ITEM 1. BUSINESS
General
Cash America International, Inc. (the “Company”) provides pawn loans, short-term cash advances, check cashing services and other specialty financial services to individuals. The Company also sells merchandise in its pawnshops, primarily personal property that has been forfeited in connection with its pawn lending operations.
The Company was incorporated in 1984 to engage in the business of owning and operating pawnshops. Since its formation, the Company has significantly broadened the scale and geographic scope of its pawn operations so that, as of December 31, 2007, it was the nation’s largest provider of pawn loans and, it believes, is the largest operator of pawnshops in the world. The Company also has expanded its financial services offerings by offering cash advances and other specialty financial services.
As of December 31, 2007, the Company operated 499 pawnshops in 22 states (including 14 pawnshops that are franchises). Most of the Company’s pawnshops operate under the “Cash America” trade name; 44 pawnshops (located in Arizona, California, Nevada and Washington) operate under the “SuperPawn” trade name.
The Company offers unsecured cash advances through 431 of its pawnshops, in 87 standalone Cash America Payday Advance locations, in 217 locations operated by its wholly-owned subsidiary Cashland Financial Services, Inc. under the “Cashland” trade name, and, since September 2006, over the internet under the trade name “CashNetUSA” at www.cashnetusa.com in the United States. In July 2007, the Company began offering short-term unsecured loans to customers who reside throughout the United Kingdom through its internet platform under the trade name “QuickQuid” at www.quickquid.co.uk.
Through its wholly-owned subsidiary Mr. Payroll Corporation (“Mr. Payroll”), the Company offers check cashing services through 134 franchised and five company-owned check cashing centers. Many of the Company’s pawn and cash advance locations also offer check cashing services and other retail financial services such as stored value cards, money orders and money transfers.
Since its inception, the Company has grown by acquiring existing pawnshops and establishing new ones in locations that can benefit from its centralized management and standardized operations. The Company has pursued a similar strategy for acquiring and establishing cash advance locations since 2003. With both pawnshops and cash advance locations, the Company seeks to increase its share of the consumer loan business and concentrate multiple lending locations in regional and local markets in order to expand market penetration, enhance name recognition and reinforce marketing programs. The Company intends to continue this strategy for acquiring and establishing new lending locations, and intends to offer new products and services at its physical lending locations in order to meet the growing financial services needs of its customers.
The Company began offering cash advances online with its acquisition of CashNetUSA in September 2006. The Company is also actively exploring strategies to increase and enhance its online presence, with the goal of becoming the premier online cash advance provider. The Company also intends to offer new products and services that complement its specialty financial services and to meet the growing financial services needs of its customers both at its physical lending locations and online.
Recent Developments.
On September 15, 2006, the Company, through its wholly-owned subsidiary Cash America Net Holdings, LLC, purchased substantially all of the assets of The Check Giant, LLC (“TCG”), which offered
short-term cash advances over the internet under the name “CashNetUSA” for an initial purchase price of approximately $35.9 million in cash and transaction costs of approximately $2.9 million. The Company also agreed to pay up to five supplemental earn-out payments during the two year period after the closing. The amount of each supplemental payment will be based on a multiple of earnings attributable to CashNetUSA’s business for the twelve months preceding the date of determining each scheduled supplemental payment, as described more fully in the asset purchase agreement, and will be reduced by amounts previously paid. The supplemental payments are to be paid in cash within 45 days of the measurement date; the Company may, however, at its option pay up to 25% of each supplemental payment in shares of its common stock based on an average share price value as of the measurement date. Management expects all of these supplemental payments will be accounted for as goodwill. Through December 31, 2007, the Company had made two supplemental payments. The first supplemental payment of approximately $33.8 million, which was paid in cash in February 2007, was determined as of December 31, 2006. A second payment of approximately $43.4 million was paid in cash in November 2007 and was determined as of September 30, 2007. Each payment reflected adjustments for amounts previously paid. The operating results of CashNetUSA have been included in the Company’s consolidated financial statements from the date of acquisition.
In August 2007, the Company received gross proceeds in the amount of $16.8 million on the sale of notes receivable that it had received in 2004 as part of the proceeds from its sale of Svensk Pantbelåning, its former Swedish pawn lending subsidiary. In September 2004, the Company sold Svensk Pantbelåning to Rutland Partners LLP for cash and two subordinated notes receivable. One of the notes receivable was convertible into approximately 27.7% of the parent company of Svensk Pantbelåning on a fully-diluted basis. In August 2007, Rutland Partners LLP sold Svensk Pantbelåning to a third party who also purchased the notes receivable from the Company. The Company’s total proceeds of $16.8 million represent $12.4 million in the repayment of principal, including $0.3 million of accrued interest owed on notes receivable and $4.4 million for the value of its conversion rights under the convertible note. For the year ended December 31, 2007, the Company recognized a pre-tax gain of approximately $6.3 million from the sale of the notes and related rights.
The Company’s principal executive offices are located at 1600 West 7th Street, Fort Worth, Texas 76102-2599, and its telephone number is (817) 335-1100. As used in this report, the term “Company” includes Cash America International, Inc. and its subsidiaries.
Access to Reports. Through its home page at www.cashamerica.com, the Company provides free access to its Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K, and all amendments to those reports filed or furnished pursuant to Sections 13(a) and 15(d) of the Securities Exchange Act of 1934 as soon as reasonably practicable after such reports are electronically filed with or furnished to the Securities and Exchange Commission (the “SEC”).
These reports may also be read and copied at the SEC’s Public Reference Room at 100 F Street, NE, Washington, D.C. 20549, or at the SEC website at www.sec.gov. Information on the operation of the Public Reference Room may be obtained by calling the SEC at 1-800-SEC-0330.
Pawn Lending and Merchandise Disposition Activities
Pawnshops are convenient sources of consumer loans. They also sell previously-owned merchandise acquired from customers who do not redeem their pawned goods or purchased directly from customers. A pawnshop may also sell items purchased from third-party vendors.
Lending. When receiving a pawn loan from the Company, a customer pledges personal property to the Company as security for the loan. The Company delivers a pawn transaction agreement, commonly referred to as a pawn ticket, to the customer, along with the proceeds of the loan. If the customer does not repay the loan or redeem the property, the customer forfeits the property to the Company, and the Company sells the property.
The Company relies on the disposition of pawned property to recover the principal amount of an unpaid pawn loan, plus a yield on the investment. It does not have recourse against the customer for the loan. As a result, the customer’s creditworthiness is not a factor in the loan decision, and a decision not to redeem pawned property does not affect the customer’s personal credit status. Goods pledged to secure pawn loans are generally tangible personal property such as jewelry, tools, televisions and stereos, musical instruments, firearms, and other miscellaneous items. (Pawn transactions can also take the form of a “buy-sell agreement” involving the actual sale of the property by the customer to the pawnshop with the customer retaining an option to repurchase the property. Pledge and buy-sell transactions are referred to throughout this report as “pawn loans.”)
The Company contracts for a finance and service charge to compensate it for the use of the funds loaned. The finance and service charge is typically calculated as a percentage of the pawn loan amount based on the size and duration of the transaction, in a manner similar to which interest is charged on a bank loan, and generally ranges from 12% to 300% annually, as permitted by applicable state pawnshop laws. These finance and service charges contributed approximately 17.3% of the Company’s total revenue in 2007, 21.5% in 2006 and 23.5% in 2005. The amounts of these charges are disclosed to the customer on the pawn ticket.
The pawn ticket also sets forth, among other items: the name and address of the pawnshop and the customer; the customer’s identification number from his or her driver’s license or other approved identification; the loan date; the identification and description of the pledged goods, including applicable serial numbers; the amount financed; the maturity date; the total amount that must be paid to redeem the pledged goods on the maturity date; and the annual percentage rate.
The Company sets the amount of a pawn loan generally as a percentage of the pledged personal property’s estimated disposition value. The Company relies on many sources to determine the estimated disposition value, including its proprietary automated product valuation system, catalogs, “blue books,” newspapers, internet research and its (or its employees’) experience in disposing of similar items of merchandise in particular pawnshops. The Company does not use a standard or mandated percentage of estimated disposition value in determining the loan amount. Instead, its employees may set the percentage for a particular item and determine whether the item’s disposition, if it is forfeited to the pawnshop, would yield a profit margin consistent with the Company’s historical experience with similar items. The Company holds the pledged property through the term of the loan, which, unless earlier repaid, renewed or extended, is generally one month plus an additional period (typically 30-60 days) for the customer to redeem his merchandise by paying off the loan and all accrued charges. A majority of the Company’s pawn loans are either paid in full with accrued finance and service charges or are renewed or extended by the customer’s payment of accrued finance and service charges. If a customer does not repay, renew or extend his loan, the unredeemed collateral is forfeited to the Company and becomes merchandise available for disposition through the Company’s pawnshops, wholesale sources, internet sales or through a major gold bullion bank. The Company does not record pawn loan losses or charge-offs because the amount advanced becomes the carrying cost of the forfeited collateral that is to be recovered through the merchandise disposition function described below.
The recovery of the amount advanced and the realization of a profit on the disposition of merchandise depends on the Company’s initial assessment of the property’s estimated disposition value when the pawn loan is made. While the Company has historically realized profits when disposing of merchandise, the improper assessment of the disposition value could result in the disposition of the merchandise for an amount less than the loan amount. For 2007, 2006 and 2005, the Company experienced profit margins on disposition of merchandise of 37.8%, 38.7% and 38.8%, respectively. Changes in gold prices generally will also increase or decrease the disposition value of jewelry items acquired in pawn transactions and could enhance or adversely affect the Company’s profit or recovery of the carrying cost of the acquired collateral.
At December 31, 2007, the Company had approximately 1.2 million outstanding pawn loans totaling $137.3 million, with an average of approximately $116 per loan outstanding.
Presented below is information with respect to pawn loans made, acquired, and forfeited for the pawn lending operations for the years ended December 31, 2007, 2006 and 2005 ($ in thousands):
Merchandise Disposition Activities. The Company sells merchandise that pawn customers forfeit when they do not repay or renew their pawn loans. The Company sells most of this merchandise at its pawnshops, but also disposes of some items through wholesale sources, over the internet, or, in the case of some gold jewelry, through a major gold bullion bank. Its pawnshops also sell used goods purchased from the general public and some new merchandise, principally accessory merchandise that complements and enhances the marketability of items such as tools, consumer electronics and jewelry. For the year ended December 31, 2007, $257.9 million of merchandise was added to merchandise held for disposition, of which $206.8 million was from loans not repaid, $50.6 million was purchased from customers and vendors, and $0.4 million was added through acquisitions of pawnshops. Proceeds from disposition of merchandise contributed 42.7% of the Company’s total revenue in 2007, 48.1% in 2006 and 50.4% in 2005.
While the Company offers refunds and exchanges for certain merchandise items, it does not provide its customers with express warranties on used merchandise. Customers may purchase merchandise on a layaway plan under which the customer makes an initial cash deposit representing a small portion of the disposition price and pays the balance in regularly scheduled, non-interest bearing payments. The Company segregates the layaway item and holds it until the customer has paid the full disposition price. If the customer fails to make a required payment, the item is placed with the other merchandise held for disposition. At December 31, 2007, the Company held approximately $7.9 million in customer layaway deposits.
The Company provides an allowance for valuation and shrinkage of its merchandise. The amount of this allowance is based on management’s evaluation of factors such as historical shrinkage and the quantity, composition and age of merchandise on hand. At December 31, 2007, total pawn operations merchandise on hand was $98.1 million, after deducting an allowance for valuation and shrinkage of merchandise of $2.0 million.
Cash Advance Activities
The Company’s cash advance products are generally offered as single payment cash advance loans. These loans generally have a loan term of seven to 45 days and are generally payable on the customer’s next payday. The Company originates cash advances in some of its locations and arranges for customers to obtain cash advances from independent third-party lenders in others. The Company also offers cash advances over the internet under the name CashNetUSA in the United States and under the name QuickQuid in the United Kingdom.
In a cash advance transaction, a customer executes a promissory note or other repayment agreement typically supported by that customer’s personal check or authorization to debit the customer’s checking account via an Automated Clearing House (“ACH”) transaction. Customers may repay the amount due from the cash advance either with cash, by allowing their check to be presented for collection, or by allowing their checking account to be debited via an ACH transaction. Collection activities are an important
aspect of the cash advance product offering due to the high incidence of unpaid balances beyond stated terms. The Company operates centralized collection centers to coordinate a consistent approach to customer service and collections.
The Company offers cash advances in which it lends its own funds and cash advances originated by independent third-party lenders under a program in which the Company acts as a credit services organization on behalf of consumers in accordance with applicable state laws (the “CSO program”). Credit services that the Company provides to its customers under the CSO program include arranging loans with independent third-party lenders, assisting in the preparation of loan applications and loan documents, and accepting loan payments at the location where the loans were arranged. For the customer who obtains a loan from a third-party lender through the CSO program, the Company also, as part of its credit services, guarantees, on behalf of the customer, the customer’s payment obligations to the third-party lender. A customer who obtains a loan through the CSO program pays the Company a fee for the credit services, including the guaranty, and enters into a contract with the Company governing the credit services arrangement. Losses on cash advances acquired by the Company as a result of its guaranty obligations are the responsibility of the Company. As of December 31, 2007, the CSO program was offered in Texas and Florida. The Company discontinued the CSO program in Michigan in February 2007, and has since offered only cash advances underwritten by the Company to customers in that state. In January 2008, the Company began offering a CSO program in the state of Maryland through its online platform.
The Company offers short-term unsecured cash advances in many of its pawnshops, in standalone Cash America Payday Advance and Cashland locations, and, since its acquisition of CashNetUSA in September 2006, over the internet. As of December 31, 2007, a cash advance product was available in 735 total locations, including 431 pawnshop locations and 304 standalone cash advance locations, and the internet lending operations had cash advances outstanding in 32 states and in the United Kingdom. Cash advance products offered under the CSO program were available at 319 locations and through the CashNetUSA website. Although cash advance transactions may take the form of loans or deferred check deposit transactions, this report refers to cash advances originated both by the Company and by third-party lenders under the CSO program as “cash advances” for convenience. Cash advance fees earned by the Company contributed approximately 38.2% of the Company’s total revenue in 2007, 28.1% in 2006 and 23.8% in 2005.
If the Company collects a delinquent amount that exceeds the amount it has acquired as a result of its guaranty to third-party lenders, the Company is entitled to the excess when collected. Since the Company may not succeed in collecting all of its delinquent accounts, it records an accrual for amounts estimated to be adequate to absorb credit losses from cash advances in the aggregate cash advance portfolio, including those it expects to acquire as a result of its guaranty obligations. As of December 31, 2007, $148.4 million of combined gross cash advances was outstanding, including $34.6 million owned by the third-party lenders that is not included in the Company’s consolidated balance sheet. An allowance for losses of $25.7 million has been provided in the consolidated financial statements. The Company also provided accrued losses for third-party owned portfolios of $1.8 million at December 31, 2007, which is included in “Accounts payable and accrued expenses” in the accompanying consolidated balance sheet. See Item 8. Financial Statements and Supplementary Data, Note 4 of “Notes to Consolidated Financial Statements.”
Presented below is information with respect to the cash advance product for the years ended December 31, 2007, 2006 and 2005:
Check Cashing and Other Services
The Company provides check cashing and other financial services through its Mr. Payroll and Cashland subsidiaries and through many of its pawnshop and payday advance locations. Other financial services include the sale of stored value cards, money orders, money transfers and auto insurance, among others. As of December 31, 2007, Mr. Payroll’s operations consisted of 134 franchised and five company-owned check cashing centers in 18 states. Each Mr. Payroll franchisee pays royalties to Mr. Payroll based on the gross revenues of check cashing services provided within the franchisee’s facility. Cashland provides check cashing in all 217 of its cash advance locations. Aggregate check cashing fees, royalties and other income were 1.8% of the Company’s total revenue in 2007 and 2.3% in both 2006 and 2005.
Financial Information on Segments and Areas
Additional financial information regarding the Company’s revenues and assets by each of its three operating segments is provided in Note 17 of “Notes to Consolidated Financial Statements.”
Operations
During 2007, the Company reorganized its operations into three divisions: a Retail Services Division, which operates all of the physical lending locations; the Internet Services Division, which operates the Company’s online lending activities; and the Shared Services Division, which provides support and administrative services to the Company’s operating divisions and its management. Each Division is headed by a President who reports to the Chief Executive Officer.
Retail Services - Unit Management. The Executive Vice President - Chief Operating Officer - Retail Services Division, who reports to the President of the Retail Services Division, oversees the operations of all of the Company’s location-based pawn and cash advance lending operations. Each pawn and cash advance lending location has a unit manager who is responsible for supervising its personnel and assuring that it is managed in accordance with Company guidelines, policies and procedures. Each unit manager reports to a Market Manager, who typically oversees approximately ten unit managers. This operating division consists of five geographic operating regions, each of which is managed by a Region Vice President. Each Market Manager reports to a Region Vice President. Cashland locations are managed by two Operations Directors who oversee its geographic operating regions and report to the Executive Vice President - Chief Operating Officer - Retail Services Division. Each Cashland Market Manager reports to one of the two Cashland Operations Directors.
Internet Services. CashNetUSA is managed by the President of the Internet Services Division. Management personnel responsible for different areas of CashNetUSA’s operations report to its President.
Shared Services. The Shared Services Division provides support and administrative services to the Company’s operating divisions and its management.
Trade Names. The Company operates its locations under the trade names “Cash America,” “Payday Advance,” “Cashland,” “Mr. Payroll,” “SuperPawn,” “CashNetUSA” and “QuickQuid.” The Company’s marks “Cash America,” “Cashland,” “SuperPawn,” “Cash When It Counts,” “CashNetUSA” and “Mr. Payroll” are registered with the United States Patent and Trademark Office.
Personnel. At December 31, 2007, the Company employed 5,501 persons in its operations, of whom 521 were in executive and administrative functions.
Training. The Company provides extensive training to its store employees through training programs that are tailored to both pawn and cash advance lending locations, and combine classroom instruction, video and online presentations, and on-the-job training. A new employee is introduced to the business through an orientation program and through training programs covering job-appropriate topics such as pawn lending, cash advances, layaways, merchandising, collections, anti-money laundering, compliance, and general administration of unit operations. The experienced store employee receives additional 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 program that includes additional management principles and more extensive training in topics such as income maximization, recruitment, merchandise control, and cost efficiency.
Future Expansion
The Company has expanded both by acquiring existing pawnshops and cash advance locations (collectively referred to as “lending locations”) from others and by establishing new start-up locations. The Company intends to continue to increase the number of lending locations in this manner. Its business strategy is to continue expanding its lending business within its existing geographic markets and into other markets that meet its risk/reward considerations. Management believes that such 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. By concentrating multiple lending units in regional and local markets, the Company seeks to expand market penetration, enhance name recognition and reinforce marketing programs.
Since acquiring CashNetUSA, the Company is also actively exploring strategies to increase and enhance its online presence, with the goal of becoming the premier online cash advance provider. The Company continues to evaluate new markets in which to establish its online presence, similar to its entry into the United Kingdom during 2007. The Company also intends to continue evaluating and offering new products and services that complement its specialty financial services both at its physical lending locations and online in order to meet the growing financial services needs of its customers.
When considering acquiring an existing lending location, the Company evaluates the annual volume of loan transactions at that location, the carrying cost of merchandise, outstanding loan balances and lease terms of the facility or, if it is to be purchased, the facility’s fair market value. When considering the startup of a new lending location, the Company evaluates the location of the prospective location, whether conditions in the surrounding community indicate a sufficient level of potential customers, and whether a suitable facility is available on acceptable terms.
A new pawnshop can be ready for business within four to six weeks and a new cash advance location can be ready within two to four weeks after the Company has leased or acquired a suitable location and obtained a license. The finish-out of a new location includes the completion of counters, installation of vaults and a security system and the transfer of merchandise from other locations (for pawnshop locations). The approximate start-up costs, which consist of the investment in property and equipment, for recently
established pawnshops have ranged from $385,000 to $410,000, with an average estimated cost per location of approximately $400,000 in 2007. This amount does not include merchandise transferred from other locations, funds to advance on pawn loans and cash advances or operating expenses. The start-up costs for recently established cash advance locations have ranged from $75,000 to $150,000, with an average estimated cost per location of approximately $100,000 in 2007. This amount does not include funds to advance on cash advances or operating expenses.
The Company’s expansion program is subject to numerous unpredictable factors, such as the availability of attractive acquisition candidates or sites on suitable terms, market conditions in the pawn or cash advance business, general economic conditions and other factors described in Item 1A
ITEM 1A. RISK FACTORS
Important risk factors that could cause results or events to differ from current expectations are described below. These factors are not intended to be an all-encompassing list of risks and uncertainties that may affect the operations, performance, development and results of the Company’s business.
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A decreased demand for the Company’s products and specialty financial services and failure of the Company to adapt to such decrease could adversely affect results. Although the Company’s products and services are a staple of its customer base, the demand for a particular product or service may decrease due to a variety of factors, such as the availability of competing products, changes in customers’ financial conditions, or regulatory restrictions that reduce customer access to particular products. Should the Company fail to adapt to a significant change in its customers’ demand for, or access to, its products, the Company’s revenues could decrease significantly. Even if the Company does make adaptations, customers may resist or may reject products whose adaptations make them less attractive or less available. In any event, the effect of any product change on the results of the Company’s business may not be fully ascertainable until the change has been in effect for some time. In particular, the Company has changed, and will continue to change, some of the cash advance products and services it offers due to regulatory guidelines that have a direct or indirect effect on the governance of the Company and the products it offers.
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Adverse changes in laws or regulations affecting the Company’s short-term consumer loan services could negatively impact the Company’s operations. The Company’s products and services are subject to extensive regulation and supervision under various federal, state and local laws, ordinances and regulations. The Company faces the risk that restrictions or limitations resulting from the enactment, change, or interpretation of laws and regulations could negatively affect the Company’s business activities. In particular, short-term consumer loans have come under increased regulatory scrutiny in recent years that has resulted in increasingly restrictive regulations. Some regulatory activity may limit the number of short-term loans that customers may receive or have outstanding, and regulations adopted by some states requiring that all borrowers of certain short-term loan products be listed on a database and limiting the number of such loans they may have outstanding; and regulations limiting the availability of the Company’s cash advance products to active duty military personnel. Certain consumer advocacy groups and federal and state legislators have also asserted that laws and regulations should be tightened so as to severely limit, if not eliminate, the availability of certain cash advance products to consumers, despite the significant demand for it. Legislation relating to cash advances is pending in some state legislatures. Adoption of such federal and state regulations or legislation could restrict, or even eliminate, the availability of cash advance products in some or all of the states in which the Company offers a short term cash advance product.
In addition to state and federal laws and regulations, our business is subject to various local rules and regulations such as local zoning regulation and permit licensing. We have seen efforts by local jurisdictions to restrict pawnshop operations and cash advance lending through the use of local zoning
and permitting laws. Actions taken in the future by local governing bodies to require special use permits for, or impose other restrictions on pawnshops or cash advance lenders could have a material adverse effect on our business, results of operations and financial condition.
Finally, in recent years, the cash advance industry has been subject to regulatory proceedings, class action lawsuits and other litigation concerning the offering of cash advances, and we could suffer losses from interpretations of state laws in those lawsuits or regulatory proceedings, even if we are not a party to those proceedings.
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The failure of third-parties who provide products, services or support to the Company to maintain their products, services or support could disrupt Company operations or result in a loss of revenue. The Company’s cash advance revenues depend in part on the willingness and ability of unaffiliated third-party lenders to make loans to customers and with other third parties to provide services to facilitate lending and loan underwriting in both the storefront and online cash advance channels. The loss of the relationship with any of these third parties, and an inability to replace them, or the failure of these third parties to maintain quality and consistency in their programs or services could cause the Company to lose customers and substantially decrease the revenues and earnings of the Company’s cash advance business. The Company makes other non-cash advance products and services provided by various third-party vendors available to its customers. If a third-party provider fails to provide its product or service or to maintain its quality and consistency, the Company could lose customers and related revenue from those products or services. The Company also uses third parties to support and maintain certain of its communication systems and computerized point-of-sale and information systems. The failure of such third parties to fulfill their support and maintenance obligations could disrupt the Company’s operations.
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The Company’s business depends on the uninterrupted operation of the Company’s facilities, systems and business functions, including its information technology and other business systems. The Company’s business, particularly its online business, depends highly upon its employees’ ability to perform, in an efficient and uninterrupted fashion, necessary business functions, such as Internet support, call centers, and processing and making cash advances. A shut-down of or inability to access the facilities in which the Company’s online operations and other technology infrastructure are based, such as a power outage, a failure of one or more of its information technology, telecommunications or other systems, or sustained or repeated disruptions of such systems could significantly impair its ability to perform such functions on a timely basis and could result in a deterioration of the Company’s ability to write and process online cash advances, provide customer service, perform collections activities, or perform other necessary business functions.
A security breach of the Company’s computer systems could also interrupt or damage its operations or harm its reputation. In addition, the Company could be subject to liability if confidential customer information is misappropriated from its computer systems. Despite the implementation of significant security measures these systems may still be vulnerable to physical break-ins, computer viruses, programming errors, attacks by third parties or similar disruptive problems. Any compromise of security could deter people from entering into transactions that involve transmitting confidential information to the Company’s systems, which could have a material, adverse effect on the Company’s business.
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The Company may be unable to protect its proprietary technology or keep up with that of its competitors. The success of the Company’s business, particularly its online business, depends to a significant degree upon the protection of its software and other proprietary intellectual property rights. The Company may be unable to deter misappropriation of its proprietary information, detect unauthorized use or take appropriate steps to enforce its intellectual property rights. In addition, competitors could, without violating the Company’s proprietary rights, develop technologies that are as good as or better than its technology. The Company’s failure to protect its software and other proprietary intellectual property rights or to develop technologies that are as good as its competitors’
could put the company at a disadvantage to its competitors. Any such failures could have a material adverse effect on the Company’s business.
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The Company’s growth is subject to external factors and other circumstances over which the Company has limited control or that are beyond the Company’s control. These factors and circumstances could adversely affect the Company’s ability to grow through the opening and acquisition of new operating units. The Company’s expansion strategy includes acquiring existing stores and opening new ones. The success of this strategy is subject to numerous external factors, such as the availability of attractive acquisition candidates, the availability of sites with acceptable restrictions and suitable terms, the Company’s ability to attract, train and retain qualified unit management personnel, the ability to access capital and the ability to obtain required government permits and licenses. Some of these factors are beyond the Company’s control. The failure to execute this expansion strategy would adversely affect the Company’s ability to expand its business and could materially adversely affect its business, prospects, results of operations and financial condition.
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Increased competition from banks, savings and loans, other short-term consumer lenders, and other entities offering similar financial services, as well as retail businesses that offer products and services offered by the Company, could adversely affect the Company’s results of operations. The Company has many competitors to its core lending and merchandise disposition operations. Its principal competitors are other pawnshops, cash advance companies, online lenders, consumer finance companies and other financial institutions that serve the Company’s primary customer base. Many other financial institutions or other businesses that do not now offer products or services directed toward the Company’s traditional customer base, many of whom may be much larger than the Company, could begin doing so. Significant increases in the number and size of competitors for the Company’s business could result in a decrease in the number of cash advances or pawn loans that the Company writes, resulting in lower levels of revenues and earnings in these categories. Furthermore, the Company has many competitors to its retail operations, such as retailers of new merchandise, retailers of pre-owned merchandise, other pawnshops, thrift shops, online retailers and online auction sites. Increased competition or aggressive marketing and pricing practices by these competitors could result in decreased revenues, margins and turnover rates in the Company’s retail operations.
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A sustained deterioration in the economy could reduce demand for the Company’s products and services and result in reduced earnings. A sustained deterioration in the economy could cause deterioration in the performance of the Company’s pawn loan or cash advance portfolios and in consumer demand for pre-owned merchandise such as that sold in the Company’s pawnshops. An economic slowdown could result in an increase in loan defaults in our cash advance products. During such a slowdown, the Company could be required to tighten its underwriting standards, which would reduce cash advance balances, and could face more difficulty in collecting defaulted cash advances, which could lead to an increase in loan losses. While the credit risk for much of the Company’s pawn lending is mitigated by the collateralized nature of pawn lending, a sustained deterioration in the economy could reduce the demand and resale value of pre-owned merchandise and reduce the amount that the Company could effectively lend on an item of collateral. Such reductions could adversely affect pawn loan balances, pawn loan redemption rates, inventory balances, inventory mixes and gross profit margins.
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The Company’s earnings and financial position are subject to changes in the value of gold. A significant or sudden decline in the price of gold could materially affect the Company’s earnings. A significant portion of the Company’s pawn loans are secured by gold jewelry. The Company’s pawn service charges, sales proceeds and ability to dispose of excess jewelry inventory at an acceptable margin depend on the value of gold. A significant decline in gold prices could result in decreases in merchandise sales margins, in inventory valuations, in the value of collateral securing outstanding pawn loans, and in the balance of pawn loans secured by gold jewelry.
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Adverse real estate market fluctuations could affect the Company’s profits. The Company leases most of its locations. A significant rise in real estate prices could result in an increase in store lease costs as the Company opens new locations and renews leases for existing locations.
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The Company’s foreign operations subject the Company to foreign exchange risk. The Company is subject to the risk of unexpected changes in foreign currency exchange rates by virtue of its loans to United Kingdom residents. Our results of operations and certain of our intercompany balances associated with our United Kingdom loans are denominated in British pounds and are, as a result, exposed to foreign exchange rate fluctuations. Upon consolidation, as exchange rates vary, net sales and other operating results may differ materially from expectations, and we may record significant gains or losses on the remeasurement of intercompany balances.
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Changes in the capital markets or the Company’s financial condition could reduce available capital. The Company regularly accesses the debt capital markets to refinance existing debt obligations and to obtain capital to finance growth. Efficient access to these markets is critical to the Company’s ongoing financial success; however, the Company’s future access to the debt capital markets could become restricted due to a variety of factors, including a deterioration of the Company’s earnings, cash flows, balance sheet quality, or overall business or industry prospects, a significant deterioration in the state of the capital markets or a negative bias toward the Company’s industry by market participants.
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Media reports and public perception of short-term consumer loans as being predatory or abusive could materially adversely affect the Company’s cash advance business. In recent years, consumer advocacy groups and some media reports have advocated governmental action to prohibit or place severe restrictions on short-term consumer loans. The consumer advocacy groups and media reports generally focus on the cost to a consumer for this type of loan, which is alleged to be higher than the interest typically charged by banks to consumers with better credit histories. Though the consumer advocacy groups and media reports do not discuss the lack of viable alternatives for our customers’ borrowing needs or the comparative cost to the customer when alternatives are not available, they do typically characterize these short-term consumer loans as predatory or abusive despite the large customer demand for these loans. If the negative characterization of these types of loans becomes increasingly accepted by consumers, demand for the cash advance products could significantly decrease, which could materially affect the Company’s results of operations and financial condition. Additionally, if the negative characterization of these types of loans is accepted by legislators and regulators, the Company could become subject to more restrictive laws and regulations that could materially adversely affect the Company’s financial condition and results of operations.
•
Other risk factors are discussed under Quantitative and Qualitative Disclosures about Market Risk.
•
Other risks that are indicated in the Company’s filings with the Securities and Exchange Commission may apply as well.
ITEM 1B.
ITEM 1B. UNRESOLVED STAFF COMMENTS
None.
ITEM 2.
ITEM 2. PROPERTIES
As of December 31, 2007, the Company owned the real estate and buildings for nine of its pawnshop locations. The Company’s headquarters are located in a nine-story building adjacent to downtown Fort Worth, Texas. The Company purchased its headquarters building in January 1992. CashNetUSA’s cash advance operations are located in a leased space in Chicago, Illinois. All of the Company’s other locations are leased under non-cancelable operating leases with terms ranging from 3 to 15 years.
The following table sets forth, as of December 31, 2007, the number of Company-owned pawn and cash advance locations by state and states in which the Company has an internet lending presence. The Company also operates five Company-owned Mr. Payroll check cashing locations in Texas.
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 lending 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 Item 8. Financial Statements and Supplementary Data, Note 10 of “Notes to Consolidated Financial Statements.”
ITEM 3.
ITEM 3. LEGAL PROCEEDINGS
On August 6, 2004, James E. Strong filed a purported class action lawsuit in the State Court of Cobb County, Georgia against Georgia Cash America, Inc., Cash America International, Inc. (together with Georgia Cash America, Inc., “Cash America”), Daniel R. Feehan, and several unnamed officers, directors, owners and “stakeholders” of Cash America. The lawsuit alleges many different causes of action, among the most significant of which is that Cash America made illegal payday loans in Georgia in violation of Georgia’s usury law, the Georgia Industrial Loan Act and Georgia’s Racketeer Influenced and Corrupt Organizations Act. Community State Bank (“CSB”) for some time made loans to Georgia residents through Cash America’s Georgia operating locations. The complaint in this lawsuit claims that Cash America was the true lender with respect to the loans made to Georgia borrowers and that CSB’s involvement in the process is “a mere subterfuge.” Based on this claim, the suit alleges that Cash America is the “de facto” lender and is illegally operating in Georgia. The complaint seeks unspecified compensatory damages, attorney’s fees, punitive damages and the trebling of any compensatory damages. A previous decision by the trial judge to strike Cash America’s affirmative defenses based on arbitration (without ruling on Cash America’s previously filed motion to compel arbitration) was upheld by the Georgia Court of Appeals, and on September 24, 2007, the Georgia Supreme Court declined to review the decision. The case has been returned to the State Court of Cobb County, Georgia, where Cash America filed a motion requesting that the trial court rule on Cash America’s pending motion to compel arbitration and stay the State Court proceedings. The Court denied the motion to stay and ruled that the motion to compel arbitration was rendered moot after the discovery sanction was handed down by the Court. Cash America is currently in the process of appealing these latest orders from the Court. If Cash America’s further attempts to enforce the arbitration agreement are unsuccessful, discovery relating to the propriety of continuing this suit as a class action would proceed. Cash America believes that the plaintiffs’ claims in this suit are without merit and is vigorously defending this lawsuit.
Cash America and CSB also commenced a federal lawsuit in the U.S. District Court for the Northern District of Georgia seeking to compel Plaintiffs to arbitrate their claims against Cash America and CSB. The U.S. District Court dismissed the federal action for lack of subject matter jurisdiction, and Cash America and CSB appealed the dismissal of their complaint to the U.S. Court of Appeals for the 11th Circuit. The 11th Circuit issued a panel decision on April 27, 2007 reversing the district court’s dismissal of the action and remanding the action to the district court for a determination of the issue of the enforceability of the parties’ arbitration agreements. Plaintiff requested the 11th Circuit to review this decision en banc and this request has been granted. The en banc rehearing took place on February 26, 2008. The Strong litigation is still at an early stage, and neither the likelihood of an unfavorable outcome nor the ultimate liability, if any, with respect to this litigation can be determined at this time.
On October 23, 2007, a complaint, styled Ryan Bonner, individually and on behalf of all others similarly situated, v. Cash America International, Inc., Cash America Net of Nevada, LLC, Cash America Net of Pennsylvania, LLC and Cash America of PA, LLC, d/b/a CashNetUSA.com (collectively, “CashNetUSA”), was filed in the United States District Court for the Eastern District of Pennsylvania, alleging, on behalf of a purported class, that the defendants located outside Pennsylvania had engaged in unfair or deceptive acts or practices by making loans to Pennsylvania consumers in violation of Pennsylvania law, including its usury, fair credit extension, and unfair trade practices and consumer protection laws. The complaint also alleges that the arbitration, class action waiver and dispute resolution provisions contained in the loan documents involved in these loans are unenforceable. The complaint seeks
a declaratory judgment that the lending business conducted by CashNetUSA is illegal under Pennsylvania law and a declaration that loan agreements with Pennsylvania residents are void and unenforceable, an injunction barring continuing alleged violations (including enjoining collection on loans currently outstanding from Pennsylvania residents) and an award of monetary damages (including treble damages), penalties, costs and attorneys’ fees. CashNetUSA believes that the plaintiff’s claims in this suit are without merit and plans to vigorously defend against all of the asserted allegations. CashNetUSA has filed a Motion to Compel Arbitration seeking to compel individual arbitration of the plaintiff’s claims and is presently awaiting plaintiff’s response to this motion.
The Company is a defendant in certain lawsuits encountered in the ordinary course of its business. Certain of these matters are covered to an extent by insurance. In the opinion of management, the resolution of these matters will not have a material adverse effect on the Company’s financial position, results of operations or liquidity.
ITEM 4.
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, 2007.
PART II
ITEM 5.
ITEM 5.
MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES
(a) Market for Registrant’s Common Equity
The New York Stock Exchange is the principal exchange on which Cash America International, Inc. common stock is traded under the symbol “CSH”. There were 644 stockholders of record (not including individual participants in security listings) as of February 14, 2008. The high, low and closing sales prices of common stock as quoted on the composite tape of the New York Stock Exchange and cash dividend declared per share during 2007 and 2006 were as follows:
(c) Issuer Purchases of Equity Securities
The following table provides the information with respect to purchases made by the Company of shares of its common stock during each of the months in 2007:
ITEM 6.
ITEM 6. SELECTED FINANCIAL DATA
Five-Year Summary of Selected Consolidated Financial Data of Continuing Operations
(dollars in thousands, except per share data)
(Unaudited)
(a)
In September 2004, the Company sold its foreign pawn lending operations. The amounts for all periods presented have been reclassified to reflect the foreign operations as discontinued operations.
(b)
See “Management’s Discussion and Analysis of Financial Condition and Results of Operations” and “Financial Statements and Supplementary Data” for amounts related to the gain on the sale of foreign notes in 2007 and the gain from the early termination of a lease contract in 2006.
(c)
Includes cash advance locations only.
(d)
Mr. Payroll locations only.
ITEM 7.
ITEM 7.
MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS
GENERAL
The Company provides specialty financial services to individuals. These services include secured non-recourse loans, commonly referred to as pawn loans, to individuals through its pawn lending operations, unsecured cash advances in selected lending locations and on behalf of independent third-party lenders in other locations, and check cashing and related financial services through many of its lending locations and through franchised and Company-owned check cashing centers. The pawn loan portfolio generates finance and service charges revenue. A related activity of the pawn lending operations is the disposition of collateral from unredeemed pawn loans. In September 2006, the Company began offering online cash advances over the internet and began arranging loans online on behalf of independent third-party lenders in November 2006 through its internet distribution platform. In July 2007, the Company began offering short-term unsecured loans to customers who reside throughout the United Kingdom through its internet distribution platform.
On September 15, 2006, the Company, through its wholly-owned subsidiary Cash America Net Holdings, LLC, purchased substantially all of the assets of The Check Giant LLC (“TCG”), which offered short-term cash advances exclusively over the internet under the name “CashNetUSA.” The Company paid an initial purchase price of approximately $35.9 million in cash at closing and transaction costs of approximately $2.9 million.
As of December 31, 2007, the Company had 942 total locations offering products and services to its customers. The Company operates in three segments: pawn lending, cash advance and check cashing.
As of December 31, 2007, the Company’s pawn lending operations consisted of 499 pawnshops, including 485 Company-owned units and 14 unconsolidated franchised units located in 22 states in the United States. During the three-year period ended December 31, 2007, the Company acquired 33 operating units, established 15 locations, and combined or closed four locations for a net increase in owned pawn lending units of 44. In addition, it acquired or opened seven franchise locations, and either terminated or converted four locations to Company-owned locations.
At December 31, 2007, the Company’s cash advance operations consisted of 304 cash advance locations in seven states and its internet distribution channel. For the three year period ended December 31, 2007, the Company acquired one location, established 60 locations and combined or closed 10 locations for a net increase in cash advance locations of 51. CashNetUSA serves multiple markets through its internet distribution channel and had cash advances outstanding in 32 states and in the United Kingdom as of December 31, 2007.
As of December 31, 2007, the Company’s check cashing operations consisted of 134 franchised and five company-owned check cashing centers in 18 states. For the three year period ended December 31, 2007, the Company established 31 locations and combined or closed 26 locations for a net increase in check cashing locations of five.
CRITICAL ACCOUNTING POLICIES AND ESTIMATES
Management’s Discussion and Analysis of Financial Condition and Results of Operations is based on the Company’s consolidated financial statements, which have been prepared in accordance with accounting principles generally accepted in the United States. The preparation of these financial statements requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities, and disclosure of contingent assets and liabilities, at the dates of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting periods. On an on-going basis, management evaluates its estimates and judgments, including those related to revenue recognition,
merchandise held for disposition, allowance for losses on cash advances, long-lived and intangible assets, income taxes, contingencies and litigation. Management bases its estimates on historical experience, empirical data and on various other assumptions that are believed to be reasonable under the circumstances, the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions. The development and selection of the critical accounting policies and the related disclosures below have been reviewed with the Audit Committee of the Board of Directors.
Management believes the following critical accounting policies affect its more significant judgments and estimates used in the preparation of its consolidated financial statements.
Finance and service charges revenue recognition. The Company accrues finance and service charges revenue only on those pawn loans that the Company deems collectible based on historical loan redemption statistics. Pawn loans written during each calendar month are aggregated and tracked for performance. The gathering of this empirical data allows the Company to analyze the characteristics of its outstanding pawn loan portfolio and estimate the probability of collection of finance and service charges. If the future actual performance of the loan portfolio differs significantly (positively or negatively) from expectations, revenue for the next reporting period would be likewise affected.
Due to the short-term nature of pawn loans, the Company can quickly identify performance trends. For 2007, $159.5 million, or 99.1%, of recorded finance and service charges represented cash collected from customers and the remaining $1.5 million, or 0.9%, represented an increase in the finance and service charges receivable during the year. At the end of the current year and based on the revenue recognition method described above, the Company had accrued $27.0 million of finance and service charges receivable. Assuming the year-end accrual of finance and service charges revenue was overestimated by 10%, finance and service charges revenue would decrease by $2.7 million in 2008 and net income would decrease by $1.8 million. Some or all of the decrease would potentially be mitigated through the profit on the disposition of the related forfeited loan collateral.
Merchandise held for disposition. Merchandise held for disposition consists primarily of forfeited collateral from pawn loans not repaid. The carrying value of the forfeited collateral is stated at the lower of cost (cash amount loaned) or market. Management provides an allowance for shrinkage and valuation based on its evaluation of the merchandise. Because pawn loans are made without recourse to the borrower, the Company does not investigate or rely upon the borrower’s creditworthiness, but instead bases its lending decision on an evaluation of the pledged personal property. The amount the Company is willing to finance is typically based on a percentage of the pledged personal property’s estimated disposition value. The Company uses numerous sources in determining an item’s estimated disposition value, including the Company’s automated product valuation system as well as catalogs, “blue books,” newspapers, internet research and previous experience with similar items. The Company performs a physical count of its merchandise in each location on a cyclical basis and reviews the composition of inventory by category and age in order to assess the adequacy of the allowance, which was $2.0 million, representing 2.0% of the balance of merchandise held for disposition at December 31, 2007. Adverse changes in the disposition value of the Company’s merchandise may require an increase in the valuation allowance.
Allowance for losses on cash advances. The Company maintains an allowance for losses on Company-owned cash advances (including fees and interest) and accrues losses for third-party lender-owned cash advances at a level estimated to be adequate to absorb credit losses in the outstanding combined cash advance portfolio. The cash advance product typically serves a customer base with high risk credit performance histories. These advances are typically single payment cash advances with a typical term of seven to 45 days. Cash advances written during each calendar month are aggregated and tracked to develop a performance history. The Company stratifies the outstanding portfolio by age, delinquency and stage of collection when assessing the adequacy of the allowance for losses. The Company uses current portfolio performance, as well as the performance of cash advances made during the same calendar period twelve months earlier to develop expected loss rates used in determining the allowance. Increased defaults and
credit losses, which could occur during a national or regional economic downturn or for other reasons, could require an increase in the allowance. Since cash advances are unsecured, unlike pawn loans, the portfolio’s performance depends on the Company’s ability to collect on defaulted loans. The Company believes it effectively manages the risks inherent in this product by utilizing a variety of underwriting criteria to evaluate prospective borrowers, maintaining a customer database to track individual borrowers’ performance and by closely monitoring the performance of the portfolio. Any remaining unpaid balance of a cash advance is charged off once it has been in default for 60 days or sooner if deemed uncollectible. At December 31, 2007, allowance for losses on cash advances was $25.7 million and accrued losses on third-party lender-owned cash advances were $1.8 million, in aggregate representing 18.5% of the combined cash advance portfolio.
During fiscal year 2007, the cash advance loss provision for the combined cash advance portfolio, which increases the allowance for loan losses, was $155.2 million and reflects 7.7% of gross combined cash advances written by the Company and third-party lenders. If future loss rates increased, or decreased, by 10% (0.77%) from 2007 levels, the cash advance loss provision would increase, or decrease, by $15.5 million and net income would decrease, or increase, by $10.1 million, assuming the same volume of cash advances written in 2007.
Valuation of long-lived and intangible assets. The Company assesses the impairment of long-lived assets whenever events or changes in circumstances indicate that the carrying value may not be recoverable. Intangible assets having an indefinite useful life are tested for impairment annually or more frequently if events or changes in circumstances indicate that the assets might be impaired. Factors that could trigger an impairment review include significant underperformance relative to expected historical or projected future cash flows, significant changes in the manner of use of acquired assets or the strategy for the overall business, and significant negative industry trends. When management determines that the carrying value of long-lived and intangible assets may not be recoverable, impairment is measured based on the excess of the assets’ carrying value over the estimated fair value.
Income taxes. As part of the process of preparing its consolidated financial statements, the Company is required to estimate income taxes in each of the jurisdictions in which it operates. This process involves estimating the actual current tax exposure together with assessing temporary differences in recognition of income for tax and accounting purposes. These differences result in deferred tax assets and liabilities and are included within the Company’s consolidated balance sheets. Management must then assess the likelihood that the deferred tax assets will be recovered from future taxable income and, to the extent it believes that recovery is not likely, it must establish a valuation allowance. An expense, or benefit, is included within the tax provision in the statement of operations for any increase, or decrease, in the valuation allowance for a given period.
Effective January 1, 2007, the Company began accounting for uncertainty in income taxes recognized in the financial statements in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 requires that a more-likely-than-not threshold be met before the benefit of a tax position may be recognized in the financial statements and prescribes how such benefit should be measured. Management must evaluate tax positions taken on the Company’s tax returns for all periods that are open to examination by taxing authorities and make a judgment as to whether and to what extent such positions are more likely than not to be sustained based on merit.
Management judgment is required in determining the provision for income taxes, the deferred tax assets and liabilities and any valuation allowance recorded against deferred tax assets. Management judgment is also required in evaluating whether tax benefits meet the more-likely-than-not threshold for recognition under FIN 48.
RECENT ACCOUNTING PRONOUNCEMENTS
In September 2006, FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and emphasizes that fair value is a market-based measurement, not an entity-specific measurement. It establishes a fair value hierarchy and expands disclosures about fair value measurements in both interim and annual periods. SFAS 157 will be effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In December 2007, FASB issued proposed FASB Staff Position (“FSP”) FAS 157-b, which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis. The proposed FSP partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. The Company does not expect SFAS 157 to have a material effect on the Company’s financial position or results of operations.
In February 2007, FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”) and requires an entity to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the fair value option is elected shall be recognized in earnings as incurred and not deferred. SFAS 159 will be effective for fiscal years beginning after November 15, 2007. The Company does not expect SFAS 159 to have a material effect on the Company’s financial position or results of operations.
In December 2007, FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations - Revised” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination: recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase price; and, determines what information to disclose to enable users of the consolidated financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. In the past, the Company has completed significant acquisitions. The application of SFAS 141(R) will cause management to evaluate future transaction returns under different conditions, particularly the near term and long term economic impact of expensing transaction costs up front.
RESULTS OF CONTINUING OPERATIONS
The following table sets forth the components of consolidated statements of operations as a percentage of total revenue for the periods indicated.
The following tables set forth certain selected consolidated financial and non-financial data as of December 31, 2007, 2006 and 2005, and for each of the three years then ended ($ in thousands unless noted otherwise) related to the Company’s continuing operations.
(a)
Non-GAAP presentation. For informational purposes and to provide a greater understanding of the Company’s businesses. Management believes that information provided with this level of detail is meaningful and useful in understanding the activities and business metrics of the Company’s operations.
(b)
Includes cash advance activities at the Company’s pawn lending locations.
(c)
Amounts recorded in the Company’s consolidated financial statements.
(d)
Cash advances written by third-party lenders that were arranged by the Company on behalf of the third-party lenders, all at the Company’s pawn locations, cash advance locations and through the internet distribution channel.
(e)
Includes cash advance activities at the Company’s cash advance storefront locations and through the Company’s internet distribution channel.
(f)
Includes (i) cash advances written by the Company, and (ii) cash advances written by third-party lenders that were arranged by the Company on behalf of the third-party lenders, all at the Company’s pawn and cash advance locations and through the Company’s internet distribution channel.
OVERVIEW
Components of Consolidated Net Revenue. Consolidated net revenue is total revenue reduced by the cost of merchandise sold in the period. It represents the income available to satisfy expenses and is the measure management uses to evaluate top line performance. The components of consolidated net revenue are: finance and service charges from pawn loans, profit from the disposition of merchandise, cash advance fees, and other revenue. Other revenue is comprised mostly of check cashing fees but includes royalties and small miscellaneous other revenue items. Growth in cash advance fees has increased the related contribution of the cash advance products to consolidated net revenue during each of the three years of 2007, 2006 and 2005. Net revenue related to cash advance fees eclipsed pawn related net revenue, defined as finance and service charges on pawn loans plus the profit from disposition of merchandise, to become the largest component of net revenue in 2007. The growth in cash advance fees is primarily attributable to higher average balances, the addition of new units and the addition of cash advances made over the internet beginning in mid-September of 2006. Net revenue from pawn lending activities contributed 45.6%, 56.9% and 62.2% of net revenue for 2007, 2006 and 2005, respectively. The following graphs show consolidated net revenue and depict the mix of the components of net revenue for the years ended December 31, 2007, 2006 and 2005:
Contribution to Increase in Net Revenue. The Company’s net revenue increased 39.4% and 18.8% for the years ended December 31, 2007 and 2006, respectively, compared to the prior year periods. Cash advance fees have contributed the majority of the increase primarily because of the additional revenue and subsequent growth in revenue that followed the September 2006 acquisition of a business offering cash advances over the internet. In addition, higher average balances owed by customers, and the growth and development of newly opened cash advance locations contributed to the increase. As illustrated below, these increases represented 82.9% of the overall increase in net revenue from 2006 to 2007 and 68.3% of the Company’s overall increase in net revenue from 2005 to 2006. The increase in aggregate pawn related net revenue, including both finance and service charges and profit from the disposition of merchandise, contributed 16.8% of the year over year increase in net revenue for 2007 compared to 28.9% of growth in 2006.
While the percentage of pawn lending operations’ contribution to the growth in consolidated net revenue was smaller in the years ended December 31, 2007 and 2006 than in each of the respective prior years, net revenue from pawn lending activities increased 9.6% and 8.2% for the years ended December 31,
2007 and 2006, respectively, compared to the prior year periods. The disproportionate growth in net revenue from cash advance activities is mostly due to the inclusion of the operations of the online distribution channel acquired in September 2006 that were not in the full comparable periods through September 2006. Other revenue accounted for 0.3% and 2.8% of the overall increase in net revenue in 2007 and 2006, respectively. These trends are depicted in the following graphs:
Year Ended 2007 Compared to Year Ended 2006
Consolidated Net Revenue. Consolidated net revenue increased $193.0 million, or 39.4%, to $682.6 million during 2007 from $489.6 million during 2006. The following table sets forth 2007 and 2006 net revenue by operating segment ($ in thousands):
The components of consolidated net revenue are finance and service charges from pawn loans, which increased $11.5 million; profit from the disposition of merchandise, which increased $20.9 million; cash advance fees generated from pawn locations, cash advance locations and via the internet distribution channel, which increased $160.1 million; and combined segment revenue from check cashing fees, royalties and other, which increased $516,000. Net revenue from pawn lending operations includes finance and service charges and profit from disposition of merchandise, both of which increased in 2007 as compared to 2006, as well as cash advance fees from pawn locations, which decreased in 2007 compared to the prior year period. The increase in net revenue from cash advance operations of 101.0% was primarily due to the inclusion of the operating results of CashNetUSA for the full year in 2007.
Finance and Service Charges. Finance and service charges from pawn loans increased $11.5 million, or 7.7%, from $149.5 million in 2006 to $161.0 million in 2007. The increase is due primarily to higher loan balances attributable to the increased amount of pawn loans written through existing and new locations added during 2006 and 2007. An increase in the average balance of pawn loans outstanding contributed $9.1 million of the increase and the higher annualized yield, which is a function of the blend in permitted rates for fees and service charges on pawn loans in all operating locations of the Company, contributed $2.4 million of the increase. In addition, the Company’s decision to reduce the maximum loan term from 90 days to 60 days in 198 pawn locations in the last half of 2007 contributed to higher reported pawn loan yields as the average balance of loans outstanding declined and customer payments of finance and service charges occurred earlier than in prior periods.
The average balances of pawn loans outstanding during 2007 increased by $7.3 million, or 6.1%, compared to 2006. The increase was driven by a 9.9% increase in the average amount per loan outstanding that was partially offset by a 3.5% decrease in the average number of pawn loans outstanding during 2007. Management believes that the decrease in the average number of pawn loans outstanding could be related to the fact that higher advance rates on loans secured by gold collateral, such as jewelry, can allow customers to reduce the number of loans necessary to achieve their needs. In addition, the decrease in loan term from 90 to 60 days reduces the number of loans outstanding, as the number of unredeemed loans that would have remained in the 90 day loan cycle for the complete term are eliminated earlier in the 60 day loan cycle.
Pawn loan balances at December 31, 2007 were $137.3 million, which was 7.8% higher than at December 31, 2006. Annualized loan yield was 125.5% in 2007, compared to 123.6% in 2006. Same store pawn loan balances at December 31, 2007 increased $8.4 million, or 6.6%, as compared to December 31, 2006.
Profit from the Disposition of Merchandise. Profit from the disposition of merchandise represents the proceeds received from the disposition of merchandise in excess of the cost of disposed merchandise. The following table summarizes the proceeds from the disposition of merchandise and the related profit for 2007 as compared to 2006 ($ in thousands):
The total proceeds from disposition of merchandise and refined gold increased $62.8 million, or 18.8%, and the total profit from the disposition of merchandise and refined gold increased $20.9 million, or 16.2%, primarily due to higher levels of retail sales and disposition of refined gold. Overall gross profit margin decreased slightly from 38.7% in 2006 to 37.8% in 2007. Excluding the effect of the disposition of refined gold, the profit margin on the disposition of merchandise (including jewelry sales) decreased to 40.5% in 2007 from 41.2% in 2006. The profit margin on the disposition of refined gold increased to 31.6% in 2007 from 30.4% in 2006 primarily due to the higher market prices for gold, which in turn caused the hedge-adjusted selling price per ounce to increase 23.4% in 2007 compared to 2006. The Company also experienced a 24% increase in the volume of refined gold sold during 2007, which is generally in line with the increase in pawn loan balances for the period, primarily due to higher pawn loans on jewelry, the liquidation of jewelry inventory and the sale of gold items purchased directly from customers.
Proceeds from disposition of merchandise, excluding refined gold, increased $21.3 million, or 8.3%, in 2007 primarily due to to the higher levels of retail sales activity that was supported by higher levels of merchandise available for disposition entering into 2007 and the net addition of 10 pawnshop locations. The
consolidated merchandise turnover rate was 2.7 times in both 2007 and 2006. Management expects that profit margin on the disposition of merchandise in the near term will likely remain at or slightly below current levels mainly due to higher inventory levels and an increase in the percentage mix of refined gold sales, which typically have lower gross profit margins.
The table below summarizes the age of merchandise held for disposition before valuation allowance of $2.0 million and $1.9 million, respectively, at December 31, 2007 and 2006 ($ in thousands).
Cash Advance Fees. Cash advance fees increased $160.1 million, or 82.1%, to $355.2 million in 2007 as compared to $195.1 million in 2006. The increase in revenue from cash advance fees is predominantly due to the increase in customers using the Company’s online distribution channel, and to a lesser extent, the increase and growth of storefront locations. As of December 31, 2007, cash advance products were available in 735 lending locations, including 431 pawnshops and 304 cash advance locations. In 319 of these lending locations, the Company arranges for customers to obtain cash advance products from independent third-party lenders for a fee. Cash advance fees from same stores (both pawn and cash advance locations in business during the entire 24 month period ended December 31, 2007) increased $3.6 million, or 2.2%, to $165.2 million in 2007 compared to $161.6 million in 2006.
Cash advance fees include revenue from the cash advance portfolio owned by the Company and fees paid to the Company for arranging cash advance products from independent third-party lenders for customers. See further discussion in Note 4 of Notes to Consolidated Financial Statements. (Although cash advance transactions may take the form of loans or deferred check deposit transactions, the transactions are referred to throughout this discussion as “cash advances” for convenience.)
The following table sets forth cash advance fees by operating segment for the years ended December 31, 2007 and 2006 ($ in thousands):
The dollar value of cash advances written increased $847.2 million, or 71.9% to $2.0 billion in 2007 from $1.2 billion in 2006. These amounts include $654.8 million in 2007 and $360.6 million in 2006 extended to customers by all independent third-party lenders. The average amount per cash advance increased to $413 from $381 primarily due to the mix within the portfolio (with a larger percent in markets allowing for larger loans) and adjustments to underwriting criteria. The outstanding combined portfolio balance of cash advances increased $24.2 million, or 19.5%, to $148.4 million at December 31, 2007 from
$124.2 million at December 31, 2006. Those amounts included $113.8 million and $99.5 million at December 31, 2007 and 2006, respectively, which are included in the Company’s consolidated balance sheet. An allowance for losses of $25.7 million and $19.5 million has been provided in the consolidated financial statements for December 31, 2007 and 2006, respectively, which is netted against the outstanding cash advance amounts on the Company’s consolidated balance sheets.
The following table summarizes cash advances outstanding at December 31, 2007 and 2006 and contains certain non-Generally Accepted Accounting Principles (“non-GAAP”) measures with respect to the cash advances owned by third-party lenders that are not included in the Company’s consolidated balance sheets. The Company believes that presenting these non-GAAP measures is meaningful and necessary because management evaluates and measures the cash advance portfolio performance on an aggregate basis ($ in thousands).
(a)
Cash advances written by the Company for its own account in pawn locations, cash advance locations, and through the internet distribution channel.
(b)
Non-GAAP presentation. For informational purposes and to provide a greater understanding of the Company’s businesses. Management believes that information provided with this level of detail is meaningful and useful in understanding the activities and business metrics of the Company’s operations.
(c)
Cash advances written by third-party lenders that were arranged by the Company on behalf of the third-party lenders, all at the Company’s pawn locations, cash advance locations and through the internet distribution channel.
(d)
Includes (i) cash advances written by the Company, and (ii) cash advances written by third-party lenders that were arranged by the Company on behalf of the third-party lenders, all at the Company’s pawn and cash advance locations and through the Company’s internet distribution channel.
Management anticipates continued growth in consolidated cash advance fees for fiscal 2008, primarily due to increased consumer awareness and demand for the cash advance product, higher outstanding balances at December 31, 2007 compared to December 31, 2006, the continued growth of the internet distribution channel and the growth of balances from new units opened during and prior to 2007.
Check Cashing Fees, Royalties and Other. Check cashing fees, royalties and other income increased $516,000 to $16.4 million in 2007, or 3.2%, from $15.9 million in 2006, primarily due to expanded product offerings and their success in pawn locations and revenue growth in cash advance units. However, this growth has been partially inhibited by lower fees from check cashing activities due to a lower volume of checks being cashed potentially due to an increase in competition. The components of these revenue items are as follows (in thousands):
Operations Expenses. Consolidated operations expenses, as a percentage of total revenue, were 32.8% in 2007 compared to 35.7% in 2006. These expenses increased $56.8 million, or 22.9%, in 2007 compared to 2006. Pawn lending operating expenses increased $14.0 million, or 7.8%, primarily due to higher personnel costs, increased occupancy expenses and an increase in store level incentives. Cash advance operating expenses increased $42.8 million, or 64.5%, primarily as a result of the acquisition of a business that offers cash advances online.
As a multi-unit operator in the consumer finance industry, the Company’s operations expenses are predominately related to personnel and occupancy expenses. Personnel expenses include base salary and wages, performance incentives, and benefits. Occupancy expenses include rent, property taxes, insurance, utilities, and maintenance. The combination of personnel and occupancy expenses represents 78.6% of total operations expenses in 2007 and 82.7% in 2006. The comparison is as follows ($ in thousands):
The increase in personnel expenses is mainly due to unit additions since 2006, an increase in staffing levels, the acquisition of CashNetUSA and normal recurring salary adjustments. The increase in occupancy expense is primarily due to unit additions, as well as higher utility costs and property taxes. The increase in other operations expenses was primarily due to an increase in marketing and selling expenses.
The Company realigned its administrative activities during 2007 to create more direct oversight of operations. This change resulted in an increase in operations expenses late in 2007. For comparison purposes, the Company reclassified the same direct expenses from earlier periods out of administrative expenses and into operations expenses. The amounts reclassified in 2007 and 2006 were $3.0 million and $1.8 million, respectively. There was no change in the total amount of expenses related to this reclassification.
Administration Expenses. Consolidated administration expenses, as a percentage of total revenue, were 6.2% in 2007 compared to 7.3% in 2006. The components of administration expenses are as follows ($ in thousands):
Periodically the Company evaluates its reserves for health and workers’ compensation benefits. During 2007, the Company adjusted reserves downward consistent with past practices which reduced administrative expenses. Before the reduction in personnel expense from these credits, the increase in administration expenses was principally attributable to the acquisition of a business that offers cash advances online, increased staffing levels and annual salary adjustments. In addition, total administrative expenses in 2006 were offset by a gain of $773,000 recognized from a partial insurance settlement in 2006 related to hurricanes in 2005.
The Company realigned its administrative activities during 2007 to create more direct oversight of operations. This change resulted in an increase in operations expenses late in 2007. For comparison purposes, the Company reclassified the same direct expenses from earlier periods out of administrative expenses and into operations expenses. The amounts reclassified in 2007 and 2006 were $3.0 million and $1.8 million, respectively. There was no change in the total amount of expenses related to this reclassification.
Cash Advance Loss Provision. The Company maintains an allowance for losses on cash advances at a level projected to be adequate to absorb credit losses inherent in the outstanding combined cash advance portfolio. The cash advance loss provision is utilized to increase the allowance carried against the outstanding company owned cash advance portfolio as well as expected losses in the third-party lender-owned portfolios which are guaranteed by the Company. The allowance is based on historical trends in portfolio performance based on the status of the balance owed by the customer with the full amount of the customer’s obligations being completely reserved when they become 60 days past due. The cash advance loss provision increased $95.6 million to $155.2 million in 2007, compared to $59.6 million in 2006. An increased volume of cash advances contributed $79.0 million of the increase in the loss provision with the remaining increase of $16.6 million attributable to higher loss rates.
Total charge-offs less recoveries divided by total cash advances written increased in 2007 to 7.3% compared to 3.9% in 2006. The loss provision expense as a percentage of cash advances written was higher in 2007, increasing to 7.7% compared to 5.1% in the prior year. The loss provision as a percentage of cash advance fees increased to 43.7% in 2007 from 30.5% in 2006. These increases are mostly attributable to a significant increase in cash advance receivable balances and the greater mix of cash advance balances from online customers, which historically generates a higher loss rate. In addition, this increase in loss rates and losses as a percent of fees was weighted heavily in the first six months of 2007 due to a significant increase in new customers over that period as a result of opening new markets for the online distribution channel in late 2006 and early 2007.
Due to the short-term nature of the cash advance product and the high velocity of loans written, seasonal trends are evidenced in quarter-to-quarter performance. The table below shows the Company’s sequential loss experience for each of the calendar quarters under multiple metrics used by the Company to evaluate performance. Management believes that the increase in loss levels experienced early in 2007 was due to a large increase in new customers during the early part of the year. Typically, the normal business cycle leads sequential losses, as measured by the current period loss provision as a percentage of combined loans written in the period, to be lowest in the first quarter and increase throughout the year, with the final two quarters experiencing the peak levels of losses. During 2007, the quarterly sequential performance deviated from
this typical cycle as sequential loss rates decreased from the second to the third quarter and from the third quarter to the fourth quarter. Management believes that this sequential decrease was mainly due to the increase in customers who had established borrowing histories as a percent of all customers in the later half of the year. This change in mix was primarily in the portfolio of cash advances originated by the Company’s online channel. In addition, management took steps to reduce losses in its storefront business beginning in the last half of 2007, including additional underwriting guidelines and more emphasis on collections activities. These changes accounted for a smaller portion of the decrease in relation to the customer composition mix.
(a)
Non-GAAP presentation. For informational purposes and to provide a greater understanding of the Company’s businesses. Management believes that information provided with this level of detail is meaningful and useful in understanding the activities and business metrics of the Company’s operations.
(b)
Includes (i) cash advances written by the Company, and (ii) cash advances written by third-party lenders that were arranged by the Company on behalf of the third-party lenders, all at the Company’s pawn and cash advance locations and through the Company’s internet distribution channel.
The following table summarizes the cash advance loss provision and combined allowance for losses and accrued third-party lender losses for the years ended and at December 31, 2007 and 2006, and contains certain non-GAAP measures with respect to the cash advances written by third-party lenders that are not included in the Company’s consolidated balance sheets and related statistics. The Company believes that presenting these non-GAAP measures is meaningful and necessary because management evaluates and measures the cash advance portfolio performance on an aggregate basis including its evaluation of the loss provision for the Company-owned portfolio and the third-party lender-owned portfolio that the Company guarantees ($ in thousands).
(a)
Cash advances written by the Company for its own account in pawn locations, cash advance locations and through the internet distribution channel.
(b)
Non-GAAP presentation. For informational purposes and to provide a greater understanding of the Company’s businesses. Management believes that information provided with this level of detail is meaningful and useful in understanding the activities and business metrics of the Company’s operations.
(c)
Cash advances written by third-party lenders that were arranged by the Company on behalf of the third-party lenders, all at the Company’s pawn and cash advance locations and through the Company’s internet distribution channel.
(d)
Includes (i) cash advances written by the Company, and (ii) cash advances written by third-party lenders that were arranged by the Company on behalf of the third-party lenders, all at the Company’s pawn and cash advance locations and through the Company’s internet distribution channel.
During 2007, the Company’s online distribution channel sold selected cash advances which had been previously written off. These sales generated proceeds of $4.2 million related to loans originated after the acquisition of the online distribution channel. Those proceeds were recorded as recoveries on losses previously charged to the allowance for losses.
Depreciation and Amortization. Depreciation and amortization expense as a percentage of total revenue decreased to 3.4% in 2007 from 3.9% in 2006. Total depreciation and amortization expenses increased $4.8 million, or 17.6%, primarily due to remodeling expenditures for storefront and lending locations in 2007 and 2006, the increase in operating locations and the amortization of certain intangible assets obtained in acquisitions.
During 2008, the Company expects to deploy the first phase of its new proprietary point-of-sale system for its cash advance business in its storefront locations and the underlying platform that will serve its cash advance storefronts and pawn locations. Upon initial deployment, the Company will begin depreciating the costs currently capitalized during the system’s development and the costs of related hardware. This will significantly increase depreciation expense in future periods.
Interest Expense. Interest expense as a percentage of total revenue was 1.7% in both 2007 and 2006. Interest expense increased $4.1 million, or 34.1%, to $16.0 million in 2007 as compared to $11.9 million in 2006. The increase was primarily due to the higher weighted average floating interest rate borrowings ($121.3 million during 2007 and $81.2 million during 2006) and the higher average floating interest rate (6.3% during 2007 compared to 6.2% during 2006) and the issuance in December 2006 of $60 million of senior unsecured long-term notes. The average amount of debt outstanding increased during 2007 to $249.8 million from $160.7 million during 2006. This increase was primarily attributable to the acquisition of CashNetUSA in the third quarter of 2006 and the funding of two earn-out payments in February and November 2007. The effective blended borrowing cost was 6.4% in 2007 and 6.6% in 2006.
Interest Income. Interest income was $1.0 million in 2007 compared to $1.6 million in 2006. The interest income is primarily from the two notes receivable denominated in Swedish kronor that the Company held until August 2007 and had received in connection with its 2004 sale of its foreign pawn lending operations. The notes were sold in August 2007; therefore, the Company expects interest income in 2008 will be insignificant.
Foreign Currency Transaction Gain (Loss). The Company held two notes receivable denominated in Swedish kronor until they were sold in August 2007. Exchange rate changes between the United States dollar and the Swedish kronor resulted in a net gain of $63,000 (including a gain of $52,000 from foreign currency forward contracts) in 2007 and $296,000 (net of a loss of $1.1 million from foreign currency forward contracts) in 2006.
The functional currency of the Company’s United Kingdom operations is the British pound. In 2007, the Company recorded foreign currency transaction losses of approximately $87,000 on the intercompany balances, which are denominated in U.S. dollars, between the U.S. and United Kingdom operations.
Gain on Sale of Foreign Notes. The Company received gross proceeds in the amount of $16.8 million on the sale of notes receivable that it had received in 2004 as part of the proceeds from its sale of Svensk Pantbelåning, its former Swedish pawn lending subsidiary. In September 2004, the Company sold Svensk Pantbelåning to Rutland Partners LLP, for cash and two subordinated notes receivable. One of the notes receivable was convertible into approximately 27.7% of the parent company of Svensk Pantbelåning on a fully-diluted basis. In August 2007, Rutland Partners LLP sold Svensk Pantbelåning to a third party who also purchased the notes receivable from the Company. The Company received total proceeds of $16.8 million, $12.4 million for the repayment of the face value of the principal, including $0.3 million of accrued interest owed on notes receivable and $4.4 million for the value of its conversion rights under the convertible note. The Company recognized a pre-tax gain of approximately $6.3 million from the sale of the notes and related rights. Proceeds from the sale were used for general corporate purposes, including the repayment of debt and the repurchase of shares in the open market pursuant to an existing share repurchase authorization.
Income Taxes. The Company’s effective tax rate for continuing operations for 2007 was 36.4% as compared to 36.6% for 2006. The Company recognized a $1.1 million one-time deferred Texas margin tax credit, net of the federal income tax effect of the credit, during the second quarter of 2007. This credit resulted from a change in Texas law enacted during the second quarter. Excluding the effect of the one-time Texas deferred tax benefit, the effective tax rate for 2007 would have been 37.3%. Excluding the effect of the one-time deferred tax benefit, the increase over 2006 is primarily attributable to an increase in state and local income taxes, including the Texas margin tax that was enacted in 2006 and is imposed on the Company’s earnings beginning in 2007.
Year Ended 2006 Compared to Year Ended 2005
Consolidated Net Revenue. Consolidated net revenue increased $77.6 million, or 18.8%, to $489.6 million during 2006 from $412.0 million during 2005. The following table sets forth 2006 and 2005 net revenue by operating segment ($ in thousands):
The components of net revenue are finance and service charges from pawn loans, which increased $9.7 million; profit from the disposition of merchandise, which increased $12.7 million; cash advance fees generated from cash advance locations, pawn locations and the internet distribution channel increased $53.0 million; and check cashing fees, royalties and other income increased $2.2 million.
Finance and Service Charges. Finance and service charges from pawn loans increased $9.7 million, or 6.9%, from $139.8 million in 2005 to $149.5 million in 2006. The increase was primarily due to higher pawn loan balances attributable to an increased amount of pawn loans written. An increase in the average balance of pawn loans outstanding contributed $11.1 million of the increase, which was offset by a $1.4 million decrease resulting from the lower annualized yield of the pawn loan portfolio. The change in the annualized yield of the pawn loan portfolio is a function of the blend in permitted rates for fees and service charges on pawn loans in all operating locations of the Company and slightly lower redemption rates.
The average balances of pawn loans outstanding were 7.9% higher in 2006 than in 2005. The increase in the average balance of pawn loans outstanding was driven by a 9.5% increase in the average amount per loan that was partially offset by a 1.5% decrease in the average number of pawn loans outstanding during 2006.
Pawn loan balances at December 31, 2006 were $127.4 million, which was 10.5% higher than at December 31, 2005. Annualized loan yield was 123.6% in 2006, compared to 124.8% in 2005. Same store pawn loan balances at December 31, 2006 were $8.1 million, or 7.0%, higher than at December 31, 2005.
Profit from the Disposition of Merchandise. Profit from the disposition of merchandise represents the proceeds received from the disposition of merchandise in excess of the cost of disposed merchandise. The following table summarizes the proceeds from the disposition of merchandise and the related profit for 2006 as compared to 2005 ($ in thousands):
The total proceeds from disposition of merchandise and refined gold increased $33.8 million, or 11.3%, and the total profit from the disposition of merchandise and refined gold increased $12.7 million, or 10.9%, primarily due to higher levels of retail sales and the disposition of refined gold. Overall gross profit
margin decreased slightly from 38.8% in 2005 to 38.7% in 2006. Excluding the effect of the disposition of refined gold, the profit margin on the disposition of merchandise (including jewelry sales) decreased to 41.2% in 2006 from 41.5% in 2005. The profit margin on the disposition of refined gold increased to 30.4% in 2006 from 27.1% in 2005 primarily due to higher prevailing market prices of gold, which in turn caused the hedge-adjusted selling price per ounce to increase 25.6% in 2006 compared to 2005. The Company also experienced an 11.6% increase in the volume of refined gold sold during 2006, which was generally in line with the increase in pawn loan balances for the period. Proceeds from disposition of merchandise, excluding refined gold, increased $12.2 million, or 5.0%, in 2006 primarily due to the net addition of 19 pawnshop locations and to the higher levels of retail sales activity that was supported by higher levels of merchandise available for disposition entering into 2006. The consolidated merchandise turnover rate was 2.7 times in both 2006 and 2005.
The table below summarizes the age of merchandise held for disposition before valuation allowance of $1.9 million and $1.8 million, respectively, at December 31, 2006 and 2005 ($ in thousands).
Cash Advance Fees. Cash advance fees increased $53.0 million, or 37.3%, to $195.1 million in 2006 as compared to $142.1 million in 2005. The increase resulted primarily from the growth and development of new cash advance units and higher average cash advance balances outstanding during 2006, with some additional contribution from CashNetUSA acquired in mid-September 2006. As of December 31, 2006, cash advance products were available in 720 lending locations, including 425 pawnshops and 295 cash advance locations. In 314 of these lending locations, the Company arranged for customers to obtain cash advance products from independent third-party lenders for a fee. Cash advance fees from same stores increased $14.8 million, or 10.5%, to $156.1 million in 2006 compared to $141.3 million in 2005. Cash advance fees include revenue from the cash advance portfolio owned by the Company and fees paid to the Company for credit services rendered to customers in connection with arranging for customers to obtain cash advances from independent third-party lenders. See further discussion in Note 4 of Notes to Consolidated Financial Statements. (Although cash advance transactions may take the form of loans or deferred check deposit transactions, the transactions are referred to throughout this discussion as “cash advances” for convenience.)
The following table sets forth cash advance fees by operating segment for the years ended December 31, 2006 and 2005 ($ in thousands):
The amount of cash advances written increased $247.4 million, or 26.6% to $1.2 billion in 2006 from $930.3 million in 2005. These amounts include $360.6 million in 2006 and $356.4 million in 2005 extended to customers by all independent third-party lenders. The average amount per cash advance increased to $381 from $359 mostly due to changes in permitted loan amounts and adjustments to underwriting criteria. The outstanding combined portfolio balance of cash advances increased $59.9 million, or 93.2%, to $124.2 million at December 31, 2006 from $64.3 million at December 31, 2005. A portion of the increase was attributable to the addition of the online distribution channel established through the acquisition of CashNetUSA in September of 2006 with the remainder related primarily to store maturity and development during the year. Included in the combined portfolio balance referenced above were $99.5 million and $47.0 million for 2006 and 2005, respectively, which are included in the Company’s consolidated balance sheets. An allowance for losses of $19.5 million and $6.3 million has been provided in the consolidated financial statements for December 31, 2006 and 2005, respectively, which is netted against the outstanding cash advance amounts on the Company’s consolidated balance sheets.
The following table summarizes cash advances outstanding at December 31, 2006 and 2005 and contains certain non-Generally Accepted Accounting Principles (“non-GAAP”) measures with respect to the cash advances owned by third-party lenders that are not included in the Company’s consolidated balance sheets. The Company believes that presenting these non-GAAP measures is meaningful and necessary because management evaluates and measures the cash advance portfolio performance on an aggregate basis ($ in thousands).
(a)
Cash advances written by the Company for its own account in its pawn locations, cash advance locations and through the internet distribution channel.
(b)
Non-GAAP presentation. For informational purposes and to provide a greater understanding of the Company’s businesses. Management believes that information provided with this level of detail is meaningful and useful in understanding the activities and business metrics of the Company’s operations.
(c)
Cash advances written by third-party lenders that were arranged by the Company on behalf of the third-party lenders, all at the Company’s pawn and cash advance locations and through the Company’s internet distribution channel.
(d)
Includes (i) cash advances written by the Company, and (ii) cash advances written by third-party lenders that were arranged by the Company on behalf of the third-party lenders, all at the Company’s pawn and cash advance locations and through the Company’s internet distribution channel.
Cash advance fees related to cash advances originated by all third-party lenders (bank and non-bank) were $61.6 million in 2006 on $360.6 million in cash advances originated by third-party lenders, representing 31.1% of combined cash advance revenue and 8.9% of consolidated total revenue of the Company. The cash advance loss provision expense associated with these cash advances was $19.8 million. Direct operating expenses, excluding allocated administrative expenses, were $18.4 million, and depreciation and amortization expense was $1.6 million in 2006. Management estimates that the approximate contribution before interest and taxes on cash advances originated by all third-party lenders in 2006 was $21.8 million. This estimate does not include shared operating costs in pawn locations where the product is offered.
In March 2005, the Federal Deposit Insurance Corporation (“FDIC”) issued revised guidelines affecting certain short-term cash advance products offered by FDIC regulated banks. The revised guidance applied to the cash advance product that was offered by third-party banks in many of the Company’s locations. The revised guidance, which became effective July 1, 2005, restricted banks from providing cash advances to customers for more than three months out of a twelve month period. In order to address the short-term credit needs of customers who no longer had access to the banks’ cash advance product, the Company began offering an alternative short-term credit product in selected markets in 2005. On July 1, 2005, the Company introduced a credit services organization program (the “CSO program”). Under the CSO program, the Company acts as a credit services organization on behalf of consumers in accordance with applicable state laws. Credit services that the Company provides to its customers include arranging loans with independent third-party lenders, assisting in the preparation of loan applications and loan documents, and accepting loan payments at the location where the loans were arranged. To assist the customer in obtaining a loan from a third-party lender through the CSO program, the Company, on behalf of its customer, guarantees the customer’s payment obligations under the loan to the third-party lender. A CSO program customer pays the Company a CSO fee for the credit services, including the guaranty, and enters into a contract with the Company governing the credit services arrangement. The Company is responsible for losses on cash advances assigned to or acquired by it under its guaranty. At December 31, 2006, the Company offered the CSO program in Texas, Florida and, on a limited basis, Michigan. In February 2007, the Company discontinued the CSO program in Michigan.
Check Cashing Fees, Royalties and Other. Check cashing fees, royalties and other income increased $2.2 million to $15.9 million in 2006, or 15.8%, from $13.7 million in 2005 predominantly due to the growth in cash advance units. The components of these fees were as follows (in thousands):
Operations Expenses. Consolidated operations expenses, as a percentage of total revenue, were 35.7% in 2006 compared to 37.3% in 2005. These expenses increased $25.7 million, or 11.6%, in 2006 compared to 2005. Pawn lending operating expenses increased $11.1 million, or 6.5%, primarily due to the net addition of 19 pawnshop locations in 2006. Cash advance operating expenses increased $14.7 million, or 28.5%, primarily as a result of increased advertising expenditures, growth in expenses in the Company’s collection centers, the acquisition of CashNetUSA and the net establishment of 9 locations, which resulted in higher staffing levels.
As a multi-unit operator in the consumer finance industry, the Company’s operations expenses are predominately related to personnel and occupancy expenses. Personnel expenses include base salary and wages, performance incentives, and benefits. Occupancy expenses include rent, property taxes, insurance,
utilities, and maintenance. The combination of personnel and occupancy expenses represents 82.7% of total operations expenses in 2006 and 84.4% in 2005. The comparison is as follows ($ in thousands):
The increase in personnel expenses was mainly due to unit additions since 2005, an increase in staffing levels, including at the Company’s collection centers, the acquisition of CashNetUSA and normal recurring salary adjustments. The increase in occupancy expense was primarily due to unit additions, higher utility costs and property taxes.
The Company realigned its administrative activities during 2007 to create more direct oversight of operations. This change resulted in an increase in operations expenses late in 2007. For comparison purposes, the Company reclassified the same direct expenses from earlier periods out of administrative expenses and into operations expenses. The amounts reclassified in 2006 and 2005 were $1.8 million and $1.6 million, respectively. There was no change in the total amount of expenses related to this reclassification.
Administration Expenses. Consolidated administration expenses, as a percentage of total revenue, were 7.3% in 2006 compared to 7.2% in 2005. The components of administration expenses are as follows ($ in thousands):
The increase in administration expenses was principally attributable to increased staffing levels consistent with the Company’s expansion into new markets and the internet distribution channel and an increase in accrued management incentive in conjunction with the financial performance of the Company compared to its business plan. The increase in these expenses was partially offset by a gain of $773,000 recognized from a partial insurance settlement in 2006 related to hurricanes in 2005.
The Company realigned its administrative activities during 2007 to create more direct oversight of operations. This change resulted in an increase in operations expenses late in 2007. For comparison purposes, the Company reclassified the same direct expenses from earlier periods out of administrative expenses and into operations expenses. The amounts reclassified in 2006 and 2005 were $1.8 million and $1.6 million, respectively. There was no change in the total amount of expenses related to this reclassification.
Cash Advance Loss Provision. The Company maintains an allowance for losses on cash advances at a level projected to be adequate to absorb credit losses inherent in the outstanding combined cash advance portfolio. The cash advance loss provision is utilized to increase the allowance carried against the outstanding company owned cash advance portfolio as well as expected losses in the third-party lender-owned portfolios which are guaranteed by the Company. The allowance is based on historical trends in portfolio performance based on the status of the balance owed by the customer with the full amount of the customer’s obligations being completely reserved when they become 60 days past due. The cash advance
loss provision increased $16.8 million to $59.6 million in 2006, compared to $42.8 million in 2005. The increase was mainly attributable to the increased volume of cash advances written which was partially offset by a $2.0 million decrease as a result of lower loss rates. The loss provision as a percentage of cash advance fees increased to 30.5% in 2006 from 30.2% in 2005.
Total charge-offs less recoveries divided by total cash advances written decreased in 2006 to 3.9% compared to 4.3% in 2005. The decrease was partially related to underwriting changes made in late 2005 which resulted in lower loss rates, which in turn offset the reduction in year-over-year rates in cash advances written in 2006 compared to the prior year. The loss provision expense as a percentage of cash advances written was higher in 2006, increasing to 5.1% compared to 4.6% in the prior year mostly due to a significant increase in cash advance receivable balances as of year-end and the inclusion of the cash advance balance from online customers which carry a higher expected loss rate.
The following table summarizes the cash advance loss provision and combined allowance for losses and accrued third-party lender losses for the years ended at December 31, 2006 and 2005, and contains certain non-GAAP measures with respect to the cash advances written by third-party lenders that are not included in the Company’s consolidated balance sheets and related statistics. The Company believes that presenting these non-GAAP measures is meaningful and necessary because management evaluates and measures the cash advance portfolio performance on an aggregate basis including its evaluation of the loss provision for the Company-owned portfolio and the third-party lender-owned portfolio that the Company guarantees ($ in thousands).
(a)
Cash advances written by the Company in its pawn and cash advance locations and through the Company’s internet distribution channel.
(b)
Non-GAAP presentation. For informational purposes and to provide a greater understanding of the Company’s businesses. Management believes that information provided with this level of detail is meaningful and useful in understanding the activities and business metrics of the Company’s operations.
(c)
Cash advances written by third-party lenders that were arranged by the Company on behalf of the third-party lenders, all at the Company’s pawn and cash advance locations and through the Company’s internet distribution channel.
(d)
Includes (i) cash advances written by the Company, and (ii) cash advances written by third-party lenders that were arranged by the Company on behalf of the third-party lenders, all at the Company’s pawn and cash advance locations and through the Company’s internet distribution channel.
Depreciation and Amortization. Depreciation and amortization expense as a percentage of total revenue was 3.9% in both 2006 and 2005. Total depreciation and amortization expenses increased $3.9 million, or 16.6%, primarily due to the increase in operating locations, additional depreciation on remodelings of pawn lending locations and the amortization of certain intangible assets obtained in acquisitions.
Interest Expense. Interest expense as a percentage of total revenue decreased to 1.7% in 2006 from 1.8% in 2005. Interest expense increased $1.3 million, or 12.6%, to $11.9 million in 2006 as compared to $10.6 million in 2005. The increase was primarily due to the higher weighted average floating interest rate (6.2% during 2006 compared to 4.7% during 2005). The average amount of debt outstanding decreased during 2006 to $160.7 million from $168.3 million during 2005. The effective blended borrowing cost was 6.6% in 2006 and 6.3% in 2005.
On December 19, 2006, the Company issued $60.0 million of senior unsecured long-term notes. The notes were comprised of $35.0 million 6.09% senior notes due 2016 payable in five annual installment payments of $7.0 million beginning December 19, 2012; and $25.0 million 6.21% senior notes due 2021 payable in eleven annual payments of $2.3 million beginning December 19, 2011. Net proceeds received from the issuance of the notes were used to reduce the amount outstanding under the bank line of credit and for general corporate purposes.
Interest Income. Interest income was $1.6 million for both 2006 and 2005. Interest income was comprised of the interest earned on excess cash and on two subordinated notes denominated in Swedish kronor that the Company received in the sale of the foreign pawn lending operations.
Foreign Currency Transaction Gain (Loss). The Company held two notes receivable denominated in Swedish kronor in connection with its 2004 sale of its foreign pawn lending operations with a carrying value of $9.8 million at December 31, 2006. Exchange rate changes between the United States dollar and the Swedish kronor resulted in a net gain of $296,000 (net of a loss of $1.1 million from foreign currency forward contracts) in 2006 and a net loss of $834,000 (net of a gain of $731,000 from foreign currency forward contracts) in 2005. The foreign currency forward contracts totaling 68 million Swedish kronor (approximately $9.9 million at maturity) were established by the Company in 2005 to minimize the financial impact of currency market fluctuations.
Gain from Termination of Contract. In April 2006, the Company reached an agreement with a landlord of a lending location to terminate the lease and vacate the property for $2.2 million. The Company recorded a pre-tax net gain of $2.2 million ($1.4 million net of related taxes) from this transaction at that time. The closure of this significant pawn lending location reduced consolidated earnings for the remainder of the year.
Income Taxes. The Company’s effective tax rate for 2006 was 36.6% as compared to 36.8% for 2005.
LIQUIDITY AND CAPITAL RESOURCES
The Company’s cash flows and other key indicators of liquidity are summarized as follows ($ in thousands):
Cash flows from operating activities. Net cash provided by operating activities from continuing operations was $273.1 million for 2007, an increase of 68.8% compared to the prior year. Net cash generated by the Company’s pawn lending operations, cash advance operations and check cashing operations were $99.8 million, $172.7 million and $594,000, respectively. The improvement in cash flows from operating activities in 2007 as compared to 2006 was primarily due to the improvement in results of pawn lending operations, the addition of CashNetUSA and the growth and development of cash advance locations opened in recent periods.
Historically, the Company’s finance and service charge revenue is highest in the fourth fiscal quarter (October through December) due to higher average loan balances. Proceeds from the disposition of merchandise are generally highest in the Company’s fourth and first fiscal quarters (October through March) due to the holiday season and the impact of tax refunds. The net effect of these factors is that income from continuing operations typically is highest in the fourth and first fiscal quarters and likewise the Company’s cash flow is generally greatest in these two fiscal quarters.
Cash flows from investing activities. The Company’s pawn lending activities used cash of $21.8 million and cash advance activities used cash of $161.9 million during the current period. The Company also invested $70.1 million in property and equipment, including $17.6 million toward the development of a new point-of-sale system and $52.5 million for the establishment of new locations, the remodeling of certain locations, as well as development and enhancements to communications and information systems. In addition, the Company received $1.4 million of proceeds from insurance claims.
During the year ended December 31, 2007, the Company’s acquisition of pawnshop assets used cash of $3.8 million. Additionally, the Company made two supplemental payments of $33.8 million and $43.4 million in February 2007 and November 2007, respectively, and paid other acquisition costs of approximately $1.7 million in connection with the acquisition of substantially all of the assets of The Check Giant LLC (“TCG”). To the extent that the defined multiple of earnings attributable to the business acquired from TCG exceeds the total amounts paid through the supplemental payment measurement dates, as defined in the asset purchase agreement, the Company will make additional payments to the sellers in May and November of 2008. As of December 31, 2007, the Company has accrued to accounts payable approximately $22.0 million for this payment based on the defined multiple of trailing twelve months earnings through
December 31, 2007. The next measurement date will be March 31, 2008. The magnitude of these payments could be significant if the past success of the business continues throughout 2008.
In August 2007, the Company received gross proceeds in the amount of $16.8 million on the sale of notes receivable that it had received in September 2004 as part of the proceeds from its sale of Svensk Pantbelåning, its former Swedish pawn lending subsidiary to Rutland Partners LLP, for cash and two subordinated notes receivable. One of the notes receivable was convertible into approximately 27.7% of the parent company of Svensk Pantbelåning on a fully-diluted basis. In August 2007, Rutland Partners LLP sold Svensk Pantbelåning to a third party who also purchased the notes receivable from the Company. The Company’s total proceeds of $16.8 million represent $12.4 million in the repayment of principal, including $0.3 million of accrued interest owed on notes receivable and $4.4 million for the value of its conversion rights under the convertible note. For the year ended December 31, 2007, the Company recognized a pre-tax gain of approximately $6.3 million from the sale of the notes and related rights. Proceeds from the sale were used for general corporate purposes, including the repayment of debt and the repurchase of shares in the open market pursuant to an existing share repurchase authorization.
Management anticipates that capital expenditures for 2008 will be approximately $50 to $60 million, primarily for the remodeling of selected operating units, for the continuing development and enhancements to communications and information systems, including the multi-year project to upgrade the Company’s proprietary point-of-sale and information system, and for the establishment of approximately three to ten combined total of new cash advance-only locations and pawnshops. The additional capital required to make supplemental acquisition payments related to the CashNetUSA acquisition and to pursue other acquisition opportunities is not included in the estimate of capital expenditures because of the uncertainties surrounding such payments or any potential transaction of this nature at this time. Management expects the implementation of the new point-of-sale system, which will occur during 2008, will result in a substantial increase in depreciation expense.
Cash flows from financing activities. During 2007, the Company borrowed $90.1 million under its bank lines of credit. The Company reduced the balance owed on its senior unsecured notes by $21.1 million through the scheduled principal payments. Additional uses of cash included $4.1 million for dividends paid. On April 20, 2005, the Board of Directors authorized the Company’s repurchase of up to a total of 1,500,000 shares of its common stock (the “2005 authorization”). At its regularly scheduled meeting of its Board of Directors on October 24, 2007, the Board established a new authorization (the “2007 authorization”) for the repurchase of 1,500,000 shares and ended the 2005 authorization. Management expects to purchase shares of the Company from time to time in the open market, and funding will come from operating cash flow. During the year ended December 31, 2007, 667,600 shares were purchased for an aggregate amount of $23.6 million under the 2005 authorization and the 2007 authorization. In addition, 9,794 shares were acquired as partial payments of taxes for shares issued under stock-based compensation plans for an aggregate amount of $408,000. During 2007, stock options for 69,854 shares were exercised which generated $0.8 million of additional equity.
In March 2007, the Company amended its line of credit to extend the final maturity by two years, to March 2012. The amended credit agreement also contained a provision for the ratable $50.0 million increase in the committed amounts, up to $300.0 million, upon the Company’s request and approval by the lenders. The Company exercised the increase provision on February 29, 2008. As a result, as of that date, the committed amount under its line of credit is $300.0 million. The line of credit agreement and the senior unsecured notes require that the Company maintain certain financial ratios. The Company is in compliance with all covenants and other requirements set forth in its debt agreements. A significant decline in demand for the Company’s products and services may cause the Company to reduce its planned level of capital expenditures and lower its working capital needs in order to maintain compliance with the financial ratios in those agreements. A violation of the credit agreement or the senior unsecured note agreements could result in an acceleration of the Company’s debt and increase the Company’s borrowing costs and could adversely affect the Company’s ability to renew its existing credit facility or obtain new credit on favorable terms in the future. The Company does not anticipate a significant decline in demand for its services and has historically been successful in maintaining compliance with and renewing its debt agreements.
The following table summarizes the Company’s contractual obligations of its continuing operations at December 31, 2007, and the effect such obligations are expected to have on its liquidity and cash flow in future periods (in thousands):
(1)
Excludes interest obligations under the line of credit agreement. See Note 8 of Notes to Consolidated Financial Statements.
Management believes that the borrowings available ($75.4 million at December 31, 2007) under the credit facilities, including the flexibility to increase its bank line of credit by $50.0 million, cash generated from operations and current working capital of $302.3 million should be sufficient to meet the Company’s anticipated capital requirements. Management intends to monitor the magnitude of the potential earn-out payments related to the CashNetUSA acquisition and may defer certain non-essential capital investments until after 2008.
Off-Balance Sheet Arrangements with Third-Party Lenders
The Company arranges for consumers to obtain cash advance products from multiple independent third-party lenders through the CSO program. As of December 31, 2007, the CSO program was available to consumers in 319 of the Company’s lending locations and online borrowers located in the states of Florida and Texas. When a consumer executes a credit services agreement with the Company, the Company agrees, for a fee payable to the Company by the consumer, to provide a variety of credit services to the consumer, one of which is to guarantee the consumer’s obligation to repay the loan received by the consumer from the third-party lender if the consumer fails to do so. The Company discontinued the CSO program in Michigan in February 2007, and has since offered only cash advances underwritten by the Company to customers in that state. In January of 2008, the Company began offering a CSO program in the state of Maryland through its online platform.
For cash advance products originated by third-party lenders, each lender is responsible for evaluating each of its customers’ applications, determining whether to approve a cash advance based on an application and determining the amount of the cash advance. The Company is not involved in the lenders’ cash advance approval processes or in determining the lenders’ approval procedures or criteria. At December 31, 2007, the outstanding amount of active cash advances originated by third-party lenders was $34.6 million.
Since the Company may not be successful in collecting all amounts funded under the terms of its guaranty, the Company’s cash advance loss provision includes amounts estimated to be adequate to absorb credit losses from cash advances in the aggregate cash advance portfolio, including those expected to be assigned to the Company or acquired by the Company as a result of its guaranty obligations. Accrued losses of $1.8 million on portfolios owned by the third-party lenders are included in “Accounts payable and accrued expenses” in the consolidated balance sheets. The Company believes that this amount is adequate to absorb credit losses from cash advances expected to be assigned to the Company or acquired by the Company as a result of its guaranty obligations.
CAUTIONARY STATEMENT REGARDING RISKS AND UNCERTAINTIES THAT MAY AFFECT FUTURE RESULTS
This Annual Report on Form 10-K, including Management’s Discussion and Analysis of Financial Condition and Results of Operations, contains statements that are forward-looking, as that term is defined by the Private Securities Litigation Reform Act of 1995 or by the Securities and Exchange Commission in its rules. The Company intends that all forward-looking statements be subject to the safe harbors created by these laws and rules. The actual results of the Company could differ materially from those indicated by the forward-looking statements because of various risks and uncertainties including, without limitation, changes in demands for the Company’s services, the actions of third parties who offer products and services at the Company’s locations, fluctuations in the price of gold, changes in competition, the ability of the Company to open new operating units in accordance with its plans, economic conditions, real estate market fluctuations, interest rate fluctuations, changes in the capital markets, changes in foreign currency exchange rates, changes in tax and other laws and governmental rules and regulations applicable to the Company’s business, the effect of such changes on the Company’s business or the markets in which it operates, or the ability to successfully integrate newly acquired businesses into the Company’s operations. When used in this Annual Report on Form 10-K, the words “believes,” “estimates,” “plans,” “expects,” “anticipates,” and similar expressions as they relate to the Company or its management are intended to identify forward-looking statements. All forward-looking statements are based on current expectations regarding important risk factors. These risks and uncertainties are beyond the ability of the Company to control, and, in many cases, the Company cannot predict all of the risks and uncertainties that could cause its actual results to differ materially from those expressed in the forward-looking statements. Such statements should not be regarded as a representation by the Company or any other person that the results expressed in the statements will be achieved.
ITEM 7A.
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK
Market risks relating to the Company’s operations result primarily from changes in interest rates, foreign currency exchange rates and gold prices. The Company does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes.
Interest Rate Risk. Management’s objective is to minimize the cost of borrowing through an appropriate mix of fixed and floating rate debt. Derivative financial instruments, such as interest rate cap agreements, may be used for the purpose of managing fluctuating interest rate exposures that exist from ongoing business operations. In December 2007, the Company entered into an interest rate cap agreement with a notional amount of $10.0 million of the Company’s outstanding floating rate line of credit for a term of 24 months at a fixed LIBOR rate of 4.75%. This interest rate cap agreement was perfectly effective at December 31, 2007. The Company had variable rate borrowings outstanding of $171.8 million and $81.7 million at December 31, 2007 and 2006, respectively. Interest rates on $10.0 million of the net variable rate borrowings at December 31, 2007 were capped at 4.75%. Interest rates on $15.0 million of the net variable rate borrowings at December 31, 2006 were capped at 4.5%. If prevailing interest rates were to increase 100 basis points over the rates at December 31, 2007 and 2006, respectively, and the variable rate borrowings outstanding remained constant, the Company’s interest expense would increase by $1.6 million and $667,000, and net income after taxes would decrease by $1.1 million and $433,000 in 2007 and 2006, respectively.
Gold Price Risk. The Company periodically uses forward sale contracts with a major gold bullion bank to sell a portion of the expected amount of refined gold produced in the normal course of business from its liquidation of forfeited gold merchandise. A significant decrease in the price of gold would result in a reduction of proceeds from the disposition of refined gold to the extent that amounts sold were in excess of the amount of contracted forward sales. In addition, a significant and sustained decline in the price of gold would negatively impact the value of some of the goods pledged as collateral by customers and identified for liquidation as refined gold. In this instance, management believes some customers would be willing to add additional items of value to their pledge in order to obtain the desired loan amount. However, those
customers unable or unwilling to provide additional collateral would receive lower loan amounts, possibly resulting in a lower balance of pawn loans outstanding for the Company.
Foreign Currency Exchange Risk. The Company is subject to the risk of an unexpected change in British pound exchange rates as a result of its loans to residents of the United Kingdom. As a result of fluctuations in the British pound, the Company recorded foreign currency transaction losses of $87,000 in 2007. Forward contracts in the amount of 1.0 million British pounds were established in 2007 to minimize the effect of market fluctuations. A hypothetical 10% decline in the exchange rate of the British pound at December 31, 2007 would have decreased net income by $171,000.
In addition, the notes receivable received in the sale of the Company’s foreign operations subjected the Company to the risk of unexpected changes in Swedish kronor exchange rates. The Company recorded a net gain of $63,000 as a result of fluctuations in the Swedish kronor during 2007. These notes receivable were sold in August 2007.
ITEM 8.
ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA
Index to Consolidated Financial Statements
Report of Independent Registered Public Accounting Firm
Report of Management on Internal Control over Financial Reporting
Consolidated Balance Sheets - December 31, 2007 and 2006
Consolidated Statements of Income - Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Stockholders’ Equity - Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Comprehensive Income - Years Ended December 31, 2007, 2006 and 2005
Consolidated Statements of Cash Flows - Years Ended December 31, 2007, 2006 and 2005
Notes to Consolidated Financial Statements
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
To the Board of Directors and Stockholders of
Cash America International, Inc.:
In our opinion, the accompanying consolidated balance sheets and the related consolidated statements of income, stockholders’ equity, comprehensive income and cash flows present fairly, in all material respects, the financial position of Cash America International, Inc. and its subsidiaries at December 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended December 31, 2007 in conformity with accounting principles generally accepted in the United States of America. Also in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of December 31, 2007, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). The Company’s management is responsible for these financial statements, for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Report of Management on Internal Control over Financial Reporting. Our responsibility is to express opinions on these financial statements and on the Company’s internal control over financial reporting based on our integrated audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audits to obtain reasonable assurance about whether the financial statements are free of material misstatement and whether effective internal control over financial reporting was maintained in all material respects. Our audits of the financial statements included 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.
Our audit of internal control over financial reporting included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audits also included performing such other procedures as we considered necessary in the circumstances. We believe that our audits provide a reasonable basis for our opinions.
A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements.
Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.
/s/ PricewaterhouseCoopers LLP
Fort Worth, Texas
February 20, 2008
REPORT OF MANAGEMENT ON INTERNAL CONTROL OVER FINANCIAL REPORTING
Management is responsible for establishing and maintaining adequate internal control over financial reporting and for the assessment of the effectiveness of the Company’s internal control over financial reporting. The Company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. The Company’s internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the Company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the Company are being made only in accordance with authorizations of management and directors of the Company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on the financial statements.
Management assessed the effectiveness of the Company’s internal control over financial reporting as of December 31, 2007. In making its assessment of the effectiveness of the Company’s internal control over financial reporting, management of the Company has utilized the criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO).
Based on management’s assessment, we concluded that, as of December 31, 2007, the Company’s internal control over financial reporting is effective based on those criteria.
The effectiveness of the Company’s internal control over financial reporting as of December 31, 2007 has been audited by PricewaterhouseCoopers LLP, an independent registered public accounting firm, as stated in their report which appears in this Form 10-K.
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(in thousands, except share data)
See notes to consolidated financial statements.
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF INCOME
(in thousands, except per share data)
See notes to consolidated financial statements.
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF STOCKHOLDERS’ EQUITY
(in thousands, except share data)
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(in thousands)
See notes to consolidated financial statements.
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF CASH FLOWS
(in thousands)
See notes to consolidated financial statements.
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
1. Nature of the Company
Cash America International, Inc. (the “Company”) is a provider of specialty financial services to individuals. The Company offers secured non-recourse loans, commonly referred to as pawn loans, to individuals through its pawn lending operations. The pawn loan portfolio generates finance and service charges revenue. A related activity of the pawn lending operations is the disposition of merchandise, primarily collateral from unredeemed pawn loans. The Company also offers unsecured cash advances in selected lending locations and over the internet and on behalf of independent third-party lenders in other locations and over the internet. In addition, the Company provides check cashing and related financial services through many of its lending locations and through its franchised and company-owned check cashing centers. Since the acquisition of the assets of The Check Giant, LLC (“TCG”) in September 2006, the Company has offered short-term cash advances exclusively over the internet under the name “CashNetUSA” in the United States and, beginning in July 2007, under the name “QuickQuid” in the United Kingdom.
On September 15, 2006, the Company, through its wholly-owned subsidiary Cash America Net Holdings, LLC, purchased substantially all of the assets of TCG, which offered short-term cash advances exclusively over the internet under the name “CashNetUSA.” The Company paid an initial purchase price of approximately $35.9 million in cash at closing and transaction costs of approximately $2.9 million. The operating results of CashNetUSA have been included in the Company’s consolidated financial statements from the date of acquisition. See Note 3.
As of December 31, 2007, the Company had 942 total locations and an internet-based subsidiary offering products and services to its customers. The pawn lending operations consisted of 499 pawnshops, including 485 owned units and 14 unconsolidated franchised units in 22 states. The cash advance operations consisted of 304 locations in seven states, and CashNetUSA which serves multiple markets through its internet distribution channel and had cash advances outstanding in 32 states and the United Kingdom. The check cashing operations consisted of 139 total locations, including 134 franchised and five company-owned check cashing centers in 18 states.
2. Summary of Significant Accounting Policies
Basis of Presentation • The consolidated financial statements include the accounts of the Company and its majority-owned subsidiaries. All significant intercompany accounts and transactions have been eliminated in consolidation.
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 dates of the consolidated financial statements and the reported amounts of revenue and expenses during the reporting periods. On an ongoing basis, management evaluates its estimates and judgments, including those related to revenue recognition, merchandise held for disposition, allowance for losses on cash advances, long-lived and intangible assets, income taxes, contingencies and litigation. Management bases its estimates on historical experience and on various other assumptions that are believed to be reasonable under the circumstances the results of which form the basis for making judgments about the carrying values of assets and liabilities. Actual results may differ from these estimates under different assumptions or conditions.
Foreign Currency Translations • Notes receivable and related interest receivable resulting from the sale of the Company’s foreign pawn lending operations are denominated in Swedish kronor. The balances are
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
translated into U.S. dollars at the exchange rates in effect at the balance sheet date. Interest income on the notes was translated at the monthly average exchange rates. In August 2007, the Company completed the sale of these notes. See Note 21. All realized and unrealized transaction gains and losses are included in determining net income for the reporting period.
The functional currency for the Company’s subsidiary (CashEuroNet UK, LLC) is the British pound. The assets and liabilities of this subsidiary are translated into U.S. dollars at the exchange rates in effect at each balance sheet date, and the resulting adjustments are accumulated in other comprehensive income (loss) as a separate component of stockholders’ equity. Revenue and expenses are translated at the monthly average exchange rates occurring during each year.
Cash and Cash Equivalents • The Company considers cash on hand in operating locations, deposits in banks and short-term marketable securities with original maturities of 90 days or less as cash and cash equivalents.
Revenue Recognition
Pawn Lending • Pawn loans are made on the pledge of tangible personal property. The Company accrues finance and service charges revenue only on those pawn loans that the Company deems collectible based on historical loan redemption statistics. Pawn loans written during each calendar month are aggregated and tracked for performance. The gathering of this empirical data allows the Company to analyze the characteristics of its outstanding pawn loan portfolio and estimate the probability of collection of finance and service charges. For loans not repaid, the carrying value of the forfeited collateral (“merchandise held for disposition”) is stated at the lower of cost (cash amount loaned) or market. Revenue is recognized at the time that merchandise is sold. Interim customer payments for layaway sales are recorded as customer deposits and subsequently recognized as revenue during the period in which the final payment is received.
Cash Advances • Cash advances provide customers with cash in exchange for a promissory note or other repayment agreement supported, in most cases, by that customer’s personal check or authorization to debit that customer’s account via an Automated Clearing House (“ACH”) transaction for the aggregate amount of the payment due. The customer may repay the cash advance either in cash, or, as applicable, by allowing the check to be presented for collection, or by allowing the customer’s checking account to be debited through an ACH for the amount due. The Company accrues fees and interest on cash advances on a constant yield basis ratably over the period of the cash advance, pursuant to its terms. (Although cash advance transactions may take the form of loans or deferred check deposit transactions, the transactions are referred to throughout this discussion as “cash advances” for convenience.)
The Company provides a cash advance product in some markets under a credit services organization program, in which the Company assists in arranging loans for customers from independent third-party lenders. The Company also guarantees the customer’s payment obligations in the event of default if the customer is approved for and accepts the loan. The borrower pays fees to the Company under the credit services organization program (“CSO fees”) for performing services on the borrower’s behalf, including credit services, and for agreeing to guaranty the borrower’s payment obligations to the lender. As a result of providing the guaranty, the CSO fees are deferred and amortized over the term of the loan and recorded as cash advance fees in the accompanying consolidated statements of income. The contingent loss on the guaranteed loans is accrued and recorded as a liability. See Note 4.
Check Cashing Fees, Royalties and Other • The Company records check cashing fees derived from both check cashing locations it owns and many of its lending locations in the period in which the check cashing service is provided. It records royalties derived from franchise locations on an accrual basis. Revenues
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
derived from other financial services such as money order commissions, prepaid debit card fees, etc. are recognized when earned.
Allowance for Losses on Cash Advances • In order to manage the portfolio of cash advances effectively, the Company utilizes a variety of underwriting criteria, monitors the performance of the portfolio, and maintains either an allowance or accrual for losses.
The Company maintains either an allowance or accrual for losses on cash advances (including fees and interest) at a level estimated to be adequate to absorb credit losses inherent in the outstanding combined Company and third-party lender portfolio (the portion owned by independent third-party lenders). The allowance for losses on Company-owned cash advances offsets the outstanding cash advance amounts in the consolidated balance sheets. Active third-party lender-originated cash advances are not included in the consolidated balance sheets. An accrual for contingent losses on third-party lender-owned cash advances that are guaranteed by the Company is maintained and included in “Accounts payable and accrued expenses” in the consolidated balance sheets.
The Company aggregates and tracks cash advances written during each calendar month to develop a performance history. The Company stratifies the outstanding combined portfolio by age, delinquency, and stage of collection when assessing the adequacy of the allowance for losses. It uses historical collection performance adjusted for recent portfolio performance trends to develop the expected loss rates used to establish either the allowance or accrual. Increases in either the allowance or accrual are created by recording a cash advance loss provision in the consolidated statements of income. The Company charges off all cash advances once they have been in default for 60 days or sooner if deemed uncollectible. Recoveries on losses previously charged to the allowance are credited to the allowance when collected.
The Company’s online distribution channel periodically sells selected cash advances that have been previously written off. Proceeds from these sales are recorded as recoveries on losses previously charged to the allowance for losses.
The allowance deducted from the carrying value of cash advances was $25.7 million and $19.5 million at December 31, 2007 and 2006, respectively. The accrual for losses on third-party lender-owned cash advances was $1.8 million and $1.2 million at December 31, 2007 and 2006, respectively. See Note 4.
Merchandise Held for Disposition and Cost of Disposed Merchandise • Merchandise held for disposition includes merchandise acquired from unredeemed loans, merchandise purchased directly from the public and merchandise purchased from vendors. Merchandise held for disposition is stated at the lower of cost (specific identification) or market. The cost of merchandise, computed on the specific identification basis, is removed from merchandise held for disposition and recorded as a cost of revenue at the time of sale. Cash received upon the sale of forfeited merchandise is classified as a recovery of principal on unredeemed loans under investing activities and any related profit or loss on disposed merchandise is included in operating activities in the period when the merchandise is sold. The Company provides an allowance for valuation and shrinkage based on management’s evaluation of the characteristics of the merchandise. The allowance deducted from the carrying value of merchandise held for disposition amounted to $2.0 million and $1.9 million at December 31, 2007 and 2006, respectively.
Property and Equipment • Property and equipment is recorded at cost. The cost of property retired or sold and the related accumulated depreciation are removed from the accounts, and any resulting gain or loss is recognized in the consolidated statements of income. Depreciation expense is generally provided on a straight-line basis, using the following estimated useful lives:
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 based on its estimated useful life which currently ranges from 3 to 5 years.
Goodwill and Other Intangible Assets • SFAS No. 142, “Goodwill and Other Intangible Assets,” became effective January 1, 2002, and, as a result, the Company discontinued the amortization of goodwill as of that date. In lieu of amortization, the Company is required to perform an impairment review of goodwill at least annually. The Company completed its reviews during 2007, 2006 and 2005. Based on the results of these tests, management determined that there was no impairment as the respective fair values of each of the Company’s reporting units exceeded their respective carrying amounts. See Note 6.
The Company amortizes intangible assets with an estimable life on the basis of their expected periods of benefit, generally 3 to 10 years. The costs of start-up activities and organization costs are charged to expense as incurred.
Impairment of Long-Lived Assets • An evaluation of the recoverability of property and equipment and intangible assets is performed whenever the facts and circumstances indicate that the carrying value may be impaired. An impairment loss is recognized if the future undiscounted cash flows associated with the asset are less than the asset’s corresponding carrying value. The amount of the impairment loss, if any, is the excess of the asset’s carrying value over its estimated fair value.
Income Taxes • The provision for income taxes is based on income before income taxes as reported for financial statement purposes. Deferred income taxes are provided for in accordance with the assets and liability method of accounting for income taxes in order to recognize the tax effects of temporary differences between financial statement and income tax accounting.
Effective January 1, 2007, the Company began accounting for uncertainty in income taxes recognized in the consolidated financial statements in accordance with Financial Accounting Standards Board (“FASB”) Interpretation No. 48, “Accounting for Uncertainty in Income Taxes” (“FIN 48”). FIN 48 requires that a more-likely-than-not threshold be met before the benefit of a tax position may be recognized in the consolidated financial statements and prescribes how such benefit should be measured. It also provides guidance on derecognition, classification, accrual of interest and penalties, accounting in interim periods, disclosure and transition. It requires that the new standard be applied to the balances of assets and
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS(Continued)
liabilities as of the beginning of the period of adoption and that a corresponding adjustment be made to the opening balance of retained earnings. See Note 9.
It is the Company’s policy to classify interest and penalties on income tax liabilities as interest expense and administrative expense, respectively. The Company did not change its policy on classification of such amounts upon adoption of FIN 48.
Hedging and Derivatives Activity • As a policy, the Company does not engage in speculative or leveraged transactions, nor does it hold or issue financial instruments for trading purposes. The Company does periodically use derivative financial instruments, such as interest rate cap agreements, for the purpose of managing interest rate exposures that exist from ongoing business operations. In December 2007, the Company entered into an interest rate cap agreement that has been determined to be a perfectly effective cash flow hedge pursuant to SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities” (“SFAS 133”), and its corresponding amendments under SFAS No. 138 “Accounting for Certain Derivative Instruments and Certain Hedging Activities - an Amendment of FASB Statement No. 133” (“SFAS 138”) and SFAS No. 149 “Amendment of FASB Statement No. 133 on Derivative and Hedging Activities” (“SFAS 149”). The fair value of the interest rate cap agreement is recognized in the accompanying consolidated balance sheets and changes in its fair value are recognized in accumulated other comprehensive income/loss. The Company also entered into foreign currency forward contracts in 2007 to minimize the effect of market fluctuations. See Note 13. The Company may periodically enter into forward sale contracts with a major gold bullion bank to sell refined gold that is produced in the normal course of business from the Company’s liquidation of forfeited gold merchandise. These contracts are not accounted for as derivatives because they meet the criteria for the normal purchases and normal sales scope exception in SFAS 133.
Operations and Administration Expenses • Operations expenses include expenses incurred for personnel, occupancy and marketing that are directly related to the pawn lending, cash advance and check cashing operations. These costs are incurred within the lending locations and the Company’s call centers for customer service and collections. In addition, similar costs related to non-home office management supervision, oversight of locations and similar costs incurred by the Retail Services Division for the oversight of the Company’s physical lending locations are included in operations expenses. Administration expenses include expenses incurred for personnel and general office activities such as accounting and legal directly related to corporate administrative functions.
Marketing Expenses • Costs of advertising and direct customer procurement are expensed at the time of first occurrence and included in operating expenses. Advertising expense for continuing operations was $35.0 million, $18.5 million and $12.9 million for the years ended December 31, 2007, 2006, and 2005, respectively.
Stock-Based Compensation • Beginning January 1, 2006, the Company has accounted for its stock-based employee compensation plans in accordance with Statement of Financial Accounting Standards No. 123R, “Share-Based Payment” (“SFAS 123R”), using the modified prospective method. Under the modified prospective method, the Company is required to recognize compensation expense over the remaining vesting periods for the portion of stock-based awards for which the requisite service had not been rendered as of January 1, 2006. Prior to January 1, 2006, stock-based compensation was accounted for in accordance with Accounting Principles Board Opinion No. 25, "Accounting for Stock Issued to Employees,” often referred to as the “intrinsic value” based method, and no compensation expense was recognized for the stock options. The consolidated financial statements for the year ended December 31, 2005, which was prior to the adoption of SFAS 123R, have not been restated and do not reflect the recognition of the compensation cost related to the stock options. The Company has elected to use the transition method of FASB Staff
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Position FAS 123(R)-3, “Transition Election Related to Accounting for Tax Effects of Share-Based Awards” (“FSP FAS 123 (R)-3”), the “short-cut method” to determine its pool of windfall tax benefits as of January 1, 2006. The following table illustrates the effect on net income and earnings per share had the Company applied SFAS No. 123R for the year ended December 31, 2005 (in thousands, except per share amounts).
(a)
Determined under fair value based method for all awards, net of related tax effects. “All awards” refers to awards granted, modified, or settled in fiscal periods beginning after December 15, 1994, that is, options for which the fair value was required to be measured under SFAS 123.
Net Income Per Share • Basic net income per share is computed by dividing net income by the weighted average number of common shares outstanding during the year. Diluted net income per share is calculated by giving effect to the potential dilution that could occur if securities or other contracts to issue common shares were exercised and converted into common shares during the year. Units issued under the Company’s restricted stock awards are included in diluted shares upon the granting of the awards even though the vesting of shares will occur over time.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table sets forth the reconciliation of numerators and denominators of basic and diluted earnings per share computations for the years ended December 31, 2007, 2006 and 2005 (in thousands, except per share amounts):
There were no anti-dilutive shares for the years ended December 31, 2007, 2006 and 2005.
Recent Accounting Pronouncements • In September 2006, FASB issued Statement of Financial Accounting Standards No. 157, “Fair Value Measurements” (“SFAS 157”). SFAS 157 defines fair value to be the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date and emphasizes that fair value is a market-based measurement, not an entity-specific measurement. It establishes a fair value hierarchy and expands disclosures about fair value measurements in both interim and annual periods. SFAS 157 will be effective for fiscal years beginning after November 15, 2007 and interim periods within those fiscal years. In December 2007, FASB issued proposed FASB Staff Position (“FSP”) FAS 157-b, which delays the effective date of SFAS 157 for nonfinancial assets and nonfinancial liabilities that are recognized or disclosed in the financial statements on a nonrecurring basis. The proposed FSP partially defers the effective date of SFAS 157 to fiscal years beginning after November 15, 2008, and interim periods within those fiscal years for items within the scope of this FSP. The Company does not expect SFAS 157 to have a material effect on the Company’s financial position or results of operations.
In February 2007, FASB issued Statement of Financial Accounting Standards No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities” (“SFAS 159”). SFAS 159 permits entities to choose, at specified election dates, to measure eligible items at fair value (the “fair value option”) and requires an entity to report unrealized gains and losses on items for which the fair value option has been elected in earnings at each subsequent reporting date. Upfront costs and fees related to items for which the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
fair value option is elected shall be recognized in earnings as incurred and not deferred. SFAS 159 will be effective for fiscal years beginning after November 15, 2007. The Company does not expect SFAS 159 to have a material effect on the Company’s financial position or results of operations.
In December 2007, FASB issued Statement of Financial Accounting Standards No. 141, “Business Combinations - Revised” (“SFAS 141(R)”). SFAS 141(R) establishes principles and requirements for how an acquirer in a business combination: recognizes and measures in its financial statements the identifiable assets acquired, the liabilities assumed, and any non-controlling interest in the acquiree; recognizes and measures the goodwill acquired in the business combination or a gain from a bargain purchase price; and, determines what information to disclose to enable users of the consolidated financial statements to evaluate the nature and financial effects of the business combination. SFAS 141(R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008. In the past, the Company has completed significant acquisitions. The application of SFAS 141(R) will cause management to evaluate future transaction returns under different conditions, particularly the near term and long term economic impact of expensing transaction costs up front.
Reclassifications • Certain amounts in the consolidated financial statements for 2006 and 2005 have been reclassified to conform to the presentation format adopted in 2007. These reclassifications have no effect on net income previously reported.
3. Acquisitions
Pursuant to its business strategy of expanding its reach into new markets with new customers and new financial services, on September 15, 2006, the Company, through its wholly-owned subsidiary Cash America Net Holdings, LLC, purchased substantially all of the assets of The Check Giant LLC (“TCG”). TCG offered short-term cash advances exclusively over the internet under the name “CashNetUSA.” The Company paid an initial purchase price of approximately $35.9 million in cash and transaction costs of approximately $2.9 million, and has continued to use the CashNetUSA trade name in connection with its online operations.
The Company also agreed to pay up to five supplemental earn-out payments during the two-year period after the closing. The amount of supplemental payments are based on a multiple of earnings attributable to CashNetUSA’s business for the twelve months preceding the date of determining each scheduled supplemental payment. Each supplemental payment is reduced by amounts previously paid. The supplemental payments are to be paid in cash within 45 days of the payment measurement date. The Company may, at its option, pay up to 25% of each supplemental payment in shares of its common stock based on an average share price as of the measurement date thereby reducing the amount of the cash payment. Management expects all of these supplemental payments will be accounted for as goodwill.
The first supplemental payment of approximately $33.8 million, which was paid in February 2007 in cash, was based on the trailing twelve months earnings of CashNetUSA through December 31, 2006 and reflects adjustments for amounts previously paid. A second payment of $43.4 million was determined as of September 30, 2007 and was paid in cash in November 2007. Total purchase price payments through the September 2007 measurement date were $113.1 million. Subsequent measurement dates of March 31 and September 30, 2008 will be calculated at 5.0 times trailing twelve month earnings. As of December 31, 2007, the Company has accrued for the payment of approximately $22.0 million as an addition to goodwill and accounts payable based on the defined multiple of 5.0 times trailing twelve months earnings through December 31, 2007. Pursuant to the terms of the purchase agreement with CashNetUSA, payments
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determined at the March 31 and September 30, 2007 measurement dates were calculated at 5.5 times trailing twelve month earnings.
As of December 31, 2006, the purchase price of CashNetUSA, including the accrued contingent payment as of December 31, 2006, was allocated as follows (in thousands):
During the year ended December 31, 2007, the Company also acquired the assets of five pawnshops and made payment on a pawnshop over which it acquired management control in December 2006. The aggregate cash payments for these acquisitions were $3.8 million.
During 2006, the Company acquired certain assets of 19 pawnshop locations in purchase transactions for a total purchase price of $27.2 million. The excess of cost of acquired assets over the net amounts assigned to assets acquired and liabilities assumed was recognized as goodwill.
In 2005 the Company acquired the assets of nine pawnshops and a cash advance location in purchase transactions for an aggregate purchase price of $19.0 million. Three of the nine pawnshops acquired in 2005 were franchised locations operated by an entity controlled by the Chairman of the Board of Directors of the Company. See Note 19.
All of the amounts of goodwill recorded in the acquisitions are expected to be deductible for tax purposes.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The following table provides information concerning the other acquisitions made by the Company’s continuing operations during 2007, 2006 and 2005 (excluding CashNetUSA) ($ in thousands):
4. Cash Advances, Allowance for Losses and Accruals for Losses on Third-Party Lender-Owned Cash Advances
The Company offers cash advance products through its cash advance locations, in most of its pawnshops and over the internet. The cash advance products are generally offered as single payment cash advance loans. These cash advance loans typically have a term of 7 to 45 days and are generally payable on the customer’s next payday. The Company originates cash advances in some of its locations and online. It arranges for customers to obtain cash advances from independent third-party lenders in other locations and online. In a cash advance transaction, a customer executes a promissory note or other repayment agreement typically supported by that customer’s personal check or authorization to debit the customer’s checking account via an ACH transaction. Customers may repay the amount due either with cash, by allowing their check to be presented for collection, or by allowing their checking account to be debited via an ACH transaction.
The Company offers services in connection with single payment cash advances originated by independent third-party lenders, whereby the Company acts as a credit services organization on behalf of consumers in accordance with applicable state laws (the “CSO program”). The CSO program includes arranging loans with independent third-party lenders, assisting in the preparation of loan applications and loan documents, and accepting loan payments. To assist the customer in obtaining a loan through the CSO program, the Company also, as part of the credit services it provides to the customer, guarantees, on behalf of the customer, the customer’s payment obligations to the third-party lender under the loan. A customer who obtains a loan through the CSO program pays the Company a fee for the credit services, including the guaranty, and enters into a contract with the Company governing the credit services arrangement. Losses on cash advances acquired by the Company as a result of its guaranty obligations are the responsibility of the Company. As of December 31, 2007, the CSO program was offered in Texas and Florida. The Company discontinued the CSO program in Michigan in February 2007, and has since offered only cash advances underwritten by the Company to customers in that state. In January of 2008, the Company began offering a CSO program in the state of Maryland through its online platform.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
If the Company collects a customer’s delinquent payment in an amount that is less than the amount the Company paid to the third-party lender pursuant to the guaranty, the Company must absorb the shortfall. If the amount collected exceeds the amount paid under the guaranty, the Company is entitled to the excess and recognizes the excess amount in income. Since the Company may not be successful in collection of these delinquent amounts, the Company’s cash advance loss provision includes amounts estimated to be adequate to absorb credit losses from cash advances in the aggregate cash advance portfolio, including those expected to be acquired by the Company as a result of its guaranty obligations. The estimated amounts of losses on portfolios owned by the third-party lenders are included in “Accounts payable and accrued expenses” in the consolidated balance sheets.
Prior to the program’s discontinuance, for cash advances originated by commercial banks, the banks sold participation interests in the bank-originated cash advances to third parties, and the Company purchased sub-participation interests in certain of those participations. The Company also received an administrative fee for its services. In order to benefit from the use of the Company’s collection resources and proficiency, the banks assigned cash advances unpaid after their payment due date to the Company at a discount from the amount owed by the borrower.
The Company discontinued offering single payment third-party bank-originated cash advances to its Texas, Florida and North Carolina customers in January 2006, discontinued offering single and multi-payment third-party bank-originated cash advances to its Georgia customers in April 2006, and discontinued offering multi-payment third-party bank-originated cash advances to its California customers in July 2006.
Cash advances outstanding at December 31, 2007 and 2006, were as follows (in thousands):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Changes in the allowance for losses for the Company-owned portfolio and the accrued loss for third-party lender-owned portfolio for the years ended December 31, 2007, 2006 and 2005 were as follows (in thousands):
Cash advances assigned to the Company for collection were $93.6 million, $33.8 million and $67.6 million during 2007, 2006 and 2005, respectively. The Company’s participation interest in unrelated third-party lender originated cash advances was $-0- at December 31, 2007 and 2006. As of December 31, 2005, the Company held participation interests of $2.6 million related to programs funded through banks.
5. Property and Equipment
Major classifications of property and equipment at December 31, 2007 and 2006 were as follows (in thousands):
The Company recognized depreciation expense of $27.7 million, $23.7 million and $20.1 million during 2007, 2006 and 2005, respectively.
6. Goodwill and Other Intangible Assets
Goodwill and other intangible assets having an indefinite useful life are tested for impairment annually at June 30, or more frequently if events or changes in circumstances indicate that the assets might be impaired, using a two-step impairment assessment. The first step of the goodwill impairment test, used to identify potential impairment, compares the fair value of a reporting unit with its carrying amount, including goodwill. If the fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is considered not impaired, and the second step of the impairment test is not necessary. If the carrying amount of a reporting unit exceeds its fair value, the second step of the goodwill impairment test is performed to measure the amount of impairment loss, if any. The useful lives of other intangible assets must be reassessed and the remaining amortization periods adjusted accordingly. Based on the results of the
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
initial and the subsequent annual impairment tests, management determined that there have been no impairments.
Goodwill • Changes in the carrying value of goodwill for the years ended December 31, 2007 and 2006 were as follows (in thousands):
Acquired Intangible Assets • Acquired intangible assets that are subject to amortization as of December 31, 2007 and 2006, were as follows (in thousands):
Non-competition agreements are amortized over the applicable terms of the contracts. Customer and lead provider relationships are generally amortized over five to six years based on the pattern of economic benefits provided. At December 31, 2007 and 2006, tradenames of $5.4 million and $5.3 million, respectively, and licenses of $7.7 million obtained in conjunction with acquisitions are not subject to amortization.
Amortization • Amortization expense for the acquired intangible assets is as follows (in thousands):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
7. Accounts Payable and Accrued Expenses
Accounts payable and accrued expenses at December 31, 2007 and 2006, were as follows (in thousands):
8. Long-term Debt
The Company’s long-term debt instruments and balances outstanding at December 31, 2007 and 2006, were as follows (in thousands):
In March 2007, the Company amended its line of credit to extend the final maturity by two years, to March 2012. The amended credit agreement also contained a provision for the ratable $50.0 million increase in the committed amounts, up to $300.0 million, upon the Company’s request and approval by the lenders. See Note 23.
Interest on the amended line of credit is charged, at the Company’s option, at either LIBOR plus a margin or at the agent’s base rate. The margin on the line of credit varies from 0.875% to 1.625% (1.125% at December 31, 2007), depending on the Company’s cash flow leverage ratios as defined in the amended agreement. The Company also pays a fee on the unused portion ranging from 0.25% to 0.30% (0.25% at December 31, 2007) based on the Company’s cash flow leverage ratios. The weighted average interest rate (including margin) on the line of credit at December 31, 2007 was 6.2%. On December 27, 2007, the Company entered into an interest rate cap agreement with a notional amount of $10.0 million of the Company’s outstanding floating rate line of credit for a term of 24 months at a fixed rate of 4.75%. See Note 13.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
At December 31, 2007 and 2006, borrowings under the Company’s bank line of credit consisted of three pricing tranches with conclusion dates ranging from 1 to 32 days, respectively. However, pursuant to the bank line of credit agreement which expires in 2012, the Company routinely refinances these borrowings within its long-term facility. Therefore, these borrowings are reported as part of the line of credit and as long-term debt.
On December 19, 2006, the Company issued $60.0 million of senior unsecured long-term notes. The notes were comprised of $35.0 million 6.09% senior notes due 2016 payable in five annual payments of $7.0 million beginning December 19, 2012; and $25.0 million 6.21% senior notes due 2021 payable in eleven annual payments of $2.3 million beginning December 19, 2011. Net proceeds received from the issuance of the notes were used to reduce the amount outstanding under the line of credit and for general corporate purposes.
In December 2005, the Company issued $40.0 million of 6.12% senior unsecured notes, due in December 2015. The notes are payable in six equal annual payments of approximately $6.7 million beginning December 2010. Net proceeds received from the issuance of the notes were used to reduce the amount outstanding under the Company’s bank line of credit.
The credit agreements governing the line of credit and the senior unsecured notes require the Company to maintain certain financial ratios. The Company is in compliance with all covenants or other requirements set forth in its credit agreements as amended.
As of December 31, 2007, annual maturities of the outstanding long-term debt, including the Company’s line of credit, for each of the five years after December 31, 2007 are as follows (in thousands):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
9. Income Taxes
The components of the Company’s deferred tax assets and liabilities as of December 31, 2007 and 2006, were as follows (in thousands):
The components of the provision for income taxes and the income to which it relates for the years ended December 31, 2007, 2006 and 2005 are shown below (in thousands):
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The effective tax rate on income from continuing operations differs from the federal statutory rate of 35% for the following reasons ($ in thousands):
As of December 31, 2006, the Company had net capital loss carryovers of $54,000 that were used to net capital gains in 2007. A deferred tax valuation allowance was provided before 2005 to reduce deferred tax benefits of capital losses that the Company did not expect to realize. During 2006 and 2005, the Company reduced the valuation allowance by $65,000 and $123,000, respectively, as a result of capital gains arising during those years or expected to arise in the carryforward years. The decrease in the valuation allowance during 2005 includes $37,000 attributable to gains recognized on disposal of discontinued foreign operations. The tax benefit resulting from that portion of the decrease reduced the tax provision on the gain from disposal of discontinued foreign operations.
The Company adopted the provisions of FIN 48 on January 1, 2007. The 2007 activity related to unrecognized tax benefits is summarized below (in thousands):
No interest or penalties have been accrued in the consolidated financial statements related to unrecognized tax benefits. The Company does not expect a significant increase in unrecognized tax benefits during the next 12 months.
As of December 31, 2007, the Company’s 2004 through 2007 tax years were open to examination by the Internal Revenue Service and major state taxing jurisdictions.
10. Commitments and Contingencies
Leases • The Company leases certain of its facilities under operating leases with terms ranging from 3 to 15 years and certain rights to extend for additional periods. Future minimum rentals due under non-cancelable leases for continuing operations are as follows for each of the years ending December 31 (in thousands):
\
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
Rent expense for continuing operations was $37.1 million, $34.0 million and $32.6 million for 2007, 2006 and 2005, respectively.
Earn-Out Payments • The Company has agreed to pay up to five supplemental earn-out payments during the two-year period after the closing of the acquisition of CashNetUSA. See Note 3 for further discussion.
Guarantees • The Company guarantees borrowers’ payment obligations to unrelated third-party lenders. At December 31, 2007, the amount of cash advances guaranteed by the Company was $34.6 million representing amounts due under cash advances originated by third-party lenders under the CSO program. The fair value of the liability related to these guarantees of $1.8 million was included in “Accounts payable and accrued expenses” in the accompanying financial statements.
The Company guarantees obligations under certain operating leases for the premises related to 3 stores sold in June 2002 from a discontinued operating segment. In the event the buyer is unable to perform under the operating leases, the Company’s maximum aggregate potential obligation under these guarantees was approximately $402,000 at December 31, 2007. This amount is reduced dollar-for-dollar by future amounts paid on these operating leases by the buyer. If the buyer fails to perform and the Company must make payments under these leases, the Company will seek to mitigate its losses by subleasing the properties or buying out of the leases.
Litigation • On August 6, 2004, James E. Strong filed a purported class action lawsuit in the State Court of Cobb County, Georgia against Georgia Cash America, Inc., Cash America International, Inc. (together with Georgia Cash America, Inc., “Cash America”), Daniel R. Feehan, and several unnamed officers, directors, owners and “stakeholders” of Cash America. The lawsuit alleges many different causes of action, among the most significant of which is that Cash America made illegal payday loans in Georgia in violation of Georgia’s usury law, the Georgia Industrial Loan Act and Georgia’s Racketeer Influenced and Corrupt Organizations Act. Community State Bank (“CSB”) for some time made loans to Georgia residents through Cash America’s Georgia operating locations. The complaint in this lawsuit claims that Cash America was the true lender with respect to the loans made to Georgia borrowers and that CSB’s involvement in the process is “a mere subterfuge.” Based on this claim, the suit alleges that Cash America is the “de facto” lender and is illegally operating in Georgia. The complaint seeks unspecified compensatory damages, attorney’s fees, punitive damages and the trebling of any compensatory damages. A previous decision by the trial judge to strike Cash America’s affirmative defenses based on arbitration (without ruling on Cash America’s previously filed motion to compel arbitration) was upheld by the Georgia Court of Appeals, and on September 24, 2007, the Georgia Supreme Court declined to review the decision. The case has been returned to the State Court of Cobb County, Georgia, where Cash America filed a motion requesting that the trial court rule on Cash America’s pending motion to compel arbitration and stay the State Court proceedings. The Court denied the motion to stay and ruled that the motion to compel arbitration was rendered moot after the discovery sanction was handed down by the Court. Cash America is currently in the process of appealing these latest orders from the Court. If Cash America’s further attempts to enforce the arbitration agreement are unsuccessful, discovery relating to the propriety of continuing this suit as a class action would proceed. Cash America believes that the plaintiffs’ claims in this suit are without merit and is vigorously defending this lawsuit.
Cash America and CSB also commenced a federal lawsuit in the U.S. District Court for the Northern District of Georgia seeking to compel Plaintiffs to arbitrate their claims against Cash America and CSB. The U.S. District Court dismissed the federal action for lack of subject matter jurisdiction, and Cash America and CSB appealed the dismissal of their complaint to the U.S Court of Appeals for the 11th Circuit. The 11th Circuit issued a panel decision on April 27, 2007 reversing the district court’s dismissal of
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
the action and remanding the action to the district court for a determination of the issue of the enforceability of the parties’ arbitration agreements. Plaintiff requested the 11th Circuit to review this decision en banc and this request has been granted. The en banc rehearing took place on February 26, 2008. The Strong litigation is still at an early stage, and neither the likelihood of an unfavorable outcome nor the ultimate liability, if any, with respect to this litigation can be determined at this time.
On October 23, 2007, a complaint, styled Ryan Bonner, individually and on behalf of all others similarly situated, v. Cash America International, Inc., Cash America Net of Nevada, LLC, Cash America Net of Pennsylvania, LLC and Cash America of PA, LLC, d/b/a CashNetUSA.com (collectively, “CashNetUSA”), was filed in the United States District Court for the Eastern District of Pennsylvania, alleging, on behalf of a purported class, that the defendants located outside Pennsylvania had engaged in unfair or deceptive acts or practices by making loans to Pennsylvania consumers in violation of Pennsylvania law, including its usury, fair credit extension, and unfair trade practices and consumer protection laws. The complaint also alleges that the arbitration, class action waiver and dispute resolution provisions contained in the loan documents involved in these loans are unenforceable. The complaint seeks a declaratory judgment that the lending business conducted by CashNetUSA is illegal under Pennsylvania law and a declaration that loan agreements with Pennsylvania residents are void and unenforceable, an injunction barring continuing alleged violations (including enjoining collection on loans currently outstanding from Pennsylvania residents) and an award of monetary damages (including treble damages), penalties, costs and attorneys’ fees. CashNetUSA believes that the plaintiff’s claims in this suit are without merit and plans to vigorously defend against all of the asserted allegations. CashNetUSA has filed a Motion to Compel Arbitration seeking to compel individual arbitration of the plaintiff’s claims and is presently awaiting plaintiff’s response to this motion.
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.
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
11. Stockholders’ Equity
During 2007 and 2006, the Company received net proceeds totaling $761,000 and $7.2 million from the exercise of stock options for 69,854 and 662,828 shares, respectively.
The Company received 9,794 shares, 7,379 shares and 2,588 during 2007, 2006 and 2005, respectively, of its common stock valued at $408,000 and $188,000 and $67,000, respectively, as partial payment of taxes for shares issued under stock-based compensation plans.
On April 20, 2005, the Company’s Board of Directors authorized management to purchase up to a total of 1,500,000 shares of its common stock from time to time in open market transactions and terminated the existing open market purchase authorization established on July 25, 2002. On October 24, 2007, the Board established a new authorization for the repurchase of up to a total of 1,500,000 shares of its common stock and ended the 2005 authorization. The following table summarizes the aggregate shares purchased under these plans during each of the three years ended December 31:
Periodically, shares are purchased in the open market on behalf of participants relating to the Non-Qualified Savings Plan. Certain amounts are subsequently distributed or transferred to participants’ 401(k) account annually based on results of the plan’s non-discrimination testing results. Activities during each of the three years ended December 31 are summarized as follows:
The Board of Directors adopted an officer stock loan program (the “Program”) in 1994 and modified it in 1996, 2001 and 2002. The 2002 amendment, which was adopted in response to the requirement of the Sarbanes-Oxley law, provided that no further advances would be made to existing participants and closed the plan to new participants. Prior to the 2002 amendment, Program participants used loan proceeds to acquire and hold the Company’s and affiliates’ common stock by means of stock option exercises or otherwise. Common stock held as a result of the loan was pledged to the Company in support of the obligation. Interest accrued at 6% per annum. The entire unpaid balance of principal and interest on these loans was due and payable on July 24, 2007. As of December 31, 2007, all officer stock loans had been repaid.
In November 2005, the Company’s Chief Executive Officer adopted a pre-arranged, systematic trading plan to sell company shares pursuant to guidelines specified by Rule 10b5-1 under the Securities and Exchange Act of 1934 and with the Company’s policies with respect to insider sales (the “Plan”). From
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NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
November 2005 through June 2006, the Company’s Chief Executive Officer exercised stock options and sold Company shares under the Plan. The Chief Executive Officer used proceeds from the sale of shares under the Plan to fully repay his pre-2003 secured loan under the Company’s now discontinued officer stock loan program and accrued interest thereon totaling $2.1 million. In 2006, the Company’s Chief Financial Officer and another executive officer also paid a total of $985,000 (including accrued interest) to fully repay similar officer stock loans.
12. Employee Benefit Plans
The Cash America International, Inc. 401(k) Savings Plan is open to substantially all employees. Beginning January 1, 2006, new employees are automatically enrolled in this plan unless they elect not to participate. The Cash America International, Inc. Nonqualified Savings Plan is available to certain members of management. Participants may contribute up to 50% of their earnings to these plans subject to regulatory restrictions. The Company makes matching cash contributions of 50% of each participant’s contributions, based on participant contributions of up to 5% of compensation. Company contributions vest at the rate of 20% each year after one year of service; thus a participant is 100% vested after five years of service. The Company’s total contributions to the 401(k) Savings Plan and the Nonqualified Savings Plan were $2.3 million, $1.6 million and $1.1 million in 2007, 2006 and 2005, respectively.
In addition to the plans mentioned above, the Company established a Supplemental Executive Retirement Plan (“SERP”) for its officers in 2003. Under this defined contribution plan, the Company makes an annual discretionary cash contribution to the SERP based on the objectives of the plan as approved by the Management Development and Compensation Committee of the Board of Directors. The Company recorded compensation expense of $730,000, $561,000 and $510,000 for contributions to the SERP during 2007, 2006 and 2005, respectively.
Amounts included in the consolidated balance sheets relating to the Nonqualified Savings Plan and the SERP were as follows (in thousands):
13. Derivative Instruments and Hedging Activities
In 2007, the Company entered into foreign currency contracts totaling 1.0 million British pounds (approximately $2.0 million at maturity), to minimize the effect of market fluctuations. Under the contracts, the Company will receive fixed total payments of $2.0 million and will pay the counter parties a total of 1.0 million British pounds upon maturity (January 28, 2008) unless the contracts are effectively extended through the establishment of a new contract maturing in the future. Any gain and loss related to this forward contract will be netted in the foreign currency transaction gain (loss) in the consolidated statements of income.
On December 27, 2007, the Company entered into an interest rate cap agreement with a notional amount of $10.0 million of the Company’s outstanding floating rate line of credit for a term of 24 months at a fixed rate of 4.75%. This interest rate cap agreement has been determined to be a perfectly effective cash flow hedge. For derivatives designated as cash flow hedges, the effective portions of changes in fair value of the derivative are reported in other comprehensive income and are subsequently reclassified into earnings
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
when the hedged item affects earnings. The change in the fair value of the ineffective portion of the hedge, if any, will be recorded as income or expense. The fair value of the interest rate cap agreement is included in “Other receivables and prepaid expenses” of the accompanying consolidated balance sheet.
14. Stock Purchase Rights
In August 1997, the Board of Directors declared a dividend distribution of one Common Stock Purchase Right (the “Rights”) for each outstanding share of its common stock. The Rights were to become exercisable in the event a person or group acquired 15% or more of the Company’s common stock or announced a tender offer, the consummation of which would result in ownership by a person or group of 15% or more of the common stock. If any person were to become a 15% or more shareholder of the Company, each Right (subject to certain limits) would have entitled its holder (other than such person or members of such group) to purchase, for $37.00, the number of shares of the Company’s common stock determined by dividing $74.00 by the then current market price of the common stock. The Rights expired on August 5, 2007.
15. Stock-Based Compensation
Under the equity compensation plans (the “Plans”) it sponsors, the Company is authorized to issue 9,150,000 shares of Common Stock pursuant to “Awards” granted as incentive stock options (intended to qualify under Section 422 of the Internal Revenue Code of 1986, as amended), nonqualified stock options and restricted stock units. At December 31, 2007, 1,197,904 shares were reserved for future grants under these equity compensation plans. Historically, the Company has purchased its shares on the open market from time to time and reissued those shares upon stock option exercises and stock unit conversions under its stock-based compensation plans. During 2007, 667,600 shares were purchased on the open market with an average purchase price of $35.29 per share.
Stock Options • While no stock options have been granted since April 2003, stock options currently outstanding under the Plans had original contractual terms of up to 10 years with an exercise price equal to or greater than the fair market value of the stock at grant date. On their respective grant dates, these stock options had vesting periods ranging from 1 to 7 years. However, the terms of options with the 7-year vesting periods and certain of the 4-year and 5-year vesting periods included provisions that accelerated vesting if specified share price appreciation criteria were met. During 2006, all of the previously unvested outstanding stock options, representing 22,500 shares, were accelerated. The Company recognized total compensation expense of $378,000 ($246,000 net of related income tax benefit) for 2006, including a cost of $199,000 ($130,000 net of related income tax benefit) for the effect of the accelerated vesting. At December 31, 2007, there was no remaining unrecognized stock option expense.
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
A summary of the Company’s stock option activity for each of the three years ended December 31 is as follows (shares in thousands):
Stock options outstanding and exercisable as of December 31, 2007, are summarized below (shares in thousands):
The outstanding stock options (all exercisable) at December 31, 2007 had an aggregate intrinsic value of $15.2 million and the stock options exercised during 2007 had an aggregate intrinsic value of $1.8 million. Income tax benefits realized from the exercise of stock options for the year ended December 31, 2007 and 2006 were $600,000 and $5.4 million, respectively. The portion of tax benefits recorded as increases to additional paid-in capital was $600,000 for the year ended December 31, 2007, which represented the tax benefits realized upon exercise of stock options in excess of the amounts recognized in the consolidated financial statements for 2007. No compensation expense related to the stock options was recorded for 2005, therefore, all of the tax benefits recorded upon exercise of stock options were recorded as increases to additional paid-in capital.
Restricted Stock Units • The Company has granted restricted stock units (“RSUs, or singularly, RSU”) to Company officers and to the non-management members of the Board of Directors annually since 2003. RSUs granted in December 2003 and January 2004 were granted under the 1994 Long-Term Incentive Plan; subsequent RSUs have been granted under the 2004 Long-Term Incentive Plan. Each vested RSU entitles the holder to receive a share of the common stock of the Company. For Company officers, the vested RSUs are to be issued upon vesting or, for certain awards, upon termination of employment with the Company. For directors, vested RSUs will be issued upon the director’s retirement from the Board. At December 31, 2007, the outstanding RSUs granted to Company officers had vesting periods ranging from 4 to 12 years, director RSUs had vesting periods ranging from 1 to 4 years. The amount attributable to RSU grants is amortized to expense over the vesting periods.
Compensation expense totaling $3.1 million ($2.0 million net of related taxes), $2.2 million ($1.5 million net of related taxes) and $1.7 million ($1.1 million net of related taxes) was recognized for 2007,
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
2006 and 2005, respectively, for all of the above restricted stock units granted. Total unrecognized compensation cost related to restricted units at December 31, 2007 was $6.5 million which will be recognized over a weighted average period of approximately 4.0 years.
The following table summarizes the restricted stock unit activity during 2007, 2006 and 2005:
The outstanding RSUs had an aggregate intrinsic value of $19.5 million and the outstanding vested RSUs had an aggregate intrinsic value of $6.2 million at December 31, 2007. Income tax benefits realized from the issuance of common stock for the vested RSUs for the year ended December 31, 2007, 2006 and 2005 were $512,000, $259,000 and $111,000, respectively. The portions of these benefits recorded as increases to additional paid-in capital were $211,000, $2,000 and $15,000 for the year ended December 31, 2007, 2006 and 2005, respectively. The income tax benefits recorded as increases to additional paid-in capital represent the tax benefits realized upon issuance of common stock in excess of the amounts previously recognized in the consolidated financial statements.
16. Supplemental Disclosures of Cash Flow Information
The following table sets forth certain cash and non-cash activities for the years ended December 31 (in thousands):
17. Operating Segment Information
The Company has three reportable operating segments: pawn lending, cash advance and check cashing. The cash advance and check cashing segments are managed separately due to the different operational strategies required and, therefore, are reported as separate segments. Check cashing fees, royalties and other income at pawn lending locations, which were previously included in either proceeds from disposition of merchandise or netted into administration expenses, are reclassified out of those line
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
items. All prior periods in the tables below have been revised to reflect this change. These revisions have not changed the consolidated performance of the Company for any period.
Information concerning the operating segments is set forth below (in thousands):
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
18. Pro Forma Financial Information
The following unaudited pro forma financial information reflects the consolidated results of operations of the Company as if the acquisition of CashNetUSA had occurred on January 1, 2005. The unaudited pro forma financial information has been prepared for informational purposes only and does not purport to be indicative of what would have resulted had the acquisition transaction occurred on the date indicated or what may result in the future ($ in thousands, except per share data):
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
19. Related Party Transactions
In October 2005, the Company acquired three pawnshops that were previously franchise units for a total purchase price of $3.1 million from Ace Pawn, Inc. (“Ace”), whose sole stockholder J.D. Credit, Inc. is controlled by the Chairman of the Board of Directors of the Company. The purchase price was determined by independent appraisal and approved by the Board of Directors of the Company. The Company recorded royalties of $48,000 in 2005 before the completion of the acquisition.
Under the Company’s now discontinued officer stock loan program, the Company recorded interest income of $1,000, $36,000 and $149,000, respectively, in 2007, 2006 and 2005. At December 31, 2007 and 2006, the outstanding balance on these notes was $-0- and $18,000, and accrued interest on these notes was $-0- and $5,000, respectively. As of December 31, 2007, all of the stock officer loans had been repaid.
In November 2005, the Company’s Chief Executive Officer adopted a pre-arranged, systematic trading plan to sell company shares pursuant to guidelines specified by Rule 10b5-1 under the Securities and Exchange Act of 1934 and with the Company’s policies with respect to insider sales (the “Plan”). From November 2005 through June 2006, the Company’s Chief Executive Officer exercised stock options and sold Company shares under the Plan. The Chief Executive Officer used proceeds from the sales of shares under the Plan to fully repay his pre-2003 secured loan under the Company’s now discontinued officer stock loan program and accrued interest thereon totaling $2.1 million. In 2006, the Company’s Chief Financial Officer and another executive officer also paid a total of $985,000 (including accrued interest) to fully repay similar officer stock loans.
20. Fair Values of Financial Instruments
The carrying amounts and estimated fair values of financial instruments at December 31, 2007 and 2006 were as follows (in thousands):
Cash and cash equivalents bear interest at market rates and have maturities of less than 90 days. Pawn loans have relatively short maturity periods depending on local regulations, generally 90 days or less. Cash advance loans generally have a loan term of 7 to 45 days. Finance and service charge rates are determined by regulations and bear no valuation relationship to the capital markets’ interest rate movements. Generally, pawn loans may only be resold to a licensed pawnbroker.
The fair value of the subordinated notes receivables was estimated by taking the present value of the expected cash flow over the life of the notes discounted at a rate prevalent to financial instruments with similar credit profiles and like terms.
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
The Company’s bank credit facility bears interest at a rate that is frequently adjusted on the basis of market rate changes. The fair values of the remaining long-term debt instruments are estimated based on market values for debt issues with similar characteristics or rates currently available for debt with similar terms.
21. Gain on Sale of Foreign Notes
In August 2007, the Company received gross proceeds in the amount of $16.8 million on the sale of notes receivable that it had received in 2004 as part of the proceeds from its sale of Svensk Pantbelåning, its former Swedish pawn lending subsidiary. In September 2004, the Company sold Svensk Pantbelåning to Rutland Partners LLP for cash and two subordinated notes receivable. One of the notes receivable was convertible into approximately 27.7% of the parent company of Svensk Pantbelåning on a fully-diluted basis. In August 2007, Rutland Partners LLP sold Svensk Pantbelåning to a third-party who also purchased the notes receivable from the Company. The Company’s total proceeds of $16.8 million represent $12.4 million in the repayment of the face value of the principal, including $0.3 million of accrued interest owed on notes receivable and $4.4 million for the value of its conversion rights under the convertible note. For the year ended December 31, 2007, the Company recognized a pre-tax gain of approximately $6.3 million from the sale of the notes and related rights.
22. Quarterly Financial Data (Unaudited)
The Company’s operations are subject to seasonal fluctuations. Net income tends to be highest during the first and fourth calendar quarters, when the average amount of pawn loans and cash advance balances are typically the highest and merchandise disposition activities are typically heavier compared to the other two quarters. The following is a summary of the quarterly results of operations for the years ended December 31, 2007 and 2006 (in thousands, except per share data):
CASH AMERICA INTERNATIONAL, INC. AND SUBSIDIARIES
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (Continued)
23. Subsequent Events
During the first two months of 2008, Cash America Holding, Inc., a wholly owned subsidiary of the Company, increased a loan to Primary Business Services, Inc. (“PBSI”) from $200,000 as of December 31, 2007 to $1.5 million and is contemplating additional financing going forward. The increased loan (the “Loan”) is a revolving loan and was made to PBSI and its affiliates, Primary Processing, Inc., Primary Finance, Inc. and Primary Members Insurance Services, Inc. (collectively, the “Borrowers”). As of February 28, 2008, the principal amount outstanding under the Loan was $1.0 million. The Loan is secured by all the current and future assets of the Borrowers, by the personal guaranty of the Borrowers' principal stockholder and by a pledge of all outstanding shares of each of the Borrowers. The Loan matures on February 28, 2009, and bears interest at 12% per annum. The Borrowers are using the proceeds of the Loan to fund their business operations. The Borrowers are in the early stages of operations and are not related to the Company. Prospects for repayment of the Loan are based on the future success of the Borrowers' business plan. At this time the Borrowers are not profitable.
On February 29, 2008, the Company exercised the $50 million accordion feature contained in its existing line of credit. As a result, the committed amount under the line of credit increased from $250 million to $300 million. The additional availability will be used to satisfy potential needs for funding additional working capital or capital investments.
ITEM 9.
ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE
None.
ITEM 9A.
ITEM 9A. CONTROLS AND PROCEDURES
Under the supervision and with the participation of the Company’s Chief Executive Officer and Chief Financial Officer, management of the Company has evaluated the effectiveness of the design and operation of the Company’s disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934) as of December 31, 2007 (“Evaluation Date”). Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the Evaluation Date, the Company’s disclosure controls and procedures are effective (i) to ensure that information required to be disclosed in reports that the Company files or submits under the Exchange Act is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission rules and forms; and (ii) to ensure that information required to be disclosed in the reports that the Company files or submits under the Exchange Act is accumulated and communicated to management, including the Company’s Chief Executive Officer and Chief Financial Officer, to allow timely decisions regarding required disclosures.
The Report of Management on Internal Control Over Financial Reporting is included in Item 8 of this annual report on Form 10-K. There was no change in the Company’s internal control over financial reporting during the quarter ended December 31, 2007, that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.
The Company’s management, including its Chief Executive Officer and Chief Financial Officer, does not expect that the Company’s disclosure controls and procedures or internal controls will prevent all possible error and fraud. The Company’s disclosure controls and procedures are, however, designed to provide reasonable assurance of achieving their objectives, and the Company’s Chief Executive Officer and Chief Financial Officer have concluded that the Company’s financial controls and procedures are effective at that reasonable assurance level.
PART III
ITEM 10.
ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE
Information required by this Item 10 with respect to directors, the Audit Committee of the Board of Directors and Audit Committee financial experts is incorporated into this report by reference to the Company’s Proxy Statement for the 2008 Annual Meeting of Shareholders (“Proxy Statement”), and in particular to the information in the Proxy Statement under the captions “Election of Directors” and “Meetings and Committees of the Board of Directors.” Information concerning executive officers is contained in Item 1 of this report under the caption “Executive Officers of the Registrant.” Information regarding Section 16(a) compliance is incorporated into this report by reference to the information contained under the caption “Compliance with Section 16(a) of the Securities Exchange Act of 1934” in the Proxy Statement.
The Company has adopted a Code of Business Conduct and Ethics that applies to all of its directors, officers, and employees. This Code is publicly available on the Company’s website at www.cashamerica.com. Amendments to this Code and any grant of a waiver from a provision of the Code requiring disclosure under applicable SEC rules will be disclosed on the Company’s website. These materials may also be requested in print and without charge by writing to the Company’s Secretary at Cash America International, Inc., 1600 West 7th Street, Fort Worth, Texas 76102.
In 2007, Daniel R. Feehan, Chief Executive Officer of the Company, filed his annual certification with the New York Stock Exchange (“NYSE”) regarding the NYSE’s corporate governance listing standards as required by Section 303A.12 of those listing standards.
ITEM 11.
ITEM 11. EXECUTIVE COMPENSATION
Information contained under the caption “Executive Compensation” in the Proxy Statement is incorporated by reference into this report in response to this Item 11.
ITEM 12.
ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS
Information contained under the captions “Security Ownership of Certain Beneficial Owners and Management” in the Proxy Statement is incorporated into this report by reference in response to this Item 12.
ITEM 13.
ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE
Information contained under the caption “Board Structure, Corporate Governance Matters and Director Compensation” in the Proxy Statement is incorporated into this report by reference in response to this Item 13.
ITEM 14.
ITEM 14. PRINCIPAL ACCOUNTING FEES AND SERVICES
Information contained under the caption “Ratification of Independent Registered Public Accounting Firm” in the Proxy Statement is incorporated into this report by reference in response to this Item 14.
PART IV
ITEM 15.
ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES
(a) (1) Financial Statements: See Item 8, “Financial Statements and Supplementary Data,” on pages 54 through 90 hereof, for a list of the Company’s consolidated financial statements and report of independent registered public accounting firm.
(2) Financial Statement Schedule: The following financial statement schedule of the Company is included herein on pages 94-95.
Report of Independent Registered Public Accounting Firm on Financial Statement Schedule (page 94)
Schedule II - Valuation Accounts (page 95)
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 consolidated financial statements.
(3) Exhibits required by Item 601 of Regulation S-K: The exhibits filed in response to this item are listed in the Exhibit Index on pages 96 through 97.
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 February 29, 2008.
Pursuant to the requirements of the Securities and Exchange Act of 1934, the report has been signed by the following persons on February 29, 2008 on behalf of the registrant and in the capacities and on the dates indicated.
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
ON FINANCIAL STATEMENT SCHEDULE
To the Board of Directors and Stockholders of
Cash America International, Inc.
Our audits of the consolidated financial statements and of the effectiveness of internal control over financial reporting referred to in our report dated February 20, 2008 appearing in this Annual Report on Form 10-K also included an audit of the financial statement schedule listed in Item 15(a)(2) of this Form 10- K. In our opinion, this financial statement schedule presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements.
/s/ PricewaterhouseCoopers LLP
Fort Worth, Texas
February 20, 2008
SCHEDULE II
CASH AMERICA INTERNATIONAL, INC.
VALUATION ACCOUNTS
For the Three Years Ended December 31, 2007
(dollars in thousands)
(a)
Recoveries.
(b)
Deducted from allowance for write-off or other disposition of merchandise.
(c)
Represents amounts related to business discontinued in 2001.
EXHIBIT INDEX
The following documents are filed as a part of this report. Those exhibits previously filed and incorporated herein by reference are identified by reference to the list of prior filings after the list of exhibits. Exhibits not required for this report have been omitted.
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)
Quarterly Report on Form 10-Q for the quarter ended June 30, 1995.
(h)
Quarterly Report on Form 10-Q for the quarter ended September 30, 1995.
(i)
Annual Report on Form 10-K for the year ended December 31, 1996.
(j)
Annual Report on Form 10-K for the year ended December 31, 1997.
(k)
Annual Report on Form 10-K for the year ended December 31, 1998.
(l)
Quarterly Report on Form 10-Q for the quarter ended September 30, 1999.
(m)
Quarterly Report on Form 10-Q for the quarter ended September 30, 2000.
(n)
Annual Report on Form 10-K for the year ended December 31, 2001.
(o)
Current Report on Form 8-K dated September 7, 2004.
(p)
Current Report on Form 8-K dated August 15, 2002.
(q)
Annual Report on Form 10-K for the year ended December 31, 2003.
(r)
Annual Report on Form 10-K for the year ended December 31, 2004.
(s)
Quarterly Report on Form 10-Q for the quarter ended June 30, 2005.
(t)
Annual Report on Form 10-K for the year ended December 31, 2005.
(u)
Quarterly Report on Form 10-Q for the quarter ended June 30, 2006.
(v)
Current Report on Form 8-K dated December 22, 2006.
(w)
Annual Report on Form 10-K for the year ended December 31, 2006.
(x)
Current Report on Form 8-K dated April 25, 2007.
(y)
Current Report on Form 8-K dated September 25, 2007.