pawnshop location to a franchisee. Since May 1992, the Company's headquarters have been located in a nine-story building adjacent to downtown Fort Worth, Texas. The Company purchased the building in January 1992. On March 28, 2000, a tornado severely damaged the building. Headquarters operations have been relocated to temporary facilities. The Company's operating locations were not affected. Restoration of the building began in the fourth quarter of 2000 and is planned for completion in the fourth quarter of 2001. The Company's insurance coverage provides proceeds for repairs to the building; replacement of furniture, improvements, and equipment; recovery of losses resulting from business interruption; and recovery of other general expenses. All of the Company's other locations are leased from unaffiliated parties under non-cancelable operating leases with terms ranging from 3 to 10 years.
The following table sets forth, as of March 12, 2001, the geographic markets served by the Company and the number of lending locations in such markets in which it presently operates.
The Company considers its equipment, furniture and fixtures and owned buildings to be in good condition. The Company has its own construction supervisors who engage local contractors to selectively remodel and upgrade its domestic pawnshop facilities throughout the year.
The Company's leases typically require the Company to pay all maintenance costs, insurance costs and property taxes. For additional information concerning the Company's leases see Note 16 of Notes to Consolidated Financial Statements in the Annual Report which is incorporated herein by reference.
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
The Company is a defendant in certain lawsuits encountered in the ordinary course of its business. Certain of these matters are covered to an extent by insurance. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company's financial position, results of operations or liquidity. The Alabama Supreme Court recently upheld a trial court judgment awarding
$300,000 in damages plus interest to a former employee who claimed that the Company did not pay him certain incentive compensation he believed he had earned. Of the total award, $225,000 consisted of punitive damages. The Company has petitioned the United States Supreme Court to hear the case and rule on the propriety of awarding punitive damages in this particular case. Although the Company is optimistic that it will achieve a favorable outcome in this case, there can be no assurance that the U.S. Supreme Court will grant its petition to hear the case or that it will rule in the Company's favor.
ITEM 4.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
There were no matters submitted to the Company's security holders during the fourth quarter ended December 31, 2000.
PART II
ITEM 5.
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.
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.
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF RESULTS OF OPERATIONS AND FINANCIAL CONDITION
Information contained under the caption "Management's Discussion and Analysis of Results of Operations and Financial Condition" in the Annual Report is incorporated herein by reference in response to this Item 7.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Information contained under the captions "Consolidated Financial Statements," "Notes to Consolidated Financial Statements," and "Income Statement Quarterly Data" in the Annual Report is incorporated herein by reference in response to this Item 8.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
The Company had no disagreements on accounting or financial disclosure matters with its independent public accountants to report under this Item 9.
PART III
ITEM 10.
ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT
Information contained under the caption "Election of Directors" in the Company's Proxy Statement is incorporated herein by reference in response to this Item 10. See Item 1, "Executive Officers" for information concerning executive officers.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the caption "Executive Compensation" in the Company's Proxy Statement is incorporated herein by reference in response to this Item 11.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information contained under the caption "Security Ownership of Certain Beneficial Owners and Management" in the Company's Proxy Statement is incorporated herein by reference in response to this Item 12.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information contained under the caption "Executive Compensation" in the Company's Proxy Statement is incorporated herein by reference in response to this Item 13.
PART IV
ITEM 14.
ITEM 14. EXHIBITS, FINANCIAL STATEMENT SCHEDULES, AND REPORTS ON FORM 8-K
(1) The following financial statements of the Company and Report of Independent Accountants are contained in the Annual Report and are incorporated herein by reference.
CONSOLIDATED FINANCIAL STATEMENTS:
Consolidated Balance Sheets as of December 31, 2000 and 1999.
Consolidated Statements of Operations for the years ended December 31, 2000, 1999 and 1998.
Consolidated Statements of Stockholders' Equity for the years ended December 31, 2000, 1999 and 1998.
Consolidated Statements of Cash Flows for the years ended December 31, 2000, 1999 and 1998.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
(2) The following financial statement schedule of the Company, as well as the following financial statements of innoVentry Corp. and its predecessor, Mr. Payroll Corporation, are included herein.
Schedule II -- Valuation Accounts.
Report of Independent Accountants on Financial Statement Schedule.
All other schedules for which provision is made in the applicable accounting regulation of the Securities and Exchange Commission are not required under the related instructions, are inapplicable, or the required information is included elsewhere in the financial statements.
Separate Financial Statements of Fifty Percent or Less Owned Persons-
FINANCIAL STATEMENTS OF INNOVENTRY CORP.:
Balance Sheets as of December 31, 2000 and 1999
Statements of Operations for the years ended December 31, 2000 and
Statements of Stockholders' Equity (Deficit) for the years ended December 31, 2000 and 1999
Statements of Cash Flows for the years ended December 31, 2000 and
NOTES TO FINANCIAL STATEMENTS
REPORT OF INDEPENDENT AUDITORS
FINANCIAL STATEMENTS OF MR. PAYROLL CORPORATION:
Consolidated Balance Sheet as of December 31, 1998
Consolidated Statement of Operations for the year ended December 31, 1998
Consolidated Statement of Shareholder's Equity (Deficit) for the year ended December 31, 1998
Consolidated Statement of Cash Flows for the year ended December 31, 1998
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
REPORT OF INDEPENDENT ACCOUNTANTS
(3) The exhibits filed in response to Item 601 of Regulation S-K are listed in the Exhibit Index on pages 66 through 69.
(4) During the fourth quarter ended December 31, 2000, the Company did not file any reports on Form 8-K.
SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized, on March 30, 2001.
CASH AMERICA INTERNATIONAL, INC.
By: /s/ DANIEL R. FEEHAN ------------------------------------- Daniel R. Feehan Chief Executive Officer and President
Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed by the following persons on March 30, 2001 on behalf of the registrant and in the capacities indicated.
CASH AMERICA INTERNATIONAL, INC.
SCHEDULE II--VALUATION ACCOUNTS
For the Three Years Ended December 31, 2000 (Dollars in thousands)
- ----------
(a) Deducted from allowance for write-off or other disposition of inventory.
REPORT OF INDEPENDENT ACCOUNTANTS ON THE FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders Cash America International, Inc.
Our audits of the consolidated financial statements referred to in our report dated March 28, 2001, appearing in the 2000 Annual Report to Shareholders of Cash America International, Inc. (which report and consolidated financial statements are incorporated by reference in this Annual Report on Form 10-K) also included an audit of the financial statement schedule listed in Item 14(2) of this Form 10-K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
PRICEWATERHOUSECOOPERS LLP
Fort Worth, Texas March 28, 2001
innoVentry Corp. Balance Sheets
(In thousands, except share and per share data)
See accompanying notes.
innoVentry Corp. Statements of Operations
(In thousands)
See accompanying notes.
innoVentry Corp. Statements of Stockholders' Equity (Deficit)
Years ended December 31, 2000 and 1999 (In thousands, except share data)
See accompanying notes.
innoVentry Corp. Statements of Cash Flows
(In thousands)
innoVentry Corp. Statements of Cash Flows (continued)
(In thousands)
See accompanying notes.
innoVentry Corp.
Notes to Financial Statements
December 31, 2000
1. ORGANIZATION AND BUSINESS
innoVentry Corp. ("innoVentry"), formerly known as Mr. Payroll Corporation ("Mr. Payroll"), develops and provides the necessary infrastructure to operate unmanned electronic transaction devices, which are generally marketed under the brand name RPM, that combine automated check cashing, credit card cash advance, debit card withdrawal, multimedia advertising, and facial biometric customer identification capabilities with traditional automated teller machine functionality. innoVentry operates owned and leased RPMs, and sells RPMs to third parties. At December 31, 2000, innoVentry operated RPMs in 27 states.
Mr. Payroll was incorporated and commenced operations as a check cashing service in August 1990. In 1994, Cash America International, Inc. ("Cash America") paid $2,000,000 for a 49% interest in Mr. Payroll. Effective December 31, 1996, Cash America acquired the remaining 51% in a purchase transaction. Mr. Payroll operated as a wholly owned subsidiary of Cash America until March 9, 1999. References in these Notes to Financial Statements to innoVentry include Mr. Payroll, unless the context requires otherwise.
innoVentry and Wells Fargo Cash Centers, Inc. ("Cash Centers"), a wholly owned subsidiary of Wells Fargo Bank, N.A. ("Wells Fargo"), entered into a joint venture, innoVisions, LLC ("innoVisions"), to develop and distribute a new generation of RPMs targeted at the entertainment industry. Cash Centers contributed its entertainment-related assets, including approximately 200 RPMs operating in entertainment establishments and an initial $1,000,000 working capital line of credit. innoVentry agreed to contribute transaction services and technology support, including a royalty-free license of its intellectual property rights used in the technology to operate the RPMs. innoVentry also agreed to provide RPMs to innoVisions at cost. During the period from May 1998 to March 9, 1999, these assets were operated through the joint venture. In March 1999, innoVisions was dissolved.
innoVentry Corp.
Notes to Financial Statements (continued)
1. ORGANIZATION AND BUSINESS (CONTINUED)
In March 1999, Cash Centers obtained 27,000,000 shares of new Series A convertible preferred stock in exchange for cash consideration of $20,975,000 and certain net assets formerly used by innoVisions. Concurrent with that transaction, innoVentry issued 27,000,000 shares of new Series A convertible preferred stock to Cash America in exchange for 10,000,000 shares of its common stock, representing all of the then currently issued and outstanding common stock of innoVentry. Subsequently, Cash America assigned 10% of its shares to third parties. Upon completion of these transactions, Cash Centers and Cash America owned approximately 45% and 41%, respectively, of the outstanding stock of innoVentry.
In October 1999, innoVentry issued 8,241,759 shares of new Series B convertible preferred stock to Cash Centers, Cash America, and a strategic supplier, in exchange for cash consideration of $30,000,000. At December 31, 2000 and 1999, Cash Centers, Cash America, and the supplier owned approximately 42%, 38%, and 4%, respectively, of the outstanding stock of innoVentry.
On February 2, 2001, innoVentry issued 80,312,386 shares of Series C convertible preferred stock to related parties in exchange for cash consideration of approximately $77,464,000 and the cancellation of approximately $38,270,000 of indebtedness. In addition, innoVentry renegotiated its line of credit, contract cash and lease finance arrangements with Wells Fargo (See Note 4 -Debt Obligations). These transactions are referred to herein as the Series C Financing. Concurrent with the Series C Financing, innoVentry also entered into a technology and knowledge-sharing agreement with Capital One, a stockholder (See Note 7 - Stock-Based Compensation). Subsequent to these transactions, Capital One, Cash Centers, and Cash America owned approximately 24%, 37% and 19%, respectively, of innoVentry's outstanding stock.
innoVentry has experienced operating losses since 1996 and had a working capital deficit and net capital deficit at December 31, 2000. innoVentry expects to incur substantial losses for at least the next year. Since its formation, innoVentry has raised capital through private placements of convertible preferred stock. Future capital requirements, however, depend on many factors, including innoVentry's ability to execute its business plan. innoVentry may need to raise additional capital through the issuance of debt or equity securities. There can be no assurance that innoVentry will be able to raise additional financing, or that such financing will be available to innoVentry on acceptable terms.
innoVentry Corp.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Presentation and Use of Estimates
The accompanying financial statements have been prepared in accordance with accounting principles generally accepted in the United States that require management to make estimates and assumptions that affect amounts reported in the financial statements and accompanying notes. These estimates are based on information available as of the date of the financial statements. Actual results could differ from those estimates.
Cash and Cash Equivalents
Cash and cash equivalents include cash on hand, cash and checks held by third party vendors for RPM operations, demand deposits with financial institutions, and cash and checks held by the Company under a contract cash arrangement. At December 31, 2000 and 1999, cash held by third party vendors was $3,839,000 and $5,464,000, respectively, and cash held under a contract cash arrangement totaled $13,030,000 and $12,951,000, respectively (see Note 4 - Debt Obligations). innoVentry considers all highly liquid investments with maturity of three months or less from the date of purchase to be cash equivalents. The carrying amount reported in the balance sheet for cash and cash equivalents approximates fair value.
Property, Equipment, Internal Use Software, and Leasehold Improvements
Property, equipment, internal use software, and leasehold improvements are recorded at the lower of cost or fair value, less accumulated depreciation and amortization. Depreciation on property and equipment, including assets held under capital lease obligations, is computed using the straight-line method over the estimated useful lives of the assets, which range from 3 to 5 years. Internal use software is accounted for in accordance with Statement of Position No. 98-1, "Accounting for the Costs of Computer Software Developed or Obtained for Internal Use" ("SOP No. 98-1") and is amortized on a straight-line basis over estimated useful lives of 3 to 5 years. Leasehold improvements are amortized on a straight-line basis over the shorter of the asset's useful life or corresponding lease term.
innoVentry Corp.
Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Capitalized Software Development Costs
innoVentry accounts for the cost of developing software to be used in connection with the RPM machines in accordance with Statement of Financial Accounting Standard ("SFAS") No. 86, "Accounting for the Cost of Computer Software to Be Sold, Leased, or Otherwise Marketed," under which certain computer software development costs incurred subsequent to the establishment of technological feasibility are capitalized and amortized over the estimated lives of the related products. Technological feasibility is established upon the completion of a working model. Amortization of capitalized computer software development costs begins when a project is available for use and is computed using the straight-line method, on a project-by-project basis, over the remaining estimated economic life of the software.
During the year ended December 31, 2000, innoVentry significantly modified the scope of its software development project. As a result of this modification, innoVentry wrote-off $4,855,000 in previously capitalized software development costs. innoVentry was able to utilize a portion of the code from the previous software product to accelerate the development of a replacement software product. The new software product reached technological feasibility in September 2000, and innoVentry has capitalized subsequent software development costs of $2,427,000, which will be amortized over a four-year period beginning on the date of release. For the year ended December 31, 1999, innoVentry capitalized $7,238,000, of costs related to software development and recorded related amortization of $4,114,000. During the year ended December 31, 1999, innoVentry changed the estimated useful life of certain capitalized software development costs from 5 years to 2 years, which increased the related amortization expense by approximately $1,463,000.
Revenue Recognition
innoVentry recognizes fee revenue from transactions conducted through innoVentry and third party-owned RPMs. Financial services fees are based on a flat usage fee or a percentage of the transaction value. Check cashing fees and credit card cash advance fees are based on a percentage of the transaction value. All fee revenue is recognized at the time service is rendered. innoVentry allocates a portion of its revenue to channel partners under the terms of revenue sharing arrangements based on the volume and nature of transactions conducted by innoVentry through RPMs located on the channel partner's premises.
innoVentry Corp. Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Revenue Recognition (continued)
innoVentry sells machines to third parties and receives fees related to services provided to purchasers of these machines, including post-contract customer support. Machine sales revenue less the cost of the machines is deferred and amortized over the contractual service period. During the years ended December 31, 2000 and 1999, innoVentry did not have significant machine sales.
Stock-Based Compensation
SFAS No. 123, "Accounting for Stock-Based Compensation," encourages but does not require companies to record compensation cost for stock-based employee compensation plans at fair value. innoVentry has chosen to account for stock-based compensation using the intrinsic value method prescribed in Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees," ("APB Opinion No. 25") and related interpretations. For equity instruments granted to non-employees, innoVentry follows the guidance provided by Emerging Issues Task Force Issue No. 96-18, "Accounting for Equity Instruments That Are Issued to Other Than Employees for Acquiring, or in Conjunction with Selling, Goods or Services" ("EITF Issue No. 96-18").
Segment Reporting
SFAS No. 131, "Disclosures about Segments of an Enterprise and Related Information" establishes standards for disclosures about operating segments, products and services, geographic areas, and major customers. innoVentry has determined that it has one operating and reportable segment, which is the development, operation, and sale of RPMs that provide check cashing, credit card cash advance, debit card withdrawal, and other financial services. innoVentry markets its products in the United States through its direct sales force. Revenues are generated by users in the United States.
Advertising Expenses
innoVentry expenses the costs of advertising, including promotional expenses, as incurred. For the years ended December 31, 2000 and 1999, innoVentry recognized advertising expenses of $5,589,000 and $613,000, respectively, which were included in "Sales and marketing" expenses in the accompanying Statements of Operations.
innoVentry Corp. Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Income Taxes
innoVentry uses the liability method of accounting for income taxes. Under the liability method, deferred tax assets and liabilities are recognized for the expected future tax consequences attributable to differences between the financial reporting and tax reporting bases of existing assets and liabilities, as well as for operating loss and tax credit carryforwards. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the years in which those temporary differences are expected to be recovered or settled. Deferred tax expense represents the net change in the deferred tax asset or liability balance during the year. The effect on deferred tax assets and liabilities of a change in tax rates is recognized in income in the period that includes the enactment date. This amount, together with income taxes currently payable or refundable for the current year, represents the total income tax expense for the year.
For the periods prior to March 9, 1999, innoVentry was included in the consolidated federal income tax return, and in certain consolidated and combined state and local income tax returns, filed by Cash America. For periods beginning and subsequent to March 9, 1999, innoVentry has filed separate federal and certain separate state and local tax returns according to the taxable activity of its operations. Pursuant to the terms of innoVentry's tax matters agreement with Cash America, any reduction of consolidated federal income tax liability that Cash America realizes as a result of innoVentry's net operating losses prior to March 9, 1999 are not to be treated as a benefit payable from Cash America to innoVentry.
Concentration of Credit Risk
Financial instruments that potentially expose innoVentry to concentrations of credit risk consist primarily of demand deposits with financial institutions, short-term investments and trade accounts receivable. innoVentry invests cash that is not required for immediate operating needs in a diversified portfolio of financial instruments issued by institutions with investment grade credit ratings. innoVentry limits the amount of credit exposure to any one type of investment. Cash, cash equivalents and short-term investments are deposited with Wells Fargo. These securities generally mature within one year and, therefore, bear minimal risk. innoVentry has not realized any significant losses on these investments nor has it realized any significant credit losses from its accounts receivable.
innoVentry Corp. Notes to Financial Statements (continued)
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
New Accounting Standards
SFAS No. 133, "Accounting for Derivative Instruments and Hedging Activities", and its amendments, SFAS 137 and 138, establishes accounting and reporting standards for derivative instruments and for hedging activities. It requires that derivatives be recognized on the balance sheet at fair value and specifies the accounting for changes in fair value. innoVentry does not currently engage in hedging activities and does not hold any derivative financial instruments. Accordingly, innoVentry's adoption of SFAS 133, as amended, on January 1, 2001, had no impact on the Company's financial position or operations.
3. PROPERTY, EQUIPMENT, INTERNAL USE SOFTWARE, AND LEASEHOLD IMPROVEMENTS
The following is a summary of property, equipment, internal use software, and leasehold improvements (in thousands):
Computer equipment, office equipment, vehicles, and RPM equipment include assets held under capital lease obligations with a cost basis of $32,684,000 and $5,958,000 at December 31, 2000 and 1999, respectively. Accumulated depreciation and amortization includes depreciation related to capital leased assets of $3,507,000 and $417,000 at December 31, 2000 and 1999, respectively.
RPM - assembly-in-process includes subassembly components for RPMs that are available-for-sale or use by innoVentry which have not yet been put into service. As such, no depreciation expense has been recorded related to this equipment.
innoVentry Corp. Notes to Financial Statements (continued)
3. PROPERTY, EQUIPMENT, INTERNAL USE SOFTWARE, AND LEASEHOLD IMPROVEMENTS (CONTINUED)
For the years ended December 31, 2000 and 1999, innoVentry capitalized $1,063,000 and $624,000 of costs related to internal use software and recognized related amortization of $144,000 and $75,000, respectively.
innoVentry periodically evaluates the carrying amount of its long-lived assets and applies the provisions of SFAS No. 121, "Accounting for the Impairment of Long-Lived Assets and for Long-Lived Assets to Be Disposed Of." SFAS No. 121 requires long-lived assets and certain identifiable intangibles to be held and used or disposed of by an entity be reviewed for impairment whenever events or changes in circumstances indicate that the carrying amount of an asset may not be recoverable.
During the year ended December 31, 1999, innoVentry determined that certain RPM equipment and RPM assembly-in-progress would not support future technological requirements. innoVentry recognized the impairment of those assets by adjusting the cost basis of the equipment scheduled for trade-in to reflect current market value and recorded an impairment loss on RPM equipment of $4,727,000 during the year ended December 31, 1999.
4. DEBT OBLIGATIONS
Line of Credit with Affiliate
Under a revolving secured credit agreement with Wells Fargo, innoVentry can borrow up to $62,000,000 at December 31, 2000. Interest is payable monthly at one of the following rates: base rate (the greater of 1% below the prime rate or 0.5% below the Federal Funds rate), one-month LIBOR, three-month LIBOR or six-month LIBOR. The credit facility matures in February 2001 and is guaranteed by Wells Fargo & Co. At December 31, 2000, there was $61,500,000 outstanding on the line of credit. In addition to the amount owed pursuant to the credit facility, innoVentry had overdrafted its depository accounts by approximately $35,922,000 at December 31, 2000. This overdraft was settled with the proceeds of the Series C Financing in February 2001.
innoVentry Corp. Notes to Financial Statements (continued)
4. DEBT OBLIGATIONS (CONTINUED)
Line of Credit with Affiliate (continued)
Throughout the year ending December 31, 2000, innoVentry and Wells Fargo signed several new amendments to the existing credit agreement to increase the aggregate amount of borrowings available under the line of credit from $8,000,000 at December 31, 1999 to $62,000,000 at December 31, 2000, guarantee indebtedness of innoVentry up to $64,955,000 by Wells Fargo & Co. and extend the maturity to January 2001. In consideration for these amendments, innoVentry granted Wells Fargo & Co., or its assigns, warrants to purchase up to 1,197,630 shares of innoVentry common stock at $0.01 per share and paid arrangement fees of $284,375 to Wells Fargo. The estimated fair value of the warrants was $2,168,000. The warrants were fully vested, non-forfeitable and exercisable at the date of grant and expire in 2010. The arrangement fees and estimated fair value of the warrants was amortized to interest expense over the term of the related amendments.
In connection with the Series C Financing effective February 2, 2001, Wells Fargo cancelled $35,000,000 of debt payable by innoVentry under the revolving secured credit agreement in exchange for 24,283,632 shares of Series C convertible preferred stock. In addition, innoVentry and Wells Fargo entered into a new amended and restated credit agreement (the "Restated Credit Agreement"), which provides for up to $55,000,000 in aggregate secured borrowings and matures on April 30, 2002. Upon the occurrence of certain events, including innoVentry's election, an asset sale with cash proceeds greater than $1,000,000, or incurrence of other indebtedness (other than that provided for in the Restated Credit Agreement), the commitment amount may be reduced to an amount not less than $15,000,000. The terms of the revolving secured credit agreement establish certain limitations on indebtedness, liens, mergers and acquisitions, asset sales and investments. Under the terms of the Restated Credit Agreement, interest is payable monthly at the one of the following rates: base rate (the greater of 1.00% below the (a) prime rate or (b) the Federal Funds rate plus 0.5%) or Wells Fargo's Eurodollar Rate (one-month LIBOR divided by 1.0 less the LIBOR reserve Requirement) plus 0.75%. innoVentry paid an arrangement fee of $150,000 related to Restated Credit Agreement.
innoVentry Corp. Notes to Financial Statements (continued)
4. DEBT OBLIGATIONS (CONTINUED)
Due to Affiliate Under Contract Cash Arrangement
Under a contract cash arrangement, Wells Fargo supplies all cash requirements for RPMs in substantially all locations where Wells Fargo is able to transact operations. The cash remains the property of Wells Fargo until dispensed from the machine through cash withdrawal transactions. Once the customer transactions are processed by various third party processors with which innoVentry contracts, reimbursements of amounts withdrawn and related fees are deposited by the third party processors into innoVentry's demand deposit accounts. innoVentry then reimburses Wells Fargo for the amounts withdrawn. The arrangement expires in June 2001 and is renewable by either party for one-year intervals. The arrangement is cancelable with 90-day notice after the initial term by either innoVentry or Wells Fargo. The arrangement requires monthly interest payments based on rates ranging from 1% to the Federal Funds rate plus 50 basis points on average daily cash balance. At December 31, 2000 and 1999, cash in innoVentry's demand deposit accounts due but not yet remitted to Wells Fargo under the arrangement was $13,030,000 and $12,951,000, respectively. For the years ended December 31, 2000 and 1999, interest expense incurred related to the arrangement was $1,349,000 and $389,000, respectively, and is included in "Interest expense" in the accompanying Statements of Operations.
In conjunction with the Series C Financing, Wells Fargo and innoVentry entered into a Restructured RPM Funding Arrangement (the "RPM Funding Arrangement"), which expires on April 30, 2002. Under the terms of the RPM Funding Arrangement, Wells Fargo will provide up to $750,000,000 of currency for use in innoVentry's network of RPM machines, subject to certain per machine cash limitations. The RPM Funding Arrangement requires a monthly fee based on rates ranging from 1.00% to the Federal Funds rate plus 50 basis points based on the average daily cash balance. The terms of the RPM Funding Arrangement also provide for the establishment of a restricted deposit account in Wells Fargo's name for the processing and collection of checks deposited into the RPMs.
innoVentry Corp. Notes to Financial Statements (continued)
4. DEBT OBLIGATIONS (CONTINUED)
Note Payable to Stockholder
During 1999, innoVentry executed a note payable in the amount of $2,900,000 to Cash America. The note accrues interest at 7.0% annually. At December 31, 2000 and 1999, accrued interest related to the note payable to stockholder of $357,000 and $153,000, respectively, was included within "Note and interest payable to stockholder" in the accompanying Balance Sheets.
In conjunction with the Series C Financing, Cash America cancelled this note payable and accrued interest in exchange for 2,269,066 shares of innoVentry's Series C convertible preferred stock.
5. COMMITMENTS AND CONTINGENCIES
Lease Commitments
innoVentry leases facilities and equipment under non-cancelable operating and capital lease agreements that expire through October 2010. For the years ended December 31, 2000 and 1999, innoVentry recorded rent expense related to operating leases on facilities of $4,425,000 and $1,320,000, respectively, included in "Operations" expense in the accompanying Statements of Operations. Certain facility leases entered into by innoVentry contain options that may extend the lease term beyond the initial commitment period, subject to terms agreed to at lease inception. For operating leases that contain predetermined fixed escalations of minimum rentals, innoVentry recognizes the related rental expense on a straight-line basis and records the difference between the recognized rental expense and amounts payable under the leases as deferred rent. At December 31, 2000 and 1999, this liability amounted to $551,000 and $147,000, respectively, and is included in "Other non-current liabilities" in the accompanying Balance Sheets.
Effective October 1, 2000, innoVentry entered into a new lease agreement for office space. The lease is secured by a $2,800,000 irrevocable letter of credit issued by Wells Fargo. In conjunction with the facility lease, innoVentry placed cash of $208,000 and 268,000 shares of common stock in escrow for the benefit of the lessor. The shares were to be released to the lessor upon achievement of certain milestones documented in the lease. On February 1, 2001, the shares were released from escrow into the custody of the lessor. The estimated fair market value of the common shares was $488,000 which will be recognized as rent expense.
innoVentry Corp. Notes to Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Lease Commitments (continued)
innoVentry has entered into a master lease facility with Wells Fargo Equipment Finance, Inc., guaranteed by Wells Fargo & Company, which provides for the sale to Wells Fargo Equipment Finance, Inc. and lease back of up to $17,000,000 of RPM equipment by innoVentry. In conjunction with the Series C Financing, Wells Fargo Equipment Finance increased this lease line commitment from $17,000,000 to $85,050,000. The new lease line commitment is available until April 30, 2002. The lease arrangements are secured by pledges of all equipment leased under the arrangements. Principal and interest are payable monthly at rates ranging between 1% to 2% above the 5-year treasury note rate and are fixed at the time of financing for 5 year terms each. During the years ended December 31, 2000 and 1999, $8,906,000 and $5,751,000 of equipment to be used by innoVentry in ongoing operations was sold and leased back under this facility.
innoVentry has also entered into a master lease facility with Diebold Credit Corporation ("Diebold") that allows innoVentry to lease from Diebold up to $56,700,000 of RPM equipment. The lease arrangements are secured by pledges of all equipment leased under the arrangements. Principal and interest are payable monthly at various rates and are fixed at the time of each financing for a term of 63 months. During the year ended December 31, 2000, $17,536,000 of equipment to be used by innoVentry in ongoing operations was leased under this facility.
As consideration for guaranteeing payments under the aforementioned lease with Diebold, innoVentry granted to Wells Fargo & Co. warrants for the purchase of 4,000,000 shares of common stock at $0.01 per share. The warrants were fully vested, non-forfeitable and exercisable at the date of grant and expire in 2010. The estimated fair value of these warrants was $4,196,000 on the date of grant, which is being amortized over the lease term as a component of interest expense.
innoVentry Corp. Notes to Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Lease Commitments (continued)
The following is a summary of future minimum rental commitments for non-cancelable leases at December 31, 2000 (in thousands):
Purchase Commitments
During the years ended December 31, 2000, and 1999 innoVentry purchased $13,847,000 and $14,088,000, respectively, of RPM components and services from Diebold, a significant investor in innoVentry's Series B convertible preferred stock that was issued in October 1999. At December 31, 1999 $7,777,000 was due to Diebold and is included in "Accounts payable to stockholder and affiliate" in the accompanying Balance Sheet. At December 31, 1999, innoVentry had remaining purchase commitments of approximately $26,853,000 with Diebold. This purchase commitment was fulfilled during the year ended December 31, 2000 through the aforementioned purchase and activity under the Diebold master lease facility. Additionally, at December 31, 2000, and 1999, innoVentry had firm purchase commitments with various other equipment suppliers totaling $3,000,000 and $7,290,000, respectively.
innoVentry Corp. Notes to Financial Statements (continued)
5. COMMITMENTS AND CONTINGENCIES (CONTINUED)
Claims and Legal Proceedings
innoVentry is party to various claims, investigations, and legal proceedings arising out of the normal course of its business. While there can be no assurance that an adverse determination of any such matters could not have a material adverse impact in any future period, management does not believe, based upon information known to it, that the final resolution of any of these matters will have a material adverse effect upon innoVentry's financial position and annual results of operations and cash flows.
6. STOCKHOLDERS' EQUITY (DEFICIT)
Effective January 1, 1999, Cash America returned 1,500 shares of Series A preferred stock and 8,500 shares of Series B preferred stock to innoVentry. This represented all of the issued and outstanding preferred stock of innoVentry, and the return of this preferred stock was recorded as additional paid-in capital on the common stock held by Cash America. No additional shares of common stock were issued in exchange for the contributed preferred stock.
In March 1999, innoVentry's Board of Directors eliminated the then-existing designation of Series A and Series B preferred stock. The Board of Directors of innoVentry authorized new Series A and Series B convertible preferred stock ("Preferred Stock") on March 9, 1999, and September 29, 1999, respectively.
On February 2, 2001, innoVentry's Board of Directors amended the articles of incorporation and increased the aggregate number of shares authorized from 162,241,759 shares to 691,241,759 shares consisting of 400,000,000 shares of common stock and 291,241,759 shares of Preferred Stock. Four series of Preferred Stock have been designated: Series A Preferred Stock (54,000,000 shares), Series B Preferred Stock (8,241,759 shares), Series C Preferred Stock (175,000,000 shares) and Series D Preferred Stock (54,000,000 shares). Subsequent to the Series C Financing, 152,540,269 shares of Preferred Stock are issued and outstanding and are comprised of Series A Preferred Stock (54,000,000 shares), Series B Preferred Stock (8,241,759 shares) and Series C Preferred Stock (80,298,510 shares). No Series D Preferred Stock is outstanding. The description of the preferred stock terms that follows reflect the terms established in the articles of incorporation dated February 2, 2001.
innoVentry Corp. Notes to Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
The Series C and D Preferred Stock shareholders are entitled to receive liquidation preference prior and in preference to any distribution to the holders of Series A and B Preferred Stock, and the common shareholders in an amount equal to all declared but unpaid dividends, if any, plus $1.4413 per share of Series C and Series D Preferred Stock, respectively, adjusted for any combinations, consolidations, stock distributions or dividends. After payment of the full liquidation preference, holders of the Series A and Series B Preferred Stock are entitled to receive liquidation preference prior and in preference to any distribution to the holders of common stock in an amount equal to all declared but unpaid dividends, if any, plus $1.00 and $3.64 per share of Series A and Series B Preferred Stock, respectively, adjusted for any combinations, consolidations, stock distributions or dividends. The liquidation preference for Series A and Series B Preferred Stock was $84,000,000 at December 31, 2000 and 1999.
If the distributable assets are insufficient to permit payment to the Series C and D Preferred Stock shareholders of their preferential amount, then the entire amount of distributable assets, shall be distributed pro rata among the Series C and D Preferred Stock shareholders in proportion to their respective preferential amounts. Similarly, if the remaining distributable assets are insufficient to permit payment to the Series A and B Preferred Stock shareholders of their preferential amount, then the entire amount of distributable assets, shall be distributed pro rata among the Series A and B Preferred Stock shareholders in proportion to their respective preferential amounts.
Following the payment of such liquidation preferences, the remaining assets, if any, will be available for distribution to the holders of innoVentry's common stock and preferred stock pro rata based on the number of shares of common stock held by each shareholder determined on as as-if-converted basis.
innoVentry Corp. Notes to Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
Each share of Series A, Series B and Series C Preferred Stock is convertible at the option of the shareholder at any time after the date of issuance into common stock of innoVentry on a one-for-one basis subject to adjustment for subsequent common stock splits, dividends, distributions, or subdivisions. The Series D Preferred Stock is not convertible at the option of the holder. Each share of Preferred Stock, including the Series D Preferred Stock, will automatically convert into common stock, on the same basis as a voluntary conversion, upon the occurrence of the earlier of an initial public offering of at least 15% of the outstanding shares of common stock on a fully diluted, as-converted basis, that will yield proceeds (net of any underwriter discounts, concessions or commissions) to innoVentry in excess of $71,000,000, a sale of all or substantially all of innoVentry's assets, or the acquisition by another entity, that results in proceeds of $476,000,000 or more, or the date specified by agreement of the holders of at least 66 2/3% of voting power of the then-outstanding shares of Preferred Stock, with each series voting as a separate class.
Each holder of Series A, Series B and Series C Preferred Stock is entitled to the number of votes equal to the number of shares of common stock into which such shares of preferred stock held by such holder could then be converted. The Series A, Series B and Series C Preferred Stock and common stock shall vote together and not as separate classes. The Series D Preferred Stock is non-voting.
Holders of the Series C and Series D Preferred Stock are entitled to receive cumulative cash dividends at an annual rate of $0.1128 per share accruing from the date of issuance. Such dividends will be due and payable when and if declared by the Board of Directors and at any time two years after the date of first issuance upon a redemption request of the holders of at least 60% of the shares of Series C and Series D Preferred Stock then outstanding, and immediately prior to the payment of any dividend on shares of common stock or Series A, or Series B Preferred Stock, or certain other events. Holders of the Series A and Series B Preferred Stock and Common Stock are entitled to receive dividends as and when declared by the Board of Directors to the extent permitted by law.
innoVentry Corp. Notes to Financial Statements (continued)
6. STOCKHOLDERS' EQUITY (DEFICIT) (CONTINUED)
During 1999, innoVentry sold 8,200,000 shares of common stock to certain members of management and advisors to innoVentry at prices ranging from $0.20 to $1.82 per share. Of these 8,200,000 shares, 6,600,000 shares were financed using notes receivable from stockholders. These full recourse notes receivable bear interest at a range from 4.83% to 5.22% and are due the earlier of five years after grant, voluntary resignation, sale or liquidation of holder, or one year after an initial public offering. As of December 31, 2000, and 1999, the balance of this account is $965,000 and $1,432,000, respectively, and is classified as "Notes receivable from stockholders" in the accompanying Balance Sheets.
Also included in the 8,200,000 shares sold during the year ended December 31,1999 are 7,200,000 shares which are subject to innoVentry's right to repurchase at the original issuance price. During the year ended December 31, 2000, innoVentry sold an additional 200,000 shares to a service provider for a purchase price of $1.82 per share. Those shares of common stock are subject to innoVentry's right to repurchase at the original issuance price. innoVentry's repurchase rights lapse over a four-year period subject to the purchaser's continued status as a service provider. During 2000, innoVentry exercised its right to repurchase 478,125 shares by canceling the related note receivable from an employee who left innoVentry. At December 31, 2000 and 1999, 1,387,500 shares and 4,558,333 shares, respectively, remain subject to repurchase.
7. STOCK-BASED COMPENSATION
Under the 1999 Stock Plan (the "Plan"), innoVentry grants restricted common stock purchase rights and options to purchase shares of its common stock to employees, officers, and directors of innoVentry. At December 31, 2000 innoVentry has reserved 19,450,000 shares of common stock for issuance through the Plan. At December 31, 2000, 10,328,000 shares were available for future grants under the Plan. The Board of Directors administers the Plan and may award a number of forms of stock-based compensation to eligible participants including incentive and nonqualified stock options that vest over a four-year period and have a ten-year contractual life. Restricted stock purchase rights may also be granted under the Plan, and these rights vest over a three year period.
innoVentry Corp. Notes to Financial Statements (continued)
7. STOCK-BASED COMPENSATION (CONTINUED)
The following summarizes stock option activity and related information during the period from Plan inception to December 31, 2000:
A summary of stock options outstanding and exercisable under the Plan at December 31, 2000 follows:
As discussed in Note 2, innoVentry has elected to follow APB Opinion No. 25 and related interpretations in accounting for its employee and director stock-based awards. Under APB Opinion No. 25, innoVentry does not recognize compensation expense with respect to such awards if the exercise price equals or exceeds the fair value of the underlying security on the date of grant and other terms are fixed.
innoVentry Corp. Notes to Financial Statements (continued)
7. STOCK-BASED COMPENSATION (CONTINUED)
The fair value of options awarded for the purpose of the alternative fair value disclosures required by SFAS No. 123 was estimated as of the dates of grant and was determined using the Black-Scholes model with risk-free interest rates ranging from 6.00% to 6.38% and from 5.28% to 6.38% during 2000 and 1999, respectively, and with expected lives of 7 years, expected volatility of 60%, and a dividend yield of zero. The weighted average fair value of the options granted was $0.99 and $0.75 during 2000, and 1999, respectively. The estimated fair value of the options is amortized to expense over the options' vesting periods. For the years ended December 31, 2000 and 1999, pro forma net loss would have increased to $125,601,150 and $41,442,000, respectively, if compensation cost associated with innoVentry's stock-based compensation plans had been determined using the Black-Scholes model described above.
In connection with stock option grants to employees and restricted stock granted to directors during the year ended December 31, 1999, innoVentry recorded deferred stock compensation of $5,591,000, representing the difference between the exercise price and the deemed fair value of innoVentry common stock on the date such stock options and restricted stock were granted. No deferred stock compensation was recorded during the year ended December 31, 2000. Such amounts are included as a reduction of stockholders' equity and are being amortized to operations on a graded vesting method over the related vesting period of each respective option or purchase right. During the years ended December 31, 2000 and 1999, innoVentry recorded amortization of deferred stock compensation expense of $2,462,000 and $1,270,000, respectively. At December 31, 2000 and 1999, $1,121,000 and $4,321,000, respectively, of deferred stock compensation remained unamortized.
During 1999, innoVentry also issued non-employee stock purchase rights totaling 1,100,000 shares of common stock outside of the Plan at $0.20 per share. During the year ended December 31, 1999 innoVentry recorded stock compensation in the amount of $98,000, based upon the estimated fair value at the date of issuance calculated in accordance with EITF Issue No. 96-18. At December 31, 1999, $876,000 of deferred stock compensation remained unamortized.
In conjunction with the Series C Financing and the technology and knowledge-sharing agreement entered into with Capital One, innoVentry issued Capital One warrants to purchase 84,404,884 shares of common stock at prices ranging from $0.01 per share to $2.8826 per share. The warrants were fully vested, non-forfeitable and exercisable at the date of grant, and expire between the years 2006 and 2011.
innoVentry Corp. Notes to Financial Statements (continued)
8. INCOME TAXES
The significant components of the benefit for income taxes are as follows (in thousands):
The 1999 benefit for income taxes results in an effective tax rate that differs from the federal statutory rate primarily due to nondeductible goodwill amortization, non-deductible deferred stock compensation expense, and an increase in the valuation allowance amortization for deferred tax assets. The deferred tax benefit results from a reduction in beginning of the year net deferred tax liability balances.
The 2000 provision for income taxes results in an effective tax rate that differs from the federal statutory rate primarily due to state taxes, non-deductible deferred stock compensation, non-deductible interest expense, and an increase in the valuation allowance.
innoVentry Corp. Notes to Financial Statements (continued)
8. INCOME TAXES (CONTINUED)
At December 31, the significant components of the deferred tax liabilities and assets were as follows (in thousands):
Deferred tax assets are recognized to the extent management believes, based on available evidence, that it is more likely than not that they will be realized. Due to the uncertainty surrounding innoVentry's ability to realize benefits associated with its net operating losses, a valuation allowance was established against its net deferred tax assets. During the year ended December 31, 2000, the valuation allowance increased by $43,688,000.
At December 31, 2000, innoVentry had federal net operating loss carryforwards of approximately $153,000,000, which expire in the years 2009 to 2020. innoVentry has state net loss carryforwards of lesser amounts that expire in the years 2004 to 2020. Due to ownership changes, these carry forwards are subject to substantial annual limitations as provided by the Internal Revenue Code of 1986, as amended, and similar state provisions. The annual limitation could result in the expiration of a significant portion of the net operating losses before full utilization.
innoVentry Corp. Notes to Financial Statements (continued)
9. RETIREMENT SAVINGS PLAN
innoVentry maintains an employee savings and retirement plan that is intended to be qualified under Section 401(k) of the Internal Revenue Code and is available to substantially all full-time employees of innoVentry. The plan provides for tax-deferred salary deductions and after-tax employee contributions. Contributions include employee salary deferral contributions and discretionary employer contributions. For the years ended December 31, 2000 and 1999, employer discretionary contributions totaled $283,000 and $104,000, respectively, and are included in "General and Administrative" expenses in the accompanying Statement of Operations.
10. FAIR VALUE OF FINANCIAL INSTRUMENTS
At December 31, 2000 and 1999, the carrying value of innoVentry's financial instruments approximated their fair values. These financial instruments include cash and cash equivalents, short-term investments in marketable securities, accounts receivable, accounts payable and accrued expenses, accounts payable to stockholder and affiliate, borrowings under the line of credit with affiliate, amounts due to affiliate under contract cash arrangement, and certain other assets and liabilities that are considered financial instruments. Carrying values were estimated to approximate fair values for these financial instruments, as they are short-term in nature and are receivable or payable on demand.
The fair value of innoVentry's note and interest payable to stockholder and capital lease obligations with affiliate were estimated using a discounted cash flow model and a discount rate based on yields appropriate for the risks related to the financial instruments. The fair values of the line of credit and capital lease obligations with affiliate approximate their carrying values.
Report of Independent Auditors
The Board of Directors innoVentry Corp.
We have audited the accompanying balance sheets of innoVentry Corp. as of December 31, 2000 and 1999, and the related statements of operations, stockholders' equity (deficit), and cash flows for the years then ended. These financial statements are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements based on our audits.
We conducted our audits in accordance with auditing standards generally accepted in the United States. Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in all material respects, the financial position of innoVentry Corp. at December 31, 2000 and 1999, and the results of its operations and its cash flows for the years then ended, in conformity with accounting principles generally accepted in the United States.
/s/ Ernst & Young LLP
San Francisco, California March 9, 2001
MR. PAYROLL CORPORATION CONSOLIDATED BALANCE SHEET DECEMBER 31, 1998 (In thousands, except share data)
ASSETS
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
MR. PAYROLL CORPORATION CONSOLIDATED STATEMENT OF OPERATIONS YEAR ENDED DECEMBER 31, 1998 (In thousands)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
MR. PAYROLL CORPORATION CONSOLIDATED STATEMENT OF SHAREHOLDER'S EQUITY (DEFICIT) YEAR ENDED DECEMBER 31, 1998 (In thousands, except share data)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
MR. PAYROLL CORPORATION CONSOLIDATED STATEMENT OF CASH FLOWS YEAR ENDED DECEMBER 31, 1998 (In thousands)
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART OF THE CONSOLIDATED FINANCIAL STATEMENTS.
MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. SUMMARY OF BUSINESS ACTIVITY
Mr. Payroll Corporation, now known as innoVentry Corp., (the "Company") was incorporated in the State of Texas in August 1990, and began operations as a check cashing service. In 1994, Cash America International, Inc. ("Cash America") paid $2,000,000 for a 49% interest in the Company. Effective at the close of business on December 31, 1996, Cash America acquired, in a purchase transaction, the remaining 51% interest in the Company. The aggregate purchase price of the additional 51% interest was to be paid in 3 annual installments in an amount equal to .9775 times the defined after-tax net income of the Company for the 1996, 1997 and 1998 fiscal years, respectively. Cash America paid no additional consideration based on the Company's results of operations in 1996, 1997 and 1998, respectively. The purchase transaction established a new basis of accounting for purchased assets and liabilities, that has been reflected in these financial statements.
At December 31, 1998, the Company operated 127 franchised and 10 company owned check cashing centers. The Company collects an initial franchise fee, as well as a royalty based on a percentage of the check cashing fees earned by franchised centers and check cashing fees earned by its company owned centers. The Company provides training to franchisees and their employees and support services ranging from computer equipment problem resolution, marketing techniques and construction of equipment, to current issues affecting the industry. During 1997, the Company developed an automated check cashing machine ("CCM") that combines facial biometrics imaging, for customer identification purposes, with proprietary check cashing technology and a cash-dispensing machine. The Company receives check cashing fees from its company owned CCMs. The Company also sells CCMs to third parties and receives fees for providing initial customer identification, as well as subsequent check cashing verification and guarantee services from a central service center. At December 31, 1998, the Company operated 84 CCMs, including 38 that were company owned.
In May, 1998, the Company and Wells Fargo Bank, N.A. ("Wells Fargo") entered into a joint venture, named innoVisions, LLC ("innoVisions"), to develop and distribute a new generation of financial services vending machines targeting the gaming industry. The machines would combine ATM functions with automated check cashing, credit card cash advances, debit withdrawals, multimedia advertising and distribution of event tickets. Wells Fargo contributed the gaming-related assets of its wholly owned subsidiary, Wells Fargo Cash Centers, Inc. ("Cash Centers"), including approximately 200 ATMs operating in gaming establishments; an initial $1,000,000 working capital line of credit, and cash for use in its ATMs in specified markets at negotiated rates. The Company agreed to contribute transaction services and technology support, including a royalty-free license of its intellectual property rights in the technology to operate the machines. The Company also agreed to provide CCMs to innoVisions at cost. In order to test the viability of the new machines, the agreement called for a pilot placement of 10 CCMs at two casinos in Las Vegas and Reno, Nevada.
MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
In order to fund ongoing operations, the Company is dependent on a significant increase in revenue from some combination of sales of CCMs, verification fees, check cashing fees, franchise royalties and sales of franchises. Should those revenues not increase as anticipated, the Company would require additional sources of capital. The Company received additional equity contributions in March 1999. See Note 10.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
BASIS OF PRESENTATION
The consolidated financial statements include the accounts of the Company's wholly owned subsidiary. All intercompany accounts and transactions have been eliminated in consolidation. The Company uses the equity method of accounting for its investment in innoVisions.
innoVisions is in the development stage and has incurred losses since its inception. The Company has not recorded its equity in the losses of innoVisions since the carrying value of its investment is zero and the Company has neither guaranteed obligations of innoVisions nor does it have any obligation to provide financial support to innoVisions.
CASH AND CASH EQUIVALENTS
Cash and cash equivalents consist primarily of cash on hand and cash on deposit.
ACCOUNTS RECEIVABLE
The Company considers accounts receivable to be fully collectible. No allowance for doubtful accounts is maintained nor is a credit evaluation performed on customers. Amounts deemed uncollectible are immediately charged to operations.
INVENTORIES
Inventories, which consist of sub-assembly components for CCMs and of CCMs available for sale, are stated at the lower of cost (specific identification) or market.
PROPERTY AND EQUIPMENT AND DEPRECIATION
Property and equipment are recorded at cost less accumulated depreciation. Equipment held under capital leases is recorded at the lower of the net present value of the minimum lease payments or its fair value at the inception of the lease. The cost of assets sold or retired, as well as any accumulated depreciation, is removed from the accounts at the time of disposal, with recognition of any resulting gain or loss.
Depreciation expense is provided on a straight-line basis using estimated useful lives of 5 to 7 years for furniture and equipment, 7 years for check cashing machines, 25 years for store booths and 3 to 5 years for software. Amortization of capital leases is included in depreciation expense.
MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
SOFTWARE DEVELOPMENT COSTS
The Company develops computer software for internal use. Internal and external costs incurred for the development of computer applications, as well as for upgrades and enhancements that result in additional functionality of the applications, are capitalized. Internal and external training and maintenance costs are charged to expense as incurred. When an application is placed in service, the Company begins amortizing the related capitalized software costs using the straight-line method over 3 years.
INTANGIBLE ASSETS
Intangible assets, consisting principally of excess purchase price over net assets acquired, are being amortized on a straight-line basis over their expected periods of benefit, generally 28.5 years. Management assesses the recoverability of intangible assets by comparing the intangible assets to the undiscounted cash flows expected to be generated by the acquired operations during the anticipated period of benefit.
Accumulated amortization of intangible assets was $449,000 at December 31, 1998.
INCOME TAXES
The Company is included in the 1998 consolidated federal income tax return of Cash America. Pursuant to the terms of the Company's tax matters agreement (the "Tax Matters Agreement") with Cash America, any reduction of consolidated federal income tax liability that Cash America may realize as a result of the Company's net operating losses will not be treated as a benefit payable from Cash America to the Company. Accordingly, such benefits are recorded as a reduction of stockholder's equity.
The Company utilizes the liability method to account for income taxes. This method requires the recognition of deferred tax assets and liabilities for the expected future tax consequences of existing temporary differences between the financial reporting and tax reporting basis of assets and liabilities and operating loss and tax credit carryforwards for tax purposes.
REVENUE RECOGNITION
The Company collects a royalty based on a percentage of check cashing fees earned by the franchisee.
The Company recognizes franchise sales when the Company has substantially performed all of its material obligations under the franchise agreement. Under the terms of a typical franchise agreement, the Company is under no obligation to refund franchise fees once a location has opened for business.
The Company sells CCMs and recognizes sales revenue when a CCM is delivered to a purchaser, installed, and title is transferred. Thereafter, the Company records check cashing verification fee revenue in the period in which the service is provided.
MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The Company also owns and operates CCMs which generate check cashing fee revenue that is recorded in the period in which the service is provided.
ADVERTISING COSTS
Costs of advertising are expensed at the time of first occurrence. Advertising expenses were $617,000 for the year ended December 31, 1998.
YEAR 2000 EXPENSES
Costs of identifying, correcting, reprogramming and testing computer systems for Year 2000 compliance are charged to expense when incurred.
USE OF ESTIMATES
The preparation of financial statements in conformity with generally accepted accounting principles requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.
NEW ACCOUNTING STANDARDS
In June 1998, the Financial Accounting Standards Board issued Statement of Financial Accounting Standards No. 133 "Accounting for Derivative Instruments and Hedging Activities" ("SFAS 133") that, as amended, is required to be adopted in years beginning after June 15, 2000. The future adoption of SFAS 133 is not expected to have a material effect on the Company's consolidated financial position or results of operations.
3. ACQUISITIONS
Effective June 1, 1998, the Company repurchased 10 check cashing franchises and terminated options for the franchisee to open 10 additional franchises for an aggregate cash consideration of $1,400,000. The transaction has been accounted for as a purchase. The acquired goodwill of $1,390,000 is being amortized on a straight-line basis utilizing a period of 28.5 years. The assets acquired and the results of operations have been included in the financial statements since the date of acquisition.
MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
4. PROPERTY AND EQUIPMENT, NET
Major classifications of property and equipment at December 31, 1998 were as follows (in thousands):
Furniture and equipment includes $312,000 of cost and accumulated depreciation of $251,000 at December 31, 1998 relating to assets held under capital leases.
5. CAPITAL LEASE OBLIGATIONS PAYABLE
The Company leases computer equipment under capital leases. The typical lease has an original maturity of 5 years and contains options to extend the lease or purchase the assets at market or a predetermined value. The Company's capital lease obligations payable at December 31, 1998 consisted of (in thousands):
MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The net present values of minimum lease payments on capital leases are determined using appropriate interest rates at the inception of each lease. Future minimum lease payments for capitalized lease obligations at December 31, 1998 are as follows (in thousands):
6. INCOME TAXES
Income tax benefit for the year ended December 31, 1998 is as follows (in thousands):
The effective income tax rate differs from the federal statutory income tax rate for the following reasons (in thousands):
MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
The significant components of deferred tax assets and liabilities as of December 31, 1998 are as follows (in thousands):
The Company annually re-evaluates the potential for realization of its deferred income tax assets.
As of December 31, 1998, the Company has net operating loss carryforwards of $3,170,000 for federal income tax purposes. These carryforwards may only be used to reduce future taxable income of the Company and expire from 2009 through 2011.
7. SHAREHOLDER'S EQUITY
On July 21, 1998, the Company's sole shareholder approved an increase in the number of authorized common shares from 1,000,000 to 100,000,000, approved an increase in the number of authorized preferred shares from 10,000 to 35,000,000, reserved 1,000,000 common shares for issuance of stock options, and declared an 8,000-for-one stock split effective July 23, 1998. Shares outstanding have been restated to reflect the conversion.
On July 21, 1998, the Board of Directors authorized an increase in the number of authorized Series B preferred shares from 8,500 to 48,500.
8. RELATED PARTY TRANSACTIONS
The Company paid $72,000 to Cash America for legal services in 1998. (See Note 9.)
Pursuant to terms of the Tax Matters Agreement with Cash America, the Company recorded a $6,637,000 reduction to stockholder's equity in 1998, for the cumulative current federal income tax benefits of the Company's net operating losses. Such amounts will not be paid to the Company by Cash America.
MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
9. COMMITMENTS AND CONTINGENCIES
LEASE COMMITMENTS
The Company leases its primary office space from Cash America pursuant to an operating lease expiring in December 2000. Minimum annual rental commitments under non-cancelable leases including leases with initial or remaining terms of one year or more as of December 31, 1998, are as follows (in thousands):
Rent expense for operating leases was $180,000 during 1998, including $139,000 to related parties.
The Company leases many of the spaces that franchisees occupy in various retail outlets. Monthly lease rentals are typically based on a percentage of the gross fees collected by the franchisee each month. The Company pays all lease rentals accruing under such leases.
LITIGATION
The Company is involved in certain legal actions and claims arising in the ordinary course of business from time to time. It is the opinion of management, based upon the advice of legal counsel, that such litigation and claims will be resolved without a material effect on the Company's financial position and results of operations.
10. SUBSEQUENT EVENTS - 1999
DISTRIBUTION OF MANNED CHECK CASHING BUSINESS
On January 1, 1999, the Company distributed the net assets of its manned check cashing business, valued at its historical cost of $7,733,000, to Cash America.
CONTRIBUTION OF PREFERRED STOCK
On January 1, 1999, Cash America contributed 1,500 shares of Series A, $1 par value per share preferred stock, and 8,500 shares of Series B, $1 par value per share preferred stock, representing all of the issued and outstanding preferred stock of the Company, as additional capital paid on the common stock held by Cash America. No additional shares of common stock were issued.
MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
CHANGES TO PREFERRED STOCK
On March 9, 1999, the Board of Directors eliminated the existing designations of Series A and Series B preferred stock, and the Company's sole shareholder approved an increase from 35,000,000 to 54,000,000 in the authorized shares of $1 par value per share preferred stock and the designation of a new Series A Preferred Stock. Each share of the new Series A Preferred Stock is convertible at the option of its holder immediately after its date of issuance into common stock of the Company on a one-for-one basis subject to adjustment for subsequent common stock splits, dividends, distributions or subdivisions. The new Series A Preferred Stock will automatically convert into common stock, on the same basis as a voluntary conversion, upon the occurrence of the earlier of an initial public offering yielding gross proceeds to the Company in excess of $25,000,000; the liquidation, winding up or dissolution of the Company whereby the proceeds are $75,000,000 or more; or the date specified by agreement of the holders of at least 60% of the voting power of the then outstanding shares of the new Series A Preferred Stock. The holders of the new Series A Preferred Stock shall be entitled to the number of votes equal to the number of shares of common stock into which such shares of new Series A Preferred Stock could then be converted and may vote along with the holders of common stock as a single class on all matters on which the common stockholders shall be entitled to vote.
DISSOLUTION OF INNOVISIONS
On March 9, 1999, pursuant to the terms of the operating agreement, the Company, Cash Centers and the Board of Directors of innoVisions dissolved and terminated the joint venture. The business activities formerly conducted by innoVisions will be integrated into the operations of the Company.
ADDITIONAL COMMON AND PREFERRED STOCK TRANSACTIONS
On March 9, 1999, the Company issued 27,000,000 shares of new Series A Preferred Stock in exchange for 10 million shares of no par value common stock, representing all of the then currently issued and outstanding common stock of the Company. On the same date, Cash Centers purchased 27,000,000 shares of new Series A Preferred Stock for cash consideration of $20,975,000 and certain net assets having a value of approximately $6,025,000. Additionally on March 9, 1999, the Company received subscriptions from certain members of management of the Company to purchase 6,000,000 shares of common stock.
In October 1999, the Company sold 8,241,759 shares of new Series B convertible preferred stock for cash consideration of $30,000,000. The Series A and Series B convertible preferred stockholders are entitled to the same voting and conversion rights.
REINCORPORATION AND NAME CHANGE
On July 19, 1999, the Company was reorganized and reincorporated in the State of Delaware. The name of the Company was changed to innoVentry Corp.
MR. PAYROLL CORPORATION NOTES TO CONSOLIDATED FINANCIAL STATEMENTS, CONTINUED
11. SUBSEQUENT EVENTS - 2001 (UNAUDITED)
CHANGES TO COMMON AND PREFERRED STOCK
In February 2001, the Board of Directors approved an increase in the number of common shares authorized from 100,000,000 to 400,000,000 and an increase in the number of preferred shares from 62,241,759 to 291,241,759. Of the additional preferred shares, 175,000,000 were designated as Series C Preferred and 54,000,000 were designated as Series D Preferred. Terms of the Series C and Series D Preferred, including voting rights, are substantially the same as the Series A and Series B Preferred except that the holders of Series C and Series D Preferred have a liquidation preference over the holders of Series A and Series B Preferred. In addition, the holders of Series C and D Preferred shall be entitled to receive, in certain circumstances, cumulative annual cash dividends of $.1128 per share accruing from the date of issue on each outstanding share of Series C and D Preferred.
ADDITIONAL PREFERRED STOCK TRANSACTIONS
On February 2, 2001, the Company sold, in a private placement, 80,298,510 newly issued shares of Series C Preferred for $115,734,000 consisting of $77,464,000 of cash and the cancellation of $38,270,000 of the Company's indebtedness.
REPORT OF INDEPENDENT ACCOUNTANTS
To the Shareholders of Mr. Payroll Corporation (innoVentry Corp.) and Board of Directors of Cash America International, Inc.
In our opinion, the consolidated balance sheet as of December 31, 1998 and the related consolidated statements of operations, shareholder's equity (deficit) and cash flows, for the year December 31, 1998, present fairly, in all material respects, the financial position, results of operations and cash flows of Mr. Payroll Corporation (innoVentry Corp.) at December 31, 1998 and for the year ended December 31, 1998, in conformity with accounting principles generally accepted in the United States. These financial statements are the responsibility of the Company's management; our responsibility is to express an opinion on these financial statements based on our audits. We conducted our audits of these statements in accordance with auditing standards generally accepted in the United States, which require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for the opinion expressed above. We have not audited the consolidated financial statements of Mr. Payroll Corporation (innoVentry Corp.) for any period subsequent to December 31, 1998.
PricewaterhouseCoopers LLP Fort Worth, Texas April 22, 1999, except as to the information presented in Note 10, for which the dates are July 19, 1999 and October 29, 1999
EXHIBIT INDEX
The following documents are filed as a part of this report. Those exhibits previously filed and incorporated herein by reference are identified below. Exhibits not required for this report have been omitted.
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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.
(f) Annual Report on Form 10-K for the year ended December 31, 1990.
(g) Annual Report on Form 10-K for the year ended December 31, 1989.
(h) Annual Report on Form 10-K for the year ended December 31, 1996.
(i) Annual Report on Form 10-K for the year ended December 31, 1994.
(j) Quarterly Report on Form 10-Q for the quarter ended September 30, 1997.
(k) Post-Effective Amendment No. 4 to its Registration Statement on Form S-4, File No. 33-17275.
(l) Quarterly Report on Form 10-Q for the quarter ended March 31, 1993.
(m) Quarterly Report on Form 10-Q for the quarter ended September 30,1995.
(n) Annual Report on Form 10-K for the year ended December 31, 1997.
(o) Annual Report on Form 10-K for the year ended December 31, 1998.
(p) Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
(q) Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
(r) Quarterly Report on Form 10-Q for the quarter ended June 30, 1996.
(s) Quarterly Report on Form 10-Q for the quarter ended June 30, 1998.
(t) Quarterly Report on Form 10-Q for the quarter ended June 30, 1999.
(u) Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.